<DOCUMENT>
<TYPE>N-2/A
<SEQUENCE>1
<FILENAME>dn2a.txt
<DESCRIPTION>MANAGED MUNICIPALS PORTFOLIO INC
<TEXT>
<PAGE>





    As filed with the Securities and Exchange Commission on May 16, 2002
                                                     1933 Act File No. 333-76788
                                                     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


                        [x] PRE-EFFECTIVE AMENDMENT NO. 2


                        [ ] POST-EFFECTIVE AMENDMENT NO.

                                     and/or

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


                             [x] AMENDMENT NO. 14



                        MANAGED MUNICIPALS PORTFOLIO INC.
--------------------------------------------------------------------------------
                Exact Name of Registrant as Specified in Charter


                                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
                       300 First Stamford Place, 4th Floor
                            Stamford, CT 06902-6732
--------------------------------------------------------------------------------
Name and Address (Number, Street, City, State and Zip code) of Agent for Service



                          COPIES OF COMMUNICATIONS TO:
<TABLE>

<CAPTION>
<S>                                                <C>
 Burton M. Leibert, Esq.                                Sarah E. Cogan, Esq.
 Willkie Farr & Gallagher                           Simpson Thacher & Bartlett
    787 Seventh Avenue                                425 Lexington Avenue
 New York, New York 10019                            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
  Series M, Series T, Series W, Series Th
  and Series F                                       10,000        $25,000        $250,000,000           $24,470
</TABLE>


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


(2)  Previously paid.


     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>

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.


                   SUBJECT TO COMPLETION, dated May 16, 2002


P R O S P E C T U S

                                 $250,000,000
                       Managed Municipals Portfolio Inc.
    Municipal Auction Rate Cumulative Preferred Stock ("Preferred Shares")
                            2,000 Shares, Series M
                            2,000 Shares, Series T
                            2,000 Shares, Series W
                            2,000 Shares, Series Th
                            2,000 Shares, Series F
                   Liquidation Preference $25,000 Per Share

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

Managed Municipals Portfolio Inc., or the Fund, is offering 2,000 shares of
Series M, 2,000 shares of Series T, 2,000 shares of Series W, 2,000 shares of
Series Th and 2,000 shares of Series F Municipal Auction Rate Cumulative
Preferred Stock, or Preferred Shares. 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 for the initial rate period for each series
of Preferred Shares offered in this Prospectus will be    % per year for Series
M,    % per year for Series T,    % per year for Series W,    % per year for
Series Th and    % per year for Series F. For each subsequent period for the
applicable series, 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."

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

Investing in Preferred Shares involves certain risks. See "Risk Factors"
beginning on page 13.

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.

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

<TABLE>
<CAPTION>
                                               Per
                                              Share     Total
                                             ------- ------------
<S>                                          <C>     <C>
Public Offering Price                        $25,000 $250,000,000
Sales Load                                   $   250 $  2,500,000
Proceeds to Fund/(1)/ (before expenses)      $24,750 $247,500,000
</TABLE>
--------
(1)Not including offering expenses payable by the Fund, estimated to be
   $293,000.

The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Preferred Shares are
first issued.


The underwriter is offering Preferred Shares subject to certain conditions. The
underwriter expects to deliver Preferred Shares to an investor's broker-dealer,
in book-entry form through the Depository Trust and Clearing Corporation, on or
about May   , 2002.


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

                             Salomon Smith Barney

May   , 2002


<PAGE>

   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
Moody's Investors Service, Inc. and "AAA" from Fitch, 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 May   , 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 35 of
this Prospectus. The Statement of Additional Information is also available,
along with other Fund-related materials, on the Securities and Exchange
Commission's Web site (http://www.sec.gov).


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

<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

<TABLE>
<CAPTION>
                                                                      Page
                                                                      ----
     <S>                                                              <C>
     Prospectus Summary..............................................   1
     Financial Highlights............................................   6
     The Fund........................................................   7
     Use of Proceeds.................................................   7
     Capitalization..................................................   8
     Portfolio Composition...........................................   8
     The Fund's Investments..........................................   9
     Risk Factors....................................................  13
     How the Fund Manages Risk.......................................  17
     Management of the Fund..........................................  18
     Description of Preferred Shares.................................  19
     The Auction.....................................................  27
     Description of Common Stock.....................................  30
     Certain Provisions in the Charter and Bylaws....................  30
     Repurchase of Common Stock; Conversion to Open-End Fund.........  31
     Tax Matters.....................................................  32
     Custodian, Transfer Agent, Dividend Paying Agent, Auction Agent
       and Registrar.................................................  33
     Underwriting....................................................  33
     Legal Opinions..................................................  34
     Additional Information..........................................  34
     Table of Contents for the Statement of Additional Information...  35
     Further Information.............................................  36
     Appendix A...................................................... A-1
</TABLE>

<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 Glossary appended
as Appendix B to the Statement of Additional Information.

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 (the
                           "Exchange") under the symbol "MMU." See "Description
                           of Common Stock." As of April 29, 2002, the Fund had
                           41,855,575 shares of Common Stock outstanding and
                           net assets of $490,049,222.

Investment Objective and
  Investment Strategies.   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
                           Fund's 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. This is a fundamental policy of the Fund
                           and cannot be changed without shareholder approval.
                           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, Inc. ("Fitch") of ratings of "Aaa" and "AAA",
                           respectively, for Preferred Shares.

                           Ratings issued by NRSROs, including Moody's and
                           Fitch, 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 selects and manages the

                                      1

<PAGE>


                           Fund's investments in accordance with the Fund's
                           investment objective and policies. The Fund pays
                           Smith Barney for the investment management services
                           it provides to the Fund a monthly fee in arrears
                           equal on an annual basis to 0.70% of the Fund's
                           average daily total net assets. For purposes of
                           calculating the management fee, the liquidation
                           value of any outstanding preferred stock of the Fund
                           is added to the Fund's average daily total net
                           assets. In addition, Smith Barney serves as the
                           Fund's administrator and is paid an administrative
                           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. Smith
                           Barney is a wholly-owned subsidiary of Citigroup Inc.



                           Smith Barney intends to reduce its aggregate
                           management and administrative fees to 0.65%, on an
                           annual basis, on those assets of the Fund equal to
                           the product of the number of Preferred Shares
                           outstanding multiplied by the liquidation value of
                           such shares upon the issuance of Preferred Shares.
                           The blended aggregate management and administrative
                           fees after the issuance of Preferred Shares, based
                           on the Fund's current net assets plus the proceeds
                           of the $250,000,000 of Preferred Shares to be issued
                           pursuant to this Prospectus, would equal 0.82%.
                           Smith Barney currently has instituted a voluntary
                           fee waiver. Smith Barney intends to reduce or
                           eliminate this waiver of fees as soon as
                           practicable, while taking into account the effect on
                           the Fund and its shareholders of changes in the
                           waiver. Moreover, Smith Barney may waive additional
                           fees from time to time solely in its discretion. See
                           "Management of the Fund" and "Underwriting."


The Offering............   The Fund is offering 2,000 shares of Series M, 2,000
                           shares of Series T, 2,000 shares of Series W, 2,000
                           shares of Series Th and 2,000 shares of Series F 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. Except as
                           described in this Prospectus, each series has the
                           same rights and preferences and is offered on the
                           same terms. Preferred Shares are being offered by
                           Salomon Smith Barney Inc. as the underwriter (the
                           "Underwriter"). Salomon Smith Barney Inc. is an
                           affiliate of the Manager and a wholly-owned
                           subsidiary of Citigroup Inc. See "Underwriting."

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 for a series 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;

                                      2

<PAGE>

                           . 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 each series of
                           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 are not obligated to do so and may
                           discontinue such market activity 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 auction date for each series will be a business
                           day. The table below sets forth, for each series of
                           Preferred Shares, the first auction date and the
                           business day that will normally be the auction day
                           for subsequent auctions of such series.


<TABLE>
<CAPTION>
                                                   Subsequent
                     Series     First Auction Date Auction Day
                 -------------- ------------------ -----------
                 <S>            <C>                <C>
                 Series M                           Monday
                 Series T                           Tuesday
                 Series W                           Wednesday
                 Series Th                          Thursday
                 Series F                           Friday
</TABLE>


                           The first auction date for each series of Preferred
                           Shares will be the business day before the dividend
                           payment date for the initial rate period

                                      3

<PAGE>

                           for the respective series of Preferred Shares. The
                           start date for subsequent rate periods normally will
                           be the following business day, typically a Tuesday
                           for Series M, a Wednesday for Series T, a Thursday
                           for Series W, a Friday for Series Th and a Monday
                           for Series F, unless the then-current rate period
                           for the applicable series is a special rate period,
                           or the day that normally would be the auction date
                           or the first day of the subsequent rate period for
                           the applicable series is not a business day.

Dividends and Rate
  Periods...............   The table below shows the dividend rate for the
                           initial rate period for each series of Preferred
                           Shares offered in this Prospectus. For subsequent
                           rate periods, each series of Preferred Shares will
                           pay dividends based on rates set at auctions,
                           normally held weekly. In most instances dividends
                           for each series of Preferred Shares are also paid
                           weekly, on the first business day following the end
                           of the rate period. The rate set at auction for each
                           series of Preferred Shares will not exceed the
                           Maximum Rate. See "Description of Preferred
                           Shares -- Dividends and Dividend Periods -- General."

                           The table below also sets forth, for each series of
                           Preferred Shares, the date from which dividends on
                           the Preferred Shares will accumulate at the initial
                           rate, the dividend payment date for the initial rate
                           period and the day on which subsequent dividends
                           will normally be paid. If the day on which dividends
                           are payable for a particular series is not a
                           business day, then dividends for that series will be
                           paid on the first business day that falls after that
                           day.

                           Finally, the table below shows the number of days of
                           the initial rate period for each series of Preferred
                           Shares. 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."


                         Date of      Dividend
              Initial  Accumulation Payment Date Subsequent  Number of Days
              Dividend  at Initial  for Initial   Dividend   of Initial Rate
     Series     Rate      Rate*     Rate Period* Payment Day     Period
    --------- -------- ------------ ------------ ----------- ---------------
    Series M                                      Tuesday
    Series T                                      Wednesday
    Series W                                      Thursday
    Series Th                                     Friday
    Series F                                      Monday

                           --------
                           * All dates are 2002.

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 Preferred Shares
                           will generally be subject to state and local taxes.
                           All or a portion of the interest paid on the
                           municipal obligations held by the Fund may be
                           subject to the federal alternative minimum tax
                           ("AMT"). If so, an equal portion of the dividends
                           paid on Preferred Shares will also be

                                      4

<PAGE>

                           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 AMT 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 or to the AMT. 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 regular
                           federal 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, voting as a
                           separate class, 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 report is 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 and the
November 30, 2001 Semi-Annual Report, which are available without charge by
calling the Fund at 1-800-331-1710.

