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<SEC-DOCUMENT>0000950130-02-000324.txt : 20020414
<SEC-HEADER>0000950130-02-000324.hdr.sgml : 20020414
ACCESSION NUMBER:		0000950130-02-000324
CONFORMED SUBMISSION TYPE:	N-2/A
PUBLIC DOCUMENT COUNT:		6
FILED AS OF DATE:		20020124

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SMITH BARNEY INTERMEDIATE MUNICIPAL FUND INC
		CENTRAL INDEX KEY:			0000882300
		IRS NUMBER:				133643581
		STATE OF INCORPORATION:			MD
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		N-2/A
		SEC ACT:		1933 Act
		SEC FILE NUMBER:	333-73414
		FILM NUMBER:		02515614

	BUSINESS ADDRESS:	
		STREET 1:		1345 AVE OF THE AMERICAS
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10105
		BUSINESS PHONE:		2126985344

	MAIL ADDRESS:	
		STREET 2:		388 GREENWICH ST
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10013

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	SMITH BARNEY INTERMEDIATE QUALITY MUNICIPAL FUND INC
		DATE OF NAME CHANGE:	19600201

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SMITH BARNEY INTERMEDIATE MUNICIPAL FUND INC
		CENTRAL INDEX KEY:			0000882300
		IRS NUMBER:				133643581
		STATE OF INCORPORATION:			MD
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		N-2/A
		SEC ACT:		1940 Act
		SEC FILE NUMBER:	811-06506
		FILM NUMBER:		02515615

	BUSINESS ADDRESS:	
		STREET 1:		1345 AVE OF THE AMERICAS
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10105
		BUSINESS PHONE:		2126985344

	MAIL ADDRESS:	
		STREET 2:		388 GREENWICH ST
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10013

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	SMITH BARNEY INTERMEDIATE QUALITY MUNICIPAL FUND INC
		DATE OF NAME CHANGE:	19600201
</SEC-HEADER>
<DOCUMENT>
<TYPE>N-2/A
<SEQUENCE>1
<FILENAME>dn2a.txt
<DESCRIPTION>INTERMEDIATE MUNI FUND, INC.
<TEXT>
<PAGE>


    As filed with the Securities and Exchange Commission on January 24, 2002


                                                     1933 Act File No. 333-73414

                                                     1940 Act File No. 811-6506
================================================================================

                     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. 13


                          INTERMEDIATE MUNI FUND, 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
                               666 Fifth Avenue
                            New York, New York 10103
- --------------------------------------------------------------------------------
 Name and Address (Number, Street, City, State and Zip code) of Agent for
                                     Service

                          COPIES OF COMMUNICATIONS TO:
<TABLE>
<S>                            <C>                             <C>
  Burton M. Leibert, Esq.         John Baumgardner, Esq.          Sarah E. Cogan, Esq.
  Willkie Farr & Gallagher         Sullivan & Cromwell         Simpson Thacher & Bartlett
     787 Seventh Avenue         125 Broad Street, 30th Floor     425 Lexington Avenue
  New York, New York 10019       New York, New York 10004       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            AMOUNT OF
                                                          BEING      OFFERING PRICE      AGGREGATE       REGISTRATION FEE
TITLE OF SECURITIES BEING REGISTERED                    REGISTERED     PER UNIT/(1)/   OFFERING PRICE          /(2)/
<S>                                                    <C>          <C>               <C>              <C>
Municipal Auction Rate Cumulative
Preferred Stock, Series M, par value $.001 per share      2,000          $25,000         $50,000,000           $10,920
</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>

                          INTERMEDIATE MUNI FUND, INC.

                                    Form N-2

                              Cross-Reference Sheet

                               Part A - Prospectus


<TABLE>
<CAPTION>
Items in part A of Form N-2                                           Location in Prospectus
- ---------------------------                                           ----------------------
<S>                                                                   <C>
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
</TABLE>




























<TABLE>
<S>                                                            <C>
20.  Investment Advisory and Other Services .................  Investment Manager; Experts; Custodian, Transfer
                                                               Agent, Dividend Paying Agent and Registration Agent;
                                                               Principal Stockholders
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>


                 SUBJECT TO COMPLETION, DATED JANUARY 24, 2002


PROSPECTUS

                                  $50,000,000
                         Intermediate Muni Fund, Inc.
    Municipal Auction Rate Cumulative Preferred Stock ("Preferred Shares")

                            2,000 Shares, Series M

                   Liquidation Preference $25,000 Per Share

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

Intermediate Muni Fund, Inc. (the Fund) is offering 2,000 shares of Municipal
Auction Rate Cumulative Preferred Stock, Series M. The Fund is a diversified,
closed-end management investment company. The Fund's investment objective is to
provide common shareholders a high level of current income exempt from regular
federal income taxes consistent with prudent investing. The Fund invests
primarily in investment grade municipal debt securities issued by state and
local governments, including U.S. territories and possessions, political
subdivisions, agencies and public authorities (municipal obligations) with
remaining effective maturities of less than 15 years. The Fund's policy is to
invest, under normal market conditions, at least 80% of its total assets in
municipal obligations with remaining maturities of less than 15 years. The Fund
seeks to maintain a dollar-weighted average effective maturity between 3 and 10
years. Under normal market conditions, the Fund will invest at least two-thirds
of its total assets in municipal obligations rated in the three highest
categories by a nationally recognized statistical rating organization at the
time of investment. Investment grade debt securities are those rated in one of
the four highest rating categories by a nationally recognized statistical
rating organization. There is no assurance that the Fund will achieve its
investment objective.

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

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

Investing in Preferred Shares involves certain risks. See "Risk Factors"
beginning on page 12.

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 $50,000,000
   Sales Load                                             $   250 $   500,000
   Proceeds to Fund/(1)/ (before expenses)                $24,750 $49,500,000
</TABLE>
- --------
(1) Not including offering expenses payable by the Fund, estimated to be
    $200,000. The Fund and, under certain circumstances, Smith Barney Fund
    Management LLC have agreed to indemnify the underwriter against certain
    liabilities, including liabilities under the Securities Act of 1933, as
    amended, and the Investment Company Act of 1940, as amended.

The 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 broker-dealers, in
book-entry form through the Depository Trust and Clearing Corporation, on or
about January   , 2002.

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

                             Salomon Smith Barney

January   , 2002

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

<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
American Stock Exchange under the symbol "SBI." 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 January   , 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 32 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..........................................   5
The Fund......................................................   6
Use of Proceeds...............................................   7
Capitalization................................................   7
Portfolio Composition.........................................   8
The Fund's Investments........................................   8
Risk Factors..................................................  12
How the Fund Manages Risk.....................................  15
Management of the Fund........................................  15
Description of Preferred Shares...............................  16
The Auction...................................................  24
Description of Common Stock...................................  27
Certain Provisions in the Charter and Bylaws..................  27
Repurchase of Common Stock; Conversion to Open-End Fund.......  28
Tax Matters...................................................  29
Custodian, Transfer Agent, Dividend Paying Agent and Registrar  30
Underwriting..................................................  30
Legal Opinions................................................  31
Additional Information........................................  31
Special Note Regarding Forward-Looking Statements.............  31
Table of Contents for the Statement of Additional Information.  32
Further Information...........................................  33
Appendix A.................................................... A-1
</TABLE>

   Until February  , 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.

<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 Creating and
Fixing the Rights 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 C to the
Statement of Additional Information.

The Fund................   Intermediate Muni Fund, Inc. (the "Fund") is a
                           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 American Stock Exchange under the
                           symbol "SBI." See "Description of Common Stock." As
                           of December 31, 2001, the Fund had 14,004,750 shares
                           of Common Stock outstanding and net assets of
                           $142,865,649.

Investment Objective
  and Investment
  Strategies............   The Fund's investment objective is to provide common
                           shareholders a high level of current income exempt
                           from regular federal income taxes consistent with
                           prudent investing. This income, if any, will be
                           distributed to common shareholders after the
                           satisfaction of the obligation to pay dividends on
                           Preferred Shares. The Fund seeks to achieve its
                           objective by investing primarily in investment grade
                           municipal debt securities issued by state and local
                           governments, including U.S. territories and
                           possessions, political subdivisions, agencies and
                           public authorities (municipal obligations) with
                           remaining effective maturities of less than 15
                           years. The Fund's policy is to invest, under normal
                           market conditions, at least 80% of its total assets
                           in municipal obligations with remaining maturities
                           of less than 15 years. This is a fundamental policy
                           of the Fund and cannot be changed without
                           shareholder approval.

                           The Fund seeks to maintain a dollar-weighted average
                           effective maturity between 3 and 10 years. Under
                           normal market conditions, the Fund will invest at
                           least two-thirds of its total assets in municipal
                           obligations rated in the three highest rating
                           categories by a nationally recognized statistical
                           rating organization ("NRSRO") at the time of
                           investment. Investment grade debt securities are
                           those rated in one of the four highest rating
                           categories by a 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.

                                      1

<PAGE>

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 also serves as the Fund's
                           administrator. Smith Barney selects and manages the
                           Fund's investments in accordance with the Fund's
                           investment objective and policies. The Fund pays
                           Smith Barney for the services it provides to the
                           Fund a monthly fee equal on an annual basis to 0.60
                           of 1% 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 not deducted in determining the
                           Fund's average daily total net assets. Smith Barney
                           is a wholly-owned subsidiary of Citigroup Inc. See
                           "Management of the Fund" and "Underwriting."

The Offering............   The Fund is offering 2,000 shares of Municipal
                           Auction Rate Cumulative Preferred Stock, Series M,
                           at a purchase price of $25,000 per share plus
                           dividends, if any, that have accumulated from the
                           date the Fund first issues the shares. Preferred
                           Shares are being offered by Salomon Smith Barney
                           Inc. as the underwriter (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 fails you may not be able to sell
                             some or all of your shares;

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

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

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

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

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

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

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

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

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

                                      2

<PAGE>

                           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 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 first auction date for Preferred Shares will be
                                    , 2002, the Business Day before the
                           Dividend Payment Date for the Initial Rate Period
                           for Preferred Shares. The auction date for Preferred
                           Shares will be a Business Day, normally a Monday,
                           and the start date for Subsequent Rate Periods
                           normally will be the following Business Day,
                           typically a Tuesday, unless the then-current Rate
                           Period is a Special Rate Period, or the day that
                           normally would be the auction date or the first day
                           of the Subsequent Rate Period is not a Business Day.

Dividends and Rate
  Periods...............   The dividend rate for the Initial Rate Period of
                           Preferred Shares offered in this Prospectus is   %
                           per year. For Subsequent Rate Periods, Preferred
                           Shares will pay dividends based on a rate set at
                           Auction, normally held weekly. In most instances
                           dividends are also paid weekly, on the
                           first Business Day following the end of the Rate
                           Period. The rate set at Auction will not exceed the
                           Maximum Rate. See "Description of Preferred Shares
                           -- Dividends and Dividend Periods -- General."

                           The date from which dividends on Preferred Shares
                           will accumulate at the initial rate is           .
                           The Dividend Payment Date for the Initial Rate
                           Period will be Tuesday,           , 2002 and the day
                           on which dividends will normally be paid is a
                           Tuesday; provided, however, that if the Tuesday on
                           which dividends would otherwise be payable is not a
                           Business Day, then dividends will be paid on the
                           first Business Day that falls after such Tuesday.

                           The number of days of the Initial Rate Period for
                           Preferred Shares is    days. 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 a notice to holders of Preferred
                           Shares designating a Special Rate Period. See
                           "Description of Preferred Shares -- Dividends and
                           Dividend Periods -- Designation of Special Rate
                           Periods."

Taxation................   Because under normal circumstances the Fund will
                           invest substantially all of its assets in municipal
                           obligations that pay interest which is exempt from
                           regular federal income taxes, the dividends paid on
                           Preferred Shares will ordinarily be similarly
                           exempt. However, dividends paid on Preferred Shares
                           may be subject to state and local taxes. All or a
                           portion of the interest paid on the municipal
                           obligations held by the Fund will be subject to the
                           federal alternative minimum tax ("AMT"), with the
                           result that all or a portion of the dividends paid
                           on Preferred Shares will also be subject to

                                      3

<PAGE>

                           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 will be allocated proportionately to
                           holders of Preferred Shares and shares of Common
                           Stock, based on the percentage of total dividends
                           paid to each class for that year. Accordingly,
                           certain specified Preferred Shares dividends may be
                           subject to regular federal income tax. The Fund
                           intends to notify holders of Preferred Shares,
                           before any applicable Auction for a Rate Period of
                           28 days or less, of the amount of any taxable income
                           and gain for regular federal income tax purposes to
                           be paid as dividends on Preferred Shares for the
                           period relating to that Auction. For longer periods,
                           the Fund may notify holders of Preferred Shares of
                           such amount. In certain circumstances, the Fund will
                           make holders of Preferred Shares whole for taxes
                           owing on dividends paid to holders of Preferred
                           Shares that include taxable income and gain. See
                           "Tax Matters."

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

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

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

Voting Rights...........   The holders of Preferred Shares, 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 of Incorporation (which,
                           as hereafter amended, restated or supplemented from
                           time to time, is together with the Articles
                           Supplementary referred to as the "Charter"), 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."

                                      4

<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 each year presented have been audited by KPMG LLP, the Fund's
independent auditors, whose report covering each of the five years during the
period ended December 31, 2000 is included in the Fund's December 31, 2000
Annual Report and incorporated by reference into the Fund's Statement of
Additional Information. The Fund's unaudited financial statements in its June
30, 2001 Semi-Annual Report are also incorporated by reference in the Statement
of Additional Information. The financial highlights should be read in
conjunction with the financial statements and notes thereto included in the
Fund's December 31, 2000 Annual Report and the June 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) /

<TABLE>
<CAPTION>


                                     Six
                                   Months
                                    Ended                        Year Ended December 31, (unless otherwise noted)
                                  June 30,      ---------------------------------------------------------------------
                                    2001         2000    1999      1998    1997    1996    1995   1994/(3)/ 1993/(3)/
                                 -----------    ------  -------   ------  ------  ------  ------  --------  --------
                                 (unaudited)
<S>                              <C>            <C>     <C>       <C>     <C>     <C>     <C>     <C>       <C>

Net Asset Value, Beginning of
 Period.........................   $10.20       $ 9.89  $ 10.61   $10.64  $10.47  $10.66  $ 9.95   $10.81    $10.36
                                   ------       ------  -------   ------  ------  ------  ------   ------    ------
Income (Loss) from Operations:
  Net Investment Income.........     0.28         0.55     0.53     0.55    0.57    0.58    0.58     0.58      0.59
  Net Realized and Unrealized
   Gain (Loss) on Securities....     0.06         0.28    (0.71)    0.01    0.28   (0.17)   0.73    (0.84)     0.46
                                   ------       ------  -------   ------  ------  ------  ------   ------    ------
   Total Income (Loss) from
    Investment Operations.......     0.34         0.83    (0.18)    0.56    0.85    0.41    1.31    (0.26)     1.05
                                   ------       ------  -------   ------  ------  ------  ------   ------    ------
Gains from Repurchase of
 Treasury Stock.................       --         0.02       --       --      --      --      --       --        --
                                   ------       ------  -------   ------  ------  ------  ------   ------    ------
Less Distributions from:
  Net Investment Income.........    (0.28)       (0.54)   (0.53)   (0.55)  (0.57)  (0.60)  (0.60)   (0.60)    (0.57)
  In excess of Net Investment
   Income.......................       --           --       --       --   (0.01)     --      --       --        --
  Net Realized Gains............       --           --    (0.01)   (0.04)  (0.10)     --      --       --     (0.03)
                                   ------       ------  -------   ------  ------  ------  ------   ------    ------
   Total Distributions..........    (0.28)       (0.54)   (0.54)   (0.59)  (0.68)  (0.60)  (0.60)   (0.60)    (0.60)
                                   ------       ------  -------   ------  ------  ------  ------   ------    ------
   Net Asset Value, End of
    Period......................   $10.26       $10.20  $  9.89   $10.61  $10.64  $10.47  $10.66   $ 9.95    $10.81
                                   ======       ======  =======   ======  ======  ======  ======   ======    ======
Market Value, End of Period.....   $ 9.58       $ 8.81  $  8.38   $10.69  $10.56  $ 9.94  $10.38   $ 9.50    $11.13
Total Return, Based on Market
 Value/(2)/.....................    11.90%/(5)/  11.90%  (17.10)%   7.05%  13.42%   1.56%  15.93%   (9.34)%   16.71%
Total Return, Based on Net Asset
 Value/(2)/.....................     3.54%/(5)/   9.68%   (1.39)%   5.50%   8.49%   4.13%  13.72%   (2.33)%   10.30%
</TABLE>
<TABLE>
<CAPTION>






                                 1992/(3)(4)/
                                 -----------

<S>                              <C>

Net Asset Value, Beginning of
 Period.........................   $10.00
                                   ------
Income (Loss) from Operations:
  Net Investment Income.........     0.48/(6)/
  Net Realized and Unrealized
   Gain (Loss) on Securities....     0.34
                                   ------
   Total Income (Loss) from
    Investment Operations.......     0.82
                                   ------
Gains from Repurchase of
 Treasury Stock.................       --
                                   ------
Less Distributions from:
  Net Investment Income.........    (0.46)
  In excess of Net Investment
   Income.......................       --
  Net Realized Gains............       --
                                   ------
   Total Distributions..........    (0.46)
                                   ------
   Net Asset Value, End of
    Period......................   $10.36
                                   ======
Market Value, End of Period.....   $10.13
Total Return, Based on Market
 Value/(2)/.....................     1.66%/(5)/
Total Return, Based on Net Asset
 Value/(2)/.....................     8.44%/(5)/
</TABLE>
- --------
(1) Shearson Lehman Advisors, the Fund's previous investment adviser, was
    acquired by Mutual Management Corp., or MMC, a wholly-owned subsidiary of
    The Travelers Inc., in 1993. On February 23, 1999 the Board of Directors of
    MMC voted to change its name to SSBC Fund Management Inc. ("SSBC"). On
    September 21, 1999 SSBC converted to a limited liability company and
    changed its name to SSB Citi Fund Management LLC ("SSB Citi"). On April 3,
    2001, SSB Citi changed its name to Smith Barney Fund Management LLC.
(2) The total return calculation assumes that dividends are reinvested in
    accordance with the Fund's dividend reinvestment plan.
(3) Based on the monthly average shares outstanding for period.
(4) For the period from March 2, 1992 (commencement of operations) to December
    31, 1992.
(5) Total return is not annualized, as it may not be representative of the
    total return for the year.
(6) The Manager waived a portion of its fees for the period from March 2, 1992
    to December 31, 1992. If such fees were not waived, the per share decrease
    in net investment income would have been $0.01, and the ratio of expenses
    to average net assets would have been 0.70% (annualized).

                                      5

<PAGE>

                           Ratios/Supplemental Data

<TABLE>
<CAPTION>


                                   Six Months
                                      Ended                   Year Ended December 31, (unless otherwise noted)
                                    June 30,      ----------------------------------------------------------------
                                      2001        2000/(1)/ 1999   1998   1997   1996   1995   1994   1993   1992/(4)/
                                   -----------    --------  -----  -----  -----  -----  -----  -----  -----  --------
                                   (unaudited)
<S>                                <C>            <C>       <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>

Net assets, end of period (in
 millions)........................    $ 144        $ 143    $  83  $  89  $  89  $  87  $  88  $  82  $  89   $  83
Ratio of Expenses to Average Net
 Assets...........................     0.74%/(3)/   0.78%    0.77%  0.76%  0.74%  0.77%  0.72%  0.72%  0.73%   0.59%/(2)(3)/
Ratio of Net Income to Average Net
 Assets...........................     5.49%/(3)/   5.47%    5.17%  5.10%  5.42%  5.56%  5.63%  5.64%  5.56%   5.74%/(3)/
Supplemental Data: Portfolio
 Turnover Rate....................       17%          45%      54%    42%    58%    21%    13%    26%    10%     23%
</TABLE>
- --------
(1) During the fiscal year ended December 31, 2000, the Fund acquired the
    assets of Smith Barney Municipal Fund, Inc.
(2) The Manager waived a portion of its fees for the period from March 2, 1992
    to December 31, 1992. If such fees were not waived, the per share decrease
    in net investment income would have been $0.01, and the ratio of expenses
    to average net assets would have been 0.70% (annualized).
(3) Annualized.
(4) For the period from March 2, 1992 (commencement of operations) to December
    31, 1992.

                                   THE FUND

   Intermediate Muni Fund, Inc. is a diversified, closed-end management
investment company registered under the 1940 Act. The Fund was incorporated
under the laws of the State of Maryland on December 19, 1991 pursuant to
Articles of Incorporation (the "Articles") under the name "Smith Barney
Intermediate Quality Municipal Fund, Inc." On December 27, 1991, the Fund
changed its name to "Smith Barney Intermediate Municipal Fund, Inc." and
on December 26, 2000 the Fund changed its name to "Intermediate Muni
Fund, Inc." On March 2, 1992, the Fund commenced its operations. The
Fund's Common Stock is traded on the American Stock Exchange (the "Exchange")
under the symbol "SBI." 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
December 31, 2001:

<TABLE>
<CAPTION>
                                                  Amount Held
                                                by the Fund or    Amount
Title of Class                Amount Authorized for its Account Outstanding
- --------------                ----------------- --------------- -----------
<S>                           <C>               <C>             <C>

Common.......................    100,000,000*          0        14,004,750
Preferred Shares.............         0                0            0
</TABLE>
- --------
* A total of 100,000,000 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 or other rights, voting
  powers, restrictions, limitations as to dividends, qualifications or terms or
  conditions of redemption of such shares of stock. The Board has reclassified
  2,000 shares of Common Stock as Municipal Auction Rate Cumulative Preferred
  Stock, Series M, or Preferred Shares, and has authorized the issuance of
  Preferred Shares.

                                      6

<PAGE>

                                USE OF PROCEEDS

   The net proceeds of this offering will be approximately $49,300,000 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 those investment objective and
policies at or shortly (within three months) after the completion of the
offering. Pending such investment, it is anticipated that the proceeds will be
invested in short-term, tax-exempt securities.

                                CAPITALIZATION

   The following table sets forth the unaudited capitalization of the Fund as
of December 31, 2001, and as adjusted to give effect to the issuance of
Preferred Shares offered by this Prospectus.

<TABLE>
<CAPTION>
                                                                 Actual     As Adjusted
                                                              ------------  ------------
                                                                      (Unaudited)
<S>                                                           <C>           <C>

Shareholders' Equity:
 Municipal Auction Rate Cumulative Preferred Stock,
   Series M, $25,000 per share liquidation preference; 2,000
   shares authorized (no shares issued and 2,000 shares
   issued, as adjusted, respectively)........................ $          0  $ 50,000,000
 Common Stock, $.001 par value per share; 100,000,000 shares
   authorized* (14,004,750 shares outstanding, and 14,004,750
   shares outstanding as adjusted)**.........................       14,005        14,005
 Capital in excess of par value***...........................  142,012,528   141,312,528
 Balance of undistributed net investment income..............      (16,296)      (16,296)
 Accumulated net realized gain (loss) from investment
   transactions..............................................   (2,520,393)   (2,520,393)
 Net unrealized appreciation (depreciation) of investments...    3,375,805     3,375,805
                                                              ------------  ------------
 Total Net Assets............................................  142,865,649   192,165,649
 Less liquidation value of Preferred Shares..................           --   (50,000,000)
                                                              ------------  ------------
 Net assets attributable to Common Stock outstanding......... $142,865,649  $142,165,649
                                                              ============  ============
</TABLE>
- --------
   * A total of 100,000,000 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 or other rights, voting powers, restrictions,
     limitations as to dividends, qualifications or terms or conditions of
     redemption of such shares of stock. The Board has reclassified 2,000
     shares of Common Stock as Municipal Auction Rate Cumulative Preferred
     Stock, Series M, or Preferred Shares, and has authorized the issuance of
     Preferred Shares.
  ** None of these outstanding shares are held by or for the account of the
     Fund as of December 31, 2001.
 *** As adjusted capital in excess of par value reflects a reduction for the
     sales load and estimated offering costs of the Preferred Shares issuance
     ($700,000).

                                      7

<PAGE>

                             PORTFOLIO COMPOSITION

   As of December 31, 2001, 49.8% of the market value of the Fund's portfolio
was invested in long-term municipal obligations, 48.5% in intermediate-term
municipal obligations and 1.7% 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 December 31, 2001. This information
reflects the average composition of the Fund's assets as of December 31, 2001,
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*.... $ 42,801,460   29.7%
 Aa/AA.......   21,881,970   15.2%
 A/A.........   29,924,558   20.7%
 Baa/BBB.....   25,511,659   17.7%
 Other.......   21,573,779   15.0%
 Short-term..    2,500,000    1.7%
              ------------  -----
  Total...... $144,193,426  100.0%
              ============  =====
</TABLE>
- --------
* Includes securities that are backed by an escrow or trust containing
  sufficient U.S. Government securities or U.S. Government agency securities to
  ensure the timely payment of principal and interest.

                            THE FUND'S INVESTMENTS

Investment Objective and Policies

   The Fund's investment objective is to provide common shareholders a high
level of current income exempt from regular federal income taxes consistent
with prudent investing. This income, if any, will be distributed to common
shareholders after the satisfaction of the obligation to pay dividends on
Preferred Shares.

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

   The Fund invests primarily in investment grade municipal debt securities
issued by state and local governments including U.S. territories and
possessions, political subdivisions, agencies and public authorities (municipal
obligations) with remaining effective maturities of less than 15 years. The
Fund's policy is to invest, under normal market conditions, at least 80% of its
total assets in municipal obligations with remaining maturities of less than 15
years. This is a fundamental policy of the Fund and may not be changed without
shareholder approval. The Fund seeks to maintain a dollar-weighted average
effective maturity between 3 and 10 years. Under normal market conditions, the
Fund will invest at least two-thirds of its total assets in municipal
obligations rated, at the time of investment, (i) "A" or better by Standard &
Poor's Rating Agency ("S&P") or by Moody's or (ii) within the three highest
categories by an NRSRO (or, if unrated, deemed by the Manager to be of
comparable quality). Investment grade debt securities are those rated "BBB" or
higher by S&P, "Baa" or higher by Moody's or within one of the four highest
rating categories by an NRSRO. The Fund will not invest in any municipal
obligations that are rated lower than "BBB" by S&P or "Baa" by Moody's if they
are not otherwise rated investment grade by another NRSRO.

                                      8

<PAGE>

   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.

   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 "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.

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 municipal obligations with
remaining maturities of less than fifteen years. This policy is fundamental and
cannot be changed without shareholder approval.

   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 of federal tax law, and a substantial portion of the
dividends paid on Preferred Shares may thus be subject to 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."

   The two principal classifications of municipal bonds are "general
obligation" bonds and "revenue" or "special obligation" bonds, which include
"industrial revenue bonds." General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest, and, accordingly, the capacity of the issuer of a
general obligation bond as to the timely payment of interest and the repayment
of principal when due is affected by the issuer's maintenance of its tax base.
Revenue or special obligation bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special tax or other specific revenue source such as from the
user of the facility being financed; accordingly, the timely payment of
interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of
such facility or such revenue source. Although the ratings of NRSROs of the
municipal obligations in the Fund's portfolio are relative and subjective, and
are not absolute standards of quality, such ratings reflect the assessment of
the NRSROs of the issuer's ability, or the economic viability of the special
revenue source, with respect to the timely payment of interest and the
repayment of principal in accordance with the terms of the obligation. See
Appendix A to the Statement of Additional Information.

   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 and
thus may be determined to be liquid. See "Investment Policies and Techniques" in

                                      9

<PAGE>

the Statement of Additional Information. Each such note purchased by the Fund
will meet the criteria established for the purchase of municipal obligations.

   The Fund may invest in unrated "non-appropriation" lease obligations or
installment purchase contract obligations of municipal authorities or entities
believed by the Manager to be of comparable quality to securities that are
rated investment grade. There is no limitation on the percentage of the Fund's
assets that may be invested in these lease obligations. A lease obligation is
backed by the municipality's promise to make the payments due under the lease
obligation. Lease obligations containing "non-appropriation" clauses provide
that the municipality has no obligation to make lease installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis.

   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).

   The Fund may also engage in interest rate and other hedging and risk
management transactions; purchase and sell options (including swaps, caps,
floors and collars) on municipal obligations and on indices based on municipal
obligations; and purchase and sell municipal obligations on a "when-issued" or
"delayed delivery" basis. In general, the Fund may purchase and sell (or write)
options on up to 20% of its assets. The Securities and Exchange Commission (the
"Commission") requires that obligations of investment companies such as the
Fund, in connection with options sold, must comply with certain segregation or
cover requirements which are more fully described in the Statement of
Additional Information. The Fund may engage in these transactions both for
speculative purposes and as a means to hedge risk. The Fund may also engage, to
a limited extent, in financial futures contracts and related options contracts
for hedging purposes. The Fund may also hold securities or use investment
techniques that provide for payments based on or "derived" from the performance
of an underlying asset, index or other economic benchmark. 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. See the Statement of Additional Information for a further
description of these investment practices.

Selection of Investments

   The Manager selects securities for the Fund's portfolio which the Manager
believes entail reasonable credit risk considered in relation to the particular
investment policies of the Fund. As a result, the Fund does not necessarily
invest in the highest yielding municipal obligations permitted by its
investment policies if the Manager determines that market risks or credit risks
associated with such investments would subject the Fund's portfolio to
excessive risk. The potential for realization of capital gains resulting from
possible changes in interest rates is not a major consideration. The Fund's
policy is to invest at least 80% of its total assets in municipal obligations
with remaining maturities of less than fifteen years. For this purpose, any
scheduled principal prepayments on municipal obligations are reflected in the
calculation of dollar-weighted average effective maturity. The Manager may
adjust the average effective maturity of the Fund's portfolio from time to
time, depending on its assessment of the relative yields available on
securities of different maturities and its expectations of future changes in
interest rates.

   The Fund generally does not invest more than 25% of its total assets in any
industry, nor does the Fund invest more than 5% of its total assets in the
securities of any single issuer. Governmental issuers of municipal obligations
are not considered part of any "industry". However, municipal obligations
backed only by the assets and revenues of nongovernmental users may for this
purpose be deemed to be issued by such nongovernmental users, and the 25%
limitation would apply to the industries of such nongovernmental users. It is
nonetheless possible that the Fund may invest more than 25% of its total assets
in a broader segment of the municipal obligations market, such as hospital and
other health care facilities obligations, housing agency revenue obligations,
and airport revenue obligations. The Fund will invest more than 25% of its
assets in such types of

                                      10

<PAGE>

municipal obligations if the Manager determines that the yields available from
such obligations in a particular segment justify the additional risks
associated with a large investment in that segment. Although these obligations
could be supported by the credit of governmental users, or by the credit of
nongovernmental users engaged in a number of industries, economic, business,
political and other developments generally affecting the revenues of such users
(for example, proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand for their
services or products) may have a general adverse effect on all such municipal
obligations in such a market segment. The Fund may 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, its agencies
or instrumentalities; other debt securities rated within the four highest
categories by an NRSRO; commercial paper rated in the highest category by an
NRSRO; certificates of deposit, time deposits and bankers' acceptances; or
repurchase agreements with respect to any of the foregoing investments or any
other fixed-income securities that the Manager considers consistent with such
strategy. To the extent the Fund invests in taxable securities, the Fund will
not at such times be able to achieve its investment objective of income exempt
from regular federal income taxes.

"When-Issued" and "Delayed Delivery" Securities

   The Fund may purchase municipal obligations on a "when-issued" and "delayed
delivery" basis. 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. 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,

                                      11

<PAGE>

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.

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

                                 RISK FACTORS

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

Interest Rate Risk

   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

                                      12

<PAGE>

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 Preferred Shares may fluctuate in response to
changes in interest rates, and may be more or less than their original cost if
sold on the open market in advance of the next Auction. Accrued Preferred Share
dividends, however, should at least partially compensate for the increased
market interest rates.

Ratings and Asset Coverage Risk

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

Inflation Risk

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

Credit Risk

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

                                      13

<PAGE>

Income Risk

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

Call Risk

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

Liquidity Risk

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

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. If the Fund invests more than 25% of its assets in such segments,
it will be more susceptible to economic, business, political, regulatory and
other developments generally affecting issuers of those segments of the
municipal market.


   The Fund may invest in unrated "non-appropriation" lease obligations or
installment purchase contract obligations of municipal authorities or entities
believed by the Manager to be of comparable quality to securities that are
rated investment grade. It is possible that a municipality will fail to
appropriate money in the future because of political changes, changes in the
economic viability of a project or general economic changes. While these lease
obligations generally are secured by a lien on the leased property, disposing
of foreclosed property could be costly and time-consuming, and the Fund may not
recoup its original investment.

                                      14

<PAGE>

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

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

   It is possible that some of the Fund's income may be subject to federal
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 Fund may
not invest more than 25% of total Fund assets in securities of issuers in any
one industry, except that the Fund may from time to time invest more than 25%
of its total assets in a particular segment of the municipal obligations market
or in obligations of issuers located in the same state; and may not invest more
than 5% of total Fund assets in securities of any one issuer, except that this
limitation does not apply to bonds issued by the U.S. Government, its agencies
and instrumentalities or to the investment of 25% of its total assets. The Fund
may become subject to guidelines which are more limiting than the investment
restrictions set forth above in order to obtain and maintain ratings from
Moody's or Fitch on Preferred Shares. See the Statement of Additional
Information for a complete list of the fundamental and non-fundamental
investment policies of the Fund.

   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

                                      15

<PAGE>

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 is a registered investment
adviser. The Manager manages investment companies that had total assets of
approximately $119.2 billion as of December 31, 2001, of which approximately
$10 billion consisted of municipal bond portfolios (not including municipal
money market portfolios). Pursuant to an investment management agreement with
the Fund and subject to the supervision and direction of the Board, Smith
Barney is responsible for the management of the investment of the Fund's
assets, managing the Fund's corporate affairs and providing certain clerical
and bookkeeping services. See the Statement of Additional Information under
"Management of the Fund --Investment Manager." The Fund pays the Manager for
the services it provides to the Fund a monthly fee equal on an annual basis to
0.60 of 1% 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 not deducted in determining the Fund's average
daily total net assets. The Manager is a wholly-owned subsidiary 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.

   The Manager is responsible for execution of specific investment strategies
and day-to-day investment operations. Peter Coffey, Vice President and
Investment Officer of the Fund, is primarily responsible for management of the
Fund's assets. Mr. Coffey is a Managing Director of Smith Barney and is the
senior asset manager for ten other funds investing in tax-exempt securities
with aggregate assets of approximately $2.1 billion as of December 31, 2001.

   In addition to the management fee, the Fund pays all other costs and
expenses of its operations, including fees of its directors not affiliated with
Smith Barney and Board meeting expenses; interest charges; taxes; charges and
expenses of the Fund's legal counsel and independent accountants, and of the
transfer agent, registrar and dividend disbursing agent of the Fund; expenses
of repurchasing shares; expenses of printing and mailing share certificates,
shareholder reports, notices, proxy statements and reports to governmental
offices; brokerage and other expenses connected with the execution, recording
and settlement of portfolio security transactions; expenses connected with
negotiating of, effecting purchase or sale of, or registering privately issued
portfolio securities; fees and expenses of the Fund's custodian for all
services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating and publishing
the net asset value of the Fund's Common Stock; expenses of membership in
investment company associations; expenses of fidelity bonding and other
insurance premiums; expenses of shareholders' meetings; registration fees and
state notice filing fees; Exchange listing fees; and its other business and
operating expenses.

                        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, and other charter documents, which have
been filed with the Commission.

                                      16

<PAGE>

General

   Under the Articles, the Fund is authorized to issue up to 100,000,000 shares
of capital stock, designated Common Stock. Pursuant to the Articles, the Board
may classify or reclassify any unissued shares of capital stock without a
shareholder vote into one or more classes of preferred or other stock with no
restrictions on the rights or preferences of any such class except as may be
imposed by the 1940 Act, Maryland law or the Articles Supplementary. The Board
has authorized the issuance of up to 2,000 shares of Municipal Auction Rate
Preferred Stock Series M, or Preferred Shares. All Preferred Shares will have a
liquidation preference of $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared).

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

Dividends and Dividend Periods

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

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

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

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

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

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

                                      17

<PAGE>

   Sufficient Clearing Bids existed has not yet occurred for a Minimum Rate
   Period after such Special Rate Period, in which case the higher of:

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

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

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

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

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

   If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any Preferred Shares
during a Special Rate Period of more than 364 Rate Period Days, or

                                      18

<PAGE>

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) without duplication, the redemption price for shares, if any,
for which notice of redemption has been mailed by the Fund; provided, however,
that the foregoing clause (b) shall not apply to the Fund's failure to pay the
redemption price in respect of Preferred Shares when the related notice of
redemption provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such notice of
redemption.

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

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

   If, in the case of any Special Rate Period of more than 28 Rate Period Days,
the Fund makes a Taxable Allocation to a dividend paid on Preferred Shares
without having given advance notice thereof to the Auction Agent, the Fund
shall, prior to the end of the calendar year in which such dividend was paid,
provide notice thereof to the 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 federal income tax
consequences) from the aggregate of such Taxable Allocations and the related
Gross-up Payment to be equal to the dollar amount of the dividends which would
have been received by such holder if the amount of the aggregate Taxable
Allocations would have been excludable from the gross income of such holder for
federal income tax purposes. Such Gross-up Payment shall be calculated:
(a) without consideration being given to the time value of money; (b) assuming
that no holder of Preferred Shares is subject to the 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
Internal Revenue Code of

                                      19

<PAGE>

1986, as amended (the "Code") or successor provisions) would be taxable in the
hands of each holder of Preferred Shares at the maximum marginal regular
federal income tax rate applicable to ordinary income, or net capital gain, as
applicable, or the maximum marginal regular federal corporate income tax rate
applicable to ordinary income or net capital gain, as applicable, whichever is
greater, in effect at the time such Gross-up Payment is made.

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

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

   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.

                                      20

<PAGE>

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, including the Articles
Supplementary, and applicable law, at the redemption price of $25,000 per share
plus an amount equal to accumulated but unpaid dividends thereon (whether or
not earned or declared) to (but not including) the date fixed for redemption.
Any such redemption will be limited to the number of Preferred Shares necessary
to restore the required Discounted Value or the 1940 Act Preferred Shares Asset
Coverage, as the case may be.

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

      (a) as a whole or from time to time in part, on the second Business Day
   preceding any Dividend Payment Date, out of funds legally available therefor
   in accordance with the Charter, including the Articles Supplementary, 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, including the Articles Supplementary, 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.

                                      21

<PAGE>

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

Rating Agency Guidelines and Asset Coverage

   The Fund is required under the 1940 Act and Moody's and Fitch guidelines to
maintain assets having in the aggregate a Discounted Value at least equal to
the Preferred Shares Basic Maintenance Amount. Moody's and Fitch have each
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and Fitch guidelines do not impose any limitations on the
percentage of the Fund's assets that may be invested in holdings not eligible
for inclusion in the calculation of the Discounted Value of the Fund's
portfolio. The amount of such assets included in the portfolio at any time may
vary depending upon the rating, diversification and other characteristics of
the eligible assets included in the portfolio, although it is not anticipated
that in the normal course of business the value of such assets would exceed 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 shares) ("1940 Act Preferred Shares Asset Coverage"). Based on the
composition of the portfolio of the Fund and market conditions as of December
31, 2001, 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 $700,000, would have been computed as follows:

<TABLE>
<S>                                                                       <C> <C>          <C> <C>
                 Value of Fund assets less liabilities
                  not constituting senior securities                          $192,165,649
- -----------------------------------------------------------------------   =   ------------ =   384%
  Senior securities representing indebtedness plus liquidation value of       $ 50,000,000
                           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

                                      22

<PAGE>

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

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

Voting Rights

   Except as otherwise provided in this Prospectus and in the Statement of
Additional Information, in the Charter, including the Articles Supplementary,
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 shares 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
   $50,000,000); or

                                      23

<PAGE>

      (b) amend, alter or repeal the provisions of the Charter, including the
   Articles Supplementary, 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) a division or split of a share of Preferred Shares
   will be deemed to affect such preferences, rights or powers only if the
   terms of such division adversely affect the holders of Preferred Shares and
   (iii) 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 Preferred Shares outstanding at the
   time, voting as a separate class, file a voluntary application for relief
   under federal bankruptcy law or any similar application under state law for
   so long as the Fund is solvent and does not foresee becoming insolvent.

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

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

                                  THE AUCTION

General

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

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

                                      24

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

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

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

Auction Procedures

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

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

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

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

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

                                      25

<PAGE>

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 behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any Preferred Shares held by it or customers who are Beneficial
Owners will be treated in the same manner as a Beneficial Owner's failure to
submit to its Broker-Dealer an Order in respect of Preferred Shares held by it.
A Broker-Dealer may also submit Orders to the Auction Agent for its own account
as an Existing Holder or Potential Holder, provided it is not an affiliate of
the Fund.

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

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

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

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

                                      26

<PAGE>

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

Secondary Market Trading and Transfer of Preferred Shares

   The Broker-Dealers are expected to maintain a secondary trading market in
Preferred Shares outside of Auctions, but are not obligated to do so, and may
discontinue such activity at any time. There can be no assurance that such
secondary trading market in Preferred Shares will provide owners with liquidity
of investment. Preferred 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, 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 100,000,000 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 or terms or conditions of
redemption of such shares of stock. All shares of Common Stock have equal
rights to the payment of dividends and the distribution of assets upon
liquidation. Shares of Common Stock are fully paid and non-assessable when
issued and have no preemptive, conversion or cumulative voting 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.

                                      27

<PAGE>

   The Articles require a vote by holders of at least 75% of the shares of each
class of capital stock of the Fund outstanding and entitled to vote, except as
described below, to authorize (1) the Fund's conversion from a closed-end to an
open-end investment company or generally to authorize any of the following
transactions; (2) any merger or consolidation or share exchange of the Fund
with or into any other company; (3) the dissolution or liquidation of the Fund;
(4) any sale, lease, exchange, mortgage, pledge, transfer or other disposition
of all or substantially all of the Fund's assets; (5) a change in the nature of
the business of the Fund so that it would cease to be an investment company
registered under the 1940 Act; or (6) with certain exceptions, the issuance or
transfer by the Fund of any securities of the Fund to any other person in
exchange for cash, securities or other property having an aggregate fair market
value of $1,000,000 or more; provided, with respect to (1) through (5), if such
action has been authorized by the affirmative vote of at least 70% of the
entire Board, the affirmative vote of the holders of only a majority of the
Fund's shares of capital stock outstanding and entitled to vote at the time is
required; and provided, further, with respect to (6), if such transaction has
been authorized by the affirmative vote of at least 70% of the entire Board, no
shareholder vote is required to authorize such action. None of the foregoing
provisions may be amended except by the vote of at least 75% of the outstanding
shares of each class of capital stock of the Fund outstanding and entitled to
vote thereon. 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. See the Statement of Additional
Information under "Certain Provisions in the Charter and Bylaws."

   The Board is classified into three classes, each with a term of three years
with only one class of Directors standing for election in any year. Such
classification may prevent replacement of a majority of the Directors for up to
a two-year period. Directors may be removed from office only for cause and only
by vote of at least 75% of the shares entitled to be voted for such director in
an election of directors.

   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
closed-end investment companies frequently trade at a discount from net asset
value, or in some cases 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.

   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 American Stock 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 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.

                                      28

<PAGE>

   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, and intends to
distribute substantially all of its net income and gains to its shareholders.
Therefore, it is not expected that the Fund will be subject to any federal
income tax to the extent its earnings are so distributed. In addition, the Fund
intends to satisfy each year conditions contained in the Code that will enable
interest from municipal obligations, excluded from gross income for federal
income tax purposes with respect to the Fund, to retain that status when
distributed to the holders of Common Stock and holders of Preferred Shares
(that is, to be classified as "exempt-interest" dividends of the Fund). 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 AMT imposed on the shareholder. Different
AMT rules apply to individuals and to corporations. In addition to
exempt-interest dividends, the Fund also may distribute to its shareholders
amounts that are treated as long-term capital gain or ordinary income. The Fund
will allocate distributions to shareholders that are treated as interest that
is exempt from regular federal income taxes and as long-term capital gain and
ordinary income, if any, among the shares of Common Stock and Preferred Shares
in proportion to total dividends paid to each class for the year. The Fund
intends to notify holders of Preferred Shares in advance if it will allocate to
them income that is not exempt from regular federal income tax. In certain
circumstances, the Fund will make payments to holders of Preferred Shares to
offset the tax effects of the taxable distribution. See "Description of
Preferred Shares -- Dividends and Dividend Periods -- Gross-Up Payments." The
sale or other disposition of shares of Common Stock or Preferred Shares of the
Fund will normally result in capital gain or loss to shareholders. Present law
taxes both long-term and short-term capital gains of corporations at the rates
applicable to ordinary income. For non-corporate taxpayers, under current law
short-term capital gains and ordinary income will be taxed at a maximum rate of
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 (or amounts credited as an
undistributed capital gain) with respect to such shares. Under certain
circumstances, a shareholder's holding period may have to restart after, or may
be suspended for, any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property, or through certain options or short sales. Any
loss realized on a sale or exchange of shares of the Fund will be disallowed to
the extent those shares of the Fund are replaced by other shares within a
period of 61 days beginning 30 days before and ending 30 days after the date of
disposition of the original shares. In that event, the basis of the replacement
shares of the Fund will be adjusted to reflect the disallowed loss. Although
dividends generally will be treated as distributed when paid, dividends
declared in October, November or December, payable to shareholders of record on
a specified date in

                                      29

<PAGE>

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 31% 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 advisor about federal income tax
matters.

        CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING 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. PFPC Inc., located at P.O. Box 8030, Boston, Massachusetts
02266, serves as the Fund's transfer agent, dividend-paying agent and registrar.

                                 UNDERWRITING

   Salomon Smith Barney Inc. is acting as Underwriter in 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, 2,000
shares of 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 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 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 $      per share. The underwriting commission the Fund will pay of
$      per share is equal to    % of the initial offering price. After the
initial public offering, the Underwriter may change the public offering price
and the concession.

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

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

                                      30

<PAGE>

                                LEGAL OPINIONS

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

                            ADDITIONAL INFORMATION

   The Fund is subject to the information requirements of the Securities
Exchange Act of 1934 and the 1940 Act, and in accordance therewith files
reports and other information with the Commission. Such reports, proxy and
public statements and other information can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, DC 20549. Call 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 American Stock Exchange. The Commission maintains a Web site
(http:\\www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference into this Prospectus and the Statement of
Additional Information, and reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.

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

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

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   Certain statements in this Prospectus constitute forward-looking statements,
which involve known and unknown risks, uncertainties and other factors that may
cause the actual results, levels of activity, performance or achievements of
the Fund to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" and elsewhere in this Prospectus. As a result of the
foregoing and other factors, no assurance can be given as to the future
results, levels of activity or achievements, and neither the Fund nor any other
person assumes responsibility for the accuracy and completeness of such
statements.

                                      31

<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-13
    Portfolio Transactions............................................. S-18
    Net Asset Value.................................................... S-19
    Additional Information Concerning the Auctions for Preferred Shares S-20
    Certain Provisions in the Articles of Incorporation................ S-22
    Repurchase of Common Stock; Conversion to Open-End Fund............ S-22
    Tax Matters........................................................ S-24
    Experts............................................................ S-30
    Appendix A -- Ratings of Investments...............................  A-1
    Appendix B -- Options and Futures..................................  B-1
    Appendix C -- Glossary.............................................  C-1
</TABLE>

                                      32

<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.

                                      33

<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>

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

                                  $50,000,000

                         Intermediate Muni Fund, Inc.

                       Municipal Auction Rate Cumulative
                                Preferred Stock

                            2,000 Shares, Series M

                                 -------------
                                  PROSPECTUS
                                January  , 2002
                                 -------------

                             Salomon Smith Barney

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

<PAGE>


                 SUBJECT TO COMPLETION, DATED JANUARY 18, 2002

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.


                          INTERMEDIATE MUNI FUND, 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 January __, 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

<TABLE>
<CAPTION>
                                                                                  PAGE
                                                                                  ----
<S>                                                                               <C>
Investment Objective ...........................................................  S-2
Investment Restrictions ........................................................  S-2
Investment Policies and Techniques .............................................  S-3
Management of the Fund .........................................................  S-13
Portfolio Transactions .........................................................  S-18
Net Asset Value ................................................................  S-19
Additional Information Concerning the Auctions for Preferred Shares ............  S-20
Certain Provisions in the Articles of Incorporation ............................  S-22
Repurchase of Common Stock; Conversion to Open-End Fund ........................  S-22
Tax Matters ....................................................................  S-24
Experts ........................................................................  S-30
</TABLE>

<TABLE>

<S>                                                                               <C>
Appendix A - Ratings of Investments                                               A-1
Appendix B - Options and Futures                                                  B-1
Appendix C - Glossary                                                             C-1
</TABLE>


   The date of this Statement of Additional Information is January __, 2002.


<PAGE>

                              INVESTMENT OBJECTIVE

         The Fund's investment objective is to provide common shareholders a
high level of current income exempt from regular federal income taxes consistent
with prudent investing. The Fund's investment objective is a fundamental policy
of the Fund.

         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 the Fund
expects that a substantial portion of the income it produces will be includable
in AMT income. 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."

         Under normal market conditions, the Fund will invest at least
two-thirds of its total assets in municipal obligations rated, at the time of
investment, (i) "A" or better by S&P or by Moody's or (ii) within the three
highest categories by an NRSRO (or, if unrated, deemed by the Manager to be of
comparable quality). The Fund's policies on the credit quality of its
investments apply only at the time of the purchase of a security, and the Fund
is not required to dispose of securities in the event that S&P or Moody's or any
other NRSRO downgrades its assessment of the credit characteristics of a
particular issuer or in the event the Manager reassesses its view with respect
to the credit quality of the issuer thereof.

                             INVESTMENT RESTRICTIONS

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

         1. Purchase securities (other than obligations issued or guaranteed by
the United States Government or its agencies or instrumentalities) of any issuer
if as a result of the purchase, more than 5% of the value of the Fund's total
assets would be invested in the securities of the issuer, except that up to 25%
of the value of the Fund's total assets may be invested without regard to this
5% limitation.

         2. Invest more than 25% of its total assets in a single industry;
however, as described under "Investment Objective and Management Policies" in
the Prospectus, the Fund may from time to time invest more than 25% of its total
assets in a particular segment of the municipal securities market or in
obligations of issuers located in the same state.

         3. Issue senior securities if such issuance is specifically prohibited
by the 1940 Act or the rules or regulations thereunder.

                                       S-2

<PAGE>

         4.   Borrow money in excess of 33 1/3% of its total assets (including
the amount of money borrowed but excluding any liabilities and indebtedness not
constituting senior securities) except that the Fund may borrow up to an
additional 5% of its total assets for temporary purposes; pledge its assets
other than to secure such borrowings or in connection with when-issued and
forward commitment transactions and similar investment strategies.

         5.   Make loans of money or property to any person, except to the
extent that the securities in which the Fund may invest are considered to be
loans and except that the Fund may lend money or property in connection with the
maintenance of the value of or the Fund's interest with respect to the municipal
securities owned by the Fund.

         6.   Buy any securities on "margin." Neither the deposit of initial or
variation margin in connection with hedging and risk management transactions nor
short-term credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.

         7.   Sell any securities "short," write, purchase or sell puts, calls
or combinations thereof, or purchase or sell financial futures or options,
except as described under the heading "Investment Policies and Techniques --
Investment Techniques" and in Appendix B to this Statement of Additional
Information.

         8.   Act as an underwriter of securities, except to the extent that the
Fund may be deemed an underwriter in connection with the sale of securities in
its portfolio.

         9.   Make investments for the purpose of exercising control or
participation in management, except to the extent that exercise by the Fund of
its rights under agreements related to municipal securities would be deemed to
constitute such control or participation.

         10.  Invest in securities of other investment companies in an amount
exceeding the limitation set forth in the 1940 Act and the rules thereunder,
except as part of a merger, consolidation or other acquisition.

         11.  Invest in equity interests in oil, gas or other mineral
exploration or development programs except pursuant to the exercise by the Fund
of its rights under agreements relating to municipal securities.

         12.  Purchase or sell real estate, commodities or commodity contracts,
except to the extent that the municipal securities the Fund may invest in are
considered to be interests in real estate, commodities or commodity contracts,
or to the extent that the Fund exercises its rights under agreements relating to
such municipal securities (in which case the Fund may liquidate real estate
acquired as a result of default on a mortgage).

                       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.

                                       S-3

<PAGE>

         The Fund's policy is to invest at least 80% of its total assets in
municipal obligations with remaining maturities of less than fifteen years and
to maintain a dollar-weighted average effective maturity of the entire portfolio
between three and ten years. For this purpose, any scheduled principal
prepayments will be reflected in the calculation of dollar-weighted average
effective maturity.

         Investment In 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 municipal obligations with remaining maturities of less than fifteen
years. This policy is fundamental and cannot be changed without shareholder
approval.

         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 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 discussed 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 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 is
in taxable form. If the Fund took possession of a bankrupt issuer's assets,
income derived from the Fund's ownership and management of the assets may not be
tax exempt. Shareholders may receive more of the total distributions from the
Fund in taxable form. The Fund might not be able to take possession of the
assets of a bankrupt issuer because of laws

                                       S-4

<PAGE>

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
from its investments imposed on it by the Code. If the Fund cannot take
possession of the assets and enforce its rights, the value of the security may
be greatly diminished. This could reduce the Fund's net asset value.

         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.

         Lease Obligations. Also included within the general category of
         -----------------
municipal obligations are participations in lease obligations or installment
purchase contract obligations (hereinafter collectively called "lease
obligations") of municipal authorities or entities. Although lease obligations
do not constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is ordinarily backed
by the municipality's covenant to budget for, appropriate and make the payments
due under the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. In addition to the
"non-appropriation" risk, these securities represent a relatively new type of
financing that has not yet developed the depth of marketability associated with
more conventional bonds. Although "non-appropriation" lease obligations are
often secured by the underlying property, disposition of the property in the
event of foreclosure might prove difficult. The Fund may invest up to 100% of
its assets in "non-appropriation" lease obligations and in unrated
"non-appropriation" lease obligations believed, at the time of investment, by
the Manager to have credit characteristics equivalent to, and to be of
comparable quality as, securities that are rated investment grade.

         In evaluating such unrated lease obligations, the Manager will consider
such factors as it deems appropriate, including:

         .   whether the lease can be cancelled;

         .   the ability of the lease obligee to direct the sale of the
             underlying assets;

         .   the general creditworthiness of the lease obligor;

         .   the likelihood that the municipality will discontinue appropriating
             funding for the leased property in the event such property is no
             longer considered essential by the municipality;

                                       S-5

<PAGE>

                . the legal recourse of the lease obligee in the event of such a
                  failure to appropriate funding; and

                . any limitations which are imposed on the lease obligor's
                  ability to utilize substitute property or services other than
                  those covered by the lease obligations.

                Participation Certificates. Participation certificates are
                --------------------------
obligations issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract. Some
municipal leases and participation certificates may not be readily marketable.

                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.

INVESTMENT TECHNIQUES

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

                In connection with the investment objective and policies
described in this Statement of Additional Information and in the Prospectus, the
Fund may: purchase and sell options (including swaps, caps, floors and collars)
on municipal securities and on indices based on municipal securities; borrow
funds and issue senior securities to the extent permitted under the 1940 Act;
engage in interest rate and other hedging and risk management transactions; and
purchase and sell municipal securities on a "when-issued" or "delayed delivery"
basis. 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.

                Securities Options Transactions. The Fund may invest in options
                -------------------------------
on municipal securities, traded over-the-counter and, if applicable, traded on a
national securities exchange. In general, the Fund may purchase and sell (or
write) options on up to 20% of its assets. The Commission requires that
obligations of investment companies such as the Fund, in connection with options
sold, must comply with certain segregation or cover requirements which are more
fully described in Appendix B to this Statement of Additional Information. There
is no limitation on the amount of the Fund's assets which can be used to comply
with such segregation or cover requirements.

                                       S-6

<PAGE>

                  A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying security at the agreed-upon
exercise (or "strike") price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to buy, the
underlying security at the strike price during the option period. Purchasers of
options pay an amount, known as a premium, to the option writer in exchange for
the right under the option contract. Option contracts may be written with terms
which would permit the holder of the option to purchase or sell the underlying
security only upon the expiration date of the option.

                  The Fund may purchase put and call options in hedging
transactions to protect against a decline in the market value of municipal
securities in the Fund's portfolio (e.g., by the purchase of a put option) and
to protect against an increase in the cost of fixed-income securities that the
Fund may seek to purchase in the future (e.g., by the purchase of a call
option). In the event the Fund purchases put and call options, paying premiums
therefor, and price movements in the underlying securities are such that
exercise of the options would not be profitable for the Fund, to the extent such
underlying securities correlate in value to the Fund's portfolio securities,
losses of the premiums paid may be offset by an increase in the value of the
Fund's portfolio securities (in the case of a purchase of put options) or by a
decrease in the cost of acquisition of securities by the Fund (in the case of a
purchase of call options).

                  The Fund may also sell put and call options as a means of
increasing the yield on the Fund's portfolio and also as a means of providing
limited protection against decreases in market value of the Fund's portfolio.
When the Fund sells an option, if the underlying securities do not increase (in
the case of a call option) or decrease (in the case of a put option) to a price
level that would make the exercise of the option profitable to the holder of the
option, the option generally will expire without being exercised and the Fund
will realize as profit the premium received for such option. When a call option
written by the Fund is exercised, the option holder purchases the underlying
security at the strike price and the Fund does not participate in any increase
in the price of such securities above the strike price. When a put option
written by the Fund is exercised, the Fund will be required to purchase the
underlying securities at the strike price, which may be in excess of the market
value of such securities.

                  OTC Options. Over-the-counter options (OTC options) differ
                  -----------
from exchange-traded options in several respects. They are transacted directly
with dealers and not with a clearing corporation, and there is a risk of
non-performance by the dealer. OTC options are available for a greater variety
of securities and for a wider range of expiration dates and exercise prices than
are exchange-traded options. Because OTC options are not traded on an exchange,
pricing is normally done by reference to information from a market maker, which
information is carefully monitored by the Manager and verified in appropriate
cases. The Fund may be required to treat certain of its OTC options transactions
as illiquid securities. See Appendix B to this Statement of Additional
Information.

                  It will generally be the Fund's policy, in order to avoid the
exercise of an option sold by it, to cancel its obligation under the option by
entering into a closing purchase transaction, if available, unless it is
determined to be in the Fund's interest to sell (in the case of a call option)
or to purchase (in the case of a put option) the underlying securities. A
closing purchase transaction consists of the Fund purchasing an option having
the same terms as the option sold by the Fund and has the effect of cancelling
the Fund's position as a seller. The

                                       S-7

<PAGE>

premium which the Fund will pay executing a closing purchase transaction may be
higher than the premium received when the option was sold, depending in large
part upon the relative price of the underlying security at the time of each
transaction. To the extent options sold by the Fund are exercised and the Fund
either delivers portfolio securities to the holder of a call option or
liquidates securities in its portfolio as a source of funds to purchase
securities put to the Fund, the Fund's portfolio turnover rate will increase,
which would cause the Fund to incur additional brokerage expenses.

                  During the option period, the Fund, as a covered call writer,
gives up the potential appreciation above the exercise price should the
underlying security rise in value, and the Fund, as a secured put writer,
retains the risk of loss should the underlying security decline in value. For
the covered call writer, substantial appreciation in the value of the underlying
security would result in the security being "called away" at the strike price of
the option which may be substantially below the fair market value of such
security. For the secured put writer, substantial depreciation in the value of
the underlying security would result in the security being "put to" the writer
at the strike price of the option which may be substantially in excess of the
fair market value of such security. If a covered call option or a secured put
option expires unexercised, the writer realizes a gain, and the buyer a loss, in
the amount of the premium.

                  To the extent that an active market exists or develops,
whether on a national securities exchange or over-the-counter, in options on
indices based upon municipal securities, the Fund may purchase and sell options
on such indices, subject to the limitation that the Fund may purchase and sell
options on up to 20% of its assets. Through the writing or purchase of index
options, the Fund can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on securities except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the securities index upon which the option is based
is greater than, in the case of a call, or less than, in the case of a put, the
strike price of the option.

                  Price movements in securities which the Fund owns or intends
to purchase will not correlate perfectly with movements in the level of an index
and, therefore, the Fund bears the risk of a loss on an index option which is
not completely offset by movements in the price of such securities. Because
index options are settled in cash, a call writer cannot determine the amount of
its settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities.

                  Gains, if any, recognized or deemed to be recognized by the
Fund from transactions in securities options will be taxable income of the
Fund. Under a revenue ruling issued by the Internal Revenue Service (the "IRS"),
the Fund is required to allocate its tax-exempt income, net capital gain and
other taxable income, if any, between the Common Stock and preferred stock,
including the Preferred Shares, issued by the Fund on a pro rata basis in
proportion to the total dividends paid to each such class of stock for the tax
year. See "Tax Matters." For a further discussion of certain characteristics of
options and risks associated with options transactions, see Appendix B to this
Statement of Additional Information.

                                       S-8

<PAGE>

                  Borrowing and Leverage. The Fund is authorized to borrow
                  ----------------------
amounts up to 33-1/3% of its total assets (including the amount borrowed). The
use of borrowed Funds involves the speculative factor known as "leverage." 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 borrowings or
preferred stock issuances exceed the interest or 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. The Fund may also borrow up to an additional
5% of its total assets for temporary purposes without regard to the foregoing
limitations. See "Investment Restrictions."

                  In addition to the foregoing, the Fund may borrow on a
short-term basis in order to facilitate the settlement of portfolio securities
transactions.

                  Interest Rate and Other Hedging Transactions. In order to seek
                  --------------------------------------------
to protect the value of its portfolio securities against declines resulting from
changes in interest rates or other market changes, the Fund may enter into the
following hedging transactions: financial futures contracts and related options
contracts.

                  The Fund may enter into various interest rate hedging
transactions using financial instruments with a high degree of correlation to
the municipal securities which the Fund may purchase for its portfolio,
including interest rate futures contracts (e.g., futures contracts on U.S.
Treasury securities) and futures contracts on interest rate related indices
(e.g., municipal bond indices). The Fund may also purchase and write put and
call options on such futures contracts and on the underlying instruments. The
Fund may enter into these transactions in an attempt to "lock in" a return or
spread on a particular investment or portion of its portfolio, to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date, or for other risk management strategies such as managing the
effective dollar-weighted average duration of the Fund's portfolio. Financial
futures and options contracts and the risk attendant to the Fund's use thereof,
are more completely described in Appendix B to this Statement of Additional
Information. The successful utilization of hedging and risk management
transactions requires skills different from those needed in the selection of the
Fund's portfolio securities.

                                       S-9

<PAGE>

                  The Fund will not engage in the foregoing transactions for
speculative purposes, but only in limited circumstances as a means to hedge
risks associated with management of the Fund's portfolio. Typically, investments
in futures contracts and sales of futures options contracts require the Fund to
deposit in a custodial account a good faith deposit, known as "initial margin,"
in connection with its obligations in an amount of cash or specified debt
securities which generally is equal to 1%-15% of the face amount of the
contract, which initial margin requirement may be revised periodically by the
applicable exchange as the volatility of the contract fluctuates. Thereafter,
the Fund must make additional deposits with the applicable financial
intermediary equal to any net losses due to unfavorable price movements of the
contract, and will be credited with an amount equal to any net gains due to
favorable price movements. These additional deposits or credits are calculated
and required daily and are known as "variation margin."

                  The Commission generally requires that when investment
companies, such as the Fund, effect transactions of the foregoing nature, such
Funds must either segregate cash or liquid securities in the amount of their
obligations under the foregoing transactions, or cover such obligations by
maintaining positions in portfolio securities, futures contracts or options that
would serve to satisfy or offset the risk of such obligations. When effecting
transactions of the foregoing nature, the Fund will comply with such segregation
or cover requirements. There is no limitation on the percentage of the Fund's
assets which may be segregated with respect to such transactions.


                  The Fund will not enter into a futures contract or related
option, if immediately after such investment, the sum of the amount of its
initial margin deposit and premiums on open contracts and options would exceed
5% of the fair market value of the Fund's total assets after taking into account
unrealized profits and unrealized losses on any such contracts. The Fund may,
however, invest more than such amount in the future if it obtains authority to
do so from the appropriate regulatory agencies without requiring the Fund to
register as a commodity pool operator or adversely affecting its status as an
investment company for federal securities law or a regulated investment company
for income tax purposes.

                  All of the foregoing transactions present certain risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the securities being hedged creates the
possibility that losses on the hedge may be greater than gains in the value of
the Fund's securities. In addition, these instruments may not be liquid in all
circumstances and generally are closed out by entering into offsetting
transactions rather than by delivery or cash settlement at maturity. As a
result, in volatile markets, the Fund may not be able to close out a transaction
on favorable terms or at all. Although the contemplated use of those contracts
should tend to reduce the risk of loss due to a decline in the value of the
hedged security, at the same time the use of these contracts could tend to limit
any potential gain which might result from an increase in the value of such
security. Finally, the daily deposit requirements for futures contracts and
sales of futures options contracts create an ongoing greater potential financial
risk than do option purchase transactions, where the exposure is limited to the
cost of the premium for the option.

                  Successful use of futures contracts and options thereon by the
Fund is subject to the ability of the Manager to predict correctly movements in
the direction of interest rates and

                                      S-10

<PAGE>

other factors affecting securities markets. If the Manager's expectations are
not met, the Fund would be in a worse position than if a hedging strategy had
not been pursued. For example, if the Fund has hedged against the possibility of
an increase in interest rates which would adversely affect the price of
securities in its portfolio and the price of such securities increases instead,
the Fund will lose part or all of the benefit of the increased value of its
securities because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash to meet daily
variation margin requirements, it may have to sell securities to meet such
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it is disadvantageous to do so.

                  In addition to engaging in transactions utilizing options on
futures contracts, the Fund may purchase put and call options on securities and,
as developed from time to time, on interest indices and other instruments.
Purchasing options may increase investment flexibility and improve total return,
but also risks loss of the option premium if an asset the Fund has the option to
buy declines in value or if an asset the Fund has the option to sell increases
in value.

                  New options and futures contracts and other financial products
and various combinations thereof continue to be developed and the Fund may
invest in any such options, contracts and products as may be developed to the
extent consistent with its investment objective and the regulatory requirements
applicable to investment companies.

                  Gains, if any, recognized or deemed to be recognized by the
Fund from its hedging activities will be taxable income of the Fund. See "Tax
Matters."

                  When-Issued And Delayed Delivery Transactions. The Fund may
                  ---------------------------------------------
purchase municipal securities on a "when-issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher than yields on the municipal securities obtained pursuant
to such transactions. Because the Fund relies on the buyer or seller, as the
case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account,
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. The Fund will make commitments to
purchase municipal securities on such basis only with the intention of actually
acquiring these securities, but the Fund may sell such securities prior to the
settlement date if such sale is considered to be advisable.

                  To the extent that the Fund engages in "when-issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objective and policies. However, although the Fund does not intend to engage in
such transactions for speculative purposes, purchases of securities on

                                      S-11

<PAGE>

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" 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.


                  Repurchase Agreements. The Fund may use repurchase agreements
                  ---------------------
to manage its cash position. A repurchase agreement is a contractual agreement
whereby the seller of securities (U.S. Government securities or municipal bonds)
agrees to repurchase the same security at a specified price on a future date
agreed upon by the parties. The agreed-upon repurchase price determines the
yield during the Fund's holding period. Repurchase agreements are considered to
be loans collateralized by the underlying security that is the subject of the
repurchase contract. Income, if any, generated from transactions in repurchase
agreements will be taxable. See "Tax Matters" for information relating to the
allocation of taxable income, if any, between the Common Stock and Preferred
Shares. If the other party to the repurchase 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 bear the risk of
loss in the value of the security.

                  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.

PORTFOLIO TRADING AND TURNOVER RATE

                  The Fund cannot accurately predict its turnover rate, but
anticipates that its annual turnover rate will not exceed 100%. The Fund's
turnover rate is calculated by dividing the lesser of the Fund's sales or
purchases of securities during a year (excluding any security the maturity of
which at the time of acquisition is one year or less) by the average monthly
value of the Fund's securities for the year. The Fund generally will not engage
in the trading of securities for the purpose of realizing short-term profits,
but it will adjust its portfolio as it deems advisable in view of prevailing or
anticipated market conditions to accomplish the Fund's investment

                                      S-12

<PAGE>

objective. For example, the Fund may sell portfolio securities in anticipation
of a movement in interest rates. Higher turnover rates can result in
corresponding increases in the Fund's transaction costs, which must be borne by
the Fund and its shareholders. High portfolio turnover may also result in the
realization of substantial net short-term capital gains, and any distributions
resulting from such gains will be taxable at ordinary income rates for federal
income tax purposes. Other than for tax purposes, frequency of portfolio
turnover will not be a limiting factor if the Fund considers it advantageous to
purchase or sell securities.

                             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.

<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*+              Chairman of the Board      Managing Director of Salomon
  125 Broad Street               of Directors, Chief        Smith Barney; Chairman, Co-
  New York, NY  10004            Executive Officer and      Chairman or Director/Trustee of
                                 President                  the Board of 77 investment
                                                            companies associated with
                                                            Citigroup; President, Smith Barney
                                                            Fund Management LLC and
                                                            Travelers Investment Adviser, Inc.
                                                            ("TIA"); 68.


Lee Abraham+                     Director                   Retired; Director of R.G. Barry
  106 Barnes Road                                           Corp., a footwear manufacturer,
  Stamford, CT  06902                                       Signet Group plc, a specialty
                                                            retailer and eNote.com, Inc.,
                                                            a computer hardware company;
                                                            formerly, Chairman and Chief
                                                            Executive Officer of Associated
                                                            Merchandising Corporation, a
                                                            major retail merchandising and
                                                            sourcing organization;
                                                            Director/Trustee of 11 investment
                                                            companies associated with
                                                            Citigroup; 74.


Allan J. Bloostein+              Director                   President of Allan J. Bloostein
  27 West 67th Street                                       Associates, a consulting firm;
  New York, NY  10023                                       Director of CVS Corporation, a
                                                            drugstore chain, and Taubman
</TABLE>

                                      S-13

<PAGE>

<TABLE>
<CAPTION>
                                     POSITIONS AND          PRINCIPAL OCCUPATIONS
                                    OFFICES WITH THE       DURING PAST FIVE YEARS
      NAME AND ADDRESS                   FUND                     AND AGE
 ------------------------------     ----------------     -------------------------------
<S>                                 <C>                 <C>
                                                         Centers Inc., a real estate
                                                         development company; retired
                                                         Vice Chairman and Director of
                                                         The May's Department Stores
                                                         Company; Director/Trustee of 18
                                                         investment companies associated
                                                         with Citigroup; 72.

Jane F. Dasher+                         Director         Investment Officer, Korsant
  283 Greenwich Avenue                                   Partners, a family investment
  Greenwich, CT  06830                                   company; prior to 1997,
                                                         independent financial consultant;
                                                         Director/Trustee of 11 investment
                                                         companies associated with
                                                         Citigroup; 52.

Donald R. Foley+                        Director         Retired; formerly, Vice President
  3668 Freshwater Drive                                  of Edwin Bird Wilson,
  Jupiter, FL  33477                                     Incorporated, an advertising firm;
                                                         Director/Trustee of 11 investment
                                                         companies associated with
                                                         Citigroup; 79.

Richard E. Hanson, Jr. +                Director         Retired; formerly, Head of School,
  2751 Vermont Rte. 140                                  The New Atlanta Jewish Community
  Poultney, VT 05764                                     High School, Atlanta, Georgia;
                                                         Headmaster, The Peck School,
                                                         Morristown, New Jersey;
                                                         Director/Trustee of 11 investment
                                                         companies associated with
                                                         Citigroup; 60.

Paul Hardin+                            Director         Chancellor Emeritus and Professor
  12083 Morehead                                         of Law at the University of North
  Chapel Hill, NC  27514                                 Carolina at Chapel Hill; formerly,
                                                         Director of The Summit
                                                         Bancorporation; formerly,
                                                         Chancellor of the University of
                                                         North Carolina at Chapel Hill;
                                                         Director/Trustee of 13 investment
                                                         companies associated with
                                                         Citigroup; 70.

Roderick C. Rasmussen+                  Director         Investment counselor; formerly,
  9 Cadence Court                                        Vice President of Dresdner and
  Morristown, NJ  07960                                  Company Inc., investment
                                                         counselors; Director/Trustee of 11
                                                         investment companies associated
                                                         with Citigroup; 75.

John P. Toolan+                         Director         Retired; Trustee of John Hancock
  13 Chadwell Place                                      Funds; formerly, Director and
  Morristown, NJ  07960                                  Chairman of Smith Barney Trust
</TABLE>

                                      S-14

<PAGE>

<TABLE>
<CAPTION>
                                     POSITIONS AND                PRINCIPAL OCCUPATIONS
                                    OFFICES WITH THE              DURING PAST FIVE YEARS
      NAME AND ADDRESS                   FUND                             AND AGE
 ------------------------------     ----------------            ----------------------------------
<S>                                 <C>                         <C>
                                                                Company, Director of Smith
                                                                Barney Holdings Inc. and various
                                                                subsidiaries, Senior Executive
                                                                Vice President, Director and
                                                                Member of the Executive
                                                                Committee of Smith Barney;
                                                                Director/Trustee of 11 investment
                                                                companies associated with
                                                                Citigroup; 71.

Lewis E. Daidone                     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 83
                                                                investment companies associated
                                                                with Citigroup;  Director and
                                                                Senior Vice President of Smith
                                                                Barney Fund Management and
                                                                TIA; 44.

Peter Coffey                         Vice President and         Managing Director of Salomon
   333 West 34th Street              Investment Officer         Smith Barney, Vice President of
   New York, NY 10001                                           Smith Barney Fund Management
                                                                and 5 investment companies
                                                                associated with Citigroup; 57.

Anthony Pace                         Controller                 Director of Salomon Smith Barney
   125 Broad Street                                             and Controller or Assistant
   New York, NY  10004                                          Treasurer of 61 investment
                                                                companies associated with
                                                                Citigroup since 1998; 36.

Christina T. Sydor                   Secretary                  Managing Director of Salomon
   666 Fifth Avenue                                             Smith Barney and Secretary of
   New York, NY  10103                                          certain investment companies
                                                                associated with Citigroup;
                                                                Secretary and General Counsel of
                                                                Smith Barney Fund Management; 50.
</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.

     Fees for directors who are not "interested persons" of the Fund and who are
directors of a group of funds sponsored by Salomon Smith Barney (the "Fund
Complex") are set at $60,000 per year and are allocated based on relative net
assets of each fund in the Fund Complex, plus a per-meeting fee of $2,500 with
respect to in-person meetings. In addition, these directors receive $100 per
fund for each telephone meeting plus travel and out-of-pocket

                                      S-15

<PAGE>

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.

         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
January 1, 2001 through December 31, 2001). The Fund does not have a retirement
or pension plan.


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

<S>                         <C>                 <C>                           <C>
Lee Abraham ................      $166                       $0                      $ 71,625
Allan J. Bloostein .........      $191                       $0                      $116,400
Jane F. Dasher .............      $229                       $0                      $ 74,500
Donald R. Foley+ ...........      $ 97                       $0                      $ 49,900
Richard E. Hanson, Jr. .....      $129                       $0                      $ 73,800
Paul Hardin ................      $129                       $0                      $ 97,150
Heath B. McLendon* .........      $  0                       $0                      $      0
Roderick C. Rasmussen+ .....      $189                       $0                      $ 44,000
John P. Toolan+ ............      $  0                       $0                      $      0
</TABLE>
_________

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

+ Pursuant to a deferred compensation plan, the indicated persons elected to
defer the following amounts of their compensation from the Fund: Donald R.
Foley: $22, Roderick C. Rasmussen: $19, and John P. Toolan: $229, and the
following amounts of their total compensation from the Fund Complex: Donald R.
Foley: $21,600, Roderick C. Rasmussen: $30,000, and John P. Toolan: $71,500.


         Upon attainment of age 72, the Fund's current Directors may elect to
change to emeritus status. Any directors elected or appointed to the Board in
the future will be required to change to emeritus status upon attainment of age
80. 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 December 31, 2001, aggregate compensation from the Fund to
emeritus directors totaled $47.

         The Board has no compensation committee or any committee performing
similar functions. The Board has an administrative and governance committee
composed of Lee Abraham, Jane F. Dasher, Donald R. Foley and Paul Hardin, which
acts as a nominating committee of the Board. The Fund has an audit and
investment performance committee (the "Audit Committee"). The Audit Committee is
charged with recommending a firm of independent auditors to the Board and
reviewing the Fund's accounting matters. The Audit Committee consists of Allan
J. Bloostein, Richard E. Hanson, Jr., Roderick C. Rasmussen and John P. Toolan.
The Fund has a pricing committee which is charged with determining fair value
prices for securities when required. The directors of these respective
committees are not "interested persons" of the Fund as defined under the 1940
Act.

         Eight meetings of the Board were held between January 1, 2001 and
December 31, 2001, four of which were regular meetings. Four administrative and
governance committee meetings, and three Audit Committee meetings were held. No
pricing committee meetings were held. No incumbent director attended less
than 75% of meetings of the Board or of any committee on which he or she serves.



INVESTMENT MANAGER

         Smith Barney Fund Management LLC, or SBFM (formerly known as SSB Citi
Fund Management LLC), serves as the Fund's investment manager. Pursuant to an
investment management agreement (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 Manager is also the Fund's administrator
and oversees the Fund's non-investment operations and its relations with its
service providers. The Manager administers the Fund's corporate affairs subject
to the supervision of the Fund's 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

                                      S-16

<PAGE>

Commission and the filing of federal, state and local income tax returns) as are
not being furnished by the Fund's custodian.

         The Investment Management Agreement provides, among other things, that
the Manager will bear all expenses of its employees and overhead incurred in
connection with its duties under the Investment Management Agreement, other than
those assumed by the Fund, as described in the Prospectus, and will pay all
Director's fees and salaries of the Fund's Directors and officers who are
affiliated persons (as such term is defined in the 1940 Act) of the Manager.

         The Investment Management Agreement provides that the Fund shall pay to
the Manager a monthly fee in arrears equal to 0.60% per year of the Fund's
average daily total net assets at the end of each month. For purposes of
calculating the management fee, the liquidation value of any outstanding
preferred stock of the Fund is not deducted in determining the Fund's average
daily total net assets.

         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.

         The Investment Management Agreement also provides that in the absence
of willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Manager is not liable to the Fund or any of the
Fund's shareholders for any act or omission by the Manager in the supervision or
management of its investment activities or for any loss sustained by the Fund or
the Fund's shareholders.