     Per Common Share Operating Performance Throughout Each Period/(1)(2)/

<TABLE>
<CAPTION>
                                          Six Months
                                            Ended                                 Year Ended May 31,
                                         November 30, -----------------------------------------------------------------------
                                             2001      2001    2000     1999    1998    1997    1996    1995    1994   1993*
                                         ------------ ------  ------   ------  ------  ------  ------  ------  ------  ------
                                         (unaudited)
<S>                                      <C>          <C>     <C>      <C>     <C>     <C>     <C>     <C>     <C>     <C>
Net Asset Value, Beginning of Period....    $11.74    $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)/............      0.30      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.................      0.11      0.79   (1.14)   (0.32)   0.83    0.08   (0.35)   0.49   (0.23)   0.97
                                            ------    ------  ------   ------  ------  ------  ------  ------  ------  ------
   Total Income (Loss) from
    Investment Operations...............      0.41      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.................................     (0.30)    (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..................     (0.30)    (0.60)  (0.60)   (0.66)  (0.90)  (0.96)  (0.76)  (0.92)  (1.18)  (0.58)
                                            ------    ------  ------   ------  ------  ------  ------  ------  ------  ------
   Net Asset Value, End of Period.......    $11.85    $11.74  $10.93   $11.97  $12.37  $11.90  $12.11  $12.55  $12.26  $13.00
                                            ------    ------  ------   ------  ------  ------  ------  ------  ------  ------
Market Value, End of Period.............    $10.53    $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)/      1.48%++  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)/.............................      3.80%++  13.90%  (2.82)%   2.66%  12.14%   6.59%   2.79%  10.96%   3.45%  13.58%++
</TABLE>

                           Ratios/Supplemental Data

<TABLE>
<CAPTION>
                               Six Months
                                 Ended                           Year Ended May 31,
                              November 30, -------------------------------------------------------------
                                  2001     2001   2000   1999   1998   1997   1996   1995   1994   1993*
                              ------------ -----  -----  -----  -----  -----  -----  -----  -----  -----
                              (unaudited)
<S>                           <C>          <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>
Net assets, end of period (in
 millions)...................    $ 377     $ 374  $ 352  $ 414  $ 428  $ 411  $ 418  $ 433  $ 423  $ 444
Ratio of Expenses to Average
 Net Assets/(2)/.............     0.62%+    0.68%  0.89%  0.94%  0.99%  1.00%  1.00%  1.02%  1.00%  0.98%+
Ratio of Net Income to
 Average Net Assets..........     5.03%+    5.15%  5.19%  4.42%  4.35%  5.56%  5.35%  5.97%  5.15%  5.48%+
Supplemental Data:
 Portfolio Turnover Rate.....       11%       58%    35%    23%    87%   113%    45%    93%    72%   169%
</TABLE>

                                      6

<PAGE>

--------
(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 April 3, 2001, SSB Citi
    changed its name to Smith Barney Fund Management LLC ("SBFM").
(2) SBFM waived a portion of its management fees for the six month period ended
    November 30, 2001 and 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:

<TABLE>
<CAPTION>
                                                        Per share  Expense
                                                        decreases  ratios
                                                          in net   without
                                                        investment   fee
                                                          income   waivers
                                                        ---------- -------
      <S>                                               <C>        <C>
      Six Months Ended November 30, 2001 (unaudited)...   $0.02     1.02%
      2001.............................................    0.04     1.01
      2000.............................................    0.02     1.04
      1999.............................................    0.01     1.02
</TABLE>
(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.
+  Annualized.
++  Total return is not annualized, as it may not be representative of the
    total return for the year.

                                   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 (as hereafter amended, restated or supplemented
from time to time, 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 26, 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 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
April 29, 2002:

<TABLE>
<CAPTION>
                                              Amount Held
                                            by the Fund or    Amount
         Title of Class   Amount Authorized for its Account Outstanding
         --------------   ----------------- --------------- -----------
         <S>              <C>               <C>             <C>
         Common..........    500,000,000*          0        41,855,575
         Preferred Shares         10,000           0                 0
</TABLE>
--------
*  A total of 500,000,000 shares of capital stock of the Fund are authorized
   under the Articles, all originally 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 from time to time without a
   shareholder vote into one or more classes of preferred or other stock by
   setting or changing the preferences, conversion and other rights, voting
   powers, restrictions, limitations as to dividends, qualifications or terms
   or conditions of redemption of such shares of stock. The Board has
   authorized the issuance of Preferred Shares.

                                USE OF PROCEEDS

   The net proceeds of this offering will be approximately $247,207,000 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 the Fund's 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.

                                      7

<PAGE>

                                CAPITALIZATION

   The following table sets forth the unaudited capitalization of the Fund as
of April 29, 2002, and as adjusted to give effect to the issuance of Preferred
Shares offered by this Prospectus.


                                                     Actual     As Adjusted
                                                  ------------  ------------
                                                          (Unaudited)
Municipal Auction Rate Cumulative Preferred
 Stock, $25,000 per share liquidation preference;
 10,000 shares authorized (no shares issued and
 10,000 shares issued, as adjusted, respectively)            0   250,000,000
Shareholders' Equity:
 Common Stock, $.001 par value per share;
   500,000,000 shares authorized*
   (41,855,575 shares outstanding and 41,855,575
   shares outstanding, as adjusted)**............ $     41,855  $     41,855
 Capital in excess of par value***...............  504,560,540   501,767,540
 Balance of undistributed net investment income..     (112,775)     (112,775)
 Accumulated net realized gain (loss) from
   investment transactions.......................  (12,154,881)  (12,154,881)
 Net unrealized appreciation (depreciation) of
   investments...................................   (2,285,517)   (2,285,517)
                                                  ------------  ------------
 Total net assets attributable to Common Stock
   outstanding****............................... $490,049,222  $487,256,222
                                                  ============  ============
Net assets attributable to Common Stock
 outstanding plus liquidation value of Preferred
 Shares.......................................... $490,049,222  $737,256,222
                                                  ============  ============

--------
*   A total of 500,000,000 shares of capital stock of the Fund are authorized
    under the Articles, all originally designated Common Stock pursuant to the
    Articles. The Board may classify or reclassify any unissued shares of
    capital stock from time to time without a shareholder vote into one or more
    classes of preferred or other stock by setting or changing the preferences,
    conversion and other rights, voting powers, restrictions, limitations as to
    dividends, qualifications or terms or conditions of redemption of such
    shares of stock. The Board has authorized the issuance of Preferred Shares.
**  None of these outstanding shares are held by or for the account of the Fund
    as of April 29, 2002.
*** As adjusted capital in excess of par value reflects a reduction for the
    sales load and estimated offering costs of Preferred Shares issuance
    ($2,793,000).

**** The computation of total net assets for purposes of this table and for
     certain other accounting purposes does not include the liquidation value
     of any outstanding preferred stock of the Fund. Total net assets, or net
     assets, as used in the Fund's management agreement, however, include both
     the liquidation value of any outstanding preferred stock of the Fund and
     the net assets attributable to Common Stock outstanding for the purposes
     of computing the management fee.


                             PORTFOLIO COMPOSITION

   As of April 29, 2002, 96.0% of the market value of the Fund's portfolio was
invested in long-term municipal obligations, 3.8% in intermediate-term
municipal obligations and 0.2% 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 April 29, 2002. This information
reflects the average composition of the Fund's assets as of April 29, 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........................................................... $240,628,627   49.1%
Aa/AA.............................................................   60,113,713   12.2
A/A...............................................................  107,666,615   22.0
Baa/BBB...........................................................   19,724,830    4.0
Other.............................................................   61,224,666   12.5
Short-term........................................................      931,602    0.2
                                                                   ------------  -----
 Total............................................................ $490,290,053  100.0%
                                                                   ============  =====
</TABLE>

--------
*  Credit rating from Moody's, Standard and Poor's Rating Group, Inc. ("S&P")
   or Fitch.

                                      8

<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 stockholders
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. This is a fundamental policy of the
Fund and may not be changed without shareholder approval. Investment grade debt
securities are those rated in one of the four highest rating categories by an
NRSRO.

   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.

   Securities rated "BBB" by S&P are regarded by S&P as having an adequate
capacity to pay interest and repay principal; whereas such securities 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 "BBB" by Fitch are regarded by Fitch as currently having a low
expectation of credit risk; the capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. 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
payments 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.

                                      9

<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
and their 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. Under normal market conditions, at least 80% of
the Fund's total assets will be invested in investment grade 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 these bonds may be a
special preference item for purposes of the AMT. Preferred Shares may not be a
suitable investment for investors who are already subject to the AMT or who
would become subject to the AMT as a result of an investment in Preferred
Shares. See "Tax Matters."

   Municipal obligations are classified as general obligation bonds, revenue
bonds and notes. General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Industrial revenue bonds depend on the credit standing of a private
issuer and interest paid on such bonds may be subject to the AMT. 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 may have all types of interest rate payment and reset
terms, including fixed rate, floating and variable rate, zero coupon, payment
in kind and auction rate features. 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 greater detail in 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 tax 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.

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

                                      10

<PAGE>

existence of insurance covering the leased property, the maintenance by the
lessee of reserve funds or the provision of credit enhancements such as letters
of credit. As further described in the Statement of Additional Information, the
Fund will invest no more than 5% of its total assets in lease obligations that
contain non-appropriation clauses.

   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 1986, as
amended (the "Code"), which will relieve the Fund of any liability for federal
income tax to the extent its earnings and gains, if any, are timely distributed
to shareholders. To qualify as a regulated investment company, the Fund must,
among other things, limit 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 (other than U.S. government
securities or the securities of other regulated investment companies) of a
single issuer or of two or more issuers that the Fund controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses, 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 (other than U.S. government securities or the securities of
other regulated investment companies) 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 non-governmental 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 is 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 and 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

                                      11

<PAGE>

Fund will not at such times be able to achieve its investment objective of
earning income that is exempt from regular federal income taxes.

"When-Issued" and "Delayed Delivery" Securities

   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 securities. These transactions are subject to market
fluctuations; 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 or
greater than the Fund's purchase commitments, provided such securities have
been determined by the Manager to be liquid and unencumbered, and are marked to
market daily, pursuant to guidelines established by the Board. 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 securities. The Fund will make commitments
to purchase municipal obligations on such basis only with the intention of
actually acquiring these securities, but the Fund may sell such securities
prior to the settlement date if such sale is considered to be advisable.

   To the extent that the Fund engages in "when-issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for the
Fund's portfolio consistent with the Fund's investment objective and policies.
However, although the Fund does not intend to engage in such transactions for
speculative purposes, purchases of securities on such basis may involve more
risk than other types of purchases. For example, if the Fund determines it is
necessary to sell the "when-issued" or "delayed delivery" securities before
delivery, it may 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" and/or "delayed delivery" basis may increase the volatility of
the Fund's net asset value and may limit the flexibility to manage the Fund's
investments.

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.

                                      12

<PAGE>

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 a financial futures contract 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 Securities and Exchange Commission (the "Commission"). 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.

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.

                                      13

<PAGE>

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 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.

   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 Preferred Shares, which could affect the liquidity of your
investment. See "Description of Preferred Shares" and "The Auction -- Auction
Procedures."

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 longer 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

                                      14

<PAGE>

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 creditworthiness. 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 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.

                                      15

<PAGE>

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. Liquid
secondary trading in unrated municipal obligations may not exist. The Fund may
not be able to sell these securities when the Manager determines it is
appropriate.

   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. There may be no established trading
markets for certain municipal obligations and trading in these securities may
be relatively inactive. 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

   The risks in lending portfolio securities, as with other extensions of
credit, consist of possible delays in recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Although
voting rights, or rights to consent, with respect to the loaned securities pass
to the borrower, the Fund retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Fund if the holders of such securities are asked to vote upon or consent
to matters materially affecting the investment. The Fund also may call such
loans in order to sell the securities involved.

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.

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 or issuers located in the
same state, although it has no current intention of investing more than

                                      16

<PAGE>

25% of its assets in issuers located in the same state. If the Fund invests
more than 25% of its assets in such segments or in one state, it will be more
susceptible to economic, business, political, regulatory and other developments
generally affecting issuers of those segments of the municipal market 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 municipal lease obligations. These lease obligations
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 lease obligations may be less
liquid than other 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 lease obligations 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. In general, investments by the Fund in
zero coupon or other original issue discount securities will result in income
to the Fund equal to a portion of the excess of the face value of the
securities over their issue price each year that the Fund holds the securities,
even though the Fund receives no cash interest payments. This income is
included in determining the amount of income that the Fund must distribute to
maintain its status as a regulated investment company and to avoid federal
income and excise taxes.

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

   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 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

                                      17

<PAGE>

Fund, see "Investment Restrictions" in the Statement of Additional Information.
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 has 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 1934, and renders investment advice to
a wide variety of individual, institutional and investment company clients with
aggregate assets under management as of March 31, 2002 in excess of $161
billion. The Manager is an affiliate of Salomon Smith Barney Inc. and a
registered investment adviser. The Manager and Salomon Smith Barney Inc. 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 Manager is contractually entitled to receive from the Fund for the
investment management services it provides to the Fund a monthly fee in arrears
that is computed daily at the annual rate of 0.70% of the Fund's average daily
total net assets. For purposes of calculating the management fee, the
liquidation value of any outstanding preferred stock of the Fund is added to
the Fund's average daily total net assets. In addition, Smith Barney serves as
the Fund's administrator and is paid an administrative fee by the Fund for its
administrative services 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.