        The Investment Management Agreement will continue in effect for
successive periods of 12 months, provided that each continuance is specifically
approved at least annually by both (1) the vote of a majority of the Fund's
Board or the vote of a "majority of the outstanding voting securities" of the
Fund (as such term is defined in the 1940 Act) and (2) by the vote of a majority
of the Directors who are not parties to such agreement or interested persons (as
such term is defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The Investment
Management Agreement may be terminated at any time by the Fund, without the
payment of any penalty, upon the vote of the majority of the Fund's Board or a
majority of the outstanding voting securities of the Fund, or by the Manager, on
60 days' written notice by either party to the Investment Management Agreement
to the other. The Investment Management Agreement will terminate automatically
in the event of its assignment (as such term is defined in the 1940 Act and the
rules thereunder).

         Peter Coffey, 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. Coffey is a managing director of Salomon
Smith Barney.

         For the years ended December 31, 1999, 2000 and 2001 the Fund paid
$516,522, $494,918 and $872,221, respectively, in management fees to the
Manager.

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

                                       S-17

<PAGE>

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 website 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. The Fund invests primarily in the
over-the-counter market. Securities are generally traded in the over-the-counter
market on a "net" basis with dealers acting as principal for their own accounts
without charging a stated commission, although the price of the security usually
includes a profit to the dealer. The Fund also purchases securities at times in
underwritten offerings, where the price includes a fixed amount of compensation,
generally referred to as the underwriter's concession or discount. On occasion,
the Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid. The Fund will not
engage in any principal transactions with Salomon Smith Barney, except pursuant
to an exemptive order under the 1940 Act.

         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 Fund's policy regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices consistent with efficient execution of transactions in seeking
to implement the Fund's policies. The Manager will effect transactions with
those dealers whom the Manager believes provide the most favorable prices and
who are capable of providing efficient executions. Those factors that the
Manager believes contribute to efficient execution include size of the order,
difficulty of execution, operational capabilities and facilities of the dealer
involved, whether that dealer has risked its own capital in positioning a block
of securities and the dealer's prior experience in effecting transactions of
this type. If the Manager believes such price and execution are

                                       S-18

<PAGE>

obtainable from more than one dealer, it may give consideration to placing
portfolio transactions with those dealers who also furnish research and other
services to the Manager. Such services may include, but are not limited to, any
one or more of the following: information as to the availability of securities
for purchase or sale; statistical or factual information or opinions pertaining
to investment; economic analysis; and appraisals or evaluations of portfolio
securities. The information and services so received by the Manager may be of
benefit to the Manager in the management of other accounts and may not in all
cases benefit the Fund directly. While the receipt of such information and
services is useful in varying degrees and would generally reduce the amount of
research or services otherwise performed by the Manager and thus may reduce its
expenses, it is of indeterminable value and the advisory fee paid to the Manager
is not reduced by any amount that may be attributable to the value of such
services.

                                 NET ASSET VALUE

         For the purpose 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.
The net asset value is computed as of the close of regular trading on the New
York Stock Exchange (normally 4 p.m.) on each day the New York Stock Exchange is
open for business. The Fund reserves the right to calculate the net asset value
more frequently if deemed desirable.

         The Fund's securities are valued on the basis of bid prices provided by
a pricing service when the Fund believes such prices reflect fair market value.
Pricing services generally determine value by reference to transactions in
municipal securities, quotations from municipal bond dealers, market
transactions in comparable securities and various relationships between
securities. If a pricing service is not used, municipal securities will be
valued at the quoted bid prices provided by municipal bond dealers. Short-term
instruments maturing within 60 days will be valued at cost plus amortized
discount, if any, when the Board has determined that amortized cost equals fair
value. Securities and other assets that are not priced by a pricing service and
for which market quotations are not available will be valued in good faith at
fair value by or under the direction of the Board.

         If any securities held by the Fund are restricted as to resale, the
Manager will determine their fair value following procedures approved by the
Board. The Board will periodically review such valuations and procedures. The
fair value of such securities generally will be determined as the amount which
the Fund could reasonably expect to realize from an orderly disposition of such
securities over a reasonable period of time. The valuation procedures applied in
any specific instance are likely to vary from case to case. However,
consideration will be generally given to the financial position of the issuer
and other fundamental analytical data relating to the investment and to the
nature of the restrictions on disposition of securities (including any
registration expenses that might be borne by the Fund in connection with such
disposition). In addition, specific factors also generally will be considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities, and any available analysts' reports
regarding the issuer. Shares of closed-end investment companies frequently trade
at a discount from net asset value, but in some cases trade at a premium. Since
the market price of the Fund's shares is

                                       S-19

<PAGE>

determined by such factors as trading volume of the shares, general market and
economic conditions and other factors beyond the control of the Fund, the Fund
cannot predict whether its shares will trade at, below or above its computed net
asset value.

                        ADDITIONAL INFORMATION CONCERNING
                        THE AUCTIONS FOR PREFERRED SHARES

GENERAL

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

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

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

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

CONCERNING THE AUCTION AGENT

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

                                       S-20

<PAGE>

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

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

BROKER-DEALERS

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

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

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

                                      S-21

<PAGE>

               CERTAIN PROVISIONS IN THE ARTICLES OF INCORPORATION


        The Articles of Incorporation 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 Articles require a vote by holders of at least 75% of the shares of
each class of capital stock of the Fund outstanding and entitled to vote, except
as described below, to authorize (1) the conversion of the Fund from a
closed-end to an "open-end company" or any amendment to the Articles to make any
class of the Fund's stock a "redeemable security" (as such terms are defined in
the 1940 Act); (2) any merger or consolidation or share exchange of the Fund
with or into any other company (including, without limitation, a partnership,
corporation, joint venture, business trust, common loan trust or any other
business organization); (3) the dissolution or liquidation of the Fund,
notwithstanding any other provision in the Articles; (4) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition (in one transaction or
a series of transactions) of all or substantially all of the Fund's assets other
than in the ordinary course of the Fund's business; (5) a change in the nature
of the business of the Fund so that it would cease to be an investment company
registered under the 1940 Act; or (6) the issuance or transfer by the Fund (in
one transaction or a series of transactions) of any securities of the Fund to
any other person in exchange for cash, securities or other property having an
aggregate fair market value of $1,000,000 or more excluding (i) sales of any
securities of the Fund in connection with a public offering thereof, (ii)
issuance of any securities of the Fund pursuant to a dividend reinvestment plan
adopted by the Fund or pursuant to a stock dividend and (iii) issuances of any
securities of the Fund upon the exercise of any stock subscription rights
distributed by the Fund; provided, with respect to (1) through (5), if such
action has been authorized by the affirmative vote of at least 70% of the entire
Board, the affirmative vote of the holders of only a majority of the Fund's
shares of capital stock outstanding and entitled to vote at the time is
required; and provided, further, with respect to (6), if such transaction has
been authorized by the affirmative vote of at least 70% of the entire Board, no
shareholder vote is required to authorize such action. None of the foregoing
provisions may be amended except by the vote of at least 75% of the shares of
each class of capital stock of the Fund outstanding and entitled to vote
thereon. The percentage votes required under these provisions, which are greater
than the minimum requirements under Maryland law or the 1940 Act, will make more
difficult a change in the Fund's business or management and may have the effect
of depriving common shareholders of an opportunity to sell shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or similar transaction. The Board
believes that the provisions of the Articles relating to such higher votes are
in the best interest of the Fund and its shareholders.


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

             REPURCHASE OF COMMON STOCK; CONVERSION TO OPEN-END FUND

        The Fund is a closed-end investment company and, as such, its common
shareholders do not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Stock trades in the open market at a price that is a
function of several factors. Shares

                                      S-22

<PAGE>


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, 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.

         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. Accordingly, there can
be no assurance that any of these actions will be taken or, if taken, will cause
the Fund's shares to trade at a price equal to their net asset value.

         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, 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).

         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. Nevertheless, the fact that the Fund's shares of Common Stock
may be the subject of repurchase or tender offers at net asset value from time
to time, or that the Fund may be converted to an open-end company, may reduce
any spread between market price and net asset value that might otherwise exist.
Any service fees incurred in connection with any tender offer made by the Fund
will be borne by the Fund and will not reduce the stated consideration to be
paid to tendering shareholders.

         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.

         Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board would have to comply with the Securities Exchange Act of 1934, as
amended, and the 1940 Act and the rules and regulations thereunder.

                                      S-23

<PAGE>


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


                                   TAX MATTERS


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


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



         To qualify under Subchapter M for tax treatment as a regulated
investment company, the Fund must, among other things: (a) derive at least 90%
of its annual gross income (including tax-exempt interest) from dividends,
interest, payments with respect to certain securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies, or other
income (including but not limited to gains from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies and (b) diversify its holdings so that, at the end of
each quarter of the Fund's taxable year (i) at least 50% of the market value of
the Fund's assets is represented by cash, cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities, with such other securities limited, with respect to any one issuer,
to an amount not greater in value than 5% of the Fund's total assets, and to not
more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the market value of the Fund's assets is invested in the
securities (other than U.S. Government securities or securities of other
regulated investment companies) of any one issuer or two or more issuers
controlled by the Fund and engaged in the same, similar or related trades or
businesses. As a regulated investment company, the Fund will not be subject to
federal income tax in any taxable year with respect to its "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
"net capital gain" (i.e., the excess of the Fund's net long-term capital gain
over net short-term capital loss), if any, that it distributes in each taxable
year to its shareholders, provided that it distributes at least 90% 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 at least equal to the sum of 98% of its ordinary


                                      S-24

<PAGE>


taxable income for such year and 98% of its capital gain net income for the one-
year period ending October 31 in such year, plus any shortfalls from the prior
year's required distribution, is liable for a 4% excise tax on the excess of the
required distribution for such calendar year over the distributed amount for
such calendar year. To avoid the imposition of this excise tax, the Fund
generally intends to make the required distributions of its 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 required to take into account 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
character, amount and timing of distributions taxable to a shareholder.
Moreover, if the Fund invests in both Section 1256 Contracts and offsetting
positions in those contracts, then the Fund might not be able to receive the
benefit of certain realized losses for an indeterminate amount of time. The Fund
expects that its activities with respect to Section 1256 Contracts and
offsetting positions in those Contracts (1) will not cause it or its
shareholders to be treated as receiving a materially greater amount of capital
gains or distributions than actually realized or received and (2) will permit it
to use substantially all of its losses for the taxable years in which the losses
actually occur (to the extent it realizes corresponding gains in such
years).

         The Fund intends to qualify to pay "exempt-interest dividends", as
defined in the Code, on its shares of Common Stock and Preferred Shares by
satisfying the requirement that at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of tax-exempt
municipal obligations. Exempt-interest dividends are dividends or any part
thereof (other than a capital gain dividend) paid by the Fund which are
attributable to interest on tax-exempt municipal obligations and are so
designated by the Fund. Exempt-interest dividends will be exempt from regular
federal income tax, but may be subject to the AMT. Insurance proceeds received
by the Fund under any insurance policies in respect of scheduled interest
payments on defaulted municipal obligations will generally be excludable from
federal gross income under Section 103(a) of the Code. In the case of municipal
lease obligations, however, there can be no assurance that bond insurance
payments received in lieu of interest on such obligations in the event of a
"non-appropriation" will be excludable from gross income for federal income tax
purposes. See "Investment Policies and Techniques" above. Gains of the Fund that
are attributable to market discount on certain municipal obligations are treated
as ordinary taxable income. Distributions to shareholders by the Fund of net
income received, if any, from taxable temporary investments and net short-term
capital gains, if any, realized by the Fund will be taxable to its shareholders
as ordinary income. Distributions by the Fund of its net capital gains (i.e.,
the excess of net long-term capital gain over net short-term

                                      S-25

<PAGE>

capital loss), if any, are taxable as long-term capital gains 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 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 dividend received deduction
available to corporate shareholders.


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

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

         If at any time when the Preferred Shares are outstanding, the Fund
fails to meet the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Coverage, the Fund will be required to suspend
distributions to holders of its shares of Common Stock until such maintenance
amount or asset coverage, as the case may be, is restored. See

                                      S-26

<PAGE>


"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 90% of the sum of 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 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 Preferred Shares in order to maintain or restore such
maintenance amount or asset coverage and avoid the adverse consequences to the
Fund and its shareholders of failing to qualify as a regulated investment
company. There can be no assurance, however, that any such redemption would
achieve such objectives.



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


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


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

                                      S-27

<PAGE>


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

         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 (or amounts credited as undistributed capital
gain) 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.

                                      S-28

<PAGE>


         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 amount of
a taxpayer's alternative minimum taxable income. To the extent that the Fund
receives income from municipal obligations which is subject to the AMT, a
portion of the dividends paid by it, although otherwise exempt from federal
income tax, will be taxable to its shareholders to the extent that their tax
liability is determined under the AMT. The Fund will annually supply a report
indicating the percentage of the Fund's income attributable to interest on
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 "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 refunded
or credited against a taxpayer's federal income tax liability, provided the
required information is furnished to the IRS.


         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 for the holders of Common Stock 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.


                                      S-29

<PAGE>

                                     EXPERTS


     The financial statements of the Fund as of December 31, 2000 incorporated
by reference in this Statement of Additional Information in reliance upon the
report of KPMG LLP, independent auditors, are incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.


                                      S-30

<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.

                  Ba Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.

                  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

                                      A-1

<PAGE>

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 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.

                                      A-2

<PAGE>

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

                  BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC or C is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree of
speculation and are classified as "vulnerable" claims-paying ability rating.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
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" indicates 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 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

                                      A-3

<PAGE>

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, 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 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.

                                      A-4

<PAGE>

                  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-5

<PAGE>

                                                                      Appendix B

                               OPTIONS AND FUTURES

           General. The Fund may engage in futures and options transactions in
           -------
accordance with its investment objective and policies. The Fund may engage in
such transactions if it appears advantageous to the Manager to do so in order to
pursue its investment objective, to hedge (i.e. protect) against the effects of
market conditions and to stabilize the value of its assets. The Manager may also
decide not to engage in any of these investment practices. The use of futures
and options, and the possible benefits and attendant risks are discussed below,
along with information concerning certain other investment policies and
techniques.

           There are risks associated with futures and options transactions.
Because it is not possible to perfectly correlate the price of the securities
being hedged with the price movement in a futures contract, it is not possible
to provide a perfect offset on losses on the futures contract or the option on
the contract.

           Because there is imperfect correlation between the Fund's securities
that are hedged and the futures contract, the hedge may not be fully effective.
Losses on the Fund's security may be greater than gains on the futures contract,
or losses on the futures contract may be greater than gains on the securities
subject to the hedge. To compensate for imperfect correlation, the Fund may
over-hedge or under-hedge by entering into futures contracts or options on
futures contracts in dollar amounts greater or less than the dollar amounts of
the securities being hedged. If market movements are not as anticipated, the
Fund could lose money from these positions.

           If the Fund hedges against an increase in interest rates, and rates
decline instead, the Fund will lose all or part of the benefit of the increase
in value of the securities it hedged because it will have offsetting losses in
its futures or options positions. Also, in order to meet margin requirements,
the Fund may have to sell securities at a time it would not normally choose.

           Financial Futures Contracts. The Fund may enter into financial
           ---------------------------
futures contracts for the future delivery of a financial instrument, such as a
security, or the cash value of a securities index. This investment technique is
designed primarily to hedge against anticipated future changes in market
conditions which otherwise might adversely affect the value of securities which
the Fund holds or intends to purchase. A "sale" of a futures contract means the
undertaking of a contractual obligation to deliver the securities, or the cash
value of an index, called for by the contract at a specified price during a
specified delivery period. At the time of delivery, in the case of fixed-income
securities pursuant to the contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than that specified in the contract. In some cases, securities
called for by a futures contract may not have been issued at the time the
contract was written.

           Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the securities. The offsetting of a

                                       B-1

<PAGE>

contractual obligation is accomplished by purchasing (or selling, as the case
may be) on a commodities exchange an identical futures contract calling for
delivery in the same period. Such a transaction cancels the obligation to make
or take delivery of the securities. All transactions in the futures market are
made, offset or fulfilled through a clearing house associated with the exchange
on which the contracts are traded. The Fund will incur brokerage fees when it
purchases or sells contracts, and will be required to maintain margin deposits.
Futures contracts entail risk. If the Manager's judgment about the general
direction of securities markets or interest rates is wrong, the Fund's overall
performance may be poorer than if the Fund had not entered into such contracts.

           There may be an imperfect correlation between movements in prices of
futures contracts and portfolio securities being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the securities and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities rather than engage in closing
transactions due to the resultant reduction in the liquidity of the futures
market. In addition, because from the point of view of speculators, the margin
requirements in the futures market may be less onerous than margin requirements
in the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities and movements in the prices of
futures contracts, a correct forecast of market trends by the Manager may still
not result in a successful hedging transaction. If this should occur, the Fund
could lose money on the financial futures contracts and also on the value of its
portfolio securities.

           Options on Financial Futures Contracts. The Fund may purchase and
           --------------------------------------
write call and put options on financial futures contracts. An option on a
futures contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract at a specified exercise price at any
time during the period specified in the terms of the option. Upon exercise, the
writer of the option delivers the futures contract to the holder at the exercise
price. The Fund would be required to deposit with its custodian initial margin
and maintenance margin with respect to put and call options on futures contracts
written by it. Options on futures contracts involve risks similar to those risks
relating to transactions in financial futures contracts described above. Also,
an option purchased by the Fund may expire worthless, in which case the Fund
would lose the premium paid therefor.

           Options on Securities. The Fund may write covered call options so
           ---------------------
long as it owns securities which are acceptable for escrow purposes and may
write secured put options, which means that so long as the Fund is obligated as
a writer of a put option, it will invest an amount, not less than the exercise
price of the put option, in securities consistent with the Fund's investment
objective and policies and restrictions on investment. See "Investment
Objective" and "Investment Restrictions." A call option gives the purchaser the
right to buy, and the writer the obligation to sell, the underlying security at
the exercise price during the period specified in the terms of the option. A put
option gives the purchaser the right to sell, and the writer the obligation to
buy, the underlying security at the exercise price during the period specified
in the

                                       B-2

<PAGE>

terms of the option. The premium received for writing an option will reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to the market price, the price volatility of
the underlying security, the option period, supply and demand and interest
rates. The Fund may write or purchase spread options, which are options for
which the exercise price may be a fixed dollar spread or yield spread between
the security underlying the option and another security that is used as a
benchmark. The exercise price of an option may be below, equal to or above the
current market value of the underlying security at the time the option is
written. The buyer of a put who also owns the related security is protected by
ownership of a put option against any decline in that security's price below the
exercise price, less the amount paid for the option. At times the Fund may wish
to establish a position in a security upon which call options are available. By
purchasing a call option on such security the Fund would be able to fix the cost
of acquiring the security, which is the cost of the call plus the exercise price
of the option. This procedure also provides some protection from an unexpected
downturn in the market, because the Fund is only at risk for the amount of the
premium paid for the call option which it can, if it chooses, permit to expire.

           Options on Securities Indices. The Fund also may purchase and write
           -----------------------------
call and put options on securities indices. Through the writing or purchase of
index options, the Fund can achieve many of the same objectives as through the
use of options on individual securities. Options on securities indices are
similar to options on a security except that, rather than the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive upon exercise of the option, an
amount of cash, if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
the difference between the closing price of the index and the exercise price of
the option. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike options on securities (which
require, upon exercise, delivery of the underlying security), settlements of
options on securities indices, upon exercise thereof, are in cash, and the gain
or loss of an option on an index depends on price movements in the market
generally (or in a particular industry or segment of the market on which the
underlying index is based) rather than price movements in individual securities,
as is the case with respect to options on securities.

           When the Fund writes an option on a securities index, it will be
required to deposit with its custodian eligible securities equal in value to
100% of the exercise price in the case of a put, or the contract's value in the
case of a call. In addition, where the Fund writes a call option on a securities
index at a time when the contract value exceeds the exercise price, the Fund
will segregate, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess.

           Options on securities and index options involve risks similar to
those risks relating to transactions in financial futures described above. Also,
an option purchased by the Fund may expire worthless, in which case the Fund
would lose the premium paid therefor.

           Over-the-Counter Options. As previously indicated in the Prospectus
           ------------------------
and Statement of Additional Information, the Fund may deal in OTC options.

                                       B-3

<PAGE>

The Fund and the Manager have found the dealers with which they engage in OTC
options transactions generally agreeable to and capable of entering into
closing transactions. The Fund has adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse impact of such
transactions upon the liquidity of the Fund's portfolio.

           As part of these procedures the Fund will only engage in OTC options
transactions with respect to U.S. Government securities with primary dealers
that have been specifically approved by the Board. The Fund will engage in OTC
options transactions with respect to municipal securities only with dealers that
have been specifically approved by the Board. The Fund and its Manager believe
that the approved dealers should be agreeable and able to enter into closing
transactions as necessary and, therefore, present minimal credit risk to the
Fund. The Fund anticipates entering into written agreements with those dealers
to whom the Fund may sell OTC options, pursuant to which the Fund would have the
absolute right to repurchase the OTC options from such dealers at any time at a
price with respect to U.S. Government securities set forth in such agreement.
The amount invested by the Fund in OTC options on securities other than U.S.
Government securities, including options on municipal securities, will be
treated as illiquid and subject to the Fund's 25% limitation on the Fund's
assets which may be invested in illiquid securities.

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

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

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

                                       B-4

<PAGE>

the Fund is recorded as an asset and is subsequently adjusted to the current
market value of the option.

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

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

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

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

                                       B-5

<PAGE>


                                                                      Appendix C

                                    GLOSSARY

""AA" COMPOSITE COMMERCIAL PAPER RATE" on any date for any Rate Period of shares
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 Preferred Shares when all of the
Outstanding Preferred Shares 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 Period; or (ii) in the event that the Federal Reserve Bank of New York does
not make available any such rate, then the 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.

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

"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

                                      C-1

<PAGE>

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.

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

"ALL HOLD ORDER RATE" shall have the meaning specified in subparagraph (b)(iii)
of Section 3 of Part 1 of the Articles Supplementary.

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

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

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

"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 Preferred Shares so long as the Applicable Rate for shares of
Preferred Shares is to be based on the results of an Auction.

"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 the Articles
Supplementary.

"AUCTION DATE" with respect to any Rate Period, shall mean the Business Day next
preceding the first day of such Rate Period.

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

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

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

"BENEFICIAL OWNER" with respect to shares 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 such shares.

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

"BIDDER" and "BIDDERS" shall have the respective meanings specified in paragraph
(a) of Section 1 of Part II of the 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-

                                      C-2

<PAGE>

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.

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

"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 the 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.

"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 the Articles Supplementary.

"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.

"CHARTER" shall have the meaning specified on the first page of the Articles
Supplementary.

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

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

"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.

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

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

"DATE OF ORIGINAL ISSUE" with respect to the Preferred Shares, shall mean the
date on which the Fund initially issued such shares.

"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.

"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

                                      C-3

<PAGE>

the Fitch Discount Factor for a Fitch Eligible Asset or Moody's 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.

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

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

"EXISTING HOLDER," with respect to shares 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 such shares of
Preferred Shares.

"EXPOSURE PERIOD" shall mean the period commencing on a given Valuation Date and
ending 56 days thereafter.

"FAILURE TO DEPOSIT," with respect to shares 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 Preferred Shares, 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
Preferred Shares or (B) on the Business Day next preceding any redemption date
in funds available on such redemption date for Preferred Shares in The City of
New York, New York, the Redemption Price to be paid on such redemption date for
any share of Preferred Shares after notice of redemption is mailed pursuant to
paragraph (c) of Section 11 of Part I of the 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.

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

"FITCH" shall mean Fitch, Inc. and its successors.

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

                                      C-4

<PAGE>

<TABLE>
<CAPTION>

- ---------------------------------------------------------------------------------------------------
RATING CATEGORY

- ---------------------------------------------------------------------------------------------------
EXPOSURE PERIOD              AAA*       AA*       A*         BBB*         F1**        UNRATED***
- ---------------------------------------------------------------------------------------------------
<S>                          <C>        <C>       <C>        <C>          <C>         <C>
7 weeks                      151%       159%      166%       173%         136%        225%
- ---------------------------------------------------------------------------------------------------
8 weeks or less but greater  154%       161%      168%       176%         137%        231%
than 7 weeks
- ---------------------------------------------------------------------------------------------------
9 weeks or less but greater  158%       163%      170%       177%         138%        240%
than 8 weeks
- ---------------------------------------------------------------------------------------------------

</TABLE>

*    Fitch rating (or, if not rated by Fitch but rated by Moody's or S&P,
see "Fitch Eligible Asset" below)

** Municipal Obligations rated F1 by Fitch (or, if not rated by Fitch, see
"Fitch Eligible Asset" 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 "Fitch Eligible Asset" 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 F1 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.

"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 B (for the

                                      C-5

<PAGE>


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 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

                                     C-6

<PAGE>

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.

"FITCH HEDGING TRANSACTION" shall have the meaning specified in paragraph
13(b)(1) of Part I of the Articles Supplementary.

"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 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%

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

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

                                     C-7

<PAGE>


"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.

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

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

"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.

"INITIAL RATE PERIOD" shall be the period from and including the Date of
Original Issue to but excluding February 5, 2002.

"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.

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

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

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

"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

                                       C-8

<PAGE>

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 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.

"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.

"MAXIMUM RATE" for shares of Preferred Shares on any Auction Date, shall mean:

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 and (B) 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:

the dividend rate on shares for the then-ending Rate Period; and

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, 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 (y) 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

                                       C-9

<PAGE>


Rate Period, if such Special Rate Period was more than 364 Rate Period Days and
(2) the Rate Multiple on such Auction Date; or

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

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

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

"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 at least 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.

                                      C-10

<PAGE>

***** 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 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.

"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, Ba or B by
Moody's or not rated by S&P and 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 and 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

                                     C-11

<PAGE>

rating category lower than its S&P rating; 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 SP1+/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.

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.

"MOODY'S HEDGING TRANSACTION" shall have the meaning specified in paragraph
(a)(i) of Section 13 of Part I of the Articles Supplementary.

"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:

                                    C-12

<PAGE>

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


5%                                            295%

10%                                           317%

15%                                           341%

20%                                           369%

25%                                           400%

30%                                           436%

35%                                           477%

40%                                           525%

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

"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 (333-73414)
("Registration Statement"), as the same may be amended from time to time.

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

"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.

"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).

                                      C-13

<PAGE>


"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
the Articles Supplementary.

"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 the Articles Supplementary.

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

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

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

"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.

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

"POTENTIAL HOLDER," with respect to shares 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 Preferred Shares or that is an Existing
Holder of shares of Preferred Shares that wishes to become the Existing Holder
of additional shares of Preferred Shares.

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

"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 Preferred Shares outstanding from such first respective
Dividend Payment Date therefor through the 56th 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

                                      C-14

<PAGE>

Payment Date) for a Minimum Rate Period 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 such
shares, such Maximum Rate shall be the higher of (a) the Maximum Rate for the
Special Rate Period to commence on such Dividend Payment Date and (b) the
Maximum Rate for a Minimum Rate Period 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 such
shares 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 (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).

"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 the Articles Supplementary) as of a
given Valuation Date, shall mean the seventh Business Day following such
Valuation Date.

"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.

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

                                      C-15

<PAGE>

"QUARTERLY VALUATION DATE" shall mean the last Business Day of each March, June,
September and December of each year, commencing on March 28, 2002.

"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-NOTIFICATION
                                          NO NOTIFICATION

- -----------------------------------------
MOODY'S            FITCH
<S>                <C>                    <C>                             <C>
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>


"RATE PERIOD," with respect to shares of Preferred Shares, shall mean the
Initial Rate Period of such shares 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 Preferred Shares.

"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.

"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

                                      C-16

<PAGE>

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 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.

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

"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.

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

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

"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.

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

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

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

"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.

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

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

                                      C-17

<PAGE>

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

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

"SUBSEQUENT RATE PERIOD," with respect to shares of Preferred Shares, shall mean
the period from and including the first day following the Initial Rate Period of
Preferred Shares to but excluding the next Dividend Payment Date for Preferred
Shares and any period thereafter from and including one Dividend Payment Date
for Preferred Shares to but excluding the next succeeding Dividend Payment Date
for Preferred Shares; 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.

"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.

"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.

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

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

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

"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 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,"

                                      C-18

<PAGE>

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.

"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.

"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.

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

"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.

"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 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

                                      C-19

<PAGE>

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.

"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.

"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.

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

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

                                      C-20

<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 the period from March 2, 1992
               (commencement of operations) until December 31, 1992, for each of
               the years ended December 31, 1993, 1994, 1995, 1996, 1997, 1998,
               1999, 2000 and for the six months ended June 30, 2001.

          Financial Statements included in Part B of this Registration
Statement:

               Statement of assets and liabilities as of December 31, 2000.*

               Statement of operations for the year ended December 31, 2000.*



               Statement of Changes in net assets for each of the years ended
               December 31, 1999 and 2000.*

               Report of Independent Auditors.*

               Statements of assets and liabilities for the six months ended
               June 30, 2001 (unaudited).**

               Statement of operations for the six months ended June 30, 2001
               (unaudited).**

               Statements of changes in net assets for the six months ended
               June 30, 2001 (unaudited).**

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



            *     Incorporated by reference to Registrant's December 31, 2000
                  Annual Report.

           **     Incorporated by reference to Registrant's June 30, 2001
                  Semi-Annual Report.

<PAGE>




2.       Exhibits:

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

         (2) Amended Articles of Incorporation of Registrant.**

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

b.       By-Laws of Registrant.**

c.       Not applicable.

d.       (1) Form of Specimen Stock Certificate representing shares 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.       Form of Registrant's Dividend Reinvestment Plan.+

f.       Not applicable.

g.       (1)  Form of Investment Management Agreement.***

         (2)  Form of Transfer and Assumption of Investment Management Agreement
         between Registrant, Mutual Management Corp. and Smith Barney Mutual
         Funds Management Inc.****


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


         (2) Form of Underwriting Agreement for the issuance of Municipal
             Auction Rate Cumulative Preferred Stock, Series M.

i.       Not applicable.


j.       (1) Form of Custodian Services Agreement.***

         (2) Form of Master Custodian Agreement.*

k.       (1) Form of Transfer Agency and Registar Agreement.****

         (2) Form of Auction Agency Agreement.

         (3) Form of Broker-Dealer Agreement.


         (4) Form of Letter of Representations.*

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


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

                                      -2-

<PAGE>




m.       Not applicable.

n.       (1) Consent of KPMG LLP.


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

o.       Not applicable.

p.       Not applicable.

q.       Not applicable.

r.       Code of Ethics.++

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

*      Incorporated by reference to Pre-Effective Amendment No. 1 to the
       Registration Statement (No. 333-73414) filed by Registrant on January 22,
       2002.

**     Incorporated by reference to the initial Registration
       Statement (No. 33-44639) filed by Registrant on
       December 19, 1991.

***    Incorporated by reference to Pre-Effective Amendment
       No. 3 to the Registration Statement (No. 33-44639)
       filed by Registrant on February 27, 1992.

****   Incorporated by reference to Post-Effective Amendment
       No. 1 to the Registration Statement (No. 33-44639)
       filed by Registrant on March 22, 1996.

*****  Incorporated by reference to Exhibit n.2 of the initial Registration
       Statement (No. 333-73414) filed by Registrant on November 15, 2001.

+      Incorporated by reference to Exhibit 2(e) of Post-
       Effective Amendment No. 6 of Managed Municipals
       Portfolio II Inc. (No. 33-49982) filed on November 18,
       1998, accession number 91155-98-000680.

++     Incorporated by reference to Exhibit (r)(2) of Post-
       Effective Amendment No. 5 to the Registration
       Statement (No. 33-44639) filed by Registrant on April
       19, 2000.

ITEM 25:  MARKETING ARRANGEMENTS

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

                                      -3-

<PAGE>

ITEM 26:  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

        Securities and Exchange Commission fees ....      $ 10,920
        Printing and engraving expenses ............        44,000
        Legal Fees .................................        90,000
        Accounting expenses ........................         3,500
        Rating Agency Fees .........................        50,000
        Miscellaneous expenses .....................         1,580
                                                          --------
               Total ..................................             $200,000
                                                                    ========

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

          Not applicable.

ITEM 28:  NUMBER OF HOLDERS OF SECURITIES
          At December 31, 2001:


          --------------------------------------------------------------------
                                                                NUMBER OF
                          TITLE OF CLASS                      RECORD HOLDERS
                          --------------                      --------------

          --------------------------------------------------------------------
            Common Stock, $.001 par value                      204

          --------------------------------------------------------------------
            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") and the rules and regulations
promulgated thereunder.

          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
IX of the Registrant's Articles of Incorporation provide that a director or
officer of the Registrant shall not be liable to the Registrant or its
shareholders for monetary damages for breach of fiduciary duty as a director or
officer, except to the extent such exemption from liability or limitation
thereof is not permitted by law (including the 1940 Act) as currently in effect
or as the same may hereafter be amended. The Registrant's Articles of
Incorporation also provide that no amendment, modification or repeal of this
Article IX shall adversely affect any right or protection of a director or
officer that exists at the time of such amendment.

          Reference is also made to the Investment Management Agreement
incorporated by reference to Pre-effective Amendment No. 3 to the Registration
Statement (No. 33-44639) filed by Registrant on February 27, 1992 and to the
Underwriting Agreement for the issuance of Preferred Stock (to be filed as an
Exhibit to this Registration Statement).

                                      -4-

<PAGE>

          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 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 9699, Providence,
Rhode Island, 02940 respectively maintain the custodian and the shareholders
servicing agent records required by Section 31(a).

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

ITEM 32:  MANAGEMENT SERVICES

          Not applicable.

ITEM 33:  UNDERTAKINGS

          Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and

                                      -5-

<PAGE>

Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, 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 whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

      (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.

      (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 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.

                                      -6-

<PAGE>

                                   SIGNATURES


     Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on January 24, 2002.

                             INTERMEDIATE MUNI FUND, INC.

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




                                      -7-

<PAGE>

     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>
                   Signature                                           Title                              Date
- -------------------------------------------------  --------------------------------------------  ---------------------
<S>                                                <C>                                           <C>
PRINCIPAL EXECUTIVE OFFICER:

/s/ Heath B. McLendon                                        Chief Executive Officer,            January 24, 2002
- -------------------------------------------------
Heath B. McLendon                                    President and Chairman of the Board of
                                                                    Directors


PRINCIPAL FINANCIAL AND
PRINCIPAL ACCOUNTING OFFICER:


/s/ Lewis E. Daidone*                                  Senior Vice President, Chief Financial    January 24, 2002
- -------------------------------------------------
Lewis E. Daidone                                        and Accounting Officer and Treasurer



ADDITIONAL DIRECTORS:

/s/ Lee Abraham*                                                   Director                      January 24, 2002
- -------------------------------------------------
Lee Abraham

/s/ Allan J. Bloostein*                                            Director                      January 24, 2002
- -------------------------------------------------
Allan J. Bloostein

/s/ Jane F. Dasher*                                                Director                      January 24, 2002
- -------------------------------------------------
Jane F. Dasher

/s/ Donald R. Foley*                                               Director                      January 24, 2002
- -------------------------------------------------
Donald R. Foley

/s/ Richard E. Hanson, Jr.*                                        Director                      January 24, 2002
- -------------------------------------------------
Richard E. Hanson, Jr.

/s/ Paul Hardin*                                                   Director                      January 24, 2002
- ------------------------------------------------
Paul Hardin*

/s/ Roderick C. Rasmussen*                                         Director                      January 24, 2002
- -------------------------------------------------
Roderick C. Rasmussen

/s/ John P. Toolan*                                                Director                      January 24, 2002
- -------------------------------------------------
John P. Toolan

*  By: /s/ Heath B. McLendon
- -------------------------------------------------
   Heath B. McLendon as Attorney-in-fact**

** Power-of-Attorney previously filed as an Exhibit to this
   Registration Statement

</TABLE>

                                      -8-

<PAGE>

                                  EXHIBIT INDEX

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

 a.3        Form of Articles Supplementary Creating and Fixing the Rights of
            Municipal Auction Rate Cumulative Preferred Stock, Series M.
- --------------------------------------------------------------------------------
 h.2        Form of Underwriting Agreement for the issuance of Municipal Auction
            Rate Cumulative Preferred Stock, Series M.
- --------------------------------------------------------------------------------
 k.2        Form of Auction Agency Agreement.
- --------------------------------------------------------------------------------
 k.3        Form of Broker-Dealer Agreement.
- --------------------------------------------------------------------------------
 n.1        Consent of KPMG.
- --------------------------------------------------------------------------------




                                      -9-





</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.A3
<SEQUENCE>3
<FILENAME>dex99a3.txt
<DESCRIPTION>FORM OF ARTICLES SUPPLEMENTARY
<TEXT>
<PAGE>


                                                                  Exhibit a.3


                          INTERMEDIATE MUNI FUND, INC.

        FORM OF ARTICLES SUPPLEMENTARY CREATING AND FIXING THE RIGHTS OF
           MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK, SERIES M
                              ("PREFERRED SHARES")

<PAGE>


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

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


DESIGNATION ............................................................................................................. 5
DEFINITIONS ............................................................................................................. 5
PART I
     1.     NUMBER OF AUTHORIZED SHARES ................................................................................ 25
     2.     DIVIDENDS .................................................................................................. 25
            (a)      RANKING ........................................................................................... 25
            (b)      CUMULATIVE CASH DIVIDENDS ......................................................................... 25
            (c)      DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE .................................................. 25
            (d)      DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF ..................................................... 25
            (e)      DIVIDEND RATES AND CALCULATION OF DIVIDENDS ....................................................... 26
            (f)      CURING A FAILURE TO DEPOSIT ....................................................................... 28
            (g)      DIVIDEND PAYMENTS BY FUND TO AUCTION AGENT ........................................................ 28
            (h)      AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY FUND ............................................. 28
            (i)      DIVIDENDS PAID TO HOLDERS ......................................................................... 28
            (j)      DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT UNPAID DIVIDENDS .............................. 28
            (k)      DIVIDENDS DESIGNATED AS EXEMPT-INTEREST DIVIDENDS ................................................. 29
     3.     GROSS-UP PAYMENTS .......................................................................................... 29
            (a)      MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28 RATE PERIOD DAYS OR FEWER ..................... 29
            (b)      SPECIAL RATE PERIODS OF MORE THAN 28 RATE PERIOD DAYS ............................................. 29
            (c)      NO GROSS-UP PAYMENTS IN THE EVENT OF A REALLOCATION ............................................... 29
     4.     DESIGNATION OF SPECIAL RATE PERIODS ........................................................................ 29
            (a)      LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD ............................................... 29
            (b)      ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD ....................................................... 30
            (c)      NOTICE OF PROPOSED SPECIAL RATE PERIOD ............................................................ 30
            (d)      NOTICE OF SPECIAL RATE PERIOD ..................................................................... 30
            (e)      FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD .................................................. 31
     5.     VOTING RIGHTS .............................................................................................. 31
            (a)      ONE VOTE PER SHARE OF PREFERRED SHARES ............................................................ 31
            (b)      VOTING FOR ADDITIONAL DIRECTORS ................................................................... 32
            (c)      HOLDERS OF PREFERRED SHARES TO VOTE ON CERTAIN OTHER MATTERS ...................................... 33
            (d)      BOARD MAY TAKE CERTAIN ACTIONS WITHOUT SHAREHOLDER APPROVAL ....................................... 34
            (e)      RELATIVE RIGHTS AND PREFERENCES ................................................................... 35
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

<S>  <C>      <C>      <C>                                                                                                 <C>
              (f)      NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING ......................................................... 35
              (g)      VOTING FOR DIRECTORS SOLE REMEDY FOR FUND'S FAILURE TO PAY DIVIDENDS .............................. 35
              (h)      HOLDERS ENTITLED TO VOTE .......................................................................... 35
     6.       1940 ACT PREFERRED SHARES ASSET COVERAGE ................................................................... 36
     7.       PREFERRED SHARES BASIC MAINTENANCE AMOUNT .................................................................. 36
     8.       [RESERVED] ................................................................................................. 38
     9.       RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS .......................................................... 38
              (a)      DIVIDENDS ON SHARES OTHER THAN PREFERRED SHARES ................................................... 38
              (b)      DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON SHARES UNDER THE 1940 ACT ................ 39
              (c)      OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS ........................................... 39
     10.      [RESERVED] ................................................................................................. 39
     11.      REDEMPTION ................................................................................................. 40
              (a)      OPTIONAL REDEMPTION ............................................................................... 40
              (b)      MANDATORY REDEMPTION .............................................................................. 41
              (c)      NOTICE OF REDEMPTION .............................................................................. 42
              (d)      NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES ......................................................... 42
              (e)      ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION ......................................................... 42
              (f)      AUCTION AGENT AS DIRECTOR OF REDEMPTION PAYMENTS BY FUND .......................................... 43
              (g)      SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE NO LONGER OUTSTANDING .................... 43
              (h)      COMPLIANCE WITH APPLICABLE LAW .................................................................... 43
              (i)      ONLY WHOLE SHARES OF PREFERRED SHARES MAY BE REDEEMED ............................................. 43
     12.      LIQUIDATION RIGHTS ......................................................................................... 44
              (a)      RANKING ........................................................................................... 44
              (b)      DISTRIBUTIONS UPON LIQUIDATION .................................................................... 44
              (c)      PRO RATA DISTRIBUTIONS ............................................................................ 44
              (d)      RIGHTS OF JUNIOR SHARES ........................................................................... 44
              (e)      CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION ....................................................... 45
     13.      FUTURES AND OPTIONS TRANSACTIONS: FORWARD COMMITMENTS ...................................................... 45
     14.      MISCELLANEOUS .............................................................................................. 51
              (a)      [RESERVED] ........................................................................................ 51
              (b)      NO FRACTIONAL SHARES .............................................................................. 51
              (c)      STATUS OF SHARES OF PREFERRED SHARES REDEEMED, EXCHANGED OR OTHERWISE ACQUIRED BY THE FUND ........ 51
              (d)      BOARD MAY RESOLVE AMBIGUITIES ..................................................................... 51
              (e)      HEADINGS NOT DETERMINATIVE ........................................................................ 51
              (f)      NOTICES ........................................................................................... 51
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

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

PART II
     1.       ORDERS ..................................................................................................... 51
     2.       SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT .................................................... 53
     3.       DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE ............................ 55
     4.       ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND ALLOCATION OF SHARES .............. 57
     5.       NOTIFICATION OF ALLOCATIONS ................................................................................ 60
     6.       AUCTION AGENT .............................................................................................. 60
     7.       TRANSFER OF SHARES OF PREFERRED SHARES ..................................................................... 61
     8.       GLOBAL CERTIFICATE ......................................................................................... 61
</TABLE>

<PAGE>



                  INTERMEDIATE MUNI FUND, INC., a Maryland corporation (the
"Fund"), certifies to the State Department of Assessments and Taxation of
Maryland that:

                  FIRST: Pursuant to the authority expressly vested in the Board
of Directors of the Fund by Article V of the Fund's Articles of Incorporation,
as heretofore amended (which, as hereafter restated, amended or supplemented
from time to time are, together with these Articles Supplementary, herein called
the "Charter"), the Board of Directors has, by resolution, reclassified from the
unissued Common Shares of the Fund and authorized the issuance of 2,000 shares
of Municipal Auction Rate Cumulative Preferred Stock, Series M, par value $.001
per share, liquidation preference $25,000 per share.

                  SECOND: The preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption of the Municipal Auction Rate Cumulative Preferred Stock, Series M,
are as follows:

                                   DESIGNATION

         2,000 shares of Preferred Stock, par value $.001 per share, liquidation
preference $25,000 per share, are hereby designated Municipal Auction Rate
Cumulative Preferred Stock, Series M ("Preferred Shares"). Each share of the
Preferred Shares shall have an Applicable Rate for its Initial Rate Period
equal to ___% per annum and an initial Dividend Payment Date of February 5,
2002; and each share of the Preferred Shares shall have such other preferences,
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption, in addition to those required by
applicable law, as are set forth in Part I and Part II of these Articles
Supplementary. Subject to the provisions of Section 10(c) of Part I hereof, the
Board of Directors of the Fund may, in the future, reclassify additional shares
of the Fund's stock as Preferred Shares, with the same preferences, rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption and other terms herein described, except that
the Applicable Rate for the Initial Rate Period, its initial Payment Date
and any other changes in the terms herein set forth shall be as set forth in the
Articles Supplementary reclassifying such shares as Preferred Shares.

         Capitalized terms used in Part I and Part II of these Articles
Supplementary shall have the meanings provided in the "Definitions" section
immediately following.

                                   DEFINITIONS

                  As used in Parts I and II of these Articles Supplementary, 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 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
Preferred Shares when all of the Outstanding Preferred Shares are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in

                                      - 5 -

<PAGE>


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; and (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 Period; or (ii) in the event that the
Federal Reserve Bank of New York does not make available any such rate, then the
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.

                  (e) "ALL HOLD ORDER RATE" shall have the meaning specified in
subparagraph (b)(iii) of Section 3 of Part 1 of these Articles Supplementary.


                                      - 6 -

<PAGE>

                  (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 Preferred Shares so long as the Applicable
Rate for shares of Preferred Shares 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, 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 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 such shares.

                  (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.

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



                                      - 7 -

<PAGE>

                    (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 the 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 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,

                                      - 8 -

<PAGE>

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
Preferred Shares, shall mean any date on which dividends are payable on such
shares 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 Preferred
Shares, shall mean the period from and including the Date of Original Issue of
Preferred Shares to but excluding the initial Dividend Payment Date for
Preferred Shares and any period thereafter from and including one Dividend
Payment Date for Preferred Shares to but excluding the next succeeding Dividend
Payment Date for Preferred Shares.

                    (gg) "EXISTING HOLDER," with respect to shares 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
such shares of Preferred Shares.

                    (hh) "EXPOSURE PERIOD" shall mean the period commencing on a
given Valuation Date and ending 56 days thereafter.

                    (ii) "FAILURE TO DEPOSIT," with respect to shares 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 Preferred Shares, 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 Preferred Shares or (B) on the Business Day next
preceding any redemption date in funds available on such redemption date for
Preferred Shares in The City of New York, New York, the Redemption Price to be
paid on such redemption date for any share of Preferred Shares 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 same length as or is longer
than the Exposure Period, in accordance with the table set forth below.

                                     - 9 -

<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
RATING CATEGORY
- -------------------------------------------------------------------------------------------------------------
EXPOSURE PERIOD                 AAA*        AA*        A*          BBB*          F1**        UNRATED***
<S>                            <C>        <C>        <C>         <C>           <C>           <C>
- -------------------------------------------------------------------------------------------------------------
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 F1 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 B (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

                                     - 10 -

<PAGE>

may comprise no more than 12% of total Fitch Eligible Assets; such Other
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

                                     - 11 -

<PAGE>


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%; 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 regular Federal personal income tax rate applicable to ordinary income
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.

                                     - 12 -

<PAGE>

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

                    (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" shall be the period from and
including the Date of Original Issue to but excluding February 5, 2002.

                    (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

                                     - 13 -

<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 Preferred Shares on any
Auction Date, 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 and (B) 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 on shares 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, 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 (y) 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 (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,
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, (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 Reference Rate on such
Auction Date for Minimum Rate Periods and (B) the Rate Multiple on such Auction
Date.

                                     - 14 -

<PAGE>

                  (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 at
least 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 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.

                                     - 15 -

<PAGE>

                  (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, Ba or B by Moody's or not rated by S&P and 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 and 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; 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 SP1+/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.

                  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

                                     - 16 -

<PAGE>

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.

                                     - 17 -

<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 (333-73414) ("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 Preferred Shares, the number of shares theretofore issued
by the Fund except, without duplication, (i) any shares theretofore cancelled or
delivered to the Auction Agent for cancellation or redeemed by the Fund, (ii)
any shares as to which the Fund or any Affiliate thereof shall be an Existing
Holder and (iii) any shares 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.

                                     - 18 -

<PAGE>

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

                    (vvv) "POTENTIAL HOLDER," with respect to shares 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 Preferred
Shares or that is an Existing Holder of shares of Preferred Shares that wishes
to become the Existing Holder of additional shares of Preferred Shares.

                    (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 Preferred
Shares outstanding from such first respective Dividend Payment Date therefor
through the 56th 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 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 such shares, such Maximum Rate shall be the higher of (a) the Maximum
Rate for the Special Rate Period to commence on such Dividend Payment Date and
(b) the Maximum Rate for a Minimum Rate Period 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
such shares 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

                                     - 19 -

<PAGE>

obligations of the Fund senior in right of payment to the Preferred Shares; and
(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 March, June, September and December of each year,
commencing on March 28, 2002.

                    (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
- -----------------------------------------
    MOODY'S               FITCH
<S>              <C>                       <C>                             <C>
 Aa3 or higher         AA- or higher                    110%                            150%
- ---------------  ------------------------  ------------------------------  ------------------------------
   A3 to A1              A- to A+                       125%                            160%
- ---------------  ------------------------  ------------------------------  ------------------------------
</TABLE>


                                     - 20 -

<PAGE>



    Baa3 to Baa1     BBB- to BBB+           150%             250%
  ---------------  ----------------   ---------------  ----------------
     Ba3 to Ba1       BB- to BB+            200%             275%
  ---------------  ----------------   ---------------  ----------------
     Below Ba3        Below BB-             250%             300%
  ---------------  ----------------   ---------------  ----------------

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

                    (dddd) "RATE PERIOD," with respect to shares of Preferred
Shares, shall mean the Initial Rate Period of such shares 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 Preferred
Shares.

                    (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 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

                                     - 21 -

<PAGE>

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
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.

                    (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
Preferred Shares, shall mean the period from and including the first day
following the Initial Rate Period of Preferred Shares to but excluding the next
Dividend Payment Date for Preferred Shares and any period thereafter from and
including one Dividend Payment Date for Preferred Shares to but excluding the
next succeeding Dividend Payment Date for Preferred Shares; 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.

                    (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.


                                     - 22 -

<PAGE>

                    (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
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

                                     - 23 -

<PAGE>

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 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.

                                     - 24 -

<PAGE>

                    (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.

                                     PART I

                    1. NUMBER OF AUTHORIZED SHARES. The number of authorized
shares constituting the Preferred Shares is 2,000.


                    2. DIVIDENDS.

                    (a) RANKING. The shares of Preferred Shares shall rank on a
parity with each other and with shares of any other series of preferred stock as
to the payment of dividends by the Fund.

                    (b) CUMULATIVE CASH DIVIDENDS. The Holders of shares of
Preferred Shares shall be entitled to receive, when, as and if declared by the
Board of Directors, out of funds legally available therefor in accordance with
the Charter and applicable law, cumulative cash dividends at the Applicable Rate
for Preferred Shares, determined as set forth in paragraph (e) of this Section
2, and no more (except to the extent set forth in Section 3 of this Part I),
payable on the Dividend Payment Date determined pursuant to paragraph (d) of
this Section 2. Holders of shares of Preferred Shares shall not be entitled to
any dividend, whether payable in cash, property or shares, in excess of full
cumulative dividends, as herein provided, on shares of Preferred Shares. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on shares of Preferred Shares which may be in
arrears, and, except to the extent set forth in subparagraph (e)(i) of this
Section 2, no additional sum of money shall be payable in respect of any such
arrearage.

                    (c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE.
Dividends on shares of Preferred Shares shall accumulate at the Applicable Rate
for Preferred Shares from the Date of Original Issue thereof.

                    (d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF. Dividends
shall be payable for the Initial Rate Period on February 5, 2002, and, if
declared by the Board of Directors, on each seventh day thereafter (each date
being a "Dividend Payment Date"); provided, however, that:

                    (i) if the day on which dividends would otherwise be payable
on Preferred Shares 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

                                     - 25 -

<PAGE>

                         (ii) notwithstanding this paragraph (d) of Section 2,
the Fund in its discretion may establish the Dividend Payment Date in respect of
any Special Rate Period of shares of Preferred Shares consisting of more than 28
Rate Period Days; provided, however, that such date shall be set forth in the
Notice of Special Rate Period relating to such Special Rate Period, as delivered
to the Auction Agent, which Notice of Special Rate Period shall be filed with
the Secretary of the Fund; and further provided that (1) any such Dividend
Payment Date shall be a Business Day and (2) the last Dividend Payment Date in
respect of such Special Rate Period shall be the Business Day immediately
following the last day thereof, as such last day is determined in accordance
with paragraph (b) of Section 4 of this Part I.

                         (e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS.

                         (i) DIVIDEND RATES. The dividend rate on shares of
Preferred Shares during the period from and after the Date of Original Issue to
and including the last day of the Initial Rate Period shall be equal to the rate
per annum set forth under "Designation". For each Subsequent Rate Period
thereafter, the dividend rate on Preferred Shares shall be equal to the rate per
annum that results from an Auction on the Auction Date next preceding such
Subsequent Rate Period; provided, however, that if:

                         (A) an Auction for any such 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
therefor;

                         (B) any Failure to Deposit shall have occurred during
any Rate Period thereof (other than any Special Rate Period consisting of more
than 364 Rate Period Days or any Rate Period succeeding any Special Rate Period
consisting of more than 364 Rate Period Days during which a Failure to Deposit
occurred that has not been cured), but, prior to 12:00 Noon, New York City time,
on the third Business Day next succeeding the date on which such Failure to
Deposit occurred, such Failure to Deposit shall have been cured in accordance
with paragraph (f) of this Section 2 and the Fund shall have paid to the Auction
Agent a late charge ("Late Charge") equal to the sum of (1) if such Failure to
Deposit consisted of the failure timely to pay to the Auction Agent the full
amount of dividends with respect to any Dividend Period, an amount computed by
multiplying (x) 200% of the Reference Rate for the Rate Period during which such
Failure to Deposit occurs on the Dividend Payment Date for such Dividend Period
by (y) a fraction, the numerator of which shall be the number of days for which
such Failure to Deposit has not been cured in accordance with paragraph (f) of
this Section 2 (including the day such Failure to Deposit occurs and excluding
the day such Failure to Deposit is cured) and the denominator of which shall be
360, and applying the rate obtained against the aggregate Liquidation Preference
of the outstanding Preferred Shares and (2) if such Failure to Deposit consisted
of the failure timely to pay to the Auction Agent the Redemption Price of the
shares, if any, for which Notice of Redemption has been mailed by the Fund
pursuant to paragraph (c) of Section 11 of this Part I, an amount computed by
multiplying (x) 200% of the Reference Rate for the Rate Period during which such
Failure to Deposit occurs on the redemption date by (y) a fraction, the
numerator of which shall be the number of days for which such Failure to Deposit
is not cured in accordance with paragraph (f) of this Section 2 (including the
day such Failure to Deposit occurs and excluding the day such Failure to Deposit
is cured) and the denominator of which shall be 360, and applying the rate
obtained against the aggregate Liquidation Preference

                                     - 26 -

<PAGE>

of the outstanding Preferred Shares to be redeemed, no Auction will be held for
the Subsequent Rate Period and the dividend rate for such Subsequent Rate Period
will be the Maximum Rate on the Auction Date for such Subsequent Rate Period;

                         (C) any Failure to Deposit shall have occurred during
any Rate Period (other than any Special Rate Period consisting of more than 364
Rate Period Days or any Rate Period succeeding any Special Rate Period
consisting of more than 364 Rate Period Days during which a Failure to Deposit
occurred that has not been cured), and, prior to 12:00 Noon, New York City time,
on the third Business Day next succeeding the date on which such Failure to
Deposit occurred, such Failure to Deposit shall not have been cured in
accordance with paragraph (f) of this Section 2 or the Fund shall not have paid
the applicable Late Charge to the Auction Agent, no Auction will be held in
respect of Preferred Shares for the first Subsequent Rate Period thereof
thereafter (or for any Rate Period thereof thereafter to and including the Rate
Period during which (1) such Failure to Deposit is cured in accordance with
paragraph (f) of this Section 2 and (2) the Fund pays the applicable Late Charge
to the Auction Agent (the condition set forth in this clause (2) to apply only
in the event Moody's is rating such shares at the time the Fund cures such
Failure to Deposit), in each case no later than 12:00 Noon, New York City time,
on the fourth Business Day prior to the end of such Rate Period), and the
dividend rate for Preferred Shares for each such Subsequent Rate Period shall be
a rate per annum equal to the Maximum Rate on the Auction Date for such
Subsequent Rate Period (but with the prevailing rating for shares of Preferred
Shares, for purposes of determining such Maximum Rate, being deemed to be "Below
"ba3"/BB2"); or

                         (D) any Failure to Deposit shall have occurred during a
Special Rate Period consisting of more than 364 Rate Period Days, or during any
Rate Period succeeding any Special Rate Period consisting of more than 364 Rate
Period Days during which a Failure to Deposit occurred that has not been cured,
and, prior to 12:00 Noon, New York City time, on the fourth Business Day
preceding the Auction Date for the Rate Period subsequent to such Rate Period,
such Failure to Deposit shall not have been cured in accordance with paragraph
(f) of this Section 2 or, in the event Moody's is then rating such shares, the
Fund shall not have paid the applicable Late Charge to the Auction Agent (such
Late Charge, for purposes of this subparagraph (D), to be calculated by using,
as the Reference Rate, the Reference Rate applicable to a Rate Period (x)
consisting of more than 182 Rate Period Days but fewer than 365 Rate Period Days
and (y) commencing on the date on which the Rate Period during which Failure to
Deposit occurs commenced), no Auction will be held for such Subsequent Rate
Period (or for any Rate Period thereafter to and including the Rate Period
during which (1) such Failure to Deposit is cured in accordance with paragraph
(f) of this Section 2 and (2) the Fund pays the applicable Late Charge to the
Auction Agent (the condition set forth in this clause (2) to apply only in the
event Moody's is rating such shares at the time the Fund cures such Failure to
Deposit), in each case no later than 12:00 Noon, New York City time, on the
fourth Business Day prior to the end of such Rate Period), and the dividend rate
for each such Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate on the Auction Date for such Subsequent Rate Period (but with the
prevailing rating, for purposes of determining such Maximum Rate, being deemed
to be "Below "ba3"/BB2") (the rate per annum at which dividends are payable on
shares of Preferred Shares for any Rate Period being herein referred to as the
"Applicable Rate").

                                     - 27 -

<PAGE>


                         (ii) CALCULATION OF DIVIDENDS. The amount of dividends
per share payable on shares of Preferred Shares on any date on which dividends
shall be payable on shares shall be computed by multiplying the Applicable Rate
for Preferred Shares in effect for such Dividend Period or Dividend Periods 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 Dividend Periods
or part thereof and the denominator of which shall be 365 if such Dividend
Period consists of 7 Rate Period Days and 360 for all other Dividend Periods,
and applying the rate obtained against $25,000.

                         (f)  CURING A FAILURE TO DEPOSIT. A Failure to Deposit
shall have been cured (if such Failure to Deposit is not solely due to the
willful failure of the Fund to make the required payment to the Auction Agent)
with respect to any Rate Period if, within the respective time periods described
in subparagraph (e)(i) of this Section 2, the Fund shall have paid to the
Auction Agent (A) all accumulated and unpaid dividends on Preferred Shares and
(B) without duplication, the Redemption Price for shares, if any, for which
Notice of Redemption has been mailed by the Fund 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
Redemption Notice 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.

                         (g)  DIVIDEND PAYMENTS BY FUND TO AUCTION AGENT. The
Fund shall pay to the Auction Agent, not later than 12:00 Noon, New York City
time, on the Business Day next preceding each Dividend Payment Date for shares
of Preferred Shares, an aggregate amount of funds available on the next Business
Day in The City of New York, New York, equal to the dividends to be paid to all
Holders of shares on such Dividend Payment Date.

                         (h)  AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY
FUND. All moneys paid to the Auction Agent for the payment of dividends (or for
the payment of any Late Charge) shall be held in trust for the payment of such
dividends (and any such Late Charge) by the Auction Agent for the benefit of the
Holders specified in paragraph (i) of this Section 2. Any moneys paid to the
Auction Agent in accordance with the foregoing but not applied by the Auction
Agent to the payment of dividends (and any such Late Charge) will, to the extent
permitted by law, be repaid to the Fund at the end of 90 days from the date on
which such moneys were so to have been applied.

                         (i)  DIVIDENDS PAID TO HOLDERS. Each dividend on shares
of Preferred Shares shall be paid on the Dividend Payment Date therefor to the
Holders thereof as their names appear on the record books of the Fund on the
Business Day next preceding such Dividend Payment Date.

                         (j)  DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED
BUT UNPAID DIVIDENDS. Any dividend payment made on shares of Preferred Shares
shall first be credited against the earliest accumulated but unpaid dividends
due with respect to such shares. Dividends in arrears for any past Dividend
Period may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the Holders as their names appear on

                                     - 28 -

<PAGE>

the record books of the Fund on such date, not exceeding 15 days preceding the
payment date thereof, as may be fixed by the Board of Directors.

                         (k) DIVIDENDS DESIGNATED AS EXEMPT-INTEREST DIVIDENDS.
Dividends on shares of Preferred Shares shall be designated as exempt-interest
dividends up to the amount of tax-exempt income of the Fund, to the extent
permitted by, and for purposes of, Section 852 of the Code.

                         3.  GROSS-UP PAYMENTS. Holders of shares of Preferred
Shares shall be entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available therefor, dividends in an amount equal
to the aggregate Gross-up Payments as follows:

                         (a) MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28
RATE PERIOD DAYS OR FEWER. 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 gains or other income taxable for Federal income tax purposes to a
dividend paid on shares of Preferred Shares without having given advance notice
thereof to the Auction Agent as provided in Section 5 of Part II of these
Articles Supplementary (such allocation being referred to herein as 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 shares of Preferred Shares or the liquidation of the Fund, 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
such 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 record
books of the Fund.

                         (b) SPECIAL RATE PERIODS OF MORE THAN 28 RATE PERIOD
DAYS. 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 shares of
Preferred Shares, 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 record books of the Fund.

                         (c) NO GROSS-UP PAYMENTS IN THE EVENT OF A
REALLOCATION. The Fund shall not be required to make Gross-up Payments with
respect to any net capital gains or other taxable income determined by the
Internal Revenue Service to be allocable in a manner different from that
allocated by the Fund.

                         4.  DESIGNATION OF SPECIAL RATE PERIODS.

                         (a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE
PERIOD. The Fund, at its option, may designate any succeeding Subsequent Rate
Period of shares of Preferred Shares as a Special Rate Period consisting of a
specified number of Rate Period Days evenly divisible by seven subject to
adjustment as provided in paragraph (b) of this Section 4. A designation of a
Special Rate Period shall be effective only if

                                     - 29 -

<PAGE>

(A) notice thereof shall have been given in accordance with paragraph (c) and
subparagraph (d)(i) of this Section 4, (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 any Notice of Redemption shall have been mailed by the Fund pursuant to
paragraph (c) of Section 11 of this Part I with respect to any shares of
Preferred Shares, the Redemption Price with respect to such shares shall have
been deposited with the Auction Agent. In the event the Fund wishes to designate
any succeeding Subsequent Rate Period for shares of Preferred Shares as a
Special Rate Period consisting of more than 28 Rate Period Days, the Fund shall
notify Fitch (if Fitch is then rating the Preferred Shares) and Moody's (if
Moody's is then rating the Preferred Shares) in advance of the commencement of
such Subsequent Rate Period that the Fund wishes to designate such Subsequent
Rate Period as a Special Rate Period and shall provide Fitch (if Fitch is then
rating the Preferred Shares) and Moody's (if Moody's is then rating the
Preferred Shares) with such documents as either may request.

                         (b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the
event the Fund wishes to designate a Subsequent Rate Period as a Special Rate
Period, but the day following what would otherwise be the last day of such
Special Rate Period is not (a) a Tuesday that is a Business Day, then the Fund
shall designate such Subsequent Rate Period as a Special Rate Period consisting
of the period commencing on the first day following the end of the immediately
preceding Rate Period and ending (a) on the first Monday that is followed by a
Tuesday that is a Business Day preceding what would otherwise be such last day.

                         (c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Fund
proposes to designate any succeeding Subsequent Rate Period of shares of
Preferred Shares as a Special Rate Period pursuant to paragraph (a) of this
Section 4, not less than 20 (or such lesser number of days as may be agreed to
from time to time by the Auction Agent) nor more than 30 days prior to the date
the Fund proposes to designate as the first day of such Special Rate Period
(which shall be such day that would otherwise be the first day of a Minimum Rate
Period), notice shall be (i) published or caused to be published by the Fund in
a newspaper of general circulation to the financial community in The City of New
York, New York, which carries financial news, and (ii) mailed by the Fund by
first-class mail, postage prepaid, to the Holders of Preferred Shares. Each such
notice shall state (A) that the Fund may exercise its option to designate a
succeeding Subsequent Rate Period of shares of Preferred Shares as a Special
Rate Period, specifying the first day thereof and (B) that the Fund will, by
11:00 A.M., New York City time, on the second Business Day next preceding such
date (or by such later time or date, or both, as may be agreed to by the Auction
Agent) notify the Auction Agent of either (x) its determination, subject to
certain conditions, to exercise such option, in which case the Fund shall
specify the Special Rate Period designated, or (y) its determination not to
exercise such option.

                         (d) NOTICE OF SPECIAL RATE PERIOD. No later than
11:00 A.M., New York City time, on the second Business Day next preceding the
first day of any proposed Special Rate Period of shares of Preferred Shares as
to which notice has been given as set forth in paragraph (c) of this Section 4
(or such later time or date, or both, as may be agreed to by the Auction Agent),
the Fund shall deliver to the Auction Agent either:

                                     - 30 -

<PAGE>

     (i) a notice ("Notice of Special Rate Period") stating (A) that the Fund
has determined to designate the next succeeding Rate Period of Preferred Shares
as a Special Rate Period, specifying the same and the first day thereof, (B) the
Auction Date immediately prior to the first day of such Special Rate Period, (C)
that such Special Rate Period shall not commence if (1) an Auction for shares of
Preferred Shares shall not be held on such Auction Date for any reason or (2) an
Auction for shares of Preferred Shares shall be held on such Auction Date but
Sufficient Clearing Bids for shares of Preferred Shares shall not exist in such
Auction, (D) the scheduled Dividend Payment Dates for shares of Preferred Shares
during such Special Rate Period and (E) the Special Redemption Provisions, if
any, applicable to shares of Preferred Shares in respect of such Special Rate
Period, such notice to be accompanied by a Preferred Shares Basic Maintenance
Report showing that, as of the third Business Day next preceding such proposed
Special Rate Period, Moody's Eligible Assets (if Moody's is then rating the
Preferred Shares) and Fitch Eligible Assets (if Fitch is then rating the
Preferred Shares) each have an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount as of such Business Day (assuming for
purposes of the foregoing calculation that (a) the Maximum Rate is the Maximum
Rate on such Business Day as if such Business Day were the Auction Date for the
proposed Special Rate Period, and (b) the Moody's Discount Factors applicable to
Moody's Eligible Assets and the Fitch Discount Factors applicable to Fitch
Eligible Assets are determined by reference to the first Exposure Period longer
than the Exposure Period then applicable to the Fund, as described in the
definitions of Moody's Discount Factor and Fitch Discount Factor herein); or

     (ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Rate Period of shares of Preferred Shares and that
the next succeeding Rate Period of shares of Preferred Shares shall be a Minimum
Rate Period.

     (e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the Fund fails to
deliver either of the notices described in subparagraphs (d)(i) or (d)(ii) of
this Section 4 (and, in the case of the notice described in subparagraph (d)(i)
of this Section 4, a Preferred Shares Basic Maintenance Report to the effect set
forth in such subparagraph (if either Moody's or Fitch is then rating the
Preferred Shares)) with respect to any designation of any proposed Special Rate
Period to the Auction Agent by 11:00 A.M., New York City time, on the second
Business Day next preceding the first day of such proposed Special Rate Period
(or by such later time or date, or both, as may be agreed to by the Auction
Agent), the Fund shall be deemed to have delivered a notice to the Auction Agent
with respect to such Special Rate Period to the effect set forth in subparagraph
(d)(ii) of this Section 4. In the event the Fund delivers to the Auction Agent a
notice described in subparagraph (d)(i) of this Section 4, it shall file a copy
of such notice with the Secretary of the Fund, and the contents of such notice
shall be binding on the Fund. In the event the Fund delivers to the Auction
Agent a notice described in subparagraph (d)(ii) of this Section 4, the Fund
will provide Moody's (if Moody's is then rating the Preferred Shares) and Fitch
(if Fitch is then rating the Preferred Shares) a copy of such notice.

     5. VOTING RIGHTS.

     (a) ONE VOTE PER SHARE OF PREFERRED SHARES. Except as otherwise provided in
the Charter or as otherwise required by law, (i) each Holder of shares of
Preferred Shares shall be entitled to one vote for each share of Preferred
Shares held by such


                                     - 31 -

<PAGE>

Holder on each matter submitted to a vote of shareholders of the Fund, and (ii)
the holders of outstanding shares of preferred stock, including each share of
Preferred Shares, and of Common Shares shall vote together as a single class;
provided, however, that, at any meeting of the shareholders of the Fund held for
the election of Directors, the holders of outstanding shares of preferred stock,
including Preferred Shares, represented in person or by proxy at said meeting,
shall be entitled, as a class, to the exclusion of the holders of all other
securities and classes of shares of stock of the Fund, to elect two Directors of
the Fund, each share of preferred stock, including each share of Preferred
Shares, entitling the holder thereof to one vote. Subject to paragraph (b) of
this Section 5, the holders of outstanding Common Shares and shares of preferred
stock, including Preferred Shares, voting together as a single class, shall
elect the balance of the Directors.

     (b)  VOTING FOR ADDITIONAL DIRECTORS.

     (i)  VOTING PERIOD. During any period in which any one or more of the
conditions described in subparagraphs (A) or (B) of this subparagraph (b)(i)
shall exist (such period being referred to herein as a "Voting Period"), the
number of Directors constituting the Board of Directors shall be automatically
increased by the smallest number that, when added to the two Directors elected
exclusively by the holders of preferred stock, including Preferred Shares, would
constitute a majority of the Board of Directors as so increased by such smallest
number; and the holders of shares of preferred stock, including Preferred
Shares, shall be entitled, voting as a class on a one-vote-per-share basis (to
the exclusion of the holders of all other securities and classes of shares of
stock of the Fund), to elect such smallest number of additional Directors,
together with the two Directors that such holders are in any event entitled to
elect. A Voting Period shall commence:

     (A)  if at the close of business on any dividend payment date accumulated
dividends (whether or not earned or declared) on any outstanding shares of
preferred stock, including Preferred Shares, equal to at least two full years'
dividends shall be due and unpaid and sufficient cash or specified securities
shall not have been deposited with the Auction Agent for the payment of such
accumulated dividends; or

     (B)  if at any time holders of Preferred Shares are entitled under the 1940
Act to elect a majority of the Directors of the Fund.

     Upon the termination of a Voting Period, the voting rights described in
this subparagraph (b)(i) shall cease, subject always, however, to the revesting
of such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).

     (ii) NOTICE OF SPECIAL MEETING. As soon as practicable after the accrual of
any right of the holders of preferred stock, including Preferred Shares, to
elect additional Directors as described in subparagraph (b)(i) of this Section
5, the Fund shall notify the Auction Agent and the Auction Agent shall call a
special meeting of such holders, by mailing a notice of such special meeting to
such holders, such meeting to be held not less than 10 nor more than 20 days
after the date of mailing of such notice. If the Fund fails to send such notice
to the Auction Agent or if the Auction Agent does not call such a special
meeting, it may be

                                     - 32 -

<PAGE>

called by any such holder on like notice. The record date for determining the
holders entitled to notice of and to vote at such special meeting shall be the
close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting of holders of
preferred stock, including Preferred Shares, held during a Voting Period at
which Directors are to be elected, such holders, voting together as a class (to
the exclusion of the holders of all other securities and classes of shares of
stock of the Fund), shall be entitled to elect the number of Directors
prescribed in subparagraph (b)(i) of this Section 5 on a one-vote-per-share
basis.

     (iii) TERMS OF OFFICE OF EXISTING DIRECTORS. The terms of office of all
persons who are Directors of the Fund at the time of a special meeting of
Holders and holders of other shares of preferred stock of the Fund to elect
Directors shall continue, notwithstanding the election at such meeting by the
Holders and such other holders of the number of Directors that they are entitled
to elect, and the persons so elected by the Holders and such other holders,
together with the two incumbent Directors elected by the Holders and such other
holders of shares of preferred stock of the Fund and the remaining incumbent
Directors elected by the holders of the Common Shares and preferred stock,
including Preferred Shares, shall constitute the duly elected Directors of the
Fund.


     (iv) TERMS OF OFFICE OF CERTAIN DIRECTORS TO TERMINATE UPON TERMINATION OF
VOTING PERIOD. Simultaneously with the termination of a Voting Period, the terms
of office of the additional Directors elected by the Holders and holders of
other shares of preferred stock of the Fund pursuant to subparagraph (b)(i) of
this Section 5 shall terminate, the remaining Directors shall constitute the
Directors of the Fund and the voting rights of the Holders and such other
holders to elect additional Directors pursuant to subparagraph (b)(i) of this
Section 5 shall cease, subject to the provisions of the last sentence of
subparagraph (b)(i) of this Section 5.

     (v)  Solely for purposes of the provisions of Section 5(b)(i) of this Part
I, and subject to the terms thereof in accordance with the 1940 Act and Section
3-803(f) of the Maryland General Corporation Law (the "MGCL"), by resolution of
its Board of Directors on December 14, 2001, the Fund elected to be subject to
Section 3-804(b) of the MGCL, which vests in the Board of Directors the power to
fix the number of Directors of the Fund, to be effective upon the occurrence of
the conditions giving rise to a Voting Period, notwithstanding any contrary
provisions in the Fund's Charter or Bylaws. Except as set forth above, the Fund
has not elected to be subject to the provisions of Title 3, Subtitle 8 of the
MGCL.

     (c)  HOLDERS OF PREFERRED SHARES TO VOTE ON CERTAIN OTHER MATTERS.

     (i)  INCREASES IN CAPITALIZATION. So long as any shares of 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, in person or by proxy, either in writing or at a meeting, voting as
a separate class: (a) authorize, create or issue any class or series of shares
ranking prior to or on a parity with shares of Preferred Shares with respect to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund, or authorize, create or
issue additional shares of any series

                                     - 33 -

<PAGE>

of Preferred Shares (except that, notwithstanding the foregoing, but subject to
the provisions of paragraph (c) of Section 13 of this Part I, the Board of
Directors, 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
preferred shares ranking on a parity with shares of Preferred Shares with
respect to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund if the Fund
receives written confirmation from Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) that
such authorization, creation and issuance would not impair the rating then
assigned by such rating agency to the Preferred Shares; provided, however, that
if Moody's or Fitch is not then rating the shares of Preferred Shares, the
aggregate liquidation preference of all Preferred Shares of the Fund outstanding
after any such issuance, exclusive of accumulated and unpaid dividends, may not
exceed $40,000,000) or (b) amend, alter or repeal the provisions of the Charter,
or these Articles Supplementary, whether by merger, consolidation or otherwise,
so as to affect any preference, right or power of such shares of 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, (ii) a division or split of a share of Preferred
Shares will be deemed to affect such preferences, rights or powers only if the
terms of such division adversely affect the Holders of shares of Preferred
Shares and (iii) the authorization, creation and issuance of classes or series
of shares ranking junior to shares of Preferred Shares with respect to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund, will be deemed to affect
such preferences, rights or powers only if Moody's or Fitch is then rating
shares of 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 shares of 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, in person or by proxy, either in writing or at a
meeting, 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.

     (ii) 1940 ACT MATTERS. Unless a higher percentage is provided for in the
Charter, (A) the affirmative vote of the Holders a "majority of the outstanding"
(as such term is defined in the 1940 Act) preferred stock of the Fund, including
Preferred Shares, voting as a separate class, shall be required to approve (A)
any plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares and (B) any action requiring a vote of security holders of
the Fund under Section 13(a) of the 1940 Act. In the event a vote of Holders of
Preferred Shares is required pursuant to the provisions of Section 13(a) of the
1940 Act, the Fund shall, not later than ten Business Days prior to the date on
which such vote is to be taken, notify Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) that
such vote is to be taken and the nature of the action with respect to which such
vote is to be taken. The Fund shall, not later than ten Business Days after the
date on which such vote is taken, notify Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) of
the results of such vote.

     (d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT SHAREHOLDER APPROVAL. The Board
of Directors may, without the vote or consent of the


                                     - 34 -

<PAGE>

Holders of the Preferred Shares, or any other stockholder of the Fund, from time
to time amend, alter or repeal any or all of the definitions of the terms listed
below, or any provision of the Articles Supplementary viewed by Moody's or Fitch
as a predicate for any such definition, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of the
Preferred Shares or the Holders thereof, provided the Board of Directors
receives written confirmation from Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares), that
any such amendment, alteration or repeal would not impair the ratings then
assigned to the Preferred Shares by Moody's (if Moody's is then rating the
Preferred Shares) or Fitch (if Fitch is then rating the Preferred Shares):

<TABLE>
<CAPTION>

<S>                                                          <C>
Annual Valuation Date                                        Market Value
Accountant's Confirmation                                    Maximum Potential Additional Dividend Liability
Annual Valuation Date                                        Moody's Discount Factor
Closing Transaction                                          Moody's Eligible Assets
Deposit Securities                                           Moody's Hedging Transactions
Discounted Value                                             Moody's Volatility Factor
Exposure Period                                              Municipal Bonds
Fitch Discount Factor                                        Municipal Index
Fitch Eligible Assets                                        Quarterly Valuation Date
Fitch Hedging Transactions                                   Receivables for Municipal Obligations Sold
Fitch Volatility Factor                                      Preferred Shares Basic Maintenance Amount
Forward Commitments                                          Preferred Shares Basic Maintenance Cure Date
Hedging Transactions                                         Preferred Shares Basic Maintenance Report
Independent Accountant                                       Treasury Futures
1940 Act Preferred Shares Asset Coverage                     Valuation Date
1940 Act Cure Date
</TABLE>

     (e) RELATIVE RIGHTS AND PREFERENCES. Unless otherwise required by law or
provided elsewhere in the Charter, the Holders of shares of Preferred Shares
shall not have any relative rights or preferences or other special rights other
than those specifically set forth herein.

     (f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING. The Holders of shares of
Preferred Shares shall have no preemptive rights or rights to cumulative voting.

     (g) VOTING FOR DIRECTORS SOLE REMEDY FOR FUND'S FAILURE TO PAY DIVIDENDS.
In the event that the Fund fails to pay any dividends on the shares of Preferred
Shares, the exclusive remedy of the Holders shall be the right to vote for
Directors pursuant to the provisions of this Section 5.