   Effective September 1, 1998, the Manager instituted a voluntary fee waiver.
For the fiscal year ended May 31, 2001, the aggregate of its advisory and
administrative fees did not exceed 0.57% of average daily net assets. The
Manager intends to reduce or eliminate its waiver of fees with regard to the
Fund upon the issuance of the Preferred Shares. Specifically, the Manager
intends to reduce its aggregate management and administrative fees to 0.65%, on
an annual basis, on those assets of the Fund equal to the product of the number
of Preferred Shares outstanding multiplied by the liquidation value of such
shares upon the issuance of Preferred Shares. The blended aggregate management
and administrative fees after the issuance of the Preferred Shares, based on the


                                      18

<PAGE>


Fund's current net assets plus the proceeds of the $250,000,000 of Preferred
Shares to be issued pursuant to this Prospectus, would equal 0.82%. Moreover,
the Manager may waive additional fees from time to time solely in its
discretion.


   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
Manager and administrator; taxes, interest, brokerage fees and commissions, if
any; fees of directors who are not officers, directors, shareholders or
employees of the Manager; Commission 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, including the definitions of certain
terms contained therein, which definitions are attached as Appendix B 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 10,000 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 a 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.  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. The table below sets forth, for each
series of Preferred Shares, (a) the dividend rate for the initial Rate Period,
(b) the date from which dividends or Preferred Shares will accumulate at the
initial rate, (c) the dividend payment date for the initial Rate Period, (d)
the day on which subsequent dividends will normally be paid; provided, however,
that (i) if the day on which

                                      19

<PAGE>

dividends on a series would otherwise be payable as set forth below is not a
business day, then such dividends shall be payable on such shares on the first
business day that falls after such day; and (ii) the Fund may specify different
Dividend Payment Dates for a series in respect of any Special Rate Period of
more than 28 Rate Period Days and (e) the number of days of the initial Rate
Period. Any Subsequent Rate Period for each series 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.


<TABLE>
<CAPTION>
                                      Dividend
                                      Payment
                           Date of    Date for
                Initial  Accumulation Initial  Subsequent  Number of Days
                Dividend  at Initial    Rate    Dividend   of Initial Rate
       Series     Rate      Rate*     Period*  Payment Day     Period
      --------- -------- ------------ -------- ----------- ---------------
      <S>       <C>      <C>          <C>      <C>         <C>
      Series M                                  Tuesday
      Series T                                  Wednesday
      Series W                                  Thursday
      Series Th                                 Friday
      Series F                                  Monday
</TABLE>

--------
*  All dates are 2002.

   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 each series of Preferred Shares will accumulate from the Date
of Original Issue. The dividend rate for the initial Rate Period for each
series is set forth in the table above. For each Subsequent Rate Period, the
dividend rate will be the Applicable Rate for such series 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

                                      20

<PAGE>

      (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 for the first Subsequent 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 year 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 year 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)

                                      21

<PAGE>

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 Charter 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 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
regular 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 AMT 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 Code
or successor provisions) would be taxable in the hands of each holder of
Preferred Shares at the maximum marginal regular federal individual 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

                                      22

<PAGE>

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.

   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.

                                      23

<PAGE>

   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 business 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 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

                                      24

<PAGE>

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 40% 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 stock) ("1940 Act Preferred Shares Asset Coverage"). Based on the
composition of the portfolio of the Fund and market conditions as of April 29,
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 $2,793,000, would have been computed as follows:

<TABLE>
   <S>                                              <C> <C>          <C> <C>
      Value of Fund assets less liabilities not
            constituting senior securities              $737,256,222
   ------------------------------------------------ =   ------------ =   295%
   Senior securities representing indebtedness plus     $250,000,000
      liquidation value of the Preferred Shares
</TABLE>

   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 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.

                                      25

<PAGE>

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
   $250,000,000); or

      (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 a majority of the shares 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.

                                      26

<PAGE>

   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 year 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,
Deutsche Bank Trust Company Americas) 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 may enter 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.

   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 0.25% 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

                                      27

<PAGE>

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 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

                                      28

<PAGE>

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 Series M Preferred Shares will normally be held every
Monday and each Subsequent Rate Period will normally begin on the following
Tuesday. The Auctions for Series T Preferred Shares will normally be held every
Tuesday and each Subsequent Rate Period will normally begin on the following
Wednesday. The Auctions for Series W Preferred Shares will normally be held
every Wednesday and each Subsequent Rate Period will normally begin on the
following Thursday. The Auctions for Series Th Preferred Shares will normally
be held every Thursday and each Subsequent Rate Period will normally begin on
the following Friday. The Auctions for Series F Preferred Shares will normally
be held every Friday and each Subsequent Rate Period will normally begin on the
following Monday.

   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.

                                      29

<PAGE>

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 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

                                      30

<PAGE>

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 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.

   The Articles 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 in the
Articles). 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 providing for the conversion of the Fund.

   Reference should be made to the Articles on file with the Commission 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.

            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 Exchange. 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

                                      31

<PAGE>

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 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
regular 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 timely 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 gains or ordinary income. The Fund will allocate
distributions to shareholders that are treated as interest that is exempt from
regular federal income taxes and as long-term capital gain, if any, and as
ordinary income proportionately among the shares of Common Stock and each class
of Preferred Shares based on the percentage of total dividends paid to each
class for that year. The Fund will also allocate interest that is subject to
the AMT proportionately among the shares of Common Stock and Preferred Shares
in the same manner. 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 any distribution which
is subject to regular federal income taxes. 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
38.6% 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

                                      32

<PAGE>

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
substantially identical 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% 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, AUCTION AGENT AND REGISTRAR

   State Street Bank and Trust Company, located at 225 Franklin Street, Boston,
Massachusetts 02110, 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. Deutsche Bank Trust Company Americas, located at 100 Plaza
One, 6th floor, Jersey City, New Jersey 07311, currently serves as the Fund's
Auction Agent. PFPC Global Fund Services, located at P.O. Box 8030, Boston,
Massachusetts 02266-8030, 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 of
the 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 Preferred Shares. In the Underwriting Agreement, the Fund
has 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, and the Manager has agreed to indemnify the Underwriter to the
extent the Fund does not.

   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 the
shares to selected dealers at the public offering price less a concession not
in excess of $137.50 per share. The underwriting commission the Fund will pay
of $250 per share is equal to 1% 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

                                      33

<PAGE>

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
information 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, proxy and information
statements and other information concerning the Fund may also be inspected at
the offices of the 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.

                                      34

<PAGE>

         TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
  <S>                                                                     <C>

  Investment Objective...................................................  S-2
  Investment Restrictions................................................  S-2
  Investment Policies and Techniques.....................................  S-3
  Management of the Fund................................................. S-15
  Portfolio Transactions................................................. S-20
  Net Asset Value........................................................ S-21
  Additional Information Concerning the Auctions for Preferred Shares.... S-21
  Certain Provisions in the Charter and Bylaws........................... S-23
  Repurchase of Common Stock; Conversion to Open-End Fund................ S-25
  Tax Matters............................................................ S-27
  Experts................................................................ S-32
  Appendix A--Ratings of Investments.....................................  A-1
  Appendix B--Glossary...................................................  B-1
</TABLE>

                                      35

<PAGE>

                              FURTHER INFORMATION

   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.

                                      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%
                      38.60%. 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   38.60% 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>

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

                                 $250,000,000

                       Managed Municipals Portfolio Inc.

                       Municipal Auction Rate Cumulative
                                Preferred Stock

                            2,000 Shares, Series M
                            2,000 Shares, Series T
                            2,000 Shares, Series W
                            2,000 Shares, Series Th
                            2,000 Shares, Series F

                                 -------------
                                  PROSPECTUS

                                 May   , 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 MAY 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 1-800-331-1710. 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-2
Investment Restrictions ...............................................   S-2
Investment Policies and Techniques ....................................   S-3
Management of the Fund ................................................   S-15
Portfolio Transactions ................................................   S-20
Net Asset Value .......................................................   S-21
Additional Information Concerning the Auctions for Preferred Shares ...   S-21
Certain Provisions in the Articles of Incorporation ...................   S-23
Repurchase of Common Stock; Conversion to Open-End Fund ...............   S-25
Tax Matters ...........................................................   S-27
Experts ...............................................................   S-32


Appendix A - Ratings of Investments ...................................   A-1
Appendix B - Glossary .................................................   B-1


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 regular 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 and
all or a portion of the dividends paid by the Fund may thus be subject to the
AMT. 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,
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 (as such
term is defined in the 1940 Act) of the Fund's 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. 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 Statement of
Additional Information.



     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 Statement of Additional Information. 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 Statement of Additional
Information.


     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, territories
and possessions of the United States and the District of Columbia and their
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 regular 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
distributions that are in taxable form. If the Fund took possession of a
bankrupt issuer's assets, income derived by the Fund from its ownership and
management of the assets may not be tax-exempt and shareholders may thus 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 lease obligations are municipal
obligations that may take the form of leases, installment purchase contracts or
conditional sales contracts, or certificates of participation with respect to
such contracts or leases. Municipal lease obligations are issued by state and
local governments and authorities to purchase land or various types of equipment
and facilities. Although municipal lease obligations do not constitute general
obligations of the municipality for which the municipality's taxing authority is
pledged, they ordinarily are backed by the municipality's covenant to budget
for, appropriate and make the payments due under the lease obligation. The
leases underlying certain municipal obligations, however, provide that lease
payments are subject to partial or full abatement if, because of material damage
or destruction of the leased property, there is substantial interference with
the lessee's use or occupancy of such property. This "abatement risk" may be
reduced by the existence of insurance covering the leased property, the
maintenance by the lessee of reserve funds or the provision of credit
enhancements such as letters of credit.

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

                                       S-5

<PAGE>



                  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 gives the
Fund an undivided interest in a municipal bond owned by a bank. The Fund has the
right to sell the instrument back to the bank. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the 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 at which it was issued, 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 through the
custodian bank those rights that may exist against the underlying issuer. Thus,
in the event the underlying issuer fails to pay principal or interest when due,
the Fund may be subject to delays, expenses and risks that are 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 Statement of Additional Information 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 Statement of Additional Information 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 and the Fund's investment restrictions, 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 aggregate initial margin deposits for
futures contracts held by the Fund plus premiums required to establish positions
other than those considered by the CFTC to be "bona fide hedging" will not
exceed 5% of the portfolio's net asset value 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 Fund's liability for a 4% federal 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.

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 58%, 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; Director
                                                                of Taubman Centers, Inc.; retired
                                                                Director of CVS Corporation.

+Dwight B. Crane (63)                Director                   Professor, Harvard Business School;
   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. (oil industry
   Suite 1012                                                   consulting); formerly Group Vice
   Chicago, IL  60611                                           President, Mergers & Acquisitions
                                                                BP Amoco p.l.c.; formerly Vice
                                                                President-Financial Operations
                                                                Amoco Corporation; 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; 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 $39,349.


                  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 Directors
Emeritus totaled $2,750.


                  The Fund has no compensation committee of the Board of
Directors, or any committee performing similar functions. The Fund has a
nominating committee composed of directors who are the non-interested directors,
which is charged with recommending nominees for election as directors of the
Fund. The nominating committee will accept nominations for the office of
director made by the stockholders in a written request addressed to the
Secretary of the Fund which includes biographical data and sets forth the
qualifications of the proposed nominee. The Fund has an audit committee composed
of the non-interested directors, which is charged with recommending a firm of
independent auditors to the Fund and reviewing accounting matters with the
auditors as set forth in the committees's charter. The audit committee held one
meeting during the Fund's most recent fiscal year. The Fund has a pricing
committee composed of the non-interested directors which is charged with
determining fair value prices for securities when required. The pricing
committee held one meeting during the Fund's last fiscal year.