     (h) HOLDERS ENTITLED TO VOTE. For purposes of determining any rights of the
Holders to vote on any matter, whether such right is created by these Articles
Supplementary, by the other provisions of the Charter, by statute or otherwise,
no Holder shall be entitled to vote any share of Preferred Shares and no share
of Preferred Shares shall be deemed to be "outstanding" for the purpose of
voting or determining the number of shares required to constitute a quorum if,
prior to or concurrently with the time of determination of shares entitled to
vote or shares deemed outstanding for quorum purposes, as the case may be, the
requisite Notice of Redemption with respect to such shares shall have been
mailed as provided in paragraph (c) of Section 11 of this Part I and the
Redemption Price for the redemption of such

                                     - 35 -

<PAGE>

shares shall have been deposited in trust with the Auction Agent for that
purpose. No share of Preferred Shares held by the Fund or any affiliate of the
Fund (except for shares held by a Broker-Dealer that is an affiliate of the Fund
for the account of its customers) shall have any voting rights or be deemed to
be outstanding for voting or other purposes.

     6. 1940 ACT PREFERRED SHARES ASSET COVERAGE. The Fund shall maintain, as of
the last Business Day of each month in which any share of Preferred Shares is
outstanding, the 1940 Act Preferred Shares Asset Coverage.

     7. PREFERRED SHARES BASIC MAINTENANCE AMOUNT.

     (a) So long as shares of Preferred Shares are outstanding, the Fund shall
maintain, on each Valuation Date, and shall verify to its satisfaction that it
is maintaining on such Valuation Date, (i) Fitch Eligible Assets having an
aggregate Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount (if Fitch is then rating the shares of Preferred Shares) and
(ii) Moody's Eligible Assets having an aggregate Discounted Value equal to or
greater than the Preferred Shares Basic Maintenance Amount (if Moody's is then
rating the shares of Preferred Shares).

     (b) On or before 5:00 P.M., New York City time, on the third Business Day
after a Valuation Date on which the Fund fails to satisfy the Preferred Shares
Basic Maintenance Amount, and on the third Business Day after the Preferred
Shares Basic Maintenance Cure Date with respect to such Valuation Date, the Fund
shall complete and deliver to Fitch (if Fitch is then rating the shares of
Preferred Shares), Moody's (if Moody's is then rating the shares of Preferred
Shares) and the Auction Agent (if either Fitch or Moody's is then rating the
shares of Preferred Shares) a Preferred Shares Basic Maintenance Report as of
the date of such failure or such Preferred Shares Basic Maintenance Cure Date,
as the case may be, which will be deemed to have been delivered to the Auction
Agent if the Auction Agent receives a copy or telecopy, telex or other
electronic transcription thereof and on the same day the Fund mails to the
Auction Agent for delivery on the next Business Day the full Preferred Shares
Basic Maintenance Report. The Fund shall also deliver a Preferred Shares Basic
Maintenance Report to (i) the Auction Agent (if either Moody's or Fitch is then
rating the shares of Preferred Shares) as of the last Business Day of each
month, and (ii) Moody's (if Moody's is then rating the shares of Preferred
Shares) and Fitch (if Fitch is then rating the shares of Preferred Shares), in
each case on or before the seventh Business Day after such day. A failure by the
Fund to deliver a Preferred Shares Basic Maintenance Report pursuant to the
preceding sentence shall be deemed to be delivery of a Preferred Shares Basic
Maintenance Report indicating the Discounted Value for all assets of the Fund is
less than the Preferred Shares Basic Maintenance Amount, as of the relevant
Valuation Date.

     (c) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
7 relating to a Quarterly Valuation Date that is also an Annual Valuation Date,
the Fund shall cause the Independent Accountant to confirm in writing to Fitch
(if Fitch is then rating the shares of Preferred Shares), Moody's (if Moody's is
then rating the shares of Preferred Shares) and the Auction Agent (if either
Fitch or Moody's is then rating the shares of Preferred Shares) (i) the
mathematical accuracy of the calculations reflected in such Report (and in any
other Preferred

                                     - 36 -

<PAGE>

Shares Basic Maintenance Report, randomly selected by the Independent
Accountant, that was delivered by the Fund during the quarter ending on such
Annual Valuation Date), (ii) that, in such Report (and in such randomly selected
Report), the Fund determined in accordance with these Articles Supplementary
whether the Fund had, at such Annual Valuation Date (and at the Valuation Date
addressed in such randomly-selected Report), Fitch Eligible Assets (if Fitch is
then rating the shares of Preferred Shares) of an aggregate Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount and Moody's
Eligible Assets (if Moody's is then rating the shares of Preferred Shares) of an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount, (iii) that, in such Report (and in such randomly selected
Report), the Fund determined whether the Fund had, at such Annual Valuation Date
(and at the Valuation Date addressed in such randomly selected Report) in
accordance with these Articles Supplementary, with respect to the Fitch ratings
on Municipal Obligations, the issuer name, issue size and coupon rate listed in
such Report, verified by the Independent Accountant by reference to Bloomberg
Financial Services or another independent source approved in writing by Moody's
(if Moody's is then rating the Preferred Shares) and Fitch (if Fitch is then
rating the Preferred Shares) and the Independent Accountant shall provide a
listing in its letter of any differences, (iv) with respect to the Moody's
ratings on Municipal Obligations, the issuer name, issue size and coupon rate
listed in such Report, that such information has been verified by the
Independent Accountant by reference to Bloomberg Financial Services or another
independent source approved in writing by Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares) and
the Independent Accountant shall provide a listing in its letter of any
differences, (v) with respect to the bid or mean price (or such alternative
permissible factor used in calculating the Market Value) provided by the
custodian of the Fund's assets to the Fund for purposes of valuing securities in
the Fund's portfolio, that the Independent Accountant has traced the price used
in such Report to the bid or mean price listed in such Report as provided to the
Fund and verified that such information agrees (in the event such information
does not agree, the Independent Accountant will provide a listing in its letter
of such differences) and (vi) with respect to such confirmation to Moody's (if
Moody's is then rating the Preferred Shares) and Fitch (if Fitch is then rating
the Preferred Shares), that the Fund has satisfied the requirements of Section
13 of this Part I of these Articles Supplementary (such confirmation is herein
called the "Accountant's Confirmation").

     (d) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
7 relating to any Valuation Date on which the Fund failed to satisfy the
Preferred Shares Basic Maintenance Amount, and relating to the Preferred Shares
Basic Maintenance Cure Date with respect to such failure to satisfy the
Preferred Shares Basic Maintenance Amount, the Fund shall cause the Independent
Accountant to provide to Fitch (if Fitch is then rating the shares of Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares) and the
Auction Agent (if either Fitch or Moody's is then rating the Preferred Shares)
an Accountant's Confirmation as to such Preferred Shares Basic Maintenance
Report.

     (e) If any Accountant's Confirmation delivered pursuant to paragraph (c) or
(d) of this Section 7 shows that an error was made in the Preferred Shares Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation was required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all Fitch Eligible Assets (if Fitch is
then rating the Preferred Shares) or Moody's Eligible Assets (if

                                     - 37 -

<PAGE>

Moody's is then rating the Preferred Shares), as the case may be, of the Fund
was determined by the Independent Accountant, the calculation or determination
made by such Independent Accountant shall be final and conclusive and shall be
binding on the Fund, and the Fund shall accordingly amend and deliver the
Preferred Shares Basic Maintenance Report to Fitch (if Fitch is then rating the
Preferred Shares), Moody's (if Moody's is then rating the Preferred Shares) and
the Auction Agent (if either Fitch or Moody's is then rating the Preferred
Shares) promptly following receipt by the Fund of such Accountant's
Confirmation.

     (f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of any shares of Preferred Shares, the Fund
shall complete and deliver to Fitch (if Fitch is then rating the Preferred
Shares) and Moody's (if Moody's is then rating the Preferred Shares) a Preferred
Shares Basic Maintenance Report as of the close of business on such Date of
Original Issue.

     (g) On or before 5:00 p.m., New York City time, on the seventh Business Day
after either (i) the Fund shall have redeemed Common Shares or (ii) the ratio of
the Discounted Value of Fitch Eligible Assets or the Discounted Value of Moody's
Eligible Assets to the Preferred Shares Basic Maintenance Amount on any
valuation date is less than or equal to 110% (and additionally, in that case,
weekly thereafter until the Preferred Shares Basic Maintenance Amount on the
next valuation date is at least 110%) or (iii) whenever requested by Moody's or
Fitch, the Fund shall complete and deliver to Fitch (if Fitch is then rating the
shares of Preferred Shares) or Moody's (if Moody's is then rating the shares of
Preferred Shares), as the case may be, a Preferred Shares Basic Maintenance
Report as of the date of either such event.

     8. [RESERVED].

     9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.

     (a) DIVIDENDS ON SHARES OTHER THAN 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 shares of stock of the Fund
ranking, as to the payment of dividends, on a parity with shares of Preferred
Shares for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the shares of Preferred Shares
through their most recent Dividend Payment Date. When dividends are not paid in
full upon the shares of Preferred Shares through their most recent Dividend
Payment Date or upon the shares of any other class or series of shares of stock
of the Fund ranking on a parity as to the payment of dividends with shares of
Preferred Shares through their most recent respective dividend payment dates,
all dividends declared upon shares of Preferred Shares and any other such class
or series of shares of stock ranking on a parity as to the payment of dividends
with shares of Preferred Shares shall be declared pro rata so that the amount of
dividends declared per share on shares of Preferred Shares and such other class
or series of shares of stock shall in all cases bear to each other the same
ratio that accumulated dividends per share on the shares of Preferred Shares and
such other class or series of shares of stock bear to each other (for purposes
of this sentence, the amount of dividends declared per share of Preferred Shares
shall be based on the Applicable Rate for such share for the Dividend Periods
during which dividends were not paid in full).

                                     - 38 -

<PAGE>

     (b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON SHARES UNDER
THE 1940 ACT. The Board of Directors shall not declare any dividend (except a
dividend payable in Common Shares), or declare any other distribution, upon the
Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at least
200% (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) after deducting the amount of such
dividend, distribution or purchase price, as the case may be.

     (c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so long as
any Preferred Shares are outstanding, and except as set forth in paragraph (a)
of this Section 9 and paragraph (c) of Section 12 of this Part I, (A) the Fund
shall 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, Common Shares or other
shares, if any, ranking junior to the shares of Preferred Shares as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of the Common Shares or any other shares
of the Fund ranking junior to or on a parity with the shares of 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 Common Shares or any other such junior shares
(except by conversion into or exchange for shares of the Fund ranking junior to
the shares of Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up), or any such
parity shares (except by conversion into or exchange for shares of the Fund
ranking junior to or on a parity with Preferred Shares as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up), unless (i) full cumulative dividends on shares of Preferred Shares
through its 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 (ii) the Fund has redeemed the full number of shares of
Preferred Shares required to be redeemed by any provision for mandatory
redemption pertaining thereto, and (B) the Fund shall 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, Common Shares or other shares, if any, ranking junior to shares
of Preferred Shares as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up) in respect of Common Shares
or any other shares of the Fund ranking junior to shares of 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 Common Shares or any other such junior shares
(except by conversion into or exchange for shares of the Fund ranking junior to
shares of 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 Moody's Eligible Assets (if Moody's is
then rating the shares of Preferred Shares) and Fitch Eligible Assets (if Fitch
is then rating the shares of Preferred Shares) would each at least equal the
Preferred Shares Basic Maintenance Amount.

     10. [RESERVED]


                                     - 39 -

<PAGE>

     11. REDEMPTION.

     (a) OPTIONAL REDEMPTION.

     (i) Subject to the provisions of subparagraph (v) of this paragraph (a),
shares of Preferred Shares may be redeemed, at the option of the Fund, 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, at a redemption
price per share equal to the sum of $25,000 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 (1) shares of
Preferred Shares may not be redeemed in part if after such partial redemption
fewer than 250 shares of Preferred Shares remain outstanding; (2) shares of
Preferred 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
such Initial Rate Period; and (3) subject to subparagraph (ii) of this paragraph
(a), the Notice of Special Rate Period relating to a Special Rate Period of
shares of Preferred Shares, as delivered to the Auction Agent and filed with the
Secretary of the Fund, may provide that shares of Preferred Shares shall not be
redeemable during the whole or any part of such Special Rate Period (except as
provided in subparagraph (iv) of this paragraph (a)) 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 ("Special
Redemption Provisions").

     (ii) A Notice of Special Rate Period relating to shares of Preferred Shares
for a Special Rate Period may contain Special Redemption Provisions only if the
Fund's Board of Directors, after consultation with the Broker-Dealer or
Broker-Dealers for such Special Rate Period, determines that such Special
Redemption Provisions are in the best interest of the Fund.

     (iii) If fewer than all of the outstanding shares of Preferred Shares are
to be redeemed pursuant to subparagraph (i) of this paragraph (a), the number of
shares to be redeemed shall be determined by the Board of Directors, and such
shares shall be redeemed pro rata from the Holders of Preferred Shares in
proportion to the number of Preferred Shares held by such Holders.

     (iv) Subject to the provisions of subparagraph (v) of this paragraph (a),
shares of Preferred Shares may be redeemed, at the option of the Fund, as a
whole but not in part, out of funds legally available therefor, on the first day
following any Dividend Period included in a Rate Period consisting of more than
364 Rate Period Days if, on the date of determination of the Applicable Rate for
shares 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 per share equal to the sum of $25,000 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.

     (v) The Fund may not on any date mail a Notice of Redemption pursuant to
paragraph (c) of this Section 11 in respect of a redemption contemplated to be
effected pursuant to this paragraph (a) unless on such date (a) the Fund has
available Deposit Securities with maturity or tender dates not later than the
day preceding the applicable redemption date and having a value not less than
the amount (including any applicable premium) due to Holders of

                                     - 40 -

<PAGE>

shares of Preferred Shares by reason of the redemption of such shares on such
redemption date and (b) the Discounted Value of Moody's Eligible Assets (if
Moody's is then rating the shares of Preferred Shares) and the Discounted Value
of Fitch Eligible Assets (if Fitch is then rating the shares of Preferred
Shares) each at least equal the Preferred Shares Basic Maintenance Amount, and
would at least equal the Preferred Shares Basic Maintenance Amount immediately
subsequent to such redemption if such redemption were to occur on such date. The
Fund shall not be required to have available Deposit Securities as described in
clause (a) of this subparagraph (v) in respect of a redemption of any shares of
Preferred Shares, as a whole or in part, contemplated to be effected pursuant to
paragraph 11(a) where such redemption is subject to the issuance of shares of
any other series of preferred stock of the Fund. For purposes of determining in
clause (b) of the preceding sentence whether the Discounted Value of Moody's
Eligible Assets and Fitch Eligible Assets at least equals the Preferred Shares
Basic Maintenance Amount, the Moody's Discount Factors applicable to Moody's
Eligible Assets and the Fitch Discount Factor applicable to Fitch Discount
Assets shall be determined by reference to the first Exposure Period longer than
the Exposure Period then applicable to the Fund, as described in the definition
of Moody's Discount Factor and Fitch Discount Factor herein.

     (b) MANDATORY REDEMPTION. The Fund shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Directors for redemption, certain of the shares of Preferred Shares, if
the Fund fails to have either Moody's Eligible Assets with a Discounted Value or
Fitch Eligible Assets with a Discounted Value greater than or equal to the
Preferred Shares Basic Maintenance Amount or fails to maintain the 1940 Act
Preferred Shares Asset Coverage, in accordance with the requirements of the
rating agency or agencies then rating the shares of Preferred Shares, and such
failure is not cured on or before the Preferred Shares Basic Maintenance Cure
Date or the 1940 Act Cure Date, as the case may be. The number of shares of
Preferred Shares to be redeemed shall be equal to the lesser of (i) the minimum
number of shares of Preferred Shares, the redemption of which, if deemed to have
occurred immediately prior to the opening of business on the Cure Date, would
have resulted in the Fund's having both Moody's Eligible Assets with a
Discounted Value and Fitch Eligible Assets with a Discounted Value greater than
or equal to the Preferred Shares Basic Maintenance Amount or maintaining the
1940 Act Preferred Shares Asset Coverage, as the case may be, on such Cure Date
(provided, however, that if there is no such minimum number of shares of
Preferred Shares the redemption or retirement of which would have had such
result, all shares of Preferred Shares then outstanding shall be redeemed), and
(ii) the maximum number of shares of Preferred Shares that can be redeemed out
of funds expected to be legally available therefor in accordance with the
Charter and applicable law. In determining the shares of Preferred Shares
required to be redeemed in accordance with the foregoing, the Fund shall
allocate the number required to be redeemed to satisfy the Preferred Shares
Basic Maintenance Amount or the 1940 Act Preferred Shares Asset Coverage, as the
case may be, pro rata among shares of Preferred Shares subject to redemption or
retirement. The Fund shall effect such redemption on the date fixed by the Fund
therefor, which date shall not be earlier than 20 days nor later than 40 days
after such Cure Date, except that if the Fund does not have funds legally
available for the redemption of all of the required number of shares of
Preferred Shares which are subject to redemption or retirement or the Fund
otherwise is unable to effect such redemption on or prior to 40 days after such
Cure Date, the Fund shall redeem those shares of Preferred Shares which it was
unable to redeem on the earliest practicable date on which it is able to effect

                                     - 41 -

<PAGE>

such redemption. If fewer than all of the outstanding shares of Preferred Shares
are to be redeemed pursuant to this paragraph (b), the number of shares to be
redeemed shall be redeemed pro rata from the Holders of shares in proportion to
the number of shares held by such Holders.

     (c) NOTICE OF REDEMPTION. If the Fund shall determine or be required to
redeem shares of Preferred Shares pursuant to paragraph (a) or (b) of this
Section 11, it shall mail a Notice of Redemption with respect to such redemption
by first class mail, postage prepaid, to each Holder of the shares of Preferred
Shares to be redeemed, at such Holder's address as the same appears on the
record books of the Fund on the record date established by the Board of
Directors. Such Notice of Redemption shall be so mailed not less than 20 nor
more than 40 days prior to the date fixed for redemption. Each such Notice of
Redemption shall state: (i) the redemption date; (ii) the number of shares of
Preferred Shares to be redeemed; (iii) the CUSIP number for the Preferred
Shares; (iv) the Redemption Price; (v) the place or places where the
certificate(s) for such shares (properly endorsed or assigned for transfer, if
the Board of Directors shall so require and the Notice of Redemption shall so
state) are to be surrendered for payment of the Redemption Price; (vi) that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date; and (vii) the provisions of this Section 11 under which such
redemption is made. If fewer than all shares of Preferred Shares held by any
Holder are to be redeemed, the Notice of Redemption mailed to such Holder shall
also specify the number of shares to be redeemed from such Holder. The Fund may
provide in any Notice of Redemption relating to a redemption contemplated to be
effected pursuant to paragraph (a) of this Section 11 that such redemption is
subject to one or more conditions precedent and that the Fund shall not be
required to effect such redemption unless each such condition shall have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.

     (d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding the
provisions of paragraphs (a) or (b) of this Section 11, if any dividends on
shares of Preferred Shares (whether or not earned or declared) are in arrears,
no shares of Preferred Shares shall be redeemed unless all outstanding shares of
Preferred Shares are simultaneously redeemed, and the Fund shall not purchase or
otherwise acquire any shares of Preferred Shares; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of 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 shares of Preferred Shares.

     (e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Charter and applicable law, such redemption shall be made as soon as practicable
to the extent such funds become available. Failure to redeem shares of Preferred
Shares shall be deemed to exist at any time after the date specified for
redemption in a Notice of Redemption when the Fund shall have failed, for any
reason whatsoever, to deposit in trust with the Auction Agent the Redemption
Price with respect to any shares for which such Notice of Redemption has been
mailed; provided, however, that the foregoing shall not apply in the case of the
Fund's failure to deposit in trust with the Auction Agent the Redemption Price
with respect to any shares where (1) the Notice of Redemption relating to such
redemption provided that such redemption was subject to one or more conditions
precedent and (2) any such condition precedent shall not have been satisfied at

                                     - 42 -

<PAGE>

the time or times and in the manner specified in such Notice of Redemption.
Notwithstanding the fact that the Fund may not have redeemed shares of Preferred
Shares for which a Notice of Redemption has been mailed, dividends may be
declared and paid on shares of Preferred Shares and shall include those shares
of Preferred Shares for which a Notice of Redemption has been mailed.

     (f)  AUCTION AGENT AS DIRECTOR OF REDEMPTION PAYMENTS BY FUND. All moneys
paid to the Auction Agent for payment of the Redemption Price of shares of
Preferred Shares called for redemption shall be held in trust by the Auction
Agent for the benefit of Holders of shares so to be redeemed.

     (g)  SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE NO LONGER
OUTSTANDING. Provided a Notice of Redemption has been mailed pursuant to
paragraph (c) of this Section 11, upon the deposit with the Auction Agent (on
the Business Day next preceding the date fixed for redemption thereby, in funds
available on the next Business Day in The City of New York, New York) of funds
sufficient to redeem the shares of Preferred Shares that are the subject of such
notice, dividends on such shares shall cease to accumulate and such shares shall
no longer be deemed to be outstanding for any purpose, and all rights of the
Holders of the shares so called for redemption shall cease and terminate, except
the right of such Holders to receive the Redemption Price, but without any
interest or other additional amount, except as provided in subparagraph (e)(i)
of Section 2 of this Part I and in Section 3 of this Part I. Upon surrender in
accordance with the Notice of Redemption of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board of Directors
shall so require and the Notice of Redemption shall so state), the Redemption
Price shall be paid by the Auction Agent to the Holders of shares of Preferred
Shares subject to redemption. In the case that fewer than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued, representing the unredeemed shares, without cost to the Holder thereof.
The Fund shall be entitled to receive from the Auction Agent, promptly after the
date fixed for redemption, any cash deposited with the Auction Agent in excess
of (i) the aggregate Redemption Price of the shares of Preferred Shares called
for redemption on such date and (ii) all other amounts to which Holders of
shares of Preferred Shares called for redemption may be entitled. Any funds so
deposited that are unclaimed at the end of 90 days from such redemption date
shall, to the extent permitted by law, be repaid to the Fund, after which time
the Holders of shares of Preferred Shares so called for redemption may look only
to the Fund for payment of the Redemption Price and all other amounts to which
they may be entitled. The Fund shall be entitled to receive, from time to time
after the date fixed for redemption, any interest on the funds so deposited.

     (h)  COMPLIANCE WITH APPLICABLE LAW. In effecting any redemption pursuant
to this Section 11, the Fund shall use its best efforts to comply with all
applicable conditions precedent to effecting such redemption under the 1940 Act
and any applicable Maryland law, but shall effect no redemption except in
accordance with the 1940 Act and any applicable Maryland law.

     (i)  ONLY WHOLE SHARES OF PREFERRED SHARES MAY BE REDEEMED. In the case of
any redemption pursuant to this Section 11, only whole shares of Preferred
Shares shall be redeemed, and in the event that any provision of the Charter
would

                                     - 43 -

<PAGE>


require redemption of a fractional share, the Auction Agent shall be authorized
to round up so that only whole shares are redeemed.

     12.  LIQUIDATION RIGHTS.

     (a)  RANKING. The shares of Preferred Shares shall rank on a parity with
each other, with shares of any other series of Preferred Shares and with shares
of any other series of preferred stock as to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund.

     (b)  DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution, liquidation or
winding up of the affairs of the Fund, whether voluntary or involuntary, the
Holders of shares of Preferred Shares then outstanding shall 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
Common Shares or on any other class of shares of the Fund ranking junior to the
Preferred Shares upon dissolution, liquidation or winding up, an amount equal to
the Liquidation Preference with respect to such shares 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 payments required to be made pursuant to Section 3 of this
Part I in connection with the liquidation of the Fund. After the payment to the
Holders of the shares of Preferred Shares of the full preferential amounts
provided for in this paragraph (b), the Holders of Preferred Shares as such
shall have no right or claim to any of the remaining assets of the Fund.

     (c)  PRO RATA DISTRIBUTIONS. In the event the assets of the Fund available
for distribution to the Holders of shares of Preferred Shares upon any
dissolution, liquidation, or winding up of the affairs of the Fund, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such Holders are entitled pursuant to paragraph (b) of this Section 12, no
such distribution shall be made on account of any shares of any other class or
series of preferred stock ranking on a parity with the shares of Preferred
Shares with respect to the distribution of assets upon such dissolution,
liquidation or winding up unless proportionate distributive amounts shall be
paid on account of the shares of Preferred Shares, ratably, in proportion to the
full distributable amounts for which holders of all such parity shares are
respectively entitled upon such dissolution, liquidation or winding up.

     (d)  RIGHTS OF JUNIOR SHARES. Subject to the rights of the holders of
shares of any series or class or classes of shares ranking on a parity with the
shares of Preferred Shares with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund, after payment
shall have been made in full to the Holders of the shares of Preferred Shares as
provided in paragraph (b) of this Section 12, but not prior thereto, any other
series or class or classes of shares ranking junior to the shares of Preferred
Shares with respect to the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Fund shall, subject to the respective terms
and provisions (if any) applying thereto, be entitled to receive any and all
assets remaining to be paid or distributed, and the Holders of the shares of
Preferred Shares shall not be entitled to share therein.

                                     - 44 -

<PAGE>

     (e)  CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION. 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 corporation nor the merger or
consolidation of any corporation into or with the Fund shall be a dissolution,
liquidation or winding up, whether voluntary or involuntary, for the purposes of
this Section 12.

     13.  FUTURES AND OPTIONS TRANSACTIONS: FORWARD COMMITMENTS.

     (a)  If Moody's is rating any Preferred Shares, then:

     (i)  For so long as any Preferred Shares are rated by Moody's, the Fund
will not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the ratings then assigned to such Preferred Shares by Moody's, except
that the Fund may purchase or sell exchange-traded futures contracts based on
the Bond Buyer Municipal Bond Index (the "Municipal Index") or United States
Treasury Bonds, Bills or Notes ("Treasury Futures"), and purchase, write or sell
exchange-traded put options on such futures contracts and purchase, write or
sell exchange-traded call options on such futures contracts (collectively,
"Moody's Hedging Transactions"), subject to the following limitations:

     (A)  the Fund will not engage in any Moody's Hedging Transaction based on
the Municipal Index (other than transactions which terminate a futures contract
or option held by the Fund by the Fund's taking an opposite position thereto
("Closing Transactions")) which would cause the Fund at the time of such
transaction to own or have sold outstanding futures contracts based on the
Municipal Index exceeding in number 10% of the average number of daily traded
futures contracts based on the Municipal Index in the 30 days preceding the time
of effecting such transaction as reported by The Wall Street Journal;

     (B)  the Fund will not engage in any Moody's Hedging Transaction based on
Treasury Futures (other than Closing Transactions) which would cause the Fund at
the time of such transaction to own or have sold

     (I)  outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 20% of the aggregate Market Value of Moody's
Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not rated by
Moody's, rated AAA by S&P), or

     (II) outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 40% of the aggregate Market Value of all
Municipal Bonds constituting Moody's Eligible Assets owned by the Fund (other
than Moody's Eligible Assets already subject to a Moody's Hedging Transaction)
and rated Baa or A by Moody's (or, if not rated by Moody's, rated A or AA by
S&P) (for purpose of the foregoing clauses (I) and (II), the Fund shall be
deemed to own futures contracts that underlie any outstanding options written by
the Fund);

     (C)  the Fund will engage in Closing Transactions to close out any
outstanding

                                     - 45 -

<PAGE>

futures contract based on the Municipal Index if the amount of open interest in
the Municipal Index as reported by The Wall Street Journal is less than 5,000;
and

     (D)  the Fund will not enter into an option of futures transaction unless,
after giving effect thereto, the Fund would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the Preferred
Shares Basic Maintenance Amount.

     (ii) For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets
which the Fund is obligated to deliver or receive pursuant to an outstanding
futures contract or option shall be as follows:

     (A)  assets subject to call options written by the Fund which are either
exchange-traded and "readily reversible" or which expire within 49 days after
the date as of which such valuation is made shall be valued at the lesser of:

     (I)  Discounted Value and

     (II) the exercise price of the call option written by the Fund;

     (B)  assets subject to call options written by the Fund not meeting the
requirements of clause (A) of this sentence shall have no value;

     (C)  assets subject to put options written by the Fund shall be valued at
the lesser of:

     (I)  the exercise price and

     (II) the Discounted Value of the subject security; and

     (D)  where delivery may be made to the Fund with any security of a class of
securities, the Fund shall assume that it will take delivery of the security
with the lowest Discounted Value.

     (iii) For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the following amounts shall be subtracted from
the aggregate Discounted Value of the Moody's Eligible Assets held by the Fund:

     (A)  10% of the exercise price of a written call option;

     (B)  the exercise price of any written put option;


     (C)  where the Fund is the seller under a futures contract, 10% of the
settlement price of the futures contract;


                                     - 46 -

<PAGE>

     (D)  where the Fund is the purchaser under a futures contract, the
settlement price of assets purchased under such futures contract;

     (E)  the settlement price of the underlying futures contract if the Fund
writes put options on a futures contract; and

     (F)  105% of the Market Value of the underlying futures contracts if the
Fund writes call options on a futures contract and does not own the underlying
contract.

     (iv) For so long as any Preferred Shares are rated by Moody's, the Fund
will not enter into any contract to purchase securities for a fixed price at a
future date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions that are permitted under Section
13(a)(ii) of this Part I), except that the Fund may enter into such contracts to
purchase newly-issued securities on the date such securities are issued
("Forward Commitments"), subject to the following limitation:

     (A)  the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed-income securities rated P-1, MTG-1
or MIG-1 by Moody's and maturing prior to the date of the Forward Commitment
with a Market Value that equals or exceeds the amount of the Fund's obligations
under any Forward Commitments to which it is from time to time a party or
long-term fixed income securities with a Discounted Value that equals or exceeds
the amount of the Fund's obligations under any Forward Commitment to which it is
from time to time a party; and

     (B)  the Fund will not enter into a Forward Commitment unless, after giving
effect thereto, the Fund would continue to have Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the Preferred Shares
Maintenance Amount.

     For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Fund is a party and of all securities deliverable to the Fund pursuant
to such Forward Commitments shall be zero.

     (b)  If Fitch is rating any Preferred Shares, then:

     (i)  For so long as any Preferred Shares are rated by Fitch, the Fund will
not buy or sell futures contracts, write, purchase or sell call options on
futures contracts or purchase put options on futures contracts or write call
options (except covered call options) on portfolio securities unless it receives
written confirmation from Fitch that engaging in such transactions would not
impair the ratings then assigned to such Preferred Shares by Fitch, except that
the Fund may purchase or sell exchange-traded futures contracts based on the
Municipal Index or Treasury Futures, and purchase, write or sell exchange-traded
put options on such futures contracts and purchase, write or sell
exchange-traded call options on such futures contracts (collectively, "Fitch
Hedging Transactions"), subject to the following limitations:

     (A)  the Fund will not engage in any Fitch Hedging Transaction based on the
Municipal Index (other than Closing Transactions) which would cause the Fund at
the time of such transactions to own or have sold outstanding futures contracts
based on the Municipal Index

                                     - 47 -

<PAGE>

exceeding in number 10% of the average number of daily traded futures contracts
based on the Municipal Index in the 30 days preceding the time of the Effecting
such transaction as reported by The Wall Street Journal;

     (B)  the Fund will not engage in any Fitch Hedging Transaction based on
Treasury Futures (other than Closing Transactions) which would cause the Fund at
the time of such transaction to own or have sold

     (I)  outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 20% of the aggregate Market Value of Fitch
Eligible Assets owned by the Fund and rated AA by Fitch (or, if not rated by
Fitch, rated Aa by Moody's; or, if not rated by Moody's, rated AAA by S&P), or

     (II) outstanding futures contracts based on Treasury Futures having an
aggregate Market Value exceeding 40% of the aggregate Market Value of all
Municipal Bonds constituting Fitch Eligible Assets owned by the Fund (other than
Fitch Eligible Assets already subject to a Fitch Hedging Transaction) and rated
A or BBB by Fitch (or, if not rated by Fitch, rated Baa by Moody's, or, if not
rated by Moody's rated A or AA by S&P) (for purposes of the foregoing clauses
(I) and (II), the Fund shall be deemed to own futures contracts that underlie
any outstanding options written by the Fund);

     (C)  the Fund will engage in Closing Transactions to close any outstanding
futures contract based on the Municipal Index if the amount of open interest in
the Municipal Index as reported by The Wall Street Journal is less than 5,000;
and

     (D)  the Fund will not enter into an option of future transaction unless,
after giving effect thereto, the Fund would continue to have Fitch Eligible
Assets with an aggregate Discounted Value equal to or greater than the Preferred
Shares Basic Maintenance Amount.

     (ii) For purposes of determining whether the Fund has Fitch Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of Fitch Eligible Assets which
the Fund is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows:

     (A)  assets subject to call options written by the Fund which are either
exchange-traded and "readily reversible" or which expire within 49 days after
the date as of which such valuation is made shall be valued at the lesser of:

     (I)  Discounted Value and

     (II) the exercise price of the call option written by the Fund;

     (B)  assets subject to call options written by the Fund not meeting the
requirements of clause (A) of this sentence shall have no value;

     (C)  assets subject to put options written by the Fund shall be valued at
the lesser of:

                                     - 48 -

<PAGE>

     (I)  the exercise price and

     (II) the Discounted Value of the subject security; and

     (D)  where delivery may be made to the Fund with any security of a class of
securities, the Fund shall assume that it will take delivery of the security
with the lowest Discounted Value.

     (iii) For purposes of determining whether the Fund has Fitch Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the following amounts shall be subtracted from
the aggregate Discounted Value of the Fitch Eligible Assets held by the Fund:

     (A)  10% of the exercise price of a written call option;

     (B)  the exercise price of any written put option;

     (C)  where the Fund is the seller under a futures contract, 10% of the
settlement price of the futures contract;

     (D)  where the Fund is the purchaser under a futures contract, the
settlement price of assets purchased under such futures contract;

     (E)  the settlement price of the underlying futures contract if the Fund
writes put options on a futures contract and does now own the underlying
contract; and

     (F)  105% of the Market Value of the underlying futures contracts if the
Fund writes call options on a futures contract and does not own the underlying
contract.

     (iv) For so long as any Preferred Shares are rated by Fitch, the Fund will
not enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that constitute
Fitch Hedging Transactions that are permitted under Section 13(b)(ii) of this
Part I), except that the Fund may enter into Forward Commitments, subject to the
following limitation:


     (A)  the Fund will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed-income securities rated F-1 by Fitch
(or, if not rated by Fitch, rated P-1, MTG-1 or MIG-1 by Moody's) and maturing
prior to the date of the Forward Commitment with a Market Value that equals or
exceeds the amount of the Fund's obligations under any Forward Commitments to
which it is from time to time a party or long-term fixed income securities with
a Discounted Value that equals or exceeds the amount of the Fund's obligations
under any Forward Commitment to which it is from time to time a party; and

     (B)  the Fund will not enter into a Forward Commitment unless, after giving
effect thereto, the Fund would continue to have Fitch Eligible Assets with an
aggregate Discounted Value equal to or greater than the Preferred Shares
Maintenance Amount.

                                     - 49 -

<PAGE>

     For purposes of determining whether the Fund has Fitch Eligible Assets with
an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which the
Fund is a party and of all securities deliverable to the Fund pursuant to such
Forward Commitments shall be zero.

     (c) For so long as any Preferred Shares are outstanding and Moody's or
Fitch or both is rating such shares, the Fund will not, unless it has received
written confirmation from Moody's or Fitch or both, as applicable, that any such
action would not impair the rating then assigned by such rating agency to such
shares, engage in any one or more of the following transactions:

     (i) borrow money, except that the Fund may, without obtaining the written
confirmation described above, borrow money for the purpose of clearing
securities transactions if

     (A) the Preferred Shares Basic Maintenance Amount would continue to be
satisfied after giving effect to such borrowing and

     (B) such borrowing

     (I) is privately arranged with a bank or other person and is evidenced by a
promissory note or other evidence of indebtedness that is not intended to be
publicly distributed or

     (II) is for "temporary purposes," is evidenced by a promissory note or
other evidence of indebtedness and is in an amount not exceeding 5% of the value
of the total assets of the Fund at the time of the borrowing (for purposes of
the foregoing, "temporary purposes" means that the borrowing is to be repaid
within sixty days and is not to be extended or renewed);

     (ii) except as provided in Section 5 of this Part I, issue additional
shares of any series of Preferred Shares or any class or series of shares
ranking prior to or on a parity with Preferred Shares with respect to the
payment of dividends or the distribution of assets upon dissolutions,
liquidation or winding up of the Fund, or reissue any Preferred Shares
previously purchased or redeemed by the Fund;

     (iii) engage in any short sales of securities;

     (iv) lend securities;

     (v) merge or consolidate into or with any other corporation or entity;

     (vi) change the Pricing Service; and

     (vii) enter into reverse repurchase agreements.

     In the event any Preferred Shares are outstanding and another
nationally-recognized statistical rating organization is rating such shares in
addition to or in lieu of Moody's

                                     - 50 -

<PAGE>

or Fitch, the Fund shall comply with any restrictions imposed by such rating
agency, which restrictions may be more restrictive than those imposed by Moody's
or Fitch.

     14. MISCELLANEOUS.

     (a) [RESERVED]

     (b) NO FRACTIONAL SHARES. No fractional shares of Preferred Shares shall be
issued.

     (c) STATUS OF SHARES OF PREFERRED SHARES REDEEMED, EXCHANGED OR OTHERWISE
ACQUIRED BY THE FUND. Shares of Preferred Shares which are redeemed, exchanged
or otherwise acquired by the Fund shall return to the status of authorized and
unissued Preferred Shares without designation as to series.

     (d) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by applicable
law, the Board of Directors may interpret or adjust the provisions of these
Articles Supplementary to resolve any inconsistency or ambiguity or to remedy
any formal defect, and may amend these Articles Supplementary with respect to
any series of Preferred Shares prior to the issuance of Preferred Shares.

     (e) HEADINGS NOT DETERMINATIVE. The headings contained in these Articles
Supplementary are for convenience of reference only and shall not affect the
meaning or interpretation of these Articles Supplementary.

     (f) NOTICES. All notices or communications, unless otherwise specified in
the By-Laws of the Fund or these Articles Supplementary, shall be sufficiently
given if in writing and delivered in person or mailed by first-class mail,
postage prepaid.

                                    PART II

     1. ORDERS

     (a) Prior to the Submission Deadline on each Auction Date for shares of
Preferred Shares:

     (i) each Beneficial Owner of shares of Preferred Shares may submit to its
Broker-Dealer by telephone or otherwise information as to:

     (A) the number of Outstanding shares, if any, held by such Beneficial Owner
which such Beneficial Owner desires to continue to hold without regard to the
Applicable Rate for the next succeeding Rate Period;

     (B) the number of Outstanding shares, if any, held by such Beneficial Owner
which such Beneficial Owner offers to sell if the Applicable Rate for the next
succeeding Rate Period shall be less than the rate per annum specified by such
Beneficial Owner; and/or

     (C) the number of Outstanding shares, if any, held by such Beneficial Owner

                                     - 51 -

<PAGE>

which such Beneficial Owner offers to sell without regard to the Applicable Rate
for the next succeeding Rate Period; and

     (ii) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive Auction
in a commercially reasonable manner, contact Potential Beneficial Owners (by
telephone or otherwise), including Persons that are not Beneficial Owners, on
such lists to determine the number of shares, if any, which each such Potential
Beneficial Owner offers to purchase if the Applicable Rate for the next
succeeding Rate Period shall not be less than the rate per annum specified by
such Potential Beneficial Owner.

     For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i)(A), (i), (B), (i), (C)
or (ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."