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 26, 2001. 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 purposes of
calculating the management fee, the liquidation value of any outstanding
preferred stock of the Fund is added to the Fund's average daily total net
assets. For the fiscal years ended May 31, 1999, 2000 and 2001 such fees
amounted to $2,712,616, $2,089,549 and $827,251, respectively. Effective
September 1, 1998, the Manager instituted a voluntary fee waiver. For the fiscal
year ended May 31, 2001, the aggregate of its advisory and administrative fees
did not exceed 0.57% of average daily net assets. The Manager intends to reduce
or eliminate its waiver of fees with regard to the Fund upon the issuance of the
Preferred Shares. The Manager also intends to reduce its aggregate management
and administrative fees to 0.65%, on an annual basis, on those assets of the
Fund equal to the product of the number of Preferred Shares outstanding
multiplied by the liquidation value of such shares upon the issuance of the
Preferred Shares. The blended aggregate management and administrative fees after
the issuance of the Preferred Shares, based on the Fund's current net assets
including the proceeds of the $250,000,000 of Preferred Shares to be issued
pursuant to this Prospectus, would equal 0.82%. Moreover, the Manager may waive
additional fees from time to time solely in its discretion.


                  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 26, 2001. 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
$143,195 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 Web 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. TO BE UPDATED]

                  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, Deutsche Bank Trust Company Americas) which provides, among other
things, that the Auction Agent will follow the Auction Procedures for purposes
of determining the Applicable Rate for shares of each series of Preferred Shares
so long as the Applicable Rate for shares of each series of Preferred Shares is
to be based on the results of the Auction.

                  Broker-Dealer Agreements. Each Auction requires the
                  ------------------------
participation of one or more Broker-Dealers. The Auction Agent will enter into
one or more agreements (collectively, the "Broker-Dealer Agreements") with
Broker-Dealers selected by the Fund, which provide for the participation of
Broker-Dealers in Auctions for shares of each series of 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 shares of each series of Preferred Shares.
One certificate for all of the shares of each series of 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 Articles Supplementary. The Fund will also issue stop-transfer
instructions to the transfer agent for shares of each series of 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 shares of each series of 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 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 shares of each series of 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 shares of each series 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 a series 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 such series of Preferred Shares placed by such
Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of a series 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 Stock) 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.


                           DIVIDEND REINVESTMENT PLAN

                  All dividends or distributions with respect to shares of
Common Stock are reinvested automatically in additional shares through
participation in the Fund's dividend reinvestment plan, unless a shareholder
elects to receive cash.

                  Under the Fund's dividend reinvestment plan, a shareholder
whose shares of Common Stock are registered in his or her own name will have all
distributions from the Fund reinvested automatically by PFPC as purchasing agent
under the plan, unless the shareholder elects to receive cash. Distributions
with respect to shares of Common Stock registered in the name of a broker-dealer
or other nominee (that is, in "street name") will be reinvested by the broker or
nominee in additional shares under the plan, unless the service is not provided
by the broker or nominee or the shareholder elects to receive distributions in
cash. Investors who own Common Stock registered in street name should consult
their broker-dealers for details regarding reinvestment. All distributions to
shareholders of Common Stock who do not participate in the plan will be paid by
check mailed directly to the record holder by or under the direction of PFPC as
dividend-paying agent.

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

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


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

                  Plan participants are subject to no charge for reinvesting
dividends and capital gains distributions under the plan. PFPC's fees for
handling the reinvestment of dividends and distributions; dividend reinvestment
plan dividends and capital gains distributions will be paid by the Fund. No
brokerage charges apply with respect to shares of Common Stock issued directly
by the Fund under the plan. Each plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to open
market purchases made under the plan. Experience under the plan may indicate
that changes to it are desirable.

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


                                   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 that are controlled by the Fund and engaged in the
same, similar or related trades or businesses.

                  As a regulated investment company, the Fund will not be
subject to federal income tax in any taxable year with respect to its taxable
net investment income (i.e., its "investment company taxable income," as that
term is defined in the Code, determined without regard to the deduction for
dividends paid) and its net capital gains (i.e., the excess of the Fund's net
long-term capital gain over its net short-term capital loss), if any, that it
distributes in each taxable year to its shareholders, provided that it
distributes an amount equal to at least 90% of the sum of its net investment
income and its net tax-exempt interest (the excess of its gross tax-exempt
interest over certain disallowed deductions) for such taxable year.

                  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
nondeductible 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, if any, 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 period 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 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, if any, received 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 AMT, net capital gain and
other taxable income, if any, among its shares of Common Stock and each class of
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 rather than as indebtedness of the Fund 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 (as that term is defined in the
Code determined without regard to the deduction for dividends paid) and net
tax-exempt income, 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 certain 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 a
shareholder's interest in the Fund, (c) is substantially disproportionate with
respect to a shareholder, or (d) with respect to non-corporate shareholders, 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 the foreign 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 38.6% 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 exempt from regular federal
income taxes, 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% "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 included in reliance upon such report
given upon the authority of said firm as experts in accounting and auditing.


                                      S-32

<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>

                                                                      Appendix B
                                                                      ----------

                                    GLOSSARY

     The following terms shall have the following meanings (with terms defined
in the singular having comparable meanings when used in the plural and vice
versa), unless the context otherwise requires:



                  (a) ""AA" COMPOSITE COMMERCIAL PAPER RATE" on any date for any
Rate Period of shares of a series of Preferred Shares, shall mean (i) (A) in the
case of any Minimum Rate Period or any Special Rate Period of fewer than 49 Rate
Period Days, the interest equivalent of the 30-day rate; provided, however, that
if such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial
Paper Rate is being used to determine the Applicable Rate for shares of such
series when all of the Outstanding shares of such series are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but
fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate
Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but
fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the interest
equivalent of the 120-day and 180-day rates; (7) 162 or more but fewer than 183
Rate Period Days, the interest equivalent of the 180-day rate, in each case on
commercial paper placed on behalf of issuers whose corporate bonds are rated
"AA" by S&P or the equivalent of such rating by S&P or another rating agency, as
made available on a discount basis or otherwise by the Federal Reserve Bank of
New York for the Business Day next preceding such date; and (8) in the case of a
Special Rate Period of 183 or more Rate Period Days, the Treasury Rate which
most closely matches the Special Rate; or (ii) in the event that the Federal
Reserve Bank of New York does not make available any such rate, then the

                             -1-

<PAGE>

arithmetic average of such rates, as quoted on a discount basis or otherwise, by
the Commercial Paper Dealers to the Auction Agent for the close of business on
the Business Day next preceding such date. If any Commercial Paper Dealer does
not quote a rate required to determine the "AA" Composite Commercial Paper Rate,
the "AA" Composite Commercial Paper Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining Commercial Paper Dealer or
Commercial Paper Dealers and any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Fund to provide such rate or
rates not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers, as the case may be, or, if the Fund does not select any such Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining
Commercial Paper Dealer or Commercial Paper Dealers. For purposes of this
definition, the "interest equivalent" of a rate stated on a discount basis (a
"discount rate") for commercial paper of a given days' maturity shall be equal
to the quotient (rounded upwards to the next higher one-thousandth (.001) of 1%)
of (A) the discount rate divided by (B) the difference between (x) 1.00 and (y)
a fraction, the numerator of which shall be the product of the discount rate
times the number of days in which such commercial paper matures and the
denominator of which shall be 360.

        (b) "ACCOUNTANT'S CONFIRMATION" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of these Articles Supplementary.

        (c) "AFFILIATE" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Fund; provided, however, that no
Broker-Dealer controlled by, in control of or under common control with the Fund
shall be deemed to be an Affiliate nor shall any corporation or any Person
controlled by, in control of or under common control with such corporation one
of the trustees, directors, or executive officers of which is a Director of the
Fund be deemed to be an Affiliate solely because such trustee, director or
executive officer is also a Director of the Fund.

        (d)  "AGENT MEMBER" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder.


                                      -2-

<PAGE>

        (e)  "ALL HOLD ORDER RATE" shall have the meaning specified in
subparagraph b(iii) of Section 3 of Part I of these Articles Supplementary.

        (f)  "ANNUAL VALUATION DATE" shall mean the last Business Day of each
December of each year.

        (g)  "APPLICABLE RATE" shall have the meaning specified in
subparagraph (e)(i) of Section 2 of Part I of these Articles Supplementary.

        (h) "AUCTION" shall mean each periodic implementation of the Auction
Procedures.

        (i) "AUCTION AGENCY AGREEMENT" shall mean the agreement between the
Fund and the Auction Agent which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of a series of Preferred Shares so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.

        (j) "AUCTION AGENT" shall mean the entity appointed as such by a
resolution of the Board of Directors in accordance with Section 6 of Part II of
these Articles Supplementary.

        (k) "AUCTION DATE" with respect to any Rate Period for shares of a
series of Preferred Shares, shall mean the Business Day next preceding the first
day of such Rate Period.

        (l) "AUCTION PROCEDURES" shall mean the procedures for conducting
Auctions set forth in Part II of these Articles Supplementary.

        (m) "AVAILABLE PREFERRED SHARES" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of these Articles Supplementary.

        (n) "BENCHMARK RATE" shall have the meaning specified in paragraph
(b)(iii) of Section 3 of Part II of these Articles Supplementary.

        (o) "BENEFICIAL OWNER" with respect to shares of a series of Preferred
Shares, means a 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 shares of
such series.

        (p) "BID" and "BIDS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of these Articles Supplementary.

        (q) "BIDDER" and "BIDDERS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of these Articles Supplementary;
provided, however, that neither the Fund nor any affiliate thereof shall be
permitted to be a Bidder in an Auction, except that any Broker-Dealer that is an
affiliate of the Fund may be a Bidder in an Auction, but only if the Orders
placed by such Broker-Dealer are not for its own account.

                                      -3-

<PAGE>

        (r) "BOARD OF DIRECTORS" shall mean the Board of Directors of the Fund
or any duly authorized committee thereof.

        (s) "BROKER-DEALER" shall mean any broker-dealer, commercial bank or
other entity permitted by law to perform the functions required of a
Broker-Dealer in Part II of these Articles Supplementary, that is a member of,
or a participant in, the Securities Depository or is an affiliate of such member
or participant, has been selected by the Fund and has entered into a
Broker-Dealer Agreement that remains effective.

        (t) "BROKER-DEALER AGREEMENT" shall mean an agreement among the Fund,
the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer
agrees to follow the procedures specified in Part II of these Articles
Supplementary.

        (u) "BUSINESS DAY" shall mean a day on which the New York Stock Exchange
is open for trading and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York, are authorized by law to close.

        (v) "CHARTER" shall have the meaning specified on the first page of
these Articles Supplementary.

        (w) "CLOSING TRANSACTION" shall have the meaning specified in paragraph
(a)(i)(A) of Section 13 of Part I of these Articles Supplementary.

        (x) "CODE" means the Internal Revenue Code of 1986, as amended.

        (y) "COMMERCIAL PAPER DEALERS" shall mean Lehman Commercial Paper
Incorporated, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and any other commercial paper dealer selected by the Fund as to
which Moody's, Fitch or any substitute rating agency then rating the Preferred
Shares shall not have objected or, in lieu of any thereof, their respective
affiliates or successors, if such entity is a commercial paper dealer.

        (z) "COMMON SHARES" shall mean the shares of common stock, par value
$.001 per share, of the Fund.

        (aa) "CURE DATE" shall mean the Preferred Shares Basic Maintenance
Cure Date or the 1940 Act Cure Date, as the case may be.

        (bb) "DATE OF ORIGINAL ISSUE" with respect to shares of a series of
Preferred Shares, shall mean the date on which the Fund initially issued such
shares.

        (cc) "DEPOSIT SECURITIES" shall mean cash and Municipal Obligations
rated at least P-1, MIG-1 or VMIG-1 by Moody's or F1 by Fitch.


        (dd) "DISCOUNTED VALUE" as of any Valuation Date, shall mean, (i) with
respect to a Fitch Eligible Asset or Moody's Eligible Asset that is not
currently callable as of such Valuation Date at the option of the issuer
thereof, the lesser of the Market Value or par value thereof divided by the
Fitch Discount Factor for a Fitch Eligible Asset or Moody's


                                      -4-

<PAGE>



Discount Factor for a Moody's Eligible Asset, or (ii) with respect to a Fitch
Eligible Asset or Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (1) the
lesser of the Market Value or next call price thereof, including any call
premium, divided by (2) the Fitch Discount Factor for Fitch Eligible Assets or
the Moody's Discount Factor for Moody's Eligible Assets.

        (ee) "DIVIDEND PAYMENT DATE" with respect to shares of a series of
Preferred Shares, shall mean any date on which dividends are payable on shares
of such series pursuant to the provisions of paragraph (d) of Section 2 of Part
I of these Articles Supplementary.

        (ff) "DIVIDEND PERIOD," with respect to shares of a series of Preferred
Shares, shall mean the period from and including the Date of Original Issue of
shares of such series to but excluding the initial Dividend Payment Date for
shares of such series and any period thereafter from and including one Dividend
Payment Date for shares of such series to but excluding the next succeeding
Dividend Payment Date for shares of such series.

        (gg) "EXISTING HOLDER," with respect to shares of a series of Preferred
Shares, shall mean a Broker-Dealer (or any such other Person as may be permitted
by the Fund) that is listed on the records of the Auction Agent as a holder of
shares of such series.

        (hh) "EXPOSURE PERIOD" shall mean the period commencing on a given
Valuation Date and ending 49 days thereafter.

        (ii) "FAILURE TO DEPOSIT," with respect to shares of a series of
Preferred Shares, shall mean a failure by the Fund to pay to the Auction Agent,
not later than 12:00 noon, New York City time, (A) on the Business Day next
preceding any Dividend Payment Date for shares of such series, in funds
available on such Dividend Payment Date in The City of New York, New York, the
full amount of any dividend (whether or not earned or declared) to be paid on
such Dividend Payment Date on any share of such series or (B) on the Business
Day next preceding any redemption date in funds available on such redemption
date for shares of such series in The City of New York, New York, the Redemption
Price to be paid on such redemption date for any share of such series after
notice of redemption is mailed pursuant to paragraph (c) of Section 11 of Part I
of these Articles Supplementary; provided, however, that the foregoing clause
(B) shall not apply to the Fund's failure to pay the Redemption Price in respect
of shares 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.

        (jj) "FEDERAL TAX RATE INCREASE" shall have the meaning specified in
the definition of "Fitch Volatility Factor" and "Moody's Volatility Factor."

        (kk) "FITCH" shall mean Fitch, Inc.  and its successors.

        (ll) "FITCH DISCOUNT FACTOR" shall mean, for purposes of determining
the Discounted Value of any Fitch Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the

                                      -5-

<PAGE>

same length as or is longer than the Exposure Period, in accordance with the
table set forth below.

<TABLE>
<CAPTION>


                                              RATING CATEGORY

<S>                         <C>         <C>         <C>        <C>           <C>         <C>

EXPOSURE PERIOD               AAA*        AA*        A*          BBB*          F1**        UNRATED***

7 weeks ..................       151%       159%        166%         173%         136%           225%
8 weeks or less but greater
than 7 weeks .............       154%       161%        168%         176%         137%           231%
9 weeks or less but greater
than 8 weeks .............       158%       163%        170%         177%         138%           240%
</TABLE>

                  *    Fitch rating (or, if not rated by Fitch, see (mm) below).

                  **   Municipal Obligations rated F1 by Fitch (or, if not rated
by Fitch, see (mm) below), which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating.

                  ***  Municipal Obligations rated less than BBB by Fitch (or,
if not rated by Fitch, see (mm) below) or unrated, not to exceed 10% of Fitch
Eligible Assets.

                  Notwithstanding the foregoing, (i) the Fitch Discount Factor
for short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least F2 by Fitch (or, if not rated by Fitch, rated
MIG-1, VMIG-1 or P-1 by Moody's or at least A-1+ or SP-1+ by S&P) and mature or
have a demand feature at par exercisable in 30 days or less, and (ii) no Fitch
Discount Factor will be applied to cash or to Receivables for Municipal
Obligations Sold.

                  Notwithstanding the foregoing, inverse floating rate
structured securities, including primary market and secondary market residual
interest bonds, may constitute no more than 10% of the Discounted Value of Fitch
Eligible Assets. The Fitch Discount Factor for such securities shall be the
product of (x) the percentage determined by reference to the rating on the
security underlying such inverse floating rate structured securities multiplied
by (y) 1.25.

                  (mm) "FITCH ELIGIBLE ASSET" shall mean cash, Receivables for
Municipal Obligations Sold or a Municipal Obligation that (i) pays interest in
cash, (ii) does not have its Fitch rating, as applicable, suspended by Fitch,
and (iii) is part of an issue of Municipal Obligations of at least $10,000,000.
Municipal Obligations issued by any one issuer and rated BB or lower or not
rated (for the purposes of this definition only, "Other Securities") may
comprise no more than 4% of total Fitch Eligible Assets; such Other Securities,
if any, together with any Municipal Obligations issued by the same issuer and
rated BBB by Fitch may comprise no more than 6% of total Fitch Eligible Assets;
such Other Securities and BBB-rated Municipal Obligations, if any, together with
any Municipal Obligations issued by the same issuer and rated A by Fitch, may
comprise no more than 10% of total Fitch Eligible Assets; and such Other
Securities, and BBB and A-rated Municipal Obligations, if any, together with any
Municipal Obligations issued by the same issuer and rated AA by Fitch, may
comprise no more than 20% of total Fitch Eligible Assets. For purposes of the
foregoing sentence any Municipal Obligation backed by the guaranty, letter of
credit or insurance issued by a third party shall be deemed to be issued by such
third party if the issuance of such third party credit is the sole determinant
of the rating on such Municipal Obligation. Other Securities issued by issuers
located within a single state or territory may comprise no more than 12% of
total Fitch Eligible Assets; such Other

                                      -6-

<PAGE>

Securities, if any, together with any Municipal Obligations issued by issuers
located within the same state or territory and rated BBB by Fitch, may comprise
no more than 20% of total Fitch Eligible Assets; such Other Securities,
BBB-rated Municipal Obligations, if any, together with any Municipal Obligations
issued by issuers located within the same state or territory and rated A by
Fitch, may comprise no more than 40% of total Fitch Eligible Assets; and such
Other Securities and BBB and A-rated Municipal Obligations, if any, together
with any Municipal Obligations issued by issuers located within the same state
or territory and rated AA by Fitch, may comprise no more than 60% of total Fitch
Eligible Assets. For purposes of applying the foregoing requirements and
applying the applicable Fitch Discount Factor, if a Municipal Obligation is not
rated by Fitch but is rated by Moody's and S&P, such Municipal Obligation
(excluding short-term Municipal Obligations) will be deemed to have the Fitch
rating which is the lower of the Moody's and S&P rating. If a Municipal
Obligation is not rated by Fitch but is rated by Moody's or S&P, such Municipal
Obligation (excluding short-term Municipal Obligations) will be deemed to have
such rating. Eligible Assets shall be calculated without including cash; and
Municipal Obligations rated F1 by Fitch or, if not rated by Fitch, rated MIG-1,
VMIG-1 or P-1 by Moody's; or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA
by S&P shall be considered to have a long-term rating of A. When the Fund sells
a Municipal Obligation and agrees to repurchase such Municipal Obligation at a
future date, such Municipal Obligation shall be valued at its Discounted Value
for purposes of determining Fitch Eligible Assets, and the amount of the
repurchase price of such Municipal Obligation shall be included as a liability
for purposes of calculating the Preferred Shares Basic Maintenance Amount. When
the Fund purchases a Fitch Eligible Asset and agrees to sell it at a future
date, such Fitch Eligible Asset shall be valued at the amount of cash to be
received by the Fund upon such future date, provided that the counterparty to
the transaction has a long-term debt rating of at least A by Fitch and the
transaction has a term of no more than 30 days, otherwise, such Fitch Eligible
Asset shall be valued at the Discounted Value of such Fitch Eligible Asset.

            Notwithstanding the foregoing, an asset will not be considered
a Fitch Eligible Asset for purposes of determining the Preferred Shares Basic
Maintenance Amount to the extent it is (i) subject to any material lien,
mortgage pledge, security interest or security agreement of any kind
(collectively, "Liens"), except for (a) Liens which are being contested in good
faith by appropriate proceedings and which Fitch (if Fitch is then rating the
Preferred Shares) has indicated to the Fund will not affect the status of such
asset as a Fitch Eligible Asset, (b) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (c) Liens to secure
payment for services rendered or cash advanced to the Fund by the Fund's
investment adviser, custodian or the Auction Agent, (d) Liens by virtue of any
repurchase agreement, and (e) Liens in connection with any futures margin
account; or (ii) deposited irrevocably for the payment of any liabilities.

            (nn) "Fitch Hedging Transaction" shall have the meaning specified
in paragraph 13(b)(1) of Part I of these Articles Supplementary.

            (oo) "Fitch Volatility Factor" shall mean, as of any Valuation
Date, (i) in the case of any Minimum Rate Period, any Special Rate Period of 28
Rate Period Days or fewer, or any Special Rate Period of 57 Rate Period Days or
more, a multiplicative factor equal to 275%, except as otherwise provided in the
last sentence of this definition; (ii) in the case of any Special Rate Period of
more than 28 but fewer than 36 Rate Period Days, a multiplicative

                                      -7-

<PAGE>

factor equal to 203%; (iii) in the case of any Special Rate Period of more than
35 but fewer than 43 Rate Period Days, a multiplicative factor equal to 217%;
and (iv) in the case of any Special Rate Period of more than 42 but fewer than
50 Rate Period Days, a multiplicative factor equal to 226%; and (v) in the case
of any special Rate Period of more than 49 but fewer than 57 Rate Period Days, a
multiplicative factor equal to 235%. If, as a result of the enactment of changes
to the Code, the greater of the maximum marginal Federal individual income tax
rate applicable to ordinary income and the maximum marginal Federal corporate
income tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points (the "Federal Tax Rate Increase"),
until the effective date described in (i) above in this definition instead shall
be determined by reference to the following table:

          FEDERAL TAX RATE INCREASE               FITCH VOLATILITY FACTOR

                    5%                                   295%
                   10%                                   317%
                   15%                                   341%
                   20%                                   369%
                   25%                                   400%
                   30%                                   436%
                   35%                                   477%
                   40%                                   525%

            (pp) "FORWARD COMMITMENTS" shall have the meaning specified in
paragraph (a)(iv) of Section 13 of Part I of these Articles Supplementary.

            (qq) "FUND" shall mean the entity named on the first page of these
Articles Supplementary, which is the issuer of the shares of Preferred Shares.

            (rr) "GROSS-UP PAYMENT" means payment to a Holder of shares 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 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 such aggregate Taxable
Allocations would have been excludable from the gross income of such Holder.
Such Gross-up Payment shall be calculated (i) without consideration being given
to the time value of money; (ii) assuming that no Holder of shares of Preferred
Shares is subject to the AMT with respect to dividends received from the Fund;
and (iii) 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 Code or successor provisions) would be
taxable in the hands of each Holder of shares of Preferred Shares at the maximum
marginal combined regular Federal personal income tax rate applicable to
ordinary income (taking into account the Federal income tax deductibility of
state and local taxes paid or incurred) or net capital gains, as applicable, or
the maximum marginal regular Federal corporate income tax rate applicable to
ordinary income or net capital gains, as applicable, whichever is greater, in
effect at the time such Gross-up Payment is made.

            (ss) "HOLDER" with respect to shares of a series of Preferred
Shares, shall mean the registered holder of such shares as the same appears on
the record books of the Fund.

                                      -8-

<PAGE>

            (tt) "HOLD ORDER" and "HOLD ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 1 of Part II of these Articles
Supplementary.

            (uu) "INDEPENDENT ACCOUNTANT" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the Fund an
independent public accountant or firm of independent public accountants under
the Securities Act of 1933, as amended from time to time.

            (vv) "INITIAL RATE PERIOD" for shares of Series M, Series T, Series
W, Series Th and Series F shall be the period from and including the Date of
Original Issue thereof to but excluding       , 2002,       , 2002,       ,
2002,       , 2002 and       , 2002, respectively.