     (b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:

     (A) the number of Outstanding shares of Preferred Shares specified in such
Bid if the Applicable Rate for shares of Preferred Shares determined on such
Auction Date shall be less than the rate specified therein;

     (B) such number or a lesser number of Outstanding shares of Preferred
Shares to be determined as set forth in clause (iv) of paragraph (a) of Section
4 of this Part II if the Applicable Rate for shares of Preferred Shares
determined on such Auction Date shall be equal to the rate specified therein; or

     (C) the number of Outstanding shares of Preferred Shares specified in such
Bid if the rate specified therein shall be higher than the Maximum Rate for
shares of Preferred Shares, or such number or a lesser number of Outstanding
shares of Preferred Shares to be determined as set forth in clause (iii) of
paragraph (b) of Section 4 of this Part II if the rate specified therein shall
be higher than the Maximum Rate for shares of Preferred Shares and Sufficient
Clearing Bids for shares of Preferred Shares do not exist.

     (ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of
Preferred Shares subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:

                                     - 52 -

<PAGE>

     (A) the number of Outstanding shares of Preferred Shares specified in such
Sell Order; or

     (B) such number or a lesser number of Outstanding shares of Preferred
Shares as set forth in clause (iii) of paragraph (b) of Section 4 of this Part
II if Sufficient Clearing Bids for shares of Preferred Shares do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of Preferred Shares shall not be liable to any Person for failing to
sell such shares pursuant to a Sell Order described in the proviso to paragraph
(c) of Section 2 of this Part II if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the Fund)
with the provisions of Section 7 of this Part II or (2) such Broker-Dealer has
informed the Auction Agent pursuant to the terms of its Broker-Dealer Agreement
that, according to such Broker-Dealer's records, such Broker-Dealer believes it
is not the Existing Holder of such shares.

     (iii) A Bid by a Potential Beneficial Holder or a Potential Holder of
shares of Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:

     (A) the number of Outstanding shares specified in such Bid if the
Applicable Rate for shares of Preferred Shares determined on such Auction Date
shall be higher than the rate specified therein; or

     (B) such number or a lesser number of Outstanding shares of Preferred
Shares as set forth in clause (v) of paragraph (a) of Section 4 of this Part II
if the Applicable Rate for shares of Preferred Shares determined on such Auction
Date shall be equal to the rate specified therein.

     (C) No Order for any number of shares of Preferred Shares other than whole
shares shall be valid.

     2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.

     (a) Each Broker-Dealer shall submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders for shares of
Preferred Shares subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the Fund) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
shall specify with respect to each Order for such shares:

     (i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Fund);

     (ii) the aggregate number of shares of Preferred Shares that are the
subject of such Order;

                                     - 53 -

<PAGE>

     (iii) to the extent that such Bidder is an Existing Holder of shares of
Preferred Shares:

     (A) the number of shares, if any, of Preferred Shares subject to any Hold
Order of such Existing Holder;

     (B) the number of shares, if any, of Preferred Shares subject to any Bid of
such Existing Holder and the rate specified in such Bid; and

     (C) the number of shares, if any, of Preferred Shares subject to any Sell
Order of such Existing Holder; and

     (iv) to the extent such Bidder is a Potential Holder of Preferred Shares,
the rate and number of shares of Preferred Shares specified in such Potential
Holder's Bid.

     (b) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.

     (c) If an Order or Orders covering all of the Outstanding shares of
Preferred Shares held by any Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold
Order to have been submitted by or on behalf of such Existing Holder covering
the number of Outstanding shares held by such Existing Holder and not subject to
Orders submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares held by any Existing Holder is not
submitted to the Auction Agent prior to the Submission Deadline for an Auction
relating to a Special Rate Period consisting of more than 28 Rate Period Days,
the Auction Agent shall deem a Sell Order to have been submitted by or on behalf
of such Existing Holder covering the number of outstanding Preferred Shares held
by such Existing Holder and not subject to Orders submitted to the Auction
Agent.

     (d) If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding shares of
Preferred Shares of a series subject to an Auction held by such Existing Holder,
such Orders shall be considered valid in the following order of priority:

     (v) all Hold Orders for shares of Preferred Shares shall be considered
valid, but only up to and including in the aggregate the number of shares of
Outstanding Preferred Shares held by such Existing Holder, and if the number of
shares of Preferred Shares subject to such Hold Orders exceeds the number of
Outstanding shares of Preferred Shares held by such Existing Holder, the number
of shares subject to each such Hold Order shall be reduced pro rata to cover the
number of Outstanding shares of Preferred Shares held by such Existing Holder;

     (vi) any Bid for shares of Preferred Shares shall be considered valid up to
and including the excess of the number of Outstanding shares of Preferred Shares
held by such Existing Holder over the number of shares of Preferred Shares
subject to any Hold Orders referred to in clause (i) above;

                                     - 55 -

<PAGE>

     (B) subject to subclause (A), if more than one Bid of an Existing Holder
for shares of Preferred Shares is submitted to the Auction Agent with the same
rate and the number of Outstanding shares of Preferred Shares subject to such
Bids is greater than such excess, such Bids shall be considered valid up to and
including the amount of such excess, and the number of shares of Preferred
Shares subject to each Bid with the same rate shall be reduced pro rata to cover
the number of shares of Preferred Shares equal to such excess;

     (C) subject to subclauses (A) and (B), if more than one Bid of an Existing
Holder for shares of Preferred Shares is submitted to the Auction Agent with
different rates, such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such excess; and

     (D) in any such event, the number, if any, of such Outstanding shares of
Preferred Shares subject to any portion of Bids considered not valid in whole or
in part under this clause (ii) shall be treated as the subject of a Bid for
shares of Preferred Shares by or on behalf of a Potential Holder at the rate
therein specified; and

     (vii) all Sell Orders for shares of Preferred Shares shall be considered
valid up to and including the excess of the number of shares of Outstanding
Preferred Shares held by such Existing Holder over the sum of shares of
Preferred Shares subject to valid Hold Orders referred to in clause (i) above
and valid Bids referred to in clause (ii) above.

     (e) If more than one Bid for one or more shares of Preferred Shares is
submitted to the Auction Agent by or on behalf of any Potential Holder, each
such Bid submitted shall be a separate Bid with the rate and number of shares
therein specified.

     (f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.

     3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.

     (a) Not earlier than the Submission Deadline on each Auction Date for
shares of Preferred Shares, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers in respect of shares
of Preferred Shares (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and shall determine:

     (i) the excess of the number of Outstanding Preferred Shares over the
number of Outstanding shares of Preferred Shares subject to Submitted Hold
Orders (such excess being hereinafter referred to as the "Available Preferred
Shares");

     (ii) from the Submitted Orders for shares of Preferred Shares whether:

     (A) the number of Outstanding shares of Preferred Shares subject to
Submitted


                                     - 55 -

<PAGE>

Bids of Potential Holders specifying one or more rates equal to or lower than
the Maximum Rate for shares of Preferred Shares exceeds or is equal to the sum
of:

     (B) the number of Outstanding shares of Preferred Shares subject to
Submitted Bids of Existing Holders specifying one or more rates higher than the
Maximum Rate for shares of Preferred Shares; and

     (C) the number of Outstanding shares of Preferred Shares subject to
Submitted Sell Orders (in the event such excess or such equality exists (other
than because the number of shares of Preferred Shares in subclauses (B) and (C)
above is zero because all of the Outstanding shares of Preferred Shares are
subject to Submitted Hold Orders), such Submitted Bids in subclause (A) above
being hereinafter referred to collectively as "Sufficient Clearing Bids"); and

     (iii) if Sufficient Clearing Bids for shares of Preferred Shares exist, the
lowest rate specified in such Submitted Bids (the "Winning Bid Rate") which if:

     (A) each such Submitted Bid of Existing Holders specifying such lowest rate
and (II) all other such Submitted Bids of Existing Holders specifying lower
rates were rejected, thus entitling such Existing Holders to continue to hold
the shares of Preferred Shares that are subject to such Submitted Bids; and

     (B) each such Submitted Bid of Potential Holders specifying such lowest
rate and (II) all other such Submitted Bids of Potential Holders specifying
lower rates were accepted; would result in such Existing Holders described in
subclause (A) above continuing to hold an aggregate number of Outstanding shares
of Preferred Shares which, when added to the number of Outstanding shares of
Preferred Shares to be purchased by such Potential Holders described in
subclause (B) above, would equal not less than the Available Preferred Shares of
Preferred Shares.

     (b) Promptly after the Auction Agent has made the determinations pursuant
to paragraph (a) of this Section 3, the Auction Agent shall advise the Fund of
the Maximum Rate for shares of Preferred Shares for which an Auction is being
held on the Auction Date and, based on such determination, the Applicable Rate
for shares of Preferred Shares for the next succeeding Rate Period thereof as
follows:

     (i) if Sufficient Clearing Bids for shares of Preferred Shares exist, that
the Applicable Rate for all shares of Preferred Shares for the next succeeding
Rate Period thereof shall be equal to the Winning Bid Rate for shares of
Preferred Shares so determined;

     (ii) if Sufficient Clearing Bids for shares of Preferred Shares do not
exist (other than because all of the Outstanding shares of Preferred Shares are
subject to Submitted Hold Orders), that the Applicable Rate for all shares of
Preferred Shares for the next succeeding Rate Period thereof shall be equal to
the Maximum Rate for shares of Preferred Shares; or


     (iii) if all of the Outstanding shares of Preferred Shares are subject to
Submitted Hold Orders, that the Applicable Rate for all shares of Preferred
Shares for the next succeeding Rate Period thereof shall be equal to the lesser
of the Kenny Index (if such Rate Period consists of fewer than 183 Rate Period
Days) or the product of (A)(I) the "AA"



                                     - 56-

<PAGE>

Composite Commercial Paper Rate on such Auction Date for such Rate Period, if
such Rate Period consists of fewer than 183 Rate Period Days; (II) the Treasury
Bill Rate on such Auction Date for such Rate Period, if such Rate Period
consists of more than 182 but fewer than 365 Rate Period Days; or (III) the
Treasury Note Rate on such Auction Date for such Rate Period, if such Rate
Period is more than 364 Rate Period Days (the rate described in the foregoing
clause (A)(I), (II) or (III), as applicable, being referred to herein as the
"Benchmark Rate") and (B) 1 minus the maximum marginal 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 the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income, whichever is greater; provided, however, that if the Fund has
notified the Auction Agent of its intent to allocate to Preferred Shares in such
Rate Period any net capital gains or other income taxable for Federal income tax
purposes ("Taxable Income"), the Applicable Rate for Preferred Shares for such
Rate Period will be (i) if the Taxable Yield Rate (as defined below) is greater
than the Benchmark Rate, then the Benchmark Rate, or (ii) if the Taxable Yield
Rate is less than or equal to the Benchmark Rate, then the rate equal to the sum
of (x) the lesser of the Kenny Index (if such Rate Period consists of fewer than
183 Rate Period Days) or the product of the Benchmark Rate multiplied by the
factor set forth in the preceding clause (B) and (y) the product of the maximum
marginal 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 the maximum marginal regular Federal corporate income
tax applicable to ordinary income, whichever is greater, multiplied by the
Taxable Yield Rate. For purposes of the foregoing, Taxable Yield Rate means the
rate determined by (a) dividing the amount of Taxable Income available for
distribution per such share of Preferred Shares by the number of days in the
Dividend Period in respect of which such Taxable Income is contemplated to be
distributed, (b) multiplying the amount determined in (a) above by 365 (in the
case of a Dividend Period of 7 Rate Period Days) or 360 (in the case of any
other Dividend Period), and (c) dividing the amount determined in (b) above by
$25,000.

     4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES.

     Existing Holders shall continue to hold the shares of Preferred Shares that
are subject to Submitted Hold Orders, and, based on the determinations made
pursuant to paragraph (a) of Section 3 of this Part II, the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected by the Auction Agent and the
Auction Agent shall take such other action as set forth below:

     (a) If Sufficient Clearing Bids for shares of a series of Preferred Shares
have been made, all Submitted Sell Orders with respect to shares of Preferred
Shares shall be accepted and, subject to the provisions of paragraphs (d) and
(e) of this Section 4, Submitted Bids with respect to shares of Preferred Shares
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids with respect to shares of Preferred Shares shall be
rejected:

     (i) Existing Holders' Submitted Bids for shares of Preferred Shares
specifying any rate that is higher than the Winning Bid Rate for shares of
Preferred Shares shall

                                      -57-

<PAGE>



be accepted, thus requiring each such Existing Holder to sell the shares of
Preferred Shares subject to such Submitted Bids;

     (ii) Existing Holders' Submitted Bids for shares of Preferred Shares
specifying any rate that is lower than the Winning Bid Rate for shares of
Preferred Shares shall be rejected, thus entitling each such Existing Holder to
continue to hold the shares of Preferred Shares subject to such Submitted Bids;

     (iii) Potential Holders' Submitted Bids for shares of Preferred Shares
specifying any rate that is lower than the Winning Bid Rate for shares of
Preferred Shares shall be accepted;

     (iv) each Existing Holder's Submitted Bid for shares of Preferred Shares
specifying a rate that is equal to the Winning Bid Rate for shares of Preferred
Shares shall be rejected, thus entitling such Existing Holder to continue to
hold the shares of Preferred Shares subject to such Submitted Bid, unless the
number of Outstanding shares of Preferred Shares subject to all such Submitted
Bids shall be greater than the number of shares of Preferred Shares ("remaining
shares") in the excess of the Available Preferred Shares over the number of
shares of Preferred Shares subject to Submitted Bids described in clauses (ii)
and (iii) of this paragraph (a), in which event such Submitted Bid of such
Existing Holder shall be rejected in part, and such Existing Holder shall be
entitled to continue to hold shares of Preferred Shares subject to such
Submitted Bid, but only in an amount equal to the number of shares of Preferred
Shares obtained by multiplying the number of remaining shares by a fraction, the
numerator of which shall be the number of Outstanding shares of Preferred Shares
held by such Existing Holder subject to such Submitted Bid and the denominator
of which shall be the aggregate number of Outstanding shares of Preferred Shares
subject to such Submitted Bids made by all such Existing Holders that specified
a rate equal to the Winning Bid Rate; and

     (v)  each Potential Holder's Submitted Bid specifying a rate that is equal
to the Winning Bid Rate shall be accepted but only in an amount equal to the
number of shares of Preferred Shares obtained by multiplying the number of
shares in the excess of the Available Preferred Shares over the number of shares
of Preferred Shares subject to Submitted Bids described in clauses (ii) through
(iv) of this paragraph (a) by a fraction, the numerator of which shall be the
number of Outstanding shares of Preferred Shares subject to such Submitted Bid
and the denominator of which shall be the aggregate number of Outstanding shares
of Preferred Shares subject to such Submitted Bids made by all such Potential
Holders that specified a rate equal to the Winning Bid Rate.

     (b)  If Sufficient Clearing Bids for shares of Preferred Shares have not
been made (other than because all of the Outstanding shares are subject to
Submitted Hold Orders), subject to the provisions of paragraph (d) of this
Section 4, Submitted Orders for shares of Preferred Shares shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids for shares of Preferred Shares shall be rejected:

     (i)  Existing Holders' Submitted Bids for shares of Preferred Shares
specifying any rate that is equal to or lower than the Maximum Rate for shares
of Preferred

                                     - 58 -

<PAGE>


Shares shall be rejected, thus entitling such Existing Holders to continue to
hold the shares of Preferred Shares subject to such Submitted Bids;

     (ii) Potential Holders' Submitted Bids for shares of Preferred Shares
specifying any rate that is equal to or lower than the Maximum Rate for shares
of Preferred Shares shall be accepted; and

     (iii) Each Existing Holder's Submitted Bid for shares of Preferred Shares
specifying any rate that is higher than the Maximum Rate for shares of Preferred
Shares and the Submitted Sell Orders for shares of Preferred Shares of each
Existing Holder shall be accepted, thus entitling each Existing Holder that
submitted or on whose behalf was submitted any such Submitted Bid or Submitted
Sell Order to sell the shares of Preferred Shares subject to such Submitted Bid
or Submitted Sell Order, but in both cases only in an amount equal to the number
of shares of Preferred Shares obtained by multiplying the number of shares of
Preferred Shares subject to Submitted Bids described in clause (ii) of this
paragraph (b) by a fraction, the numerator of which shall be the number of
shares of Outstanding Preferred Shares held by such Existing Holder subject to
such Submitted Bid or Submitted Sell Order and the denominator of which shall be
the aggregate number of Outstanding shares of Preferred Shares subject to all
such Submitted Bids and Submitted Sell Orders.

     (c) If all of the Outstanding shares of Preferred Shares are subject to
Submitted Hold Orders, all Submitted Bids for shares of Preferred Shares shall
be rejected.

     (d) If, as a result of the procedures described in clause (iv) or (v) of
paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of Preferred Shares on
any Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, round up or down the number of shares of Preferred
Preferred Shares to be purchased or sold by any Existing Holder or Potential
Holder on such Auction Date as a result of such procedures so that the number of
shares so purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be whole shares of Preferred Shares.

     (e) If, as a result of the procedures described in clause (v) of paragraph
(a) of this Section 4, any Potential Holder would be entitled or required to
purchase less than a whole share of Preferred Shares on any Auction Date, the
Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate shares of Preferred Shares for purchase among Potential
Holders so that only whole shares of Preferred Shares are purchased on such
Auction Date as a result of such procedures by any Potential Holder, even if
such allocation results in one or more Potential Holders not purchasing shares
of Preferred Shares on such Auction Date.

     (f) Based on the results of each Auction for shares of Preferred Shares,
the Auction Agent shall determine the aggregate number of shares of Preferred
Shares to be purchased and the aggregate number of shares of Preferred Shares to
be sold by Potential Holders and Existing Holders and, with respect to each
Potential Holder and Existing Holder, to the extent that such aggregate number
of shares to be purchased and such aggregate number of shares to be sold differ,
determine to which other Potential Holder(s) or Existing Holder(s) they


                                     - 59 -

<PAGE>


shall deliver, or from which other Potential Holder(s) or Existing Holder(s)
they shall receive, as the case may be, shares of Preferred Shares.
Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or Beneficial Owner
of shares of Preferred Shares with respect to whom a Broker-Dealer submitted a
Bid to the Auction Agent for such shares that was accepted in whole or in part,
or submitted or is deemed to have submitted a Sell Order for such shares that
was accepted in whole or in part, fails to instruct its Agent Member to deliver
such shares against payment therefor, partial deliveries of shares of Preferred
Shares that have been made in respect of Potential Holders' or Potential
Beneficial Owners' Submitted Bids for shares of Preferred Shares that have been
accepted in whole or in part shall constitute good delivery to such Potential
Holders and Potential Beneficial Owners.

     (g) Neither the Fund nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Beneficial Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver shares of Preferred Shares or to
pay for shares of Preferred Shares sold or purchased pursuant to the Auction
Procedures or otherwise.

     5. NOTIFICATION OF ALLOCATIONS.

     Whenever the Fund intends to include any net capital gains or other income
taxable for Federal income tax purposes in any dividend on shares of Preferred
Shares, the Fund shall, in the case of a Minimum Rate Period or a Special Rate
Period 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 Beneficial
Owners and Potential Beneficial Owners of shares of Preferred Shares believed by
it to be interested in submitting an Order in the Auction to be held on such
Auction Date.

     6. AUCTION AGENT.

     For so long as any shares of Preferred Shares are outstanding, the Auction
Agent, duly appointed by the Fund to so act, shall be in each case a commercial
bank, trust company or other financial institution independent of the Fund and
its affiliates (which however, may engage or have engaged in business
transactions with the Fund or its affiliates) and at no time shall the Fund or
any of its affiliates act as the Auction Agent in connection with the Auction
Procedures. If the Auction Agent resigns or for any reason its appointment is
terminated during any period that any shares of Preferred Shares are
outstanding, the Board of Directors shall use its best efforts promptly
thereafter to appoint another qualified commercial bank, trust company or
financial institution to act as the Auction Agent. The Auction Agent's registry
of Existing Holders of shares of Preferred Shares shall be conclusive and
binding on the Broker- Dealers. A Broker-Dealer may inquire of the Auction Agent
between 3:00 p.m. on the Business Day preceding an Auction and 9:30 a.m. on the
Auction Date for such Auction to ascertain the number of shares in respect of
which the Auction Agent has determined such Broker-Dealer to


                                     - 60 -

<PAGE>



be an Existing Holder. If such Broker-Dealer believes it is the Existing Holder
of fewer shares than specified by the Auction Agent in response to such
Broker-Dealer's inquiry, such Broker-Dealer may so inform the Auction Agent of
that belief. Such Broker-Dealer shall not, in its capacity as Existing Holder of
shares of Preferred Shares, submit Orders in such Auction covering in the
aggregate more than the number of shares specified by the Auction Agent in
response to such Broker-Dealer's inquiry.

     7.   TRANSFER OF SHARES OF PREFERRED SHARES.

     Unless otherwise permitted by the Fund, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of shares of Preferred Shares
only in whole shares and only pursuant to a Bid or Sell Order placed with the
Auction Agent in accordance with the procedures described in this Part II or to
a Broker-Dealer, provided, however, that (a) a sale, transfer or other
disposition of shares 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 this Section 7 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.

     8.   GLOBAL CERTIFICATE.

     Prior to the commencement of a Voting Period, (i) all of the shares of
Preferred Shares outstanding from time to time shall be represented by one
global certificate registered in the name of the Securities Depository or its
nominee and (ii) no registration of transfer of shares of Preferred Shares shall
be made on the books of the Fund to any Person other than the Securities
Depository or its nominee.

                                     - 61 -

<PAGE>


                  IN WITNESS WHEREOF, INTERMEDIATE MUNI FUND, INC. has caused
these presents to be signed on __________ ___, 2002 in its name and on its
behalf by its President or a Vice President and witnessed by its Secretary or
Assistant Secretary and the said officers of the Fund acknowledge said
instrument to be the corporate act of the Fund, and state under penalties of
perjury that to the best of their knowledge, information and belief the matters
and facts therein set forth with respect to authorization and approval are true
in all material respects.


                                               INTERMEDIATE MUNI FUND, INC.
                                               By:
                                                  -----------------------------

                                               Title:
         WITNESS:

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

         Title:

                                     - 62 -

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.H2
<SEQUENCE>4
<FILENAME>dex99h2.txt
<DESCRIPTION>FORM OF UNDERWRITING AGREEMENT
<TEXT>
<PAGE>


                                                                     Exhibit h.2

                Municipal Auction Rate Cumulative Preferred Stock

                          INTERMEDIATE MUNI FUND, INC.

                         2000 Preferred Shares, Series M

                    Liquidation Preference $25,000 Per Share

                             UNDERWRITING AGREEMENT
                             ----------------------

                                                               January ___, 2002

SALOMON SMITH BARNEY INC.
         388 Greenwich Street
         New York, New York 10013

Ladies and Gentlemen:

                  Intermediate Muni Fund, Inc., a Maryland corporation (the
"Fund"), proposes, upon the terms and conditions set forth herein, to issue and
sell an aggregate of 2000 Preferred Shares of its Municipal Auction Rate
Cumulative Preferred Stock, Series M, par value $0.001 per share with a
liquidation preference of $25,000 per share (the "Preferred Shares"). The
Preferred Shares will be authorized by, and subject to the terms and conditions
of, the Fund's Charter, including the Articles Supplementary Creating and
Fixing the Rights of Municipal Auction Rate Cumulative Preferred Stock of the
Fund (the "Articles Supplementary"), in the form filed as an exhibit to the
Registration Statement referred to in Section 1 of this agreement. The Fund and
its investment Manager, Smith Barney Fund Management LLC, (the "Manager"),
wish to confirm as follows their agreement with Salomon Smith Barney Inc.
(the "Underwriter") in connection with the purchase of the Preferred Shares
by the Underwriter.

                  Collectively, (i) the Investment Management Agreement, dated
as of February 27, 1992, between the Fund and the Manager (the "Management
Agreement"), (ii) the Custodian Services Agreement, dated as of _____________,
between the Fund and State Street Bank and Trust Company, (iii) the Auction
Agency Agreement, to be dated as of January 28, 2002, between the Fund and
Bankers Trust Company and (iv) the Broker-Dealer Agreement, to be dated as of
January 28, 2002, between the Fund and Salomon Smith Barney Inc. are hereinafter
referred to as the "Fund Agreements". This Underwriting Agreement is hereinafter
referred to as the "Agreement".

                  1. Registration Statement and Prospectus. The Fund has
                     -------------------------------------
prepared in conformity with the provisions of the Securities Act of 1933, as
amended (the "1933 Act"), the Investment Company Act of 1940, as amended (the
"1940 Act"), and the rules and regulations of the Securities and Exchange
Commission (the "Commission") promulgated under the 1933 Act (the

<PAGE>

                                                                               2

"1933 Act Rules and Regulations") and the 1940 Act (the "1940 Act Rules and
Regulations" and, together with the 1933 Act Rules and Regulations, the "Rules
and Regulations") a registration statement on Form N-2, as amended (File Nos.
333-73414 and 811-6506), under the 1933 Act and the 1940 Act (the "Registration
Statement"), including a Prospectus relating to the Preferred Shares, and has
filed the Registration Statement and Prospectus in accordance with the 1933 Act
and 1940 Act. The Fund also has filed a notification of registration of the Fund
as an investment company under the 1940 Act on Form N-8A (the "1940 Act
Notification"). The term "Registration Statement" as used in this Agreement
means the Registration Statement (including all financial schedules and
exhibits), as amended at the time it becomes effective under the 1933 Act or, if
the Registration Statement became effective under the 1933 Act prior to the
execution of this Agreement, as amended or supplemented at the time it became
effective, prior to the execution of this Agreement. If it is contemplated, at
the time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed under the 1933 Act and must be declared
effective before the offering of the Preferred Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. If the Fund has filed an
abbreviated registration statement to register an additional amount of Preferred
Shares pursuant to Rule 462(b) under the 1933 Act (the "Rule 462 Registration
Statement"), then any reference herein to the term "Registration Statement"
shall include such Rule 462 Registration Statement. The term "Prospectus" as
used in this Agreement means the prospectus and statement of additional
information in the forms included in the Registration Statement or, if the
prospectus and statement of additional information included in the Registration
Statement omit information in reliance on Rule 430A under the 1933 Act Rules and
Regulations and such information is included in a prospectus and statement of
additional information filed with the Commission pursuant to Rule 497 under the
1933 Act, the term "Prospectus" as used in this Agreement means the prospectus
and statement of additional information in the forms included in the
Registration Statement as supplemented by the addition of the information
contained in the prospectus filed with the Commission pursuant to Rule 497. The
term "Prepricing Prospectus" as used in this Agreement means the prospectus and
statement of additional information subject to completion in the forms included
in the Registration Statement at the time of the initial filing of the
Registration Statement with the Commission on November 15, 2001, and as such
prospectus and statement of additional information shall have been amended from
time to time prior to the date of the Prospectus, together with any other
prospectus and statement of additional information relating to the Fund other
than the Prospectus approved in writing by or directly or indirectly prepared by
the Fund or the Manager; it being understood that the definition of Prepricing
Prospectus above shall not include any Prepricing Prospectus prepared by the
Underwriter unless approved in writing by the Fund or the Manager. The terms
"Registration Statement", "Prospectus" and "Prepricing Prospectus" shall also
include any financial statements incorporated by reference therein.

                  The Fund has furnished the Underwriter with copies of such
Registration Statement, each amendment to such Registration Statement filed with
the Commission and each Prepricing Prospectus.

                  2. Agreements to Sell and Purchase. The Fund hereby agrees,
                     -------------------------------
subject to all the terms and conditions set forth herein, to issue and sell to
the Underwriter and, upon the basis of the representations, warranties and
agreements of the Fund and the Manager herein contained and subject to all the
terms and conditions set forth herein, the Underwriter agrees to purchase


<PAGE>

                                                                               3

from the Fund, at a purchase price of $24,750 per Share, the number of Preferred
Shares set forth opposite the name of the Underwriter in Schedule I hereto.

                  3. Terms of Public Offering. The Fund and the Manager have
                    -------------------------
been advised by the Underwriter that the Underwriter proposes to make a public
offering of the Preferred Shares as soon after the Registration Statement and
this Agreement have become effective as in the Underwriter's judgment is
advisable and initially to offer the Preferred Shares upon the terms set forth
in the Prospectus.

                  4. Delivery of the Preferred Shares and Payment Therefor.
                     -----------------------------------------------------
Delivery to the Underwriter of and payment for the Preferred Shares shall be
made at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New
York, NY 10017, or through the facilities of The Depository Trust Company or
another mutually agreeable facility, at 9:30 A.M., New York City time, on
January 28, 2002 (the "Closing Date"). The Closing Date may be varied by
agreement between the Underwriter and the Fund. The certificates evidencing the
Preferred Shares shall be delivered to and registered at The Depository Trust
Company, against payment of the purchase price therefor in immediately available
funds.

                  5. Agreements of the Fund and the Manager. The Fund and the
                     --------------------------------------
Manager, jointly and severally, agree with the Underwriter as follows:

                  (a) If, at the time this Agreement is executed and delivered,
it is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective under the 1933 Act before the offering of the
Preferred Shares may commence, the Fund will endeavor to cause the Registration
Statement or such post-effective amendment to become effective under the 1933
Act as soon as possible and will advise the Underwriter promptly and, if
requested by the Underwriter, will confirm such advice in writing when the
Registration Statement or such post-effective amendment has become effective.

                  (b) The Fund will advise the Underwriter promptly and, if
requested by the Underwriter, will confirm such advice in writing: (i) of any
request made by the Commission for amendment of or a supplement to the
Registration Statement, any Prepricing Prospectus or the Prospectus (or any
amendment or supplement to any of the foregoing) or for additional information,
(ii) of the issuance by the Commission, the National Association of Securities
Dealers, Inc. (the "NASD"), any state securities commission, any national
securities exchange, any arbitrator, any court or any other governmental,
regulatory, self-regulatory or administrative agency or any official of any
order suspending the effectiveness of the Registration Statement, prohibiting or
suspending the use of the Prospectus or any Prepricing Prospectus, or any sales
material (as hereinafter defined), of any notice pursuant to Section 8(e) of the
1940 Act, of the suspension of qualification of the Preferred Shares for
offering or sale in any jurisdiction, or the initiation of any proceeding for
any such purposes, (iii) of receipt by the Fund, the Manager, any affiliate of
the Fund or the Manager or any representative or attorney of the Fund or the
Manager of any other material communication from the Commission, the NASD, any
state securities commission, any national securities exchange, any arbitrator,
any court or any other governmental, regulatory, self-regulatory or
administrative agency or any official relating to the Fund (if such
communication relating to the Fund is received by such person within three years
after the date of this Agreement), the Registration Statement, the 1940 Act
Notification, the


<PAGE>
                                                                               4

Prospectus, any Prepricing Prospectus, any sales material (as hereinafter
defined) (or any amendment or supplement to any of the foregoing) or this
Agreement or any of the Fund Agreements and (iv) within the period of time
referred to in paragraph (f) below, of any material adverse change in the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Fund or the Manager or of the happening of any
other event which makes any statement of a material fact made in the
Registration Statement or the Prospectus, or any Prepricing Prospectus or any
sales material (as hereinafter defined) (or any amendment or supplement to any
of the foregoing) untrue or which requires the making of any additions to or
changes in the Registration Statement or the Prospectus, or any Prepricing
Prospectus or any sales materials (as herein defined) (or any amendment or
supplement to any of the foregoing) in order to state a material fact required
by the 1933 Act, the 1940 Act or the Rules and Regulations to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or of the necessity to
amend or supplement the Registration Statement, the Prospectus, or any
Prepricing Prospectus or any sales material (as herein defined) (or any
amendment or supplement to any of the foregoing) to comply with the 1933 Act,
the 1940 Act, the Rules and Regulations or any other law or order of any court
or regulatory body. If at any time the Commission, the NASD, any state
securities commission, any national securities exchange, any arbitrator, any
court or any other governmental, regulatory, self-regulatory or administrative
agency or any official shall issue any order suspending the effectiveness of the
Registration Statement, prohibiting or suspending the use of the Prospectus or
any sales material (as herein defined) (or any amendment or supplement to any of
the foregoing) or suspending the qualification of the Preferred Shares for
offering or sale in any jurisdiction, the Fund will make every reasonable effort
to obtain the withdrawal of such order at the earliest possible time.

                  (c) The Fund will furnish to the Underwriter, without charge,
three signed copies of the Registration Statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits thereto, and will also furnish to the Underwriter, without charge, such
number of conformed copies of the Registration Statement as originally filed and
of each amendment thereto, but without exhibits, as the Underwriter may
reasonably request.

                  (d) The Fund will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus, or
any sales material (as herein defined), of which the Underwriter shall not
previously have been advised or to which the Underwriter shall reasonably object
after being so advised or (ii) so long as, in the opinion of counsel for the
Underwriter, a Prospectus is required by the 1933 Act to be delivered in
connection with sales by the Underwriter or any dealer, file any information,
documents or reports pursuant to the Securities Exchange Act of 1934, as amended
(the "1934 Act"), without delivering a copy of such information, documents or
reports to the Underwriter prior to or concurrently with such filing.

                  (e) Prior to the execution and delivery of this Agreement, the
Fund has delivered to the Underwriter, without charge, in such quantities as the
Underwriter has requested, copies of each form of the Prepricing Prospectus. The
Fund consents to the use, in accordance with the provisions of the 1933 Act and
with the state securities or blue sky laws of the jurisdictions in which the
Preferred Shares are offered by the Underwriter and by dealers, prior to the
date of the Prospectus, of each Prepricing Prospectus so furnished by the Fund.



<PAGE>
                                                                               5

                  (f) As soon after the execution and delivery of this Agreement
as possible and thereafter from time to time for such period as in the opinion
of counsel for the Underwriter a prospectus is required by the 1933 Act to be
delivered in connection with sales by the Underwriter or any dealer, the Fund
will expeditiously deliver to the Underwriter and each dealer, without charge,
as many copies of the Prospectus (and of any amendment or supplement thereto) as
the Underwriter may reasonably request. The Fund consents to the use of the
Prospectus (and of any amendment or supplement thereto) in accordance with the
provisions of the 1933 Act and with the state securities or blue sky laws of the
jurisdictions in which the Preferred Shares are offered by the Underwriter and
by all dealers to whom Preferred Shares may be sold, both in connection with the
offering and sale of the Preferred Shares and for such period of time thereafter
as the Prospectus is required by the 1933 Act to be delivered in connection with
sales by the Underwriter or any dealer. If during such period of time any event
shall occur that in the judgment of the Fund or in the opinion of counsel for
the Underwriter is required to be set forth in the Registration Statement or the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Registration Statement or the Prospectus to comply with the 1933 Act,
the 1940 Act, the Rules and Regulations or any other federal law, rule or
regulation, or any state securities or blue sky disclosure laws, rules or
regulations, the Fund will forthwith prepare and, subject to the provisions of
paragraph (d) above, promptly file with the Commission an appropriate supplement
or amendment thereto, and will expeditiously furnish to the Underwriter and
dealers, without charge, a reasonable number of copies thereof. In the event
that the Fund and the Underwriter agree that the Registration Statement or the
Prospectus should be amended or supplemented, the Fund, if requested by the
Underwriter, will promptly issue a press release announcing or disclosing the
matters to be covered by the proposed amendment or supplement.

                  (g) The Fund will make generally available to its security
holders an earnings statement, which need not be audited, covering a
twelve-month period ending not later than 15 months after the effective date of
the Registration Statement as soon as practicable after the end of such period,
which earnings statement shall satisfy the provisions of Section 11(a) of the
1933 Act and Rule 158 of the 1933 Act Rules and Regulations.

                  (h) During the period of five years hereafter, the Fund will
furnish to the Underwriter (i) as soon as available, a copy of each report of
the Fund mailed to shareholders or filed with the Commission or furnished to the
American Stock Exchange (the "AMEX") other than reports on Form N-SAR, and (ii)
from time to time such other information concerning the Fund as the Underwriter
may reasonably request.

                  (i) If this Agreement shall terminate or shall be terminated
after execution pursuant to any provisions hereof (otherwise than by notice
given by the Underwriter terminating this Agreement pursuant to Section 12
hereof or pursuant to the second paragraph of Section 11 hereof) or if this
Agreement shall be terminated by the Underwriter because of any failure or
refusal on the part of the Fund or the Manager to comply with the terms or
fulfill any of the conditions of this Agreement, the Fund agrees to reimburse
the Underwriter for all out-of-pocket expenses (including reasonable fees and
expenses of counsel for the Underwriter) incurred by the Underwriter in
connection herewith.


<PAGE>
                                                                               6

                  (j) The Fund will apply the net proceeds from the sale of the
Preferred Shares substantially in accordance with the description set forth in
the Prospectus and in such a manner as to comply with the investment objectives,
policies and restrictions of the Fund as described in the Prospectus.

                  (k) The Fund will timely file the requisite copies of the
Prospectus with the Commission pursuant to Rule 497(c) or Rule 497(h) of the
1933 Act Rules and Regulations, whichever is applicable or, if applicable, will
timely file the certification permitted by Rule 497(j) of the 1933 Act Rules and
Regulations and will advise the Underwriter of the time and manner of such
filing.

                  (l) Except as provided in this Agreement, so long as the
Preferred Shares remain outstanding, the Fund will not sell, contract to sell,
or otherwise dispose of any senior securities (as defined in the 1940 Act) of
the Fund, or grant any options or warrants to purchase senior securities of the
Fund, for a period of 120 days after the date of the Prospectus, without the
prior written consent of the Underwriter.

                  (m) The Fund will use its best efforts to cause the Preferred
Shares, prior to the Closing Date, to be assigned a rating of "AAA" by Fitch,
Inc. ("Fitch") and "Aaa" by Moody's Investors Service, Inc. ("Moody's" and,
together with Fitch, the "Rating Agencies").

                  (n) The Fund and the Manager will each use its best efforts to
perform all of the agreements required of them and discharge all conditions to
closing as set forth in this Agreement.

                  6. Representations and Warranties of the Fund and the Manager.
                     ----------------------------------------------------------
The Fund and the Manager, jointly and severally, represent and warrant to the
Underwriter that:

                  (a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 497 of the 1933 Act Rules and
Regulations, complied when so filed in all material respects with the provisions
of the 1933 Act, the 1940 Act and the Rules and Regulations. The Commission has
not issued any order preventing or suspending the use of any Prepricing
Prospectus.

                  (b) The Registration Statement in the form in which it became
or becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 497 of the 1933
Act Rules and Regulations and the 1940 Act Notification when originally filed
with the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the applicable
requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and did
not or will not at any such times contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, except that this representation and warranty does not
apply to (i) statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information relating to
the


<PAGE>
                                                                               7

Underwriter furnished to the Fund in writing by or on behalf of the Underwriter
expressly for use therein or (ii) with respect to the representations of the
Fund, the description of the Manager contained in the Prospectus heading
"Management of the Fund" and in the statement of additional information heading
"Investment Manager."

                  (c) All the outstanding Common Stock (as defined in the
Prospectus) of the Fund has been duly authorized and validly issued, is fully
paid and nonassessable and is free of any preemptive or similar rights; the
Preferred Shares have been duly authorized and, when issued and delivered to the
Underwriter against payment therefor in accordance with the terms hereof, will
be validly issued, fully paid and nonassessable and free of any preemptive or
similar rights and will conform to the description thereof in the Registration
Statement and the Prospectus (and any amendment or supplement to either of
them); and the capitalization of the Fund conforms to the description thereof in
the Registration Statement and the Prospectus (and any amendment or supplement
to either of them).

                  (d) The Fund is a corporation duly organized and validly
existing in good standing under the laws of the State of Maryland with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify does not have a Material Adverse Effect (as
hereinafter defined); and the Fund has no subsidiaries.