            (ww) "INTEREST EQUIVALENT" means a yield on a 360-day basis of a
discount basis security which is equal to the yield on an equivalent
interest-bearing security.

            (xx) "KENNY INDEX" shall have the meaning specified in the
definition of "Taxable Equivalent of the Short-Term Municipal Bond Rate."

            (yy) "LATE CHARGE" shall have the meaning specified in subparagraph
(e)(1)(B) of Section 2 of Part I of these Articles Supplementary.

            (zz) "LIQUIDATION PREFERENCE" with respect to a given number of
shares of Preferred Shares, means $25,000 times that number.

            (aaa) "MARKET VALUE" of any asset of the Fund shall mean the market
value thereof determined by FT Interactive Data, J.J. Kenny or any other pricing
service or services designated from time to time by management or the Board of
Directors, provided that management or the Board of Directors obtains written
assurance from Moody's and Fitch, if Moody's and Fitch are then rating the
Preferred Shares, and from any substitute rating agency then rating the
Preferred Shares that such designation will not impair the rating then assigned
by Moody's, Fitch or such substitute rating agency to the Preferred Shares (the
"Pricing Service"). Market Value of any asset shall include any interest accrued
thereon. The Pricing Service values portfolio securities at the mean between the
quoted bid and asked price or the yield equivalent when quotations are readily
available. Securities for which quotations are not readily available are valued
at fair value as determined by the Pricing Service using methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
type of issue, coupon, maturity and rating; indications as to value from
dealers; and general market conditions. The Pricing Service may employ
electronic data processing techniques or a matrix system, or both, to determine
valuations. If the Pricing Service fails to provide the Market Value of any
Municipal Obligation, such Municipal Obligation shall be valued at the lower of
two bid quotations (one of which shall be in writing) obtained by the Fund from
two dealers who are members of the National Association of Securities Dealers,
Inc. and are making a market in such Municipal Obligations. Futures contracts
and options are valued at closing prices for such instruments established by the
exchange or board of trade on which they are traded, or if market quotations are
not readily available, are valued at fair value as determined by the Pricing
Service


                                      -9-

<PAGE>

or if the Pricing Service is not able to value such instruments they shall
be valued at fair value on a consistent basis using methods determined in good
faith by the Board of Directors.


            (bbb) "MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY" as of any
Valuation Date, shall mean the aggregate amount of Gross-up Payments that would
be due if the Fund were to make Taxable Allocations, with respect to any taxable
year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Fund, as of
the end of the calendar month immediately preceding such Valuation Date, and
assuming such Gross-up Payments are fully taxable.

            (ccc) "MAXIMUM RATE" for shares of a series of Preferred Shares on
any Auction Date for shares of such series, shall mean:

            (i)   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
designated by the Fund pursuant to Section 4 of Part I of these Articles
Supplementary, the product of (A) the Reference Rate on such Auction Date for
the next Rate Period of shares of such series and (B) the Rate Multiple on such
Auction Date, unless shares of such series 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 of shares of such series after such Special Rate Period, in
which case the higher of:

            (A)   the dividend rate on shares of such series for the
then-ending Rate Period; and

            (B)   the product of (1) the higher of (x) the Reference Rate on
such Auction Date for a Rate Period equal in length to the then-ending Rate
Period of shares of such series, 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 of shares of such series,
if such then-ending Rate Period was more than 364 Rate Period Days, and (y) the
Reference Rate on such Auction Date for a Rate Period equal in length to such
Special Rate Period of shares of such series, 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 (2) the Rate Multiple on such
Auction Date; or

            (ii)  in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Fund pursuant to Section 4 of Part I of these Articles
Supplementary, the product of (A) the highest of (1) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate Period of
shares of such series, 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 of shares of such series, if such
then-ending Rate Period was more than 364 Rate Period Days, (2) 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 (3) the

                                      -10-

<PAGE>

Reference Rate on such Auction Date for Minimum Rate Periods and (B) the
Rate Multiple on such Auction Date.


            (ddd) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting
of 7 Rate Period Days.

            (eee) "MOODY'S" shall mean Moody's Investors Service, Inc., a
Delaware corporation, and its successors.

            (fff) "MOODY'S DISCOUNT FACTOR" shall mean, for purposes of
determining the Discounted Value of any Moody's Eligible Asset, the percentage
determined by reference to the rating on such asset and the shortest Exposure
Period set forth opposite such rating that is the same length as or is longer
than the Moody's Exposure Period, in accordance with the table set forth below:

<TABLE>
<CAPTION>


                                                               RATING CATEGORY

                          --------------------------------------------------------------------------------------------
EXPOSURE PERIOD            Aaa*       Aa*       A*      Baa*    OTHER**     (V)MIG-1***      SP-1+****   UNRATED*****
---------------           ---------  -------   -------  ------  -------      -----------     ----------- -------------
<S>                        <C>        <C>       <C>     <C>       <C>           <C>            <C>            <C>
7 weeks                      151%       159%     166%    173%      187%          136%           148%           225%
8 weeks or less but
greater than 7 weeks          154       161      168     176       190            137           149            231
9 weeks or less but
greater than 8 weeks          158       163      170     177       192            138           150            240
</TABLE>



                  -------------------
                  *     Moody's rating.

                  **    Municipal Obligations not rated by Moody's but rated
BBB by S&P.

                  ***   Municipal Obligations rated MIG-1 or VMIG-1, which do
not mature or have a demand feature at par exercisable in 30 days and which do
not have a long-term rating.

                  ****  Municipal Obligations not rated by Moody's but rated
A-1+ or SP-1+ by S&P, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating.

                  ***** Municipal Obligations rated less than Baa3 by Moody's or
less than BBB by S&P or not rated by Moody's or S&P not to exceed 10% of Moody's
Eligible Assets.

                  Notwithstanding the foregoing, (i) the Moody's Discount Factor
for short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or
have a demand feature at par exercisable in 30 days or less or 125% as long as
such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable in 30 days or less and (ii)
no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Obligations Sold.

                  Notwithstanding the foregoing, inverse floating rate
structured securities, including primary market and secondary market residual
interest bonds, may constitute no more than 10% of the Discounted Value of
Moody's Eligible Assets. The Moody's Discount Factor

                                      -11-

<PAGE>

for such securities shall be the product of (x) the percentage determined by
reference to the rating on the security underlying such inverse floating rate
structured securities multiplied by (y) 1.25.

                 (ggg) "MOODY'S ELIGIBLE ASSET" shall mean cash, Receivables for
Municipal Obligations Sold or a Municipal Obligation that (i) pays interest in
cash, (ii) does not have its Moody's rating, as applicable, suspended by
Moody's, and (iii) is part of an issue of Municipal Obligations of at least
$10,000,000. Municipal Obligations issued by any one issuer and rated BBB or
lower by S&P, or Ba or lower by Moody's, or not rated by S&P or Moody's (for the
purposes of this definition only, "Other Securities") may comprise no more than
4% of total Moody's Eligible Assets; such Other Securities, if any, together
with any Municipal Obligations issued by the same issuer and rated Baa by
Moody's or A by S&P, may comprise no more than 6% of total Moody's Eligible
Assets; such Other Securities, Baa, and A-rated Municipal Obligations, if any,
together with any Municipal Obligations issued by the same issuer and rated A by
Moody's or AA by S&P, may comprise no more than 10% of total Moody's Eligible
Assets; and such Other Securities, Baa, A and AA-rated Municipal Obligations, if
any, together with any Municipal Obligations issued by the same issuer and rated
Aa by Moody's or AAA by S&P, may comprise no more than 20% of total Moody's
Eligible Assets. For purposes of the foregoing sentence, any Municipal
Obligation backed by the guaranty, letter of credit or insurance issued by a
third party shall be deemed to be issued by such third party if the issuance of
such third party credit is the sole determinant of the rating on such Municipal
Obligation. Other Securities issued by issuers located within a single state or
territory may comprise no more than 12% of total Moody's Eligible Assets; such
Other Securities, if any, together with any Municipal Obligations issued by
issuers located within a single state or territory and rated Baa by Moody's or A
by S&P, may comprise no more than 20% of total Moody's Eligible Assets; such
Other Securities, Baa, A-rated Municipal Obligations, if any, together with any
Municipal Obligations issued by issuers located within a single state or
territory and rated A by Moody's or AA by S&P, may comprise no more than 40% of
total Moody's Eligible Assets; and such Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal Obligations issued by
issuers located within a single state or territory and rated Aa by Moody's or
AAA by S&P, may comprise no more than 60% of total Moody's Eligible Assets. For
purposes of applying the foregoing requirements and applying the applicable
Moody's Discount Factor, if a Municipal Obligation is not rated by Moody's but
is rated by S&P, such Municipal Obligation (excluding short-term Municipal
Obligations) will be deemed to have the Moody's rating which is one full rating
category lower than its S&P rating, respectively; a Municipal Obligation shall
be deemed to be rated BBB by S&P if rated BBB-, BBB or BBB+ by S&P; Moody's
Eligible Assets should be calculated without including cash; and Municipal
Obligations rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's, rated A1+/AA
or SP-1+/AA by S&P, shall be considered to have a long-term rating of A. When
the Fund sells a Municipal Obligation and agrees to repurchase such Municipal
Obligation at a future date, such Municipal Obligation shall be valued at its
Discounted Value for purposes of determining Moody's Eligible Assets and the
amount of the repurchase price of such Municipal Obligation shall be included as
a liability for purposes of calculating the Preferred Shares Basic Maintenance
Amount. When the Fund purchases a Moody's Eligible Asset and agrees to sell it
at a future date, such Moody's Eligible Asset shall be valued at the amount of
cash to be received by the Fund upon such future date, provided that the
counterparty to the transaction has a long-term debt rating of at least A2 from
Moody's and the transaction has a term of no more than 30 days; otherwise, such
Moody's Eligible Asset shall be valued at the Discounted Value of such Moody's
Eligible Asset.

                                      -12-

<PAGE>

                Notwithstanding the foregoing, an asset will not be considered
a Moody's Eligible Asset for purposes of determining the Preferred Shares Basic
Maintenance Amount to the extent it is (i) subject to any Liens, except for (a)
Liens which are being contested in good faith by appropriate proceedings and
which Moody's (if Moody's is then rating the Preferred Shares) has indicated to
the Fund will not affect the status of such asset as a Moody's Eligible Asset,
(b) Liens for taxes that are not then due and payable or that can be paid
thereafter without penalty, (c) Liens to secure payment for services rendered or
cash advanced to the Fund by the Fund's investment adviser, custodian or the
Auction Agent, (d) Liens by virtue of any repurchase agreement, and (e) Liens in
connection with any futures margin account; or (ii) deposited irrevocably for
the payment of any liabilities.

                (hhh) "Moody's Hedging Transaction" shall have the meaning
specified in paragraph (a)(i) of Section 13 of Part I of these Articles
Supplementary.

                (iii) "MOODY'S VOLATILITY FACTOR" shall mean, as of any
Valuation Date, (i) in the case of any Minimum Rate Period, any Special Rate
Period of 28 Rate Period Days or fewer, or any Special Rate Period of 57 Rate
Period Days or more, a multiplicative factor equal to 275%, except as otherwise
provided in the last sentence of this definition; (ii) in the case of any
Special Rate Period of more than 28 but fewer than 36 Rate Period Days, a
multiplicative factor equal to 203%; (iii) in the case of any Special Rate
Period of more than 35 but fewer than 43 Rate Period Days, a multiplicative
factor equal to 217%; (iv) in the case of any Special Rate Period of more than
42 but fewer than 50 Rate Period Days, a multiplicative factor equal to 226%;
and (v) in the case of any Special Rate Period of more than 49 but fewer than 57
Rate Period Days, a multiplicative factor equal to 235%. If, as a result of the
enactment of changes to the Code, the greater of the maximum marginal Federal
individual income tax rate applicable to ordinary income and the maximum
marginal Federal corporate income tax rate applicable to ordinary income will
increase, such increase being rounded up to the next five percentage points (the
"Federal Tax Rate Increase"), until the effective date of such increase, the
Moody's Volatility Factor in the case of any Rate Period described in (i) above
in this definition instead shall be determined by reference to the following
table:

      FEDERAL                       VOLATILITY
     TAX RATE                         FACTOR
     INCREASE                         ------
     --------

          5%                            295%
         10%                            317%
         15%                            341%
         20%                            369%
         25%                            400%
         30%                            436%
         35%                            477%
         40%                            525%

                (jjj) "MUNICIPAL INDEX" shall have the meaning specified in
paragraph (a)(i) of Section 13 of Part I of these Articles Supplementary.

                                      -13-

<PAGE>

                (kkk) "Municipal Obligations" shall mean any and all
instruments that pay interest or make other distributions that are exempt from
regular Federal income tax and in which the Fund may invest consistent with the
investment policies and restrictions contained in its registration statement on
Form N-2 (333-73556) ("Registration Statement"), as the same may be amended from
time to time.

                (lll) "1940 ACT" shall mean the Investment Company Act of 1940,
as amended from time to time.

                (mmm) "1940 ACT CURE DATE," with respect to the failure by the
Fund to maintain the 1940 Act Preferred Shares Asset Coverage (as required by
Section 6 of Part I of these Articles Supplementary) as of the last Business Day
of each month, shall mean the last Business Day of the following month.

                (nnn) "1940 ACT PREFERRED SHARES ASSET COVERAGE" shall mean
asset coverage, as defined in Section 18(h) of the 1940 Act, of at least 200%
with respect to all outstanding senior securities of the Fund which are shares
of stock, including all outstanding shares of 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 or stock of a
closed-end investment company as a condition of declaring dividends on its
common shares or stock).

                (ooo) "NOTICE OF REDEMPTION" shall mean any notice with respect
to the redemption of shares of Preferred Shares pursuant to paragraph (c) of
Section 11 of Part I of these Articles Supplementary.

                (ppp) "NOTICE OF SPECIAL RATE PERIOD" shall mean any notice with
respect to a Special Rate Period of shares of Preferred Shares pursuant to
subparagraph (d)(i) of Section 4 of Part I of these Articles Supplementary.

                (qqq) "ORDER" and "ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of these Articles
Supplementary.

                (rrr) "OTHER SECURITIES" shall have the meaning specified, as
applicable, in the definitions of "Fitch Eligible Assets" and "Moody's Eligible
Assets" above.

                (sss) "OUTSTANDING" shall mean, as of any Auction Date with
respect to shares of a series of Preferred Shares, the number of shares of such
series theretofore issued by the Fund except, without duplication, (i) any
shares of such series theretofore cancelled or delivered to the Auction Agent
for cancellation or redeemed by the Fund, (ii) any shares of such series as to
which the Fund or any Affiliate thereof shall be an Existing Holder and (iii)
any shares of such series represented by any certificate in lieu of which a new
certificate has been executed and delivered by the Fund.

                (ttt) "PERSON" shall mean and include an individual, a
partnership, a corporation, a trust, an unincorporated association, a joint
venture or other entity or a government or any agency or political subdivision
thereof.

                                      -14-

<PAGE>

                (uuu) "POTENTIAL BENEFICIAL OWNER," with respect to shares of a
series of Preferred Shares, shall mean a customer of a Broker-Dealer that is not
a Beneficial Owner of shares of such series but that wishes to purchase shares
of such series, or that is a Beneficial Owner of shares of such series that
wishes to purchase additional shares of such series.

                (vvv) "POTENTIAL HOLDER," with respect to shares of a series of
Preferred Shares, shall mean a Broker-Dealer (or any such other person as may be
permitted by the Fund) that is not an Existing Holder of shares of such series
or that is an Existing Holder of shares of such series that wishes to become the
Existing Holder of additional shares of such series.

                (www) "PREFERRED SHARES" shall have the meaning set forth on the
first page of these Articles Supplementary.

                (xxx) "PREFERRED SHARES BASIC MAINTENANCE AMOUNT" as of any
Valuation Date, shall mean the dollar amount equal to the sum of (i)(A) the
product of the number of shares of Preferred Shares outstanding on such date
multiplied by $25,000 plus any redemption premium applicable to shares of
Preferred Shares then subject to redemption; (B) the aggregate amount of
dividends that will have accumulated at the Applicable Rate (whether or not
earned or declared) to (but not including) the first Dividend Payment Date for
shares of Preferred Shares outstanding that follows such Valuation Date; (C) the
aggregate amount of dividends that would accumulate on shares of each series of
Preferred Shares outstanding from such first respective Dividend Payment Date
therefor through the 49th day after such Valuation Date, at the Maximum Rate
(calculated as if such Valuation Date were the Auction Date for the Rate Period
commencing on such Dividend Payment Date) for a Minimum Rate Period of shares of
such series to commence on such Dividend Payment Date, assuming, solely for
purposes of the foregoing, that if on such Valuation Date the Fund shall have
delivered a Notice of Special Rate Period to the Auction Agent pursuant to
Section 4(d)(i) of this Part I with respect to shares of such series, such
Maximum Rate shall be the higher of (a) the Maximum Rate for the Special Rate
Period of shares of such series to commence on such Dividend Payment Date and
(b) the Maximum Rate for a Minimum Rate Period of shares of such series to
commence on such Dividend Payment Date, multiplied by the greater of the Moody's
Volatility Factor (if Moody's is then rating the Preferred Shares) and the Fitch
Volatility Factor (if Fitch is then rating the Preferred Shares) applicable to a
Minimum Rate Period, or, in the event the Fund shall have delivered a Notice of
Special Rate Period to the Auction Agent pursuant to Section 4(d)(i) of this
Part I with respect to shares of such series designating a Special Rate Period
consisting of 56 Rate Period Days or more, the Moody's Volatility Factor and
Fitch Volatility Factor applicable to a Special Rate Period of that length
(except that (1) if such Valuation Date occurs at a time when a Failure to
Deposit has occurred that has not been cured, the dividend for purposes of
calculation would accumulate at the current dividend rate then applicable to the
shares in respect of which such failure has occurred and (2) for those days
during the period described in this subparagraph (C) in respect of which the
Applicable Rate in effect immediately prior to such Dividend Payment Date will
remain in effect, the dividend for purposes of calculation would accumulate at
such Applicable Rate (or other rate or rates, as the case may be) in respect of
those days); (D) the amount of anticipated expenses of the Fund for the 90 days
subsequent to such Valuation Date; (E) the amount of the Fund's Maximum
Potential Gross-up Payment Liability in respect of shares of Preferred Shares as
of such Valuation Date; (F) the amount of any indebtedness or obligations of the
Fund senior in right of payment to the Preferred Shares; and

                                      -15-

<PAGE>

(G) any current liabilities as of such Valuation Date to the extent not
reflected in any of (i)(A) through (i)(F) (including, without limitation, any
payables for Municipal Obligations purchased as of such Valuation Date and any
liabilities incurred for the purpose of clearing securities transactions) less
(ii) the value (i.e., for purposes of current Moody's guidelines, the face value
of cash, short-term Municipal Obligations rated MIG-1, VMIG-1 or P-1, and
short-term securities that are the direct obligation of the U.S. government,
provided in each case that such securities mature on or prior to the date upon
which any of (i)(A) through (i)(G) become payable, otherwise the Moody's
Discounted Value) of any of the Fund's assets irrevocably deposited by the Fund
for the payment of any of (i)(A) through (i)(G).

                (yyy) "PREFERRED SHARES BASIC MAINTENANCE CURE DATE," with
respect to the failure by the Fund to satisfy the Preferred Shares Basic
Maintenance Amount (as required by paragraph (a) of Section 7 of Part I of these
Articles Supplementary) as of a given Valuation Date, shall mean the seventh
Business Day following such Valuation Date.

                (zzz) "PREFERRED SHARES BASIC MAINTENANCE REPORT" shall mean a
report signed by the President, Treasurer, Controller, Assistant Controller or
any Senior Vice President or Vice President of the Fund which sets forth, as of
the related Valuation Date, the assets of the Fund, the Market Value and the
Discounted Value thereof (seriatim and in aggregate), and the Preferred Shares
Basic Maintenance Amount.

                (aaaa) "PRICING SERVICE" shall have the meaning specified in
the definition of "Market Value" above.

                (bbbb) "QUARTERLY VALUATION DATE" shall mean the last Business
Day of each February, May, August and November of each year, commencing on
May 31, 2002.

                                      -16-

<PAGE>

                (cccc) "Rate Multiple," for shares of Preferred Shares on any
Auction Date, shall mean the percentage, determined as set forth in the columns
below (depending on whether the Fund has notified the Auction Agent of its
intent to allocate income taxable for Federal income tax purposes to such shares
prior to the Auction establishing the Applicable Rate for such shares as
provided in these Articles Supplementary) and based on the lower of the credit
rating or ratings assigned, at the close of business on the Business Day next
preceding such Auction Date, to shares of such Preferred Shares by Moody's or
Fitch (or if Moody's and Fitch shall not make such rating available, the
equivalent of either or both of such ratings by S&P or a nationally recognized
statistical rating organization (as that term is used in the rules and
regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended from time to time) that acts as a substitute
rating agency in respect of shares of Preferred Shares) (the Fund taking all
reasonable action to enable such rating agency to provide a rating for such
shares):

<TABLE>
<CAPTION>


                CREDIT RATING                       APPLICABLE PERCENTAGE-            APPLICABLE PERCENTAGE -
                                                         NO NOTIFICATION                    NOTIFICATION
<S>                          <C>                        <C>                                     <C>

      MOODY'S                  FITCH
   Aa3 or higher           AA- or higher                      110%                                150%
      A3 to A1                A- to A+                        125%                                160%
    Baa3 to Baa1            BBB- to BBB+                      150%                                250%
     Ba3 to Ba1              BB- to BB+                       200%                                275%
     Below Ba3               Below BB-                        250%                                300%
</TABLE>



                (dddd) "RATE PERIOD," with respect to shares of a series of
Preferred Shares, shall mean the Initial Rate Period of shares of such series
that have a Moody's rating of Aaa (if Moody's is then rating the Preferred
Shares) and a Fitch long-term debt rating of AAA (if Fitch is then rating the
Preferred Shares) and any Subsequent Rate Period, including any Special Rate
Period, of shares of such series.

                (eeee) "RATE PERIOD DAYS," for any Rate Period or Dividend
Period, means the number of days that would constitute such Rate Period or
Dividend Period but for the application of paragraph (d) of Section 2 of Part I
of these Articles Supplementary or paragraph (b) of Section 4 of Part I of these
Articles Supplementary.

                (ffff) "RECEIVABLES FOR MUNICIPAL OBLIGATIONS SOLD" shall mean
for purposes of calculation of Moody's Eligible Assets and Fitch Eligible Assets
as of any Valuation Date, no more than the aggregate of the following: (i) the
book value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Fund has received
prior written authorization from Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) or
(y) with counterparties having a Moody's long-term debt rating of at least Baa3
(if Moody's is then rating the Preferred Shares) and a Fitch long-term debt
rating of BBB (if Fitch is then rating the Preferred Shares); and (ii) the
Discounted Value of Municipal Obligations sold as of or prior to such Valuation
Date which

                                      -17-

<PAGE>

generated receivables, if such receivables are due within five business
days of such Valuation Date but do not comply with either of the conditions
specified in (i) above.

                (gggg) "REDEMPTION PRICE" shall mean the applicable redemption
price specified in Section 11 of Part I of these Articles Supplementary.

                (hhhh) "REFERENCE RATE" shall mean (i) the higher of the
Taxable Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer, (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.

                (iiii) "REGISTRATION STATEMENT" has the meaning specified in
the definition of "Municipal Obligations."

                (jjjj) "S&P" shall mean Standard & Poor's Rating Group
and its successors.

                (kkkk) "SECURITIES DEPOSITORY" shall mean The Depository
Trust Company and its successors and assigns or any other securities depository
selected by the Fund which agrees to follow the procedures required to be
followed by such securities depository in connection with the Preferred Shares.