                  (e) There are no legal or governmental proceedings pending or,
to the knowledge of the Fund, threatened, against the Fund, or to which the Fund
or any of its properties is subject, that are required to be described in the
Registration Statement or the Prospectus (and any amendment or supplement to
either of them) that are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (and any amendment or
supplement to either of them) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the 1933 Act, the 1940
Act or the Rules and Regulations.

                  (f) The Fund is not in violation of its Charter, including the
Articles Supplementary and is in compliance in material respects with its other
organizational documents applicable to the Fund (together with the Charter and
Articles Supplementary, the "Organizational Documents"), and any law, ordinance,
administrative or governmental rule or regulation applicable to the Fund or of
any decree of the Commission, the NASD, any state securities commission, any
national securities exchange, any arbitrator, any court or governmental agency,
body or official having jurisdiction over the Fund, or in default in any respect
in the performance of any material obligation, agreement or condition contained
in any bond, debenture, note or any other evidence of indebtedness or in any
material agreement, indenture, lease or other instrument to which the Fund is a
party or by which it or any of its properties may be bound, except where such
violation does not have a Material Adverse Effect (as hereinafter defined).



<PAGE>
                                                                               8

                  (g) Neither the issuance and sale of the Preferred Shares, the
execution, delivery or performance of this Agreement or any of the Fund
Agreements by the Fund, nor the consummation by the Fund of the transactions
contemplated hereby or thereby (i) requires any consent, approval, authorization
or other order of or registration or filing with, the Commission, the NASD, any
state securities commission, any national securities exchange, any arbitrator,
any court, regulatory body, administrative agency or other governmental body,
agency or official (except such as may have been obtained prior to the date
hereof and such as may be required for compliance with the state securities or
blue sky laws of various jurisdictions which have been or will be effected in
accordance with this Agreement) or conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the
Organizational Documents or (ii) conflicts or will conflict with or constitutes
or will constitute a material breach of, or a default under, any material
agreement, indenture, lease or other instrument to which the Fund is a party or
by which it or any of its properties may be bound, or violates or will violate
any statute, law, regulation or judgment, injunction, order or decree applicable
to the Fund or any of its properties, or will result in the creation or
imposition of any material lien, charge or encumbrance upon any property or
assets of the Fund pursuant to the terms of any agreement or instrument to which
it is a party or by which it may be bound or to which any of its property or
assets is subject. The Fund is not subject to any order of any court or of any
arbitrator, governmental authority or administrative agency.

                  (h) The accountants, KPMG LLP, who have certified or shall
certify the audited financial statements included or incorporated by reference
in the Registration Statement and the Prospectus (or any amendment or supplement
to either of them) are independent public accountants as required by the 1933
Act, the 1940 Act and the Rules and Regulations.

                  (i) The financial statements, together with related schedules
and notes, included or incorporated by reference in the Registration Statement
and the Prospectus (and any amendment or supplement to either of them), present
fairly the financial position, results of operations and changes in financial
position of the Fund on the basis stated or incorporated by reference in the
Registration Statement and the Prospectus at the respective dates or for the
respective periods to which they apply; such statements and related schedules
and notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information and data
included in the Registration Statement and the Prospectus (and any amendment or
supplement to either of them) are accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the Fund.

                  (j) The execution and delivery of, and the performance by the
Fund of its obligations under, this Agreement and the Fund Agreements have been
duly and validly authorized by the Fund, and this Agreement and the Fund
Agreements have been duly executed and delivered by the Fund and assuming due
authorization, execution and delivery by the other parties thereto, constitute
the valid and legally binding agreements of the Fund, enforceable against the
Fund in accordance with their terms (subject to the qualification that the
enforceability of the Fund's obligations thereunder may be limited by
bankruptcy, insolvency, reorganization, moratorium, and similar laws of general
applicability relating to or affecting creditors' rights, and to general
principles of equity regardless of whether enforceability is


<PAGE>
                                                                               9

considered in a proceeding in equity or at law), except as rights to indemnity
and contribution hereunder and thereunder may be limited by federal or state
securities laws.

                  (k) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Fund has not incurred any liability or obligation, direct or contingent, or
entered into any transaction, not in the ordinary course of business, that is
material to the Fund, and there has not been any change in the capitalization,
or material increase in the short-term debt or long-term debt, of the Fund, or
any material adverse change, or any development involving or which may
reasonably be expected to involve, a prospective material adverse change, in the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Fund, whether or not arising in the ordinary course
of business (a "Material Adverse Effect").

                  (l) The Fund has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Preferred Shares, will not distribute any offering material in connection with
the offering and sale of the Preferred Shares other than the Registration
Statement, the Prepricing Prospectus, the Prospectus or other materials, if any,
permitted by the 1933 Act, the 1940 Act or the Rules and Regulations.

                  (m) (i) The Fund has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment or supplement thereto), except
for any such permits the absence of which would not have a Material Adverse
Effect, subject to such qualifications as may be set forth in the Prospectus;
(ii) the Fund has fulfilled and performed all its material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the Fund under any such permit,
subject in each case to such qualification as may be set forth in the Prospectus
(and any amendment or supplement thereto); and (iii) except as described in the
Prospectus (and any amendment or supplement thereto), none of such permits
contains any restriction that is materially burdensome to the Fund, except where
the failure of (i), (ii) or (iii) to be accurate would not, individually or in
the aggregate, have a Material Adverse Effect on the Fund.

                  (n) The Fund maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization and
with the applicable requirements of the 1940 Act, the 1940 Act Rules and
Regulations and the Internal Revenue Code of 1986, as amended (the "Code"); (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets and to maintain compliance with the books and
records requirements under the 1940 Act and the 1940 Act Rules and Regulations;
(iii) access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.


<PAGE>
                                                                              10

                  (o) The Fund has filed all tax returns required to be filed,
which returns are complete and correct in all material respects, and the Fund is
not in material default in the payment of any taxes which were payable pursuant
to said returns or any assessments with respect thereto.

                  (p) No holder of any security of the Fund has any right to
require registration of any Common Shares, Preferred Shares or any other
security of the Fund because of the filing of the Registration Statement or
consummation of the transactions contemplated by this Agreement.

                  (q) The Fund, subject to the Registration Statement having
been declared effective and the filing of the Prospectus under Rule 497 under
the 1933 Act Rules and Regulations, has taken all required action under the 1933
Act, the 1940 Act and the Rules and Regulations to make the public offering and
consummate the sale of the Preferred Shares as contemplated by this Agreement.

                  (r) The conduct by the Fund of its business (as described in
the Prospectus) does not require it to be the owner, possessor or licensee of
any patents, patent licenses, trademarks, service marks or trade names which it
does not own, possess or license.

                  (s) The Fund is registered under the 1940 Act as a
diversified, closed-end management investment company and the 1940 Act
Notification has been duly filed with the Commission and, at the time of filing
thereof and any amendment or supplement thereto, conformed in all material
respects with all applicable provisions of the 1940 Act and the 1940 Act Rules
and Regulations. The Fund has not received any notice from the Commission
pursuant to Section 8(e) of the 1940 Act with respect to the 1940 Act
Notification. The Fund is, and at all times through the completion of the
transactions contemplated hereby, will be, in compliance in all material
respects with the terms and conditions of the 1933 Act and the 1940 Act. No
person is serving or acting as an officer, director or investment adviser of the
Fund except in accordance with the provisions of the 1940 Act and the 1940 Act
Rules and Regulations and the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), and the rules and regulations of the Commission promulgated
under the Advisers Act (the "Advisers Act Rules and Regulations").

                  (t) Except as stated in this Agreement and in the Prospectus
(and any amendment or supplement thereto), the Fund has not taken, nor will it
take, directly or indirectly, any action designed to or which might reasonably
be expected to cause or result in stabilization or manipulation of the price of
any securities issued by the Fund to facilitate the sale or resale of the
Preferred Shares, and the Fund is not aware of any such action taken or to be
taken by any affiliates of the Fund.

                  (u) The Fund has filed in a timely manner each document or
report required to be filed by it pursuant to the 1934 Act and the rules and
regulations of the Commission promulgated thereunder (the "1934 Act Rules and
Regulations"); each such document or report at the time it was filed conformed
to the requirements of the 1934 Act and the 1934 Act Rules and Regulations; and
none of such documents or reports contained an untrue statement of any material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.



<PAGE>
                                                                              11

                  (v) All advertising, sales literature or other promotional
material (including "prospectus wrappers," "broker kits," "road show slides" and
"road show scripts") authorized in writing by or prepared by the Fund or the
Manager for use in connection with the offering and sale of the Preferred Shares
(collectively "sales material") complied and comply in all material respects
with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and
Regulations and the rules and interpretations of the NASD and no such sales
material contained or contains an untrue statement of a material fact or omitted
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.

                  (w) Each of the Fund Agreements and the Fund's obligations
under this Agreement and each of the Fund Agreements comply in all material
respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and
Regulations, the Advisers Act and the Advisers Act Rules and Regulations.

                  (x) The Fund currently complies with all requirements under
the Code to qualify as a regulated investment company under Subchapter M of the
Code.

                  (y) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), no director of
the Fund is an "interested person" (as defined in the 1940 Act) of the Fund or
an "affiliated person" (as defined in the 1940 Act) of the Underwriter.

                  (z) The Fund's Common Preferred Shares are duly listed on the
AMEX.

                  7. Representations and Warranties of the Manager. The Manager
                     ---------------------------------------------
represents and warrants to the Underwriter as follows:

                  (a) The Manager is a limited liability company validly
existing in good standing under the laws of the State of Delaware, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or to qualify does not have a Material Adverse Effect on the
Manager or on the ability of the Manager to perform its obligations under this
Agreement and the Management Agreement.

                  (b) The Manager is duly registered with the Commission as an
investment adviser under the Advisers Act and is not prohibited by the Advisers
Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules
and Regulations from acting under the Management Agreement for the Fund as
contemplated by the Prospectus (or any amendment or supplement thereto). There
does not exist any proceeding or any facts or circumstances the existence of
which could lead to any proceeding which might adversely affect the registration
of the Manager with the Commission.


<PAGE>
                                                                              12

                  (c) There are no legal or governmental proceedings pending or,
to the knowledge of the Manager, threatened against the Manager, or to which the
Manager or any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus (or any amendment or supplement
to either of them) but are not described as required or that may reasonably be
expected to involve a prospective material adverse change, in the condition
(financial or other), business, prospects, properties, net assets or results of
operations of the Manager or on the ability of the Manager to perform its
obligations under this Agreement and the Management Agreement.

                  (d) Neither the execution, delivery or performance of this
Agreement or the performance of the Management Agreement by the Manager, nor the
consummation by the Manager of the transactions contemplated hereby or thereby
(A) requires the Manager to obtain any consent, approval, authorization or other
order of or registration or filing with, the Commission, the NASD, any state
securities commission, any national securities exchange, any arbitrator, any
court, regulatory body, administrative agency or other governmental body, agency
or official or conflicts or will conflict with or constitutes or will constitute
a breach of or a default under, the certificate of formation, or other
organizational documents, of the Manager or (B) conflicts or will conflict with
or constitutes or will constitute a material breach of or a default under, any
material agreement, indenture, lease or other instrument to which the Manager is
a party or by which it or any of its properties may be bound, or violates or
will violate any statute, law, regulation or filing or judgment, injunction,
order or decree applicable to the Manager or any of its properties or will
result in the creation or imposition of any material lien, charge or encumbrance
upon any property or assets of the Manager pursuant to the terms of any
agreement or instrument to which it is a party or by which it may be bound or to
which any of the property or assets of the Manager is subject. The Manager is
not subject to any order of any court or of any arbitrator, governmental
authority or administrative agency.

                  (e) The execution and delivery of, and the performance by the
Manager of its obligations under, this Agreement and the Management Agreement
have been duly and validly authorized by the Manager, and this Agreement and the
Management Agreement have been duly executed and delivered by the Manager and,
assuming due authorization, execution and delivery by the other parties thereto,
each constitutes the valid and legally binding agreement of the Manager,
enforceable against the Manager in accordance with its terms (subject to the
qualification that the enforceability of the Manager's obligations thereunder
may be limited by bankruptcy, insolvency, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights, and to
general principles of equity regardless of whether enforceability is considered
in a proceeding in equity or at law), except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws.

                  (f) The description of the Manager in the Registration
Statement and the Prospectus (and any amendment or supplement thereto) complies
in all material respects with the provisions of the 1933 Act, the 1940 Act, the
Advisers Act, the Rules and Regulations and the Advisers Act Rules and
Regulations and does not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.



<PAGE>
                                                                              13

                  (g) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Manager has not incurred any liability or obligation, direct or contingent,
or entered into any transaction, not in the ordinary course of business, that is
material to the Manager or the Fund and that is required to be disclosed in the
Registration Statement or the Prospectus and there has not been any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, prospects, properties, net assets or results of operations
of the Manager, whether or not arising in the ordinary course of business, or
which, in each case, could have a Material Adverse Effect on the ability of the
Manager to perform its obligations under this Agreement and the Management
Agreement.

                  (h) (i) The Manager has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment thereto); (ii) the Manager has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Manager under any such permit; and (iii) except
as described in the Prospectus (and any amendment or supplement thereto), none
of such permits contains any restriction that is materially burdensome to the
Manager, except where the failure of (i), (ii), or (iii) to be accurate would
not, individually or in the aggregate, have a Material Adverse Effect on the
Manager.

                  8. Indemnification and Contribution.
                     --------------------------------

                  (a)(i) The Fund agrees to indemnify and hold harmless each of
the Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and reasonable expenses
(including reasonable costs of investigation), joint or several, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any Prepricing Prospectus or in the Registration Statement or
the Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
the Underwriter furnished in writing to the Fund by or on behalf of the
Underwriter expressly for use in connection therewith; provided, however, that
the indemnification contained in this paragraph (a)(i) with respect to any
Prepricing Prospectus, Prospectus or Registration Statement shall not inure to
the benefit of the Underwriter (or to the benefit of any person controlling the
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Preferred Shares by the Underwriter to any person
if a copy of the Prospectus shall not have been delivered or sent to such person
within the time required by the 1933 Act and the 1933 Act Rules and Regulations,
and the untrue statement or alleged untrue statement or omission or alleged
omission of a material fact contained in such


<PAGE>
                                                                              14

Prepricing Prospectus was corrected in the Prospectus, provided that the Fund
has delivered the Prospectus to the Underwriter in requisite quantity on a
timely basis to permit such delivery or sending. The foregoing indemnity
agreement shall be in addition to any liability which the Fund may otherwise
have.

                  (a)(ii) The Manager agrees to indemnify and hold harmless each
of the Underwriter and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and reasonable expenses
(including reasonable costs of investigation), joint or several, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any Prepricing Prospectus or in the Registration Statement or
the Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
the Underwriter furnished in writing to the Fund by or on behalf of the
Underwriter expressly for use in connection therewith; provided, however, that
the indemnification contained in this paragraph (a)(ii) with respect to any
Prepricing Prospectus, Prospectus or Registration Statement shall not inure to
the benefit of the Underwriter (or to the benefit of any person controlling the
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Preferred Shares by the Underwriter to any person
if a copy of the Prospectus shall not have been delivered or sent to such person
within the time required by the 1933 Act and the 1933 Act Rules and Regulations,
and the untrue statement or alleged untrue statement or omission or alleged
omission of a material fact contained in such Prepricing Prospectus was
corrected in the Prospectus, provided that the Fund has delivered the Prospectus
to the Underwriter in requisite quantity on a timely basis to permit such
delivery or sending; and provided further, that (i) the Manager will not be
liable to any such indemnified party in any such case except to the extent that
the Fund has failed to indemnify and hold harmless such indemnified party
pursuant to paragraph (a)(i) in respect of any such loss, claim, damage,
liability or expense after such indemnified party has made a claim of the Fund
as required below; and (ii) the amount of the Manager's liability hereunder
shall be limited to the amount of the net proceeds from the sale of the
Preferred Shares and provided, further, that to the extent the Manager has
indemnified the Underwriter or each person, if any, who controls the
Underwriter, the Fund shall contribute to the Manager a portion of the amount
paid by the Manager to any such indemnified party as shall be appropriate to
reflect the relative benefits received by the Fund and the Manager in the
offering of the Preferred Shares and the relative fault of the Fund and the
Manager in causing the omission or misstatement which resulted in such payment.
This indemnity agreement shall be in addition to any liability which the Manager
may otherwise have.

                  (b) Any party that proposes to assert the right to be
indemnified under this Section 8 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 8, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission to so notify such indemnifying
party (i)


<PAGE>
                                                                              15

will not relieve it from any liability that it may have to any indemnified party
under the foregoing provision of this Section 8 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party and (ii) will not, in any event, relieve such
indemnifying party from any other obligation (other than pursuant to the
foregoing provision of this Section 8) it may have under this Agreement. If any
action, suit or proceeding shall be brought against the Underwriter or any
person controlling the Underwriter in respect of which indemnity may be sought
against the Fund or the Manager, the Underwriter or such controlling person
shall promptly notify the Fund or the Manager, and the Fund or the Manager shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. The Underwriter or any such controlling person shall have
the right to employ separate counsel in any such action, suit or proceeding and
to participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the Underwriter or such controlling person unless (i)
the Fund or the Manager has agreed in writing to pay such fees and expenses,
(ii) the Fund or the Manager has failed to assume the defense and employ
counsel, or (iii) the named parties to any such action, suit or proceeding
(including any impleaded parties) include both the Underwriter or such
controlling person and the Fund or the Manager and the Underwriter or such
controlling person shall have been advised by its counsel that representation of
such indemnified party and the Fund or the Manager by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or not
such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the Fund and the
Manager shall not have the right to assume the defense of such action, suit or
proceeding on behalf of the Underwriter or such controlling person). It is
understood, however, that the Fund and the Manager shall, in connection with any
one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for the Underwriter and controlling persons not having
actual or potential differing interests with the Underwriter or among
themselves, which firm shall be designated in writing by the Underwriter, and
that all such fees and expenses shall be reimbursed as they are incurred. The
Fund and the Manager shall not be liable for any settlement of any such action,
suit or proceeding effected without its written consent (which consent shall not
be unreasonably withheld), but if settled with such written consent, or if there
be a final judgment for the plaintiff in any such action, suit or proceeding,
the Fund and the Manager agree to indemnify and hold harmless the Underwriter,
to the extent provided in the preceding paragraph, and any such controlling
person from and against any loss, claim, damage, liability or expense by reason
of such settlement or judgment.

                  (c) The Underwriter agrees to indemnify and hold harmless the
Fund and the Manager, their directors, trustees and officers who sign the
Registration Statement, and any person who controls the Fund or the Manager
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
to the same extent as the foregoing indemnity from the Fund and the Manager to
the Underwriter, but only with respect to information relating to the
Underwriter furnished in writing by or on behalf of the Underwriter expressly
for use in the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto. If any action, suit or
proceeding shall be brought against the Fund or the Manager, any of their
directors or trustees, any such officer, or any such controlling person based on
the Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or


<PAGE>
                                                                              16

supplement thereto, and in respect of which indemnity may be sought against
the Underwriter pursuant to this paragraph (c), the Underwriter shall have the
rights and duties given to the Fund and the Manager by paragraph (b) above
(except that if the Fund or the Manager shall have assumed the defense thereof
the Underwriter shall not be required to do so, but may employ separate counsel
therein and participate in the defense thereof, but the fees and expenses of
such counsel shall be at the Underwriter's expense), and the Fund and the
Manager, their directors, trustees and any such officer, and any such
controlling person shall have the rights and duties given to the Underwriter by
paragraph (b) above. The foregoing indemnity agreement shall be in addition to
any liability which the Underwriter may otherwise have.

                  (d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or reasonable expenses
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Fund and the Manager on the one hand (treated jointly for this
purpose as one person) and the Underwriter on the other hand from the offering
of the Preferred Shares, or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Fund and the Manager on the one hand (treated jointly
for this purpose as one person) and the Underwriter on the other in connection
with the statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations
with respect to the offering of the Preferred Shares. The relative benefits
received by the Fund and the Manager on the one hand (treated jointly for this
purpose as one person) and the Underwriter on the other shall be deemed to be in
the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Fund bear to the total underwriting
discounts and commissions received by the Underwriter, in each case as set forth
in the table on the cover page of the Prospectus. The relative fault of the Fund
and the Manager on the one hand (treated jointly for this purpose as one person)
and the Underwriter on the other hand shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Fund and the Manager on the one hand (treated
jointly for this purpose as one person) or by the Underwriter on the other hand
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim for contribution may be
made under this Section 8(d), notify such party or parties from whom
contribution may be sought, but the omission so to notify (i) will not relieve
the party or parties from whom contribution may be sought from any other
obligation it or they may have under this Section 8(d), unless such omission
results in the forfeiture of substantive rights or defenses by the party or
parties from whom contribution is being sought and (ii) will not, in any event,
relieve the party or parties from whom contribution may be sought from any other
obligation (other than pursuant to this Section 8(d)) it or they may have under
this Agreement. Except for a settlement entered into pursuant to the last
sentence of Section 8(b) hereof, no party will be liable for contribution with
respect to any action or claim settled without its written consent (which
consent shall not be unreasonably withheld).


<PAGE>
                                                                              17

                  (e) The Fund, the Manager and the Underwriter agree that it
would not be just and equitable if contribution pursuant to this Section 8 were
determined by a pro rata allocation (even if the Underwriter were treated as one
entity for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (d) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.

                  (f) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.

                  (g) Notwithstanding any other provisions in this Section 8, no
party shall be entitled to the benefit of any provision under this Agreement
which protects or purports to protect such person against any liability to the
Fund or its security holders to which such person would otherwise be subject by
reason of such person's willful misfeasance, bad faith, or gross negligence, in
the performance of such person's duties hereunder, or by reason of such person's
reckless disregard of such person's obligations and duties hereunder.

                  (h) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Fund and the Manager set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of the Underwriter or any person
controlling the Underwriter, the Fund, the Manager, their directors, trustees or
officers, or any person controlling the Fund or the Manager, (ii) acceptance of
any Preferred Shares and payment therefor hereunder, and (iii) any termination
of this Agreement. A successor to the Underwriter or any person controlling the
Underwriter, or to the Fund, the Manager, their directors, trustees or officers,
or any person controlling the Fund or the Manager, shall be entitled to the
benefits of the indemnity, contribution, and reimbursement agreements contained
in this Section 8.

                  9. Conditions of Underwriter's Obligations. The obligation of
                     ---------------------------------------
the Underwriter to purchase the Preferred Shares hereunder are subject to the
following conditions:

                  (a) If, at the time this Agreement is executed and delivered,
it is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Preferred Shares may
commence, the Registration Statement or such


<PAGE>
                                                                              18


post-effective amendment shall have become effective not later than 5:30 P.M.,
New York City time, on the date hereof, or at such later date and time as shall
be consented to in writing by the Underwriter, and all filings, if any, required
by Rules 497 and 430A under the 1933 Act and the 1933 Act Rules and Regulations
shall have been timely made; no stop order suspending the effectiveness of the
Registration Statement or order pursuant to Section 8(e) of the 1940 Act shall
have been issued and no proceeding for those purposes shall have been instituted
or, to the knowledge of the Fund, the Manager or the Underwriter, threatened by
the Commission, and any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the Underwriter's reasonable satisfaction.

                  (b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change or any development involving a
prospective change in or affecting the condition (financial or other), business,
prospects, properties, net assets, or results of operations of the Fund or the
Manager not contemplated by the Prospectus, which in the Underwriter's
reasonable opinion would materially adversely affect the market for the
Preferred Shares, or (ii) any event or development relating to or involving the
Fund or the Manager or any officer or director of the Fund or the Manager which
makes any statement made in the Prospectus untrue or which, in the reasonable
opinion of the Fund and its counsel or the Underwriter and its counsel, requires
the making of any addition to or change in the Prospectus in order to state a
material fact required by the 1933 Act, the 1940 Act or the Rules and
Regulations or any other law to be stated therein or necessary in order to make
the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in the Underwriter's
opinion, materially adversely affect the market for the Preferred Shares.

                  (c) The Fund shall have furnished to the Underwriter a report
showing compliance with the asset coverage requirements of the 1940 Act and a
Basic Maintenance Report (as defined in the Articles Supplementary), each dated
the Closing Date and in form and substance satisfactory to the Underwriter. Each
such report may use portfolio holdings and valuations as of the close of
business of any day not more than six business days preceding the Closing Date,
provided, however, that the Fund represents in such report that its total net
assets as of the Closing Date have not declined by 5% or more from such
valuation date.

                  (d) The Underwriter shall have received on the Closing Date,
an opinion of Willkie Farr & Gallagher, counsel for the Fund, dated the Closing
Date and addressed to the Underwriter, in form and substance satisfactory to the
Underwriter and to the effect that:

                  (d)(i) The Fund has been duly organized and is validly
existing and in good standing under the laws of the State of Maryland and has
full corporate power and authority to own, lease and operate its properties, to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them);

                  (d)(ii) The Preferred Shares have been duly authorized and,
when issued and delivered to the Underwriter against payment therefor in
accordance with the terms of this Agreement, will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights under the Charter
or By-laws of the Fund or under Maryland law and will conform in all material
respects to the description thereof in the Registration Statement and the
Prospectus


<PAGE>
                                                                              19

under the heading "Description of Preferred Shares" (and any amendment or
supplement); the form of Certificate evidencing the Preferred Shares complies in
all material respects with all requirements of Maryland law; and the relative
rights, interests, powers and preferences of the Preferred Shares, and the
obligation of the Fund to redeem such Preferred Shares upon the terms and
conditions set forth in the Charter, are legal, valid, binding and enforceable
under Maryland law, subject to bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other laws of general equitable principles and to
the provisions of Section 2-311 of the Maryland General Corporation Law;

                  (d)(iii) The authorized Preferred Shares of stock of the Fund
are as set forth in the Prospectus under the heading "Capitalization";

                  (d)(iv) The Registration Statement is effective under the 1933
Act and the 1940 Act; any required filing of the Prospectus pursuant to Rule 497
of the 1933 Act Rules and Regulations has been made within the time periods
required by Rule 497(b) or (h), as the case may be; to the knowledge of such
counsel, no stop order suspending its effectiveness or order pursuant to Section
8(e) of the 1940 Act relating to the Fund has been issued and no proceeding for
any such purpose is pending or threatened by the Commission;

                  (d)(v) The Registration Statement, the Prospectus (and each
amendment thereof or supplement thereto) comply as to form in all material
respects with the applicable requirements of the 1933 Act, the 1940 Act and the
Rules and Regulations (except that no opinion need be expressed as to the
financial statements or other financial data contained therein);

                  (d)(vi) The statements made in the Prospectus (including the
statement of additional information) under the captions "The Auction" and
"Description of Preferred Preferred Shares", insofar as they purport to
summarize the provisions of the Articles Supplementary or other documents or
agreements specifically referred to therein, constitute accurate summaries of
the terms of any such documents in all material respects;

                  (d)(vii) The statements made in the Prospectus (including the
statement of additional information) under the caption "Tax Matters," insofar as
they constitute matters of law or legal conclusions, have been reviewed by such
counsel and constitute accurate statements of any such matters of law or legal
conclusions in all material respects, and fairly present the information called
for with respect thereto by Form N-2 under the 1940 Act;

                  (d)(viii) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Fund, or to which the
Fund or any of its properties is subject, that are required to be described in
the Registration Statement or the Prospectus but are not described as required;

                  (d)(ix) To such counsel's knowledge after reasonable inquiry,
there are no agreements, contracts, indentures, leases or other instruments that
are required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement by the 1933 Act that
have not been so described or filed as an exhibit, or incorporated by reference
as permitted by the 1933 Act, the 1940 Act or the Rules and Regulations;



<PAGE>
                                                                              20

                  (d)(x) Neither the issuance, sale or delivery of the Preferred
Shares, the execution, delivery or performance of this Agreement or any of the
Fund Agreements by the Fund, nor the consummation by the Fund of the
transactions contemplated thereby (A) requires any consent, approval,
authorization or other order of or registration or filing by the Fund with the
Commission, the NASD, any national securities exchange, or, to our knowledge,
any arbitrator, any court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may have been obtained
prior to the date hereof and such as may be required for compliance with state
securities and blue sky laws) or conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, the Charter, including the
Articles Supplementary, or the Bylaws of the Fund or (B) (i) conflicts or will
conflict with or constitutes or will constitute a breach of, or a default
under, any agreement, indenture, lease or other instrument known to such
counsel to which the Fund is a party or by which it or any of its properties
may be bound and that is identified, in an officer's certificate of the Fund,
as material to the business, financial condition, operations, properties or
prospects of the Fund (the "Agreements and Instruments"), (ii) violates or
will violate in any material respect any statute, law or regulation (assuming
compliance with state securities and blue sky laws), except where such
violation does not have a Material Adverse Effect and except that such counsel
may state that it expresses no opinion as to the reasonableness or fairness of
compensation payable under the Management Agreement or as to rights to
indemnity and contribution in this Agreement or the Fund Agreements, (iii)
violates or will violate any judgment, injunction, order or decree that is
applicable to the Fund or any of its properties and that is known to such
counsel, or (iv), to counsel's knowledge, will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
the Fund pursuant to the terms of the Agreements and Instruments;

                  (d)(xi) The Fund has corporate power to issue, sell and
deliver the Preferred Shares to the Underwriter as provided herein, and this
Agreement and the Fund Agreements have been duly authorized, executed and
delivered by the Fund and each complies with all applicable provisions of the
1940 Act and the Advisers Act (except that such counsel may state that it
expresses no opinion as to the reasonableness or fairness of compensation
payable under the Management Agreement); assuming due authorization, execution
and delivery by the other parties thereto, this Agreement and each Fund
Agreement constitutes the valid and binding obligation of the Fund enforceable
in accordance with its terms, except as rights to indemnity and contribution
hereunder and thereunder may be limited by federal or state securities laws or
principles of public policy and except that such counsel may state that it
expresses no opinion as to the reasonableness or fairness of compensation
payable under the Management Agreement, subject to enforcement of bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium and other laws of
general applicability relating to or affecting creditors' rights and to general
equitable principles;

                  (d)(xii) The Fund is duly registered under the 1940 Act as a
diversified, closed-end management investment company; and

                  (d)(xiii) The provisions of the Charter, including the
Articles Supplementary and the investment policies and restrictions described in
the Prospectus (including the statement of additional information) under the
caption "Investment Objectives and Policies" comply with the requirements of the
1940 Act and the 1940 Act Rules and Regulations.



<PAGE>
                                                                              21

                  Such counsel shall also have furnished to the Underwriter a
statement, addressed to the Underwriter, dated the Closing Date, to the effect
that:

                           They have not independently verified the accuracy,
         completeness or fairness of the statements made or the information
         contained in the Registration Statement or the Prospectus, and, except
         for the statements referred to in paragraphs (vi) and (vii) above and
         the information referred to in paragraph (xiii) above, they are not
         passing upon and do not assume any responsibility therefor. In the
         course of the preparation by the Fund of the Registration Statement and
         the Prospectus, they have participated in discussions with the
         representatives and employees and officers of the Fund and the Manager
         and in discussions with the Fund's independent accountants, in which
         the business and the affairs of the Fund and the Manager and the
         contents of the Registration Statement and the Prospectus were
         discussed. On the basis of information that they have gained in the
         course of their representation of the Fund in connection with its
         preparation of the Registration Statement and the Prospectus and their
         participation in the discussions referred to above, no facts have come
         to their attention that would lead them to believe that as of its
         effective date, the Registration Statement contained any untrue
         statement of a material fact or omitted to state any material fact
         required to be stated therein or necessary in order to make the
         statements therein not misleading, or that as of the Closing Date the
         Prospectus contained an untrue statement of material fact or omitted to
         state a material fact required to be stated therein or necessary to
         make the statements therein, in light of the circumstances under which
         they were made, not misleading (in each case other than the financial
         statements and schedules, the notes thereto and any schedules and other
         financial data contained or incorporated by reference therein or
         omitted therefrom, as to which they need express no opinion).

                  Insofar as the opinions expressed above are dependent upon
matters governed by Maryland law, Willkie Farr & Gallagher will be permitted to
rely on the opinion of Venable, Baetjer and Howard, LLP, Baltimore, Maryland.

                  (e) The Underwriter shall have received on the Closing Date an
opinion of the General Counsel for the Manager, dated the Closing Date and
addressed to the Underwriter, in form and substance satisfactory to the
Underwriter and to the effect that:

                  (e)(i) The Manager is a limited liability company duly
organized and validly existing and in good standing under the laws of the State
of Delaware, with full corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement to either of
them);

                  (e)(ii) The Manager is duly registered with the Commission as
an investment Manager under the Advisers Act and is not prohibited by the
Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940
Act Rules and Regulations from acting as the investment manager to the Fund
pursuant to the Advisory Agreement as described in the Prospectus;



<PAGE>
                                                                              22

                  (e)(iii) To the best of such counsel's knowledge after
reasonable inquiry, there are no legal or governmental proceedings pending or
threatened against the Manager, or to which the Manager or any of its properties
is subject, that are required to be described in the Registration Statement or
the Prospectus but are not described as required;

                  (e)(iv) To the best of such counsel's knowledge after
reasonable inquiry, the Manager is not in violation of its certificate of
formation, nor is the Manager in default under any material agreement, indenture
or instrument or in breach or violation of any judgment, decree, order, rule or
regulation of any court or governmental or self-regulatory agency or body;

                  (e)(v) Neither the execution, delivery or performance of this
Agreement nor the consummation by the Manager of the transactions contemplated
hereby (A) requires the Manager to obtain any consent, approval, authorization
or other order of or registration or filing with, the Commission, the NASD, any
national securities exchange, any arbitrator, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
such as may have been obtained prior to the date hereof and such as may be
required for compliance with state securities or blue sky laws) or conflicts or
will conflict with or constitutes or will constitute a breach of, or a default
under, the certificate of formation, or other organizational documents, of the
Manager or (B) (i) conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, any material agreement, indenture,
lease or other instrument to which the Manager is a party or by which it or any
of its properties may be bound (the "Agreements and Instruments"), (ii) violates
or will violate any statute, law or regulation (assuming compliance with state
securities and blue sky laws), (iii) violates or will violate any judgment,
injunction, order or decree that is applicable to the Manager or any of its
properties and that is known to such counsel, or (iv) will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Manager pursuant to the terms of the Agreements and Instruments;

                  (e)(vi) The Manager has the corporate power and authority to
enter into this Agreement and the Management Agreement, and this Agreement and
the Management Agreement have been duly authorized, executed and delivered by
the Manager; assuming due authorization, execution and delivery by the other
parties thereto, this Agreement and the Management Agreement each constitutes
the valid and binding obligation of the Manager enforceable in accordance with
its terms (except as rights to indemnity and contribution in this Agreement and
the Management Agreement may be limited by federal or state securities laws),
subject as to enforcement to bankruptcy, insolvency, moratorium, reorganization
and other laws of general applicability relating to or affecting creditors'
rights and to general equity principles (regardless of whether enforceability is
considered in a proceeding in equity or at law); and

                  (e)(vii) The description of the Manager (other than statements
as to the Manager's investment decisions, beliefs and strategies regarding the
Fund's portfolio as to which such counsel need express no opinion) in the
Registration Statement and the Prospectus does not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.



<PAGE>
                                                                              23

                  (f) The Underwriter shall have received on the Closing Date an
opinion of Simpson Thacher & Bartlett, counsel for the Underwriter, dated the
Closing Date and addressed to the Underwriter, with respect to such matters as
the Underwriter may reasonably request.

                  (g) The Underwriter shall have received letters addressed to
the Underwriter and dated the date hereof and the Closing Date from KPMG LLP,
independent certified public accountants, substantially in the forms heretofore
approved by the Underwriter.

                  (h) (i) No order suspending the effectiveness of the
Registration Statement or prohibiting or suspending the use of the Prospectus
(or any amendment or supplement thereto) or any Prepricing Prospectus or any
sales material shall have been issued and no proceedings for such purpose or for
the purpose of commencing an enforcement action against the Fund, the Manager
or, with respect to the transactions contemplated by the Prospectus (or any
amendment or supplement thereto) and this Agreement, the Underwriter, may be
pending before or, to the knowledge of the Fund, the Manager or the Underwriter
or in the reasonable view of counsel to the Underwriter, shall be threatened or
contemplated by the Commission at or prior to the Closing Date and that any
request for additional information on the part of the Commission (to be included
in the Registration Statement, the Prospectus or otherwise) be complied with to
the satisfaction of the Underwriter; (ii) there shall not have been any change
in the capitalization of the Fund nor any material increase in the short-term or
long-term debt of the Fund (other than in the ordinary course of business) from
that set forth or contemplated in the Registration Statement or the Prospectus
(or any amendment or supplement thereto); (iii) there shall not have been,
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto), except as may otherwise be stated in the Registration Statement and
Prospectus (or any amendment or supplement thereto), any material adverse change
in the condition (financial or other), business, prospects, properties, net
assets or results of operations of the Fund or the Manager; (iv) the Fund shall
not have any liabilities or obligations, direct or contingent (whether or not in
the ordinary course of business), that are material to the Fund, other than
those reflected in the Registration Statement or the Prospectus (or any
amendment or supplement to either of them); and (v) all the representations and
warranties of the Fund and the Manager contained in this Agreement shall be true
and correct on and as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date, and the Underwriter shall have received a
certificate of the Fund and the Manager, dated the Closing Date and signed by
the chief executive officer and the chief financial officer of each of the Fund
and the Manager (or such other officers as are acceptable to the Underwriter),
to the effect set forth in this Section 9(h) and in Section 9(i) hereof.

                  (i) Neither the Fund nor the Manager shall have failed at or
prior to the Closing Date to have performed or complied in all material respects
with any of its agreements herein contained and required to be performed or
complied with by it hereunder at or prior to the Closing Date.

                  (j) The Fund shall have delivered and the Underwriter shall
have received evidence satisfactory to the Underwriter that the Preferred Shares
are rated `aaa' by Moody's and AAA by Fitch as of the Closing Date, and there
shall not have been given any notice of any intended or potential downgrading,
or of any review for a potential downgrading, in the rating accorded to the
Preferred Shares by any Rating Agency.



<PAGE>
                                                                              24

                  (k) The Fund and the Manager shall have furnished or caused to
be furnished to the Underwriter such further certificates and documents as the
Underwriter shall have reasonably requested.

                  All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to the Underwriter and the Underwriter's
counsel.

                  Any certificate or document signed by any officer of the Fund
or the Manager and delivered to the Underwriter, or to counsel for the
Underwriter, shall be deemed a representation and warranty by the Fund or the
Manager to the Underwriter as to the statements made therein.

                  10. Expenses. The Fund agrees to pay the following costs and
                      --------
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act
Notification, the Prospectus and each amendment or supplement to any of them
(including, without limitation, the filing fees prescribed by the 1933 Act, the
1940 Act and the Rules and Regulations); (ii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for counting and
packaging) of such copies of the Registration Statement, each Prepricing
Prospectus, the Prospectus, any sales material and all amendments or supplements
to any of them as may be reasonably requested for use in connection with the
offering and sale of the Preferred Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Preferred Shares,
including any stamp taxes in connection with the original issuance and sale of
the Preferred Shares; (iv) the reproduction and delivery of this Agreement, any
dealer agreements, the preliminary blue sky memorandum, if any, and all other
agreements or documents reproduced and delivered in connection with the offering
of the Preferred Shares; (v) the registration of the Preferred Shares under the
1934 Act; (vi) the reasonable fees, expenses and disbursements of counsel for
the Underwriter relating to the preparation, reproduction, and delivery of any
preliminary blue sky memorandum; (vii) fees paid to the Rating Agencies; (viii)
the transportation and other expenses incurred by or on behalf of Fund
representatives in connection with presentations to prospective purchasers of
the Preferred Shares; and (ix) the fees and expenses of the Fund's accountants
and the fees and expenses of counsel (including local and special counsel) for
the Fund.