                (llll) "SELL ORDER" and "SELL ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 1 of Part II of these Articles
Supplementary.

                (mmmm) "SPECIAL RATE PERIOD," with respect to shares of a series
of Preferred Shares, shall have the meaning specified in paragraph (a) of
Section 4 of Part I of these Articles Supplementary.

                (nnnn) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning
specified in subparagraph (a)(i) of Section 11 of Part I of these Articles
Supplementary.

                (oooo) "SUBMISSION DEADLINE" shall mean 1:30 P.M., New York
City time, on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time.

                (pppp) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of these
Articles Supplementary.

                (qqqq) "SUBMITTED HOLD ORDER" and "SUBMITTED HOLD ORDERS" shall
have the respective meanings specified in paragraph (a) of Section 3 of Part II
of these Articles Supplementary.

                                      -18-

<PAGE>

                (rrrr) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of these
Articles Supplementary.

                (ssss) "SUBMITTED SELL ORDER" and "SUBMITTED SELL ORDERS" shall
have the respective meanings specified in paragraph (a) of Section 3 of Part II
of these Articles Supplementary.

                (tttt) "SUBSEQUENT RATE PERIOD," with respect to shares of a
series of Preferred Shares, shall mean the period from and including the first
day following the Initial Rate Period of shares of such series to but excluding
the next Dividend Payment Date for shares of such series and any period
thereafter from and including one Dividend Payment Date for shares of such
series to but excluding the next succeeding Dividend Payment Date for shares of
such series; provided, however, that if any Subsequent Rate Period is also a
Special Rate Period, such term shall mean the period commencing on the first day
of such Special Rate Period and ending on the last day of the last Dividend
Period thereof. In general, a subsequent Rate Period shall be a Minimum Rate
Period of 7 Rate Period Days, unless such subsequent Rate Period is also a
Special Rate Period.

                (uuuu) "SUBSTITUTE COMMERCIAL PAPER DEALER" shall mean Credit
Suisse First Boston or Morgan Stanley & Co., Incorporated or their respective
affiliates or successors, if such entity is a commercial paper dealer; provided,
however, that none of such entities shall be a Commercial Paper Dealer.

                (vvvv) "SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" shall
mean Credit Suisse First Boston and Merrill Lynch, Pierce, Fenner & Smith
Incorporated or their respective affiliates or successors, if such entity is a
U.S. Government securities dealer; provided, however, that none of such entities
shall be a U.S. Government Securities Dealer.

                (wwww) "SUFFICIENT CLEARING BIDS" shall have the meaning
specified in paragraph (a) of Section 3 of Part II of these Articles
Supplementary.

                (xxxx) "TAXABLE ALLOCATION" shall have the meaning specified in
Section 3 of Part I of these Articles Supplementary.

                (yyyy) "TAXABLE INCOME" shall have the meaning specified
in paragraph (b)(iii) of Section 3 of Part II of these Articles Supplementary.

                (zzzz) "TAXABLE EQUIVALENT OF THE SHORT-TERM MUNICIPAL BOND
RATE," on any date for any Rate Period of 28 Rate Period Days or fewer, shall
mean 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index or any successor
index (the "Kenny Index") (provided, however, that any such successor index must
be approved by Moody's (if Moody's is then rating the Preferred Shares) and
Fitch (if Fitch is then rating the Preferred Shares)), made available for the
Business Day immediately preceding such date but in any event not later than
8:30 A.M., New York City time, on such date by Kenny S&P Evaluation Services or
any successor thereto, based upon 30-day yield evaluations at par of short-term
bonds the interest on which is excludable for regular Federal income tax
purposes under the Code of "high grade" component issuers selected by Kenny S&P
Evaluation Services or any such successor from time to time in its discretion,
which component issuers shall include, without limitation, issuers of general

                                      -19-

<PAGE>

obligation bonds, but shall exclude any bonds the interest on which constitutes
an item of tax preference under Section 57 (a)(5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00
minus the maximum marginal regular Federal individual income tax rate applicable
to ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income (in each case expressed as a decimal),
whichever is greater; provided, however, that if the Kenny Index is not made so
available by 8:30 A.M., New York City time, on such date by Kenny S&P Evaluation
Services or any successor, the Taxable Equivalent of the Short-Term Municipal
Bond Rate shall mean the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the most recent Kenny Index so made available
for any preceding Business Day, divided by (B) 1.00 minus the maximum marginal
regular Federal individual income tax rate applicable to ordinary income or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income (in each case expressed as a decimal), whichever is greater.

                (aaaaa) "TREASURY BILL" shall mean a direct obligation of the
U.S. Government having a maturity at the time of issuance of 364 days or less.

                (bbbbb) "TREASURY BILL RATE," on any date for any Rate Period,
shall mean (i) the bond equivalent yield, calculated in accordance with
prevailing industry convention, of the rate on the most recently auctioned
Treasury Bill with a remaining maturity closest to the length of such Rate
Period, as quoted in The Wall Street Journal on such date for the Business Day
next preceding such date; or (ii) in the event that any such rate is not
published in The Wall Street Journal, then the bond equivalent yield, calculated
in accordance with prevailing industry convention, as calculated by reference to
the arithmetic average of the bid price quotations of the most recently
auctioned Treasury Bill with a remaining maturity closest to the length of such
Rate Period, as determined by bid price quotations as of the close of business
on the Business Day immediately preceding such date obtained from the U.S.
Government Securities Dealers to the Auction Agent. If any U.S. Government
Securities Dealer does not quote a rate required to determine the Treasury Bill
Rate or the Treasury Note Rate, the Treasury Bill Rate or the Treasury Note Rate
shall be determined on the basis of the quotation or quotations furnished by the
remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers and any substitute U.S. Government Securities Dealers selected by the
Fund to provide such rate or rates not being supplied by any U.S. Government
Securities Dealer of U.S. Government Securities Dealers, as the case may be, or,
if the Fund does not select any such Substitute U.S. Government Securities
Dealer or Substitute U.S. Government Securities Dealers, by the remaining U.S.
Government Securities Dealer or U.S. Government Securities Dealers.

                (ccccc) "TREASURY FUTURES" shall have the meaning specified
in paragraph (a)(i) of Section 13 of Part I of these Articles Supplementary.

                (ddddd) "TREASURY NOTE" shall mean a direct obligation of the
U.S. Government having a maturity at the time of issuance of five years or less
but more than 364 days.

                (eeeee) "TREASURY NOTE RATE," on any date for any Rate Period,
shall mean (i) the yield on the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as quoted in The
Wall Street Journal on such date for

                                      -20-

<PAGE>

the Business Day next preceding such date; or (ii) in the event that any such
rate is not published in The Wall Street Journal, then the yield as calculated
by reference to the arithmetic average of the bid price quotations of the most
recently auctioned Treasury Note with a remaining maturity closest to the length
of such Rate Period, as determined by bid price quotations as of the close of
business on the Business Day immediately preceding such date obtained from the
U.S. Government Securities Dealers to the Auction Agent. If any U.S. Government
Securities Dealer does not quote a rate required to determine the Treasury Bill
Rate or the Treasury Note Rate, the Treasury Bill Rate or the Treasury Note Rate
shall be determined on the basis of the quotation or quotations furnished by the
remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers and any Substitute U.S. Government Securities Dealers selected by the
Fund to provide such rate or rates not being supplied by any U.S. Government
Securities Dealer or U.S. Government Securities Dealers, as the case may be, or,
if the Fund does not select any such Substitute U.S. Government Securities
Dealer or Substitute U.S. Government Securities Dealers, by the remaining U.S.
Government Securities Dealer or U.S. Government Securities Dealers.

                (fffff) "U.S. GOVERNMENT SECURITIES DEALER" shall mean Lehman
Government Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc.,
Morgan Guaranty Trust Company of New York and any other U.S. Government
Securities dealer selected by the Fund as to which Moody's (if Moody's is then
rating the Preferred Shares) or Fitch (if Fitch is then rating the Preferred
Shares) shall not have objected or their respective affiliates or successors, if
such entity is a U.S. Government securities dealer.

                (ggggg) "VALUATION DATE" shall mean, for purposes of determining
whether the Fund is maintaining the Preferred Shares Basic Maintenance Amount,
the last Business Day of each month.

                (hhhhh) "VOTING PERIOD" shall have the meaning specified in
paragraph (b) of Section 5 of Part I of these Articles Supplementary.

                (iiiii) "WINNING BID RATE" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of these Articles Supplementary.


                                      -21-

<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 Highlights for the six months ended
                       November 30, 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.

              **     Incorporated by reference to Registrant's November 30, 2001
                     Semi-Annual Report (unaudited).

<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.  (1)  Form of Custody Agreement.++

    (2)  Form of Master Custodian Agreement.++++++

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

    (2)  Administration Agreement.++++


    (3)  Form of Auction Agency Agreement between the Fund and Deutsche Bank
    Trust Company Americas.

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


<PAGE>




         (5) Form of Letter of Representations.++++++

1.       (1) Opinion and Consent of Willkie Farr & Gallagher.

         (2) 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.+++++


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


*         Incorporated by reference to Pre-Effective Amendment No. 1 to the
          Registration Statement No. 33-76788, filed by Registrant on
          May 10, 2002.



**        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.



*****     Incorporated by reference to Exhibit No. 2 of the initial Registration
          Statement No. 33-47116 filed by Registrant on January 16, 2002.



+         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 to the Registration Statement No. 33-47116 filed by
          Registrant on September 30, 1996.

 +++++    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.


 ++++++   Incorporated by reference to Pre-Effective Amendment No. 1 to the
          Registration Statement No. 333-73414 filed by Intermediate Muni
          Fund, Inc. on January 22, 2002.



          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.......   $ 23,000
        Printing and engraving expenses...............     70,000
        Legal Fees....................................    140,000
        Accounting expenses...........................     10,000
        Rating Agency Fees............................     50,000
        Miscellaneous expenses........................          0
                                                         --------
               Total..................................   $293,000
                                                         ========

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

          Not applicable.

ITEM 28:  NUMBER OF HOLDERS OF SECURITIES

          At April 30, 2002:

        ----------------------------------------- ----------------------
                                                         NUMBER OF
                    TITLE OF CLASS                   RECORD HOLDERS
                    --------------                   ---------------
        ----------------------------------------------------------------
        Common Stock, $.001 par value
                                                           557
        ----------------------------------------- ----------------------
        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


       State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, and PFPC Global Fund Services, P.O. Box 8030, Boston
Massachusetts 02266-8030 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
and the Investment Company Act of 1940, 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 May 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


<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,           May 16, 2002
Heath B. McLendon                                     President and Chairman of the
                                                            Board of Directors
PRINCIPAL FINANCIAL AND
PRINCIPAL ACCOUNTING OFFICER:

/s/ Christina T. Sydor*
-------------------------------------------------      Senior Vice President, Chief         May 16, 2002
Lewis E. Daidone                                         Financial and Accounting
                                                          Officer and Treasurer

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


*    Pursuant to a power of attorney authorizing Heath B. McLendon, Lewis E.
     Daidone and Christina T. Sydor to execute amendments to this Registration
     Statement, previously filed as an exhibit to this Registration Statement.

<PAGE>

                                  EXHIBIT INDEX



----------------- ---------------------------------------------------------
EXHIBIT
NUMBER             DESCRIPTION
------             -----------
----------------- ---------------------------------------------------------

  a.3             Form of Articles Supplementary Creating and Fixing the
                  Rights of Municipal Auction Rate Cumulative Preferred
                  Stock.
----------------- ---------------------------------------------------------

  k.3             Form of Auctai Agency Agreement between the Fund and
                  Deutsche Bank Trust Company Americas.
----------------- ---------------------------------------------------------

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

  l.1             Opinion and Consent of Wilkie Farr & Gallagher.
----------------- ---------------------------------------------------------

  l.2             Opinion and Consent of Venable, Baetjer and Howard, LLP.
----------------- ---------------------------------------------------------

  n.1             Consent of KPMG, LLP.
----------------- ---------------------------------------------------------


</TEXT>
</DOCUMENT>