                  11. Effective Date of Agreement. This Agreement shall become
                      ---------------------------
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the Registration Statement or a post-effective amendment thereto to be
declared effective before the offering of the Preferred Shares may commence,
when notification of the effectiveness of the Registration Statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Fund, by
notifying the Underwriter, or by the Underwriter, by notifying the Fund.

                  Any notice under this Section 11 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.



<PAGE>
                                                                              25

                  12. Termination of Agreement. This Agreement shall be subject
                      ------------------------
to termination in the Underwriter's absolute discretion, without liability on
the part of the Underwriter to the Fund or the Manager, by notice to the Fund,
if prior to the Closing Date (i) trading in securities generally on the AMEX
shall have been suspended or materially limited, (ii) a general moratorium on
commercial banking activities in New York shall have been declared by either
federal or state authorities, or (iii) there shall have occurred any outbreak or
escalation of hostilities or other international or domestic calamity, crisis or
change in political, financial or economic conditions, the effect of which on
the financial markets of the United States is to make it, in the Underwriter's
judgment, impracticable or inadvisable to commence or continue the offering of
the Preferred Shares at the offering price to the public set forth on the cover
page of the Prospectus or to enforce contracts for the resale of the Preferred
Shares by the Underwriter. Notice of such termination may be given to the Fund
by telegram, telecopy or telephone and shall be subsequently confirmed by
letter.

                  13. Information Furnished by the Underwriter. The statements
                      ----------------------------------------
set forth in the last paragraph on the cover page and the statements in the
first and third sentences of the third paragraph and in the fifth paragraph
under the caption "Underwriting" in any Prepricing Prospectus and in the
Prospectus, constitute the only information furnished by or on behalf of the
Underwriter as such information is referred to in Sections 6(b) and 8 hereof.

                  14. Miscellaneous. Except as otherwise provided in Sections 5,
                      -------------
11 and 12 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Fund or the Manager, at the
offices of the Fund at 388 Greenwich Street, New York, New York 10013,
Attention: Secretary; or (ii) if to the Underwriter, to Salomon Smith Barney
Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager,
Investment Banking Division.

                  15. Disclaimer. A copy of the document establishing the Fund
                      ----------
is filed with the Secretary of the State of Maryland. This Agreement is executed
by officers not as individuals and is not binding upon any of the directors,
officers, or shareholders of the Fund individually but only upon the assets of
the Fund.

                  This Agreement has been and is made solely for the benefit of
the Underwriter, the Fund, the Manager, their directors and officers, and the
other controlling persons referred to in Section 8 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from the Underwriter of any of the Preferred Shares in
his status as such purchaser.

                  16. Applicable Law; Counterparts. This Agreement shall be
                      ----------------------------
governed by and construed in accordance with the laws of the State of New York.

                  This Agreement may be signed in various counterparts which
together constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.



<PAGE>


                  Please confirm that the foregoing correctly sets forth the
agreement among the Fund, the Manager and the Underwriter.




                                         Very truly yours,


                                         INTERMEDIATE MUNI FUND, INC.



                                         By:
                                            ------------------------------------


Confirmed as of the date first
above mentioned.

SALOMON SMITH BARNEY INC.           SMITH BARNEY FUND MANAGEMENT LLC



By:                                      By:
   ----------------------------             ------------------------------------




<PAGE>

                                   SCHEDULE I


                          INTERMEDIATE MUNI FUND, INC.



                                                              Number of
                           Underwriter                     Preferred Shares
                           -----------                     ----------------


Salomon Smith Barney Inc...................................




Total......................................................






</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.K2
<SEQUENCE>5
<FILENAME>dex99k2.txt
<DESCRIPTION>FORM OF AUCTION AGENCY AGREEMENT
<TEXT>
<PAGE>

                                                                     Exhibit k.2



                          INTERMEDIATE MUNI FUND, INC.

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

                        FORM OF AUCTION AGENCY AGREEMENT

                       dated as of ____________ ___, 2002

                                   Relating to

           Municipal Auction Rate Cumulative Preferred Stock, Series M

                                       of

                          Intermediate Muni Fund, Inc.

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

                             BANKERS TRUST COMPANY,
                                as Auction Agent


<PAGE>

     AUCTION AGENCY AGREEMENT dated as of January __, 2002 between INTERMEDIATE
MUNI FUND, INC., a Maryland corporation (the "Fund"), and BANKERS TRUST COMPANY,
a New York corporation (the "Auction Agent").

     WHEREAS, the Fund proposes to offer, issue and sell shares of Municipal
Auction Rate Cumulative Preferred Stock, Series M ("Preferred Shares") pursuant
to its Articles of Incorporation, as amended by the Articles Supplementary (as
defined below). The Fund desires that the Auction Agent perform certain duties
as agent in connection with each Auction (as defined below) of Preferred Shares
upon the terms and subject to the conditions of this Agreement, and the Fund
hereby appoints the Auction Agent to act in the capacities set forth in this
Agreement.

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Fund and the Auction Agent agree as follows:

1.   Definitions and Rules of Construction.
     -------------------------------------

     1.1. Terms Defined by Reference to the Articles Supplementary.
          --------------------------------------------------------

          Capitalized terms not defined herein shall have the respective
meanings specified in Parts I and II of the Articles Supplementary.

     1.2. Terms Defined Herein.
          --------------------

          As used herein and in the Settlement Procedures, the following terms
shall have the following meanings, unless the context otherwise requires:

          (a) "Agent Member" of any Person shall mean such Person's agent member
of, or a participant in, the Securities Depository that will act on behalf of a
Person.

          (b) "Articles Supplementary" shall mean the Articles Supplementary
Creating and Fixing the Rights of Municipal Auction Rate Cumulative Preferred
Stock, Series M filed by the Fund in the office of the State Department of
Assessments and Taxation of the State of Maryland.

          (c) "Auction" shall have the meaning specified in Section 2.1 hereof.

          (d) "Auction Procedures" shall mean the auction procedures
constituting Part II of the Articles Supplementary.

          (e) "Authorized Officer" shall mean each Managing Director, Vice
President, Assistant Vice President, and Associate of the Auction Agent assigned
to its Corporate Trust and Agency Group and every other officer or employee of
the Auction Agent designated as an "Authorized Officer" for purposes hereof in a
written communication from the Auction Agent to the Fund.

<PAGE>


          (f) "Broker-Dealer Agreement" shall mean each agreement among the
Fund, the Auction Agent and a Broker-Dealer substantially in the form attached
hereto as Exhibit A.
          ---------

          (g) "Fund Officer" shall mean the Chairman of the Board of Directors,
the President, each Vice President (whether or not designated by a number or
word or words added before or after the title "Vice President"), the Secretary,
the Treasurer, each Assistant Secretary and each Assistant Treasurer of the Fund
and every other officer or employee of the Fund designated as a "Fund Officer"
for purposes hereof in a notice from the Fund to the Auction Agent.

          (h) "Preferred Shares" shall mean the preferred stock, par value $.001
per share, liquidation preference $25,000 per share, of the Fund designated as
its "Municipal Auction Rate Cumulative Preferred Stock, Series M."

          (i) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit B.
                   ---------

     1.3. Rules of Construction.
          ---------------------

          Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of this Agreement:

          (a) Words importing the singular number shall include the plural
number and vice versa.

          (b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement nor shall they
affect its meaning, construction or effect.

          (c) The words "hereof", "herein", "hereto" and other words of similar
import refer to this Agreement as a whole.

          (d) All references herein to a particular time of day shall be to New
York City time.

2.   The Auction.
     -----------

     2.1. Purpose; Incorporation by Reference of Auction Procedures and
          -------------------------------------------------------------
          Settlement Procedures.
          ---------------------

          (a) The Articles Supplementary provide that the Applicable Rate on
Preferred Shares for each Subsequent Rate Period after the Initial Rate Period
thereof shall, except under certain conditions, be the rate per annum that a
commercial bank or trust company appointed by

                                      -2-

<PAGE>

the Fund advises results from implementation of the Auction Procedures for
Preferred Shares. The Board of Directors of the Fund has adopted a resolution
appointing Bankers Trust Company as Auction Agent for purposes of the Auction
Procedures for Preferred Shares. The Auction Agent hereby accepts such
appointment and agrees that, on each Auction Date, it shall follow the
procedures set forth in this Section 2 and the Auction Procedures for the
purpose of determining the Applicable Rate for Preferred Shares for each
Subsequent Rate Period thereof for which the Applicable Rate is to be determined
by an Auction. Each periodic implementation of such procedures is hereinafter
referred to as an "Auction."

          (b) All of the provisions contained in the Auction Procedures and the
Settlement Procedures are incorporated herein by reference in their entirety and
shall be deemed to be a part hereof to the same extent as if such provisions
were fully set forth herein.

     2.2. Preparation for Each Auction; Maintenance of Registry of Beneficial
          -------------------------------------------------------------------
Owners.
- ------

          (a) Not later than seven days prior to the first Auction Date for the
Preferred Shares, the Fund shall provide the Auction Agent with a list of the
Broker-Dealers. Not later than seven days prior to any Auction Date for
Preferred Shares for which any change in such list of Broker-Dealers is to be
effective, the Fund will notify the Auction Agent in writing of such change and,
if any such change involves the addition of a Broker-Dealer to such list, shall
cause to be delivered to the Auction Agent for execution by the Auction Agent a
Broker-Dealer Agreement manually signed by such Broker-Dealer; provided,
                                                               --------
however, that if the Fund proposes to designate any Special Rate Period of
- -------
Preferred Shares pursuant to Section 4 of Part I of the Articles Supplementary,
not later than 11:00 A.M. on the Business Day next preceding the Auction next
preceding the first day of such Rate Period, the Fund shall provide the Auction
Agent with a list of the Broker-Dealers and a manually signed copy of each
Broker-Dealer Agreement or a new Schedule A to a Broker-Dealer Agreement (which
Schedule A shall replace and supersede any previous Schedule A to such
Broker-Dealer Agreement) with each Broker-Dealer. The Auction Agent and the Fund
shall have entered into a Broker-Dealer Agreement with each Broker-Dealer prior
to the participation of any such Broker-Dealer in any Auction.

          (b) In the event that any Auction Date shall be changed after the
Auction Agent shall have given the notice referred to in clause (vi) of
paragraph (a) of the Settlement Procedures, or, after the notice referred to in
Section 2.5(a) hereof, if applicable, the Auction Agent, by such means as the
Auction Agent deems practicable, shall give notice of such change to the
Broker-Dealers not later than the earlier of 9:15 A.M. on the new Auction Date
or 9:15 A.M. on the old Auction Date.

          (c) (i) The Auction Agent shall maintain a registry of the beneficial
owners of the shares of Preferred Shares, who shall constitute Existing Holders
of Preferred Shares for purposes of Auctions and shall indicate thereon the
identity of the respective Broker-Dealer of each Existing Holder, if any, on
whose behalf such Broker-Dealer submitted the most recent order in any Auction
which resulted in such Existing Holder continuing to hold or purchasing shares
of Preferred Shares. The Auction Agent shall keep such registry current and
accurate. The Fund shall provide or cause to be provided to the Auction Agent at
or prior to the Date of Original Issue a list of the initial Existing Holders of
the Preferred Shares, the number of

                                      -3-

<PAGE>


Preferred Shares purchased by each such Existing Holder and the respective
Broker-Dealer of each such Existing Holder or the affiliate thereof through
which each such Existing Holder purchased such shares.

     (ii) In the event of any partial redemption of Preferred Shares, the
Auction Agent shall, at least two Business Days prior to the next Auction for
Preferred Shares, request the Securities Depository of each Existing Holder of
shares of Preferred Shares to disclose to the Auction Agent (upon selection by
the Securities Depositary of the Existing Holders whose shares are to be
redeemed) the number of shares of Preferred Shares, if any, of such Existing
Holder which are subject to such redemption, provided the Auction Agent has been
furnished, at least three Business Days prior to such Auction, with the name and
telephone number of a person or department at the Agent Member from which it
shall request such information. In the absence of receiving any such information
with respect to an Existing Holder, from such Existing Holder's Agent Member or
otherwise, the Auction Agent may continue to treat such Existing Holder as the
beneficial owner of the number of shares of Preferred Shares shown in the
Auction Agent's registry.

     (iii) The Auction Agent shall be required to register a transfer of shares
of Preferred Shares from an Existing Holder to another Person only if (A) such
transfer is pursuant to an Auction or (B) the Auction Agent has been notified in
writing (I) in a notice substantially in the form of Exhibit E to the Broker-
Dealer Agreements by such Existing Holder, the Agent Member of such Existing
Holder or the Broker-Dealer of such Existing Holder of such transfer or (II) in
a notice substantially in the form of Exhibit F to the Broker-Dealer Agreements
by the Broker-Dealer of any Person that purchased or sold such shares of
Preferred Shares in an Auction of the failure of such shares of Preferred Shares
to be transferred as a result of such Auction. 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. on the Business Day preceding such Auction.

     (d) The Auction Agent may request the Broker-Dealers, as set forth in the
Broker-Dealer Agreements, to provide the Auction Agent with a list of their
respective customers that such Broker-Dealers believe are Existing Holders of
shares of Preferred Shares. The Auction Agent shall keep confidential such
registry of Existing Holders and shall not disclose the identities of the
Existing Holders of such shares of Preferred Shares to any Person other than the
Fund and the Broker-Dealer that provided such information; and such information

                                      -4-

<PAGE>

shall not be used by the Auction Agent or its officers, employees, agents or
representatives for any purpose other than such purposes as are described
herein. The Auction Agent shall transmit any list of customers that
Broker-Dealers believe are Existing Holders of Preferred Shares and information
related thereto only to its officers, employees, agents or representatives who
need to know such information for the purposes of acting in accordance with this
Agreement and shall use its reasonable efforts to prevent transmission of such
information to others and shall cause its officers, employees, agents and
representatives to abide by the foregoing confidentiality restrictions;
provided, however, that the Auction Agent shall have no responsibility or
- --------  -------
liability for the actions of any of its officers, employees, agents or
representatives after they have left the employ of the Auction Agent.

     2.3. Information Concerning Rates.
          ----------------------------

          (a) The Rate Multiple on the date of this Agreement for Preferred
Shares is      %. If there is any change in the credit rating of Preferred
Shares by either of the rating agencies (or any substitute or successor rating
agency) referred to in the definition of "Rate Multiple" resulting in any change
in the Rate Multiple for Preferred Shares after the date of this Agreement, the
Fund shall notify the Auction Agent in writing of such change in the Rate
Multiple prior to 9:00 A.M. on the Auction Date succeeding such change. If the
Fund designates all or a portion of any dividend on Preferred Shares to consist
of net capital gains or other income taxable for Federal income tax purposes, it
will indicate, in its notice in the form of Exhibit I hereto to the Auction
                                            ---------
Agent pursuant to Section 2.6 hereof the Rate Multiple to be in effect for the
Auction Date on which the dividend rate for such dividend is to be fixed. In
determining the Maximum Rate for Preferred Shares on any Auction Date as set
forth in Section 2.3(b)(i) hereof, the Auction Agent shall be entitled to rely
on the last Rate Multiple for Preferred Shares of which it has most recently
received notice from the Fund (or, in the absence of such notice, the percentage
set forth in the first sentence of this paragraph (a)), except that if the Fund
shall have notified the Auction Agent of a Rate Multiple to be in effect for an
Auction Date in accordance with the preceding sentence, the Rate Multiple in
effect for the next succeeding Auction Date shall be, unless the Fund notifies
the Auction Agent of a change in the Rate Multiple for such succeeding Auction
Date pursuant to this Section 2.3(a), the Rate Multiple that was in effect on
the first preceding Auction Date for Preferred Shares with respect to which the
dividend, the rate for which was fixed on such Auction Date, did not include any
net capital gains or other income taxable for Federal income tax purposes.

          (b) (i) On each Auction Date for Preferred Shares, the Auction Agent
shall determine the Maximum Rate. The Maximum Rate for Preferred Shares on any
Auction Date shall be:

          (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
     designated by the Fund pursuant to Section 4 of Part I of the Articles
     Supplementary, the product of (1) the Reference Rate on such Auction Date
     for the next Rate Period of Preferred Shares and (2) the Rate Multiple on
     such Auction Date, unless the Preferred Shares has or had a Special Rate
     Period and an Auction at which Sufficient Clearing Bids existed has not yet

                                      -5-

<PAGE>


     occurred for a Minimum Rate Period of Preferred Shares after such Special
     Rate Period, in which case the higher of:

               (1) the dividend rate on shares of Preferred Shares for the
          then-ending Rate Period, and

               (2) the product of (x) the higher of (I) the Reference Rate on
          such Auction Date for the then-ending Rate Period of Preferred Shares,
          if such Rate Period consists of less than four Dividend Periods, or
          the Treasury Rate on such Auction Date for such Rate Period, if such
          Rate Period consists of four or more Dividend Periods, and (II) the
          [Reference] Rate on such Auction Date for such Special Rate Period of
          Preferred Shares, if such Special Rate Period was 364 Rate Period Days
          or fewer, or the Treasury Rate on such Auction Date for such Special
          Rate Period, if such Special Rate Period was more than 364 Rate Period
          Days and (y) the Rate Multiple on such Auction Date; or

          (B) in the case of any Auction Date which is the Auction Date
     immediately prior to the first day of any proposed Special Rate Period
     designated by the Fund pursuant to Section 4 of Part I of the Articles
     Supplementary, the product of (1) the highest of (x) the Reference Rate
     on such Auction Date for the then-ending Rate Period of Preferred Shares,
     if such Rate Period was 364 Rate Period Days or fewer, or the Treasury Rate
     on such Auction Date for such Rate Period, if such 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 was 364 Rate Period days or fewer, or the Treasury Rate
     on such Auction Date for the Special Rate Period for which the Auction is
     being held if such Special Rate Period was more than 364 Rate Period Days,
     and (z) the [Reference] Rate on such Auction Date for Minimum Rate Periods
     and (2) the Rate Multiple on such Auction Date.

Not later than 9:30 A.M. on each Auction Date, the Auction Agent shall notify
the Fund and the Broker-Dealers of the Maximum Rate so determined, the "AA"
Financial Composite Commercial Paper Rate(s), the Taxable Equivalent of the
Short-Term Municipal Bond Rate(s), the Treasury Note Rate(s) and the Treasury
Bill Rate(s), as the case may be, used to make such determination.

          (ii) From and after a Failure to Deposit by the Fund during any Rate
Period of Preferred Shares, until such failure is cured and a late charge, if
applicable, is paid, in accordance with subparagraph e(i)(B) of Section 2 of
Part I of the Articles Supplementary, on the first day of each Rate Period of
Preferred Shares the Auction Agent shall determine the Treasury Rate for such
Rate Period if such Rate Period consists of more than 364 Rate Period Days and
the [Reference] Rate for such Rate Period if such Rate Period consists of 364
Rate Period days or fewer. Not later than 9:30 A.M. on each such first day, the
Auction Agent shall notify the Fund of the applicable Reference Rate and
Treasury Rate.

          (iii) If any "AA" Financial Composite Commercial Paper Rate, Taxable
Equivalent of the Short-Term Municipal Bond Rate, Treasury Note Rate or Treasury
Bill Rate,

                                      -6-

<PAGE>


as the case may be, is not quoted on an interest equivalent, as the case may be,
basis, the Auction Agent shall convert the quoted rate to the interest or bond
equivalent thereof as set forth in the definition of such rate in the Articles
Supplementary if the rate obtained by the Auction Agent is quoted on a discount
basis, or if such rate is quoted on a basis other than an interest or bond
equivalent or discount basis the Auction Agent shall convert the quoted rate to
an interest or bond equivalent rate after consultation with the Fund as to the
method of such conversion.

          (iv) If any "AA" Financial Composite Commercial Paper Rate is to be
based on rates supplied by Commercial Paper Dealers and one or more of the
Commercial Paper Dealers shall not provide a quotation for the determination of
such "AA" Financial Composite Commercial Paper Rate, the Auction Agent shall
immediately notify the Fund so that the Fund can determine whether to select a
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers to
provide the quotation or quotations not being supplied by any Commercial Paper
Dealer or Commercial Paper Dealers. The Fund shall promptly advise the Auction
Agent of any such selection.

          (v) If any Treasury Note Rate or Treasury Bill Rate is to be based on
rates supplied by U.S. Government Securities Dealers and one or more U.S.
Government Securities Dealers shall not provide a quotation for the
determination of such Treasury Rate, the Auction Agent shall immediately notify
the Fund so that the Fund can determine whether to select a Substitute U.S.
Government Securities Dealer or Substitute U.S. Government Securities Dealers to
provide the quotation or quotations not being supplied by any U.S. Government
Securities Dealer or U.S. Government Securities Dealers. The Fund shall promptly
advise the Auction Agent of any such selection.

     2.4. Auction Schedule.
          ----------------

          The Auction Agent shall conduct Auctions in accordance with the
schedule set forth below. Such schedule may be changed by the Auction Agent with
the consent of the Fund, which consent shall not be unreasonably withheld or
delayed. The Auction Agent shall give written notice of any such change to each
Broker-Dealer. Such notice shall be given prior to the close of business on the
Business Day next preceding the first Auction Date on which any such change
shall be effective.

Time                            Event

By 9:30 A.M.                    Auction Agent advises the Fund and Broker-
                                Dealers of the applicable Maximum Rate and the
                                Reference Rate(s) and Treasury Note Rate(s),
                                as the case may be, used in determining such
                                Maximum Rate as set forth in Section 2.3(b)(i)
                                hereof.

9:30 A.M. - 1:30 P.M.           Auction Agent assembles information communicated
                                to it by Broker-Dealers as provided in Section
                                3(a) of the Auction Procedures. Submission
                                Deadline is 1:30 P.M.

                                      -7-

<PAGE>

Time                            Event

Not earlier than 1:30 P.M.      Auction Agent makes determinations pursuant to
                                Section 3(a) of the Auction Procedures.

By approximately 3:00 P.M.      Auction Agent advises Fund of results of Auction
                                as provided in Section 3(b) of the Auction
                                Procedures. Submitted Bids and Submitted Sell
                                Orders are accepted and rejected and shares of
                                Preferred Shares allocated as provided in
                                Section 4 of the Auction Procedures. Auction
                                Agent gives notice of Auction results as set
                                forth in paragraph (a) of the Settlement
                                Procedures.

The Auction Agent shall follow the notification procedures set forth in
paragraph (a) of the Settlement Procedures.

     2.5. Designation of Special Rate Period.
          ----------------------------------

           (a) The Articles Supplementary provide that, subject to the Fund's
option to designate a Special Rate Period as referred to in paragraph (b) of
this Section 2.5, each Rate Period of Preferred Shares will be a Minimum Rate
Period (a duration of 7 days, subject to certain exceptions). Not less than 10
nor more than 20 days prior to the last day of any such Rate Period that is not
a Minimum Rate Period, (i) the Fund shall deliver to the Auction Agent a notice
of the Auction Date of the next succeeding Auction for Preferred Shares in the
form of Exhibit C hereto and (ii) the Auction Agent shall deliver such notice by
        ---------
first-class mail, postage prepaid, to the Broker-Dealers for Preferred Shares as
promptly as practicable after its receipt of such notice from the Fund.

          (b) Pursuant to the Articles Supplementary, the Fund may, at its
option, designate a Special Rate Period for Preferred Shares in the manner
described in Section 4 of Part I of the Articles Supplementary.

          (i) If the Board of Directors proposes to designate any succeeding
     Subsequent Rate Period of Preferred Shares as a Special Rate Period, (A)
     the Fund shall deliver to the Auction Agent a notice of such proposed
     Special Rate Period in the form of Exhibit D hereto not less than 20 nor
     more than 30 days prior to the first day of such proposed Special Rate
     Period and (B) the Auction Agent on behalf of the Fund shall deliver such
     notice by first-class mail, postage prepaid, to each Existing Holder of
     shares of Preferred Shares at the address specified by such Existing Holder
     and to the Broker-Dealers for Preferred Shares as promptly as practicable
     after its receipt of such notice from the Fund.

          (ii) If the Board of Directors determines to designate such succeeding
     Subsequent Rate Period as a Special Rate Period, (A) the Fund shall deliver
     to the Auction Agent a notice of such determination in the form of
     Exhibit E hereto not later
     ---------


                                      -8-

<PAGE>


     than 11:00 A.M. on the second Business Day next preceding the first day of
     such proposed Special Rate Period and (B) the Auction Agent shall deliver
     such notice to the Broker-Dealers for Preferred Shares not later than 3:00
     P.M. on such second Business Day.

          (iii) If the Fund shall deliver to the Auction Agent a notice stating
     that the Fund has determined not to exercise its option to designate such
     succeeding Subsequent Rate Period as a Special Rate Period with respect to
     which it has delivered a notice in the form of Exhibit E hereto not later
     than 11:00 A.M. on the second Business Day next preceding the first day of
     such proposed Special Rate Period, or shall fail to timely deliver either
     such notice or a notice in the form of Exhibit E hereto, the Auction Agent
     shall deliver a notice in the form of Exhibit F hereto to the
                                           ---------
     Broker-Dealers for Preferred Shares not later than 3:00 P.M. on such second
     Business Day.

Such change in the length of any Rate Period shall not occur if, among other
things, (a) an Auction shall not be held on such Auction Date for any reason or
(b) an Auction shall be held but Sufficient Clearing Bids shall not exist in
such Auction.

     2.6. Failure to Deposit.
          ------------------

          (a) If:

          (i) any Failure to Deposit shall have occurred with respect to shares
     of Preferred Shares during any Rate Period thereof (other than any Special
     Rate Period consisting of four or more Dividend Periods or any Rate Period
     succeeding any Special Rate Period consisting of four or more Dividend
     Periods during which a Failure to Deposit occurred that has not been
     cured); and

          (ii) prior to 12:00 Noon on the third Business Day next succeeding the
     date on which such Failure to Deposit occurred, such Failure to Deposit
     shall have been cured in accordance with the next succeeding sentence and
     the Fund shall have paid to the Auction Agent a late charge equal to the
     sum of (A) if such Failure to Deposit consisted of the failure timely to
     pay to the Auction Agent the full amount of dividends with respect to any
     Dividend Period on the shares of Preferred Shares, an amount computed by
     multiplying (1) 225% of the "AA" Financial Composite Commercial Paper Rate
     for the Rate Period during which such Failure to Deposit occurs on the
     Dividend Payment Date for such Dividend Period by (2) a fraction, the
     numerator of which shall be the number of days for which such Failure to
     Deposit has not been cured in accordance with the next sentence (including
     the day such Failure to Deposit occurs and excluding the day such Failure
     to Deposit is cured) and the denominator of which shall be 360, and
     applying the rate obtained against the aggregate liquidation preference of
     the outstanding shares of Preferred Shares and (B) if such Failure to
     Deposit consisted of the failure timely to pay to the Auction Agent the
     cash Redemption Price of the shares of Preferred Shares, if any, for which
     Notice of Redemption has been given by the Fund pursuant to paragraph (b)
     of Section 3 of Part I of the Articles Supplementary, an amount computed by
     multiplying (x)     % of the Reference Rate for the Rate Period during
     which such

                                      -9-

<PAGE>


     Failure to Deposit occurs on the redemption date by (y) a fraction, the
     numerator of which shall be the number of days for which such Failure to
     Deposit is not cured in accordance with the next succeeding sentence
     (including the day such Failure to Deposit occurs and excluding the day
     such Failure to Deposit is cured) and the denominator of which shall be
     360, and applying the rate obtained against the aggregate liquidation
     preference of the outstanding shares of Preferred Shares to be redeemed,

then the Auction Agent shall deliver a notice in the form of Exhibit G hereto
                                                             ---------
by first-class mail, postage prepaid, to the Broker-Dealers for Preferred Shares
not later than one Business Day after its receipt of the payment from the Fund
curing such Failure to Deposit and such late charge. A Failure to Deposit with
respect to Preferred Shares shall have been cured (if such Failure to Deposit is
not solely due to the willful failure of the Fund to make the required payment
to the Auction Agent) with respect to any Rate Period thereof if, not later than
12:00 Noon on the fourth Business Day preceding any Auction Date therefor the
Fund shall have paid to the Auction Agent (A) all accumulated and unpaid
dividends on the shares of Preferred Shares and (B) without duplication, the
Redemption Price for the shares of Preferred Shares, if any, for which Notice of
Redemption has been given by the Fund pursuant to paragraph (b) of Section 3 of
Part I of the Articles Supplementary.

          (b) If:

          (i) any Failure to Deposit shall have occurred with respect to shares
     of Preferred Shares during a Rate Period thereof (other than any Special
     Rate Period consisting of more than 364 Rate Period Days or any Rate Period
     succeeding any Special Rate Period consisting of more than 364 Rate Period
     days during which a Failure to Deposit 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 to Deposit occurred, such Failure to Deposit shall
     not have been cured within the meaning of the last sentence of Section
     2.6(a) hereof and the Fund shall not have paid to the Auction Agent the
     late charge described in such Section 2.6(a), but such Failure to Deposit
     shall subsequently be so cured; or

          (ii) any Failure to Deposit shall have occurred with respect to shares
     of Preferred Shares during a Special Rate Period consisting of four or more
     Dividend Periods, or during any Rate Period succeeding any Special Rate
     Period consisting of four or more Dividend Periods during which a Failure
     to Deposit occurred that has not been cured, and such Failure to Deposit
     shall subsequently have been cured within the meaning of the last sentence
     of Section 2.6(a) hereof,

then the Auction Agent shall deliver a notice in the form of Exhibit H hereto
                                                             ---------
to the Broker-Dealers for Preferred Shares not later than one Business Day after
the receipt of the payment from the Fund curing such Failure to Deposit.

                                      -10-

<PAGE>


     2.7. Allocation of Taxable Income.
          ----------------------------

          The Fund shall, in the case of a Minimum Rate Period or a Special Rate
Period of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, designate all or a portion of any dividend on Preferred
Shares to consist of net capital gains or other income taxable for Federal
income tax purposes by delivering to the Auction Agent a notice in the form of
Exhibit I hereto of such designation before the beginning of such Rate
Period.

     2.8. Broker-Dealers.
          --------------

          (a) Not later than 5:00 P.M. on the Business Day immediately
precedings each Dividend Payment Date for Preferred Shares, the Fund shall
pay to the Auction Agent an amount in cash equal to the aggregate fees payable
to the Broker-Dealers for Preferred Shares pursuant to Section 2.8 of the
Broker-Dealer Agreements for Preferred Shares. The Auction Agent shall advise
the Fund of the amount referred to in the preceding sentence in respect of such
Auction not later than 4:00 P.M. on the Business Day preceding such Dividend
Payment Date. The Auction Agent shall apply such moneys as set forth in Section
2.8 of each such Broker-Dealer Agreement. To the extent that any such moneys
are not payable to a Broker-Dealer because Sufficient Clearing Bids did not
exist in the relevant Auction and the Preferred Shares therefore continue to
be held despite being subject to a Submitted Sell Order, the Auction Agent
shall repay such money to the Fund.


          (b) The Auction Agent shall terminate any Broker-Dealer Agreement as
set forth therein if so directed by the Fund, provided that at least one
Broker-Dealer Agreement would be in effect after such termination.

          (c) The Auction Agent shall from time to time enter into such
Broker-Dealer Agreements with one or more Broker-Dealers as the Fund shall
request.

          (d) The Auction Agent shall maintain and update from time to time a
list of Broker-Dealers.

     2.9. Ownership of Shares of Preferred Shares.
          ---------------------------------------

          The Fund shall notify the Auction Agent if the Fund or any affiliate
(as such term is defined in the Investment Company Act of 1940, as amended) of
the Fund acquires any shares of Preferred Shares, except as set forth in the
next sentence. A 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. For
purposes of this section 2.9, a Broker-Dealer shall not be deemed to be an
affiliate solely because one or more of the directors or executive officers of
the Broker-Dealer or of any Person controlled by, in control of or under common
control with such Broker-Dealer is a director of the Fund. The Auction Agent
shall have no duty or liability with respect to enforcement of this Section
2.9.

                                      -11-

<PAGE>

     2.10. Access to and Maintenance of Auction Records.
           --------------------------------------------

           The Auction Agent shall, upon the written request of the Fund, afford
to the Fund and its agents, independent accountants and legal counsel access at
reasonable times during normal business hours to all books, records, documents
and other information concerning the Auction Agent's services hereunder. The
Auction Agent shall maintain such records for a period of two years after the
Auction to which such services relate, unless requested by the Fund to maintain
such records for a longer period of time, and such records shall, in reasonable
detail, accurately and fairly reflect the actions taken by the Auction Agent
hereunder. At the end of such period, if so requested in writing, the Auction
Agent shall deliver such records to the Fund.


3.   The Auction Agent as Preferred Shares Paying Agent.
     --------------------------------------------------


     3.1. Fund to Provide for Dividends and Redemptions.
          ---------------------------------------------


          (a) Not later than 12:00 Noon on the Business Day immediately
preceding each Dividend Payment Date with respect to which dividends on the
Preferred Shares have been declared, the Fund shall deposit or cause to be
deposited with the Auction Agent sufficient funds (available on such Dividend
Payment Date in New York City) for the payment of such dividends. The Fund
hereby irrevocably instructs the Auction Agent to apply such funds deposited
with the Auction Agent to the payment of such dividends on such Dividend Payment
Date. The Fund may direct, in writing, the Auction Agent to invest any available
funds in Short-Term Money Market Instruments; provided that the proceeds of any
such investments will be available in New York City at the opening of business
on such Dividend Payment Date.

          (b) If the Fund shall give a Notice of Redemption, then, not later
than 12:00 Noon of the Business Day immediately preceding the date fixed for
redemption, the Fund shall deposit with the Auction Agent sufficient funds
(available on such redemption date in New York City) to redeem the Preferred
Shares called for redemption in such Notice of Redemption and hereby irrevocably
instructs the Auction Agent to apply such funds and, if applicable, the income
and proceeds received therefrom, to the payment of the redemption price for such
Preferred Shares upon surrender of the certificate or certificates therefor. The
Fund may direct, in writing, the Auction Agent to invest any available funds in
Short-Term Money Market Instruments; provided that the proceeds of any such
                                     --------
investments will be available in New York City at the opening of business on the
redemption date.

          (c) The Auction Agent shall not be liable or responsible for any loss,
in whole or in part, incurred or resulting from any investments made pursuant to
paragraph (a) or (b) of this Section 3.1, such investments being solely for the
account of and at the risk of the Fund. The Auction Agent shall also not be
liable to the extent that investments made by the Auction Agent at the direction
of the Fund pursuant to clause (a) or (b) of this Section 3.1 do not constitute
Short-Term Money Market Instruments.

                                      -12-

<PAGE>


          (d) If pursuant to paragraph (a) or (b) of this Section 3.1 the Fund
directs the Auction Agent to invest in Short-Term Money Market Instruments and
the Auction Agent receives income on such investments, then the Auction Agent
shall (to the extent that such income is not required to pay dividends or the
redemption price of shares to be redeemed, as the case may be), upon the request
of the Fund, transmit such income to the Fund.

     3.2. Disbursing Dividend and Redemption Price.
          ----------------------------------------


          Subject to receipt of the requisite funds, the Auction Agent shall pay
to the Holders of the Preferred Shares (i) on each Dividend Payment Date for the
Preferred Shares, dividends (to the extent that the Fund has deposited with the
Auction Agent, pursuant to Section 3.1(a) hereof, funds for the payment
thereof), on such Preferred Shares, and (ii) on any date fixed for redemption of
Preferred Shares, the redemption price for any Preferred Shares called for
redemption upon presentation and surrender of the certificate or certificates
evidencing Preferred Shares held by such Holders and called for redemption. The
amount of dividends for any Rate Period or portion thereof to be paid by the
Auction Agent to the Holders will be determined by the Fund as set forth in
Section 2(c) of Part I of the Articles Supplementary. The redemption price to be
paid by the Auction Agent to the Holders will be determined by the Fund as set
forth in Section 3(a) of Part I of the Articles Supplementary. The Fund shall
deliver to the Auction Agent any Notice of Redemption required by Section 3(b)
of Part I of the Articles Supplementary when mailed by the Fund to the Holders
of the shares to be redeemed. Such notice shall contain the information required
by such Section 3(b) to be stated in the Notice of Redemption. The Auction Agent
shall have no duty or responsibility in connection with any Notice of Redemption
and shall have no duty or responsibility to determine the redemption price and
may rely on the amount thereof set forth in such notice.

     3.3. Preferred Shares Basic Maintenance Report.
          -----------------------------------------

     On or before 5:00 P.M., New York City time, on the third Business Day after
a Valuation Date on which the Fund fails to satisfy the Preferred Shares Basic
Maintenance Amount, and on the third Business Day after the Preferred Shares
Basic Maintenance Cure Date with respect to such Valuation Date, the Fund shall
complete and deliver to the Auction Agent (if either Fitch or Moody's is then
rating the shares of Preferred Shares) a Preferred Shares Basic Maintenance
Report as of the date of such failure or such Preferred Shares Basic Maintenance
Cure Date, as the case may be, which will be deemed to have been delivered to
the Auction Agent if the Auction Agent receives a copy or telecopy, telex or
other electronic transcription thereof and on the same day the Fund mails to the
Auction Agent for delivery on the next Business Day the full Preferred Shares
Basic Maintenance Report.





                                      -13-

<PAGE>





     3.4. [Reserved.]



     3.5. Notice of Special Meeting of Holders of the Preferred Shares of the
          -------------------------------------------------------------------
Fund.
- ----

          (a) If an event described in Section 5(c) of part I of the Articles
Supplementary occurs resulting in the commencement of a Voting Period, then the
Auction Agent shall, upon receipt from the Fund of a notice (the "Notice") of a
special meeting of the Holders of the Preferred Shares (the "Special Meeting"),
mail the Notice to all Holders of Preferred Shares who were Holders of record at
the close of business on the fifth Business Day preceding the date of mailing of
the Notice to such Holders (the "Record Date"). The Auction Agent shall insert
the Record Date, the date of the Special Meeting and the time of day of such
meeting, as specified by the Fund, in the Notice.

          (b) If at any time after the Auction Agent shall have mailed the
Notice but before the Special Meeting shall have been held, all accumulated and
unpaid dividends

                                      -14-

<PAGE>

(including Additional Distributions, if any) on all then outstanding Preferred
Shares including the accumulated and unpaid dividends for the current Rate
Period for the Preferred Shares shall have been paid or declared and a sum
sufficient for the payment of such dividends deposited with the Auction Agent,
the Auction Agent shall, upon receipt from the Fund of a notice of cancellation
of such Special Meeting, mail such notice as soon as practicable to all Holders
of Preferred Shares who were Holders of record at the close of business on the
Record Date.

          (c) The Fund shall provide a temporary chairman for any Special
Meeting. The Auction Agent shall have no obligations in connection with such
meeting, except with respect to the mailing of the Notice pursuant to this
Agreement.

4.   The Auction Agent as Transfer Agent and Registrar.
     -------------------------------------------------

     4.1. Original Issue of Stock Certificates.
          ------------------------------------

          Upon the Date of Original Issue of Preferred Shares, one certificate
representing all of the shares of Preferred Shares issued on such date shall be
issued by the Fund and, at the request of the Fund, registered in the name of
Cede & Co. and countersigned by the Auction Agent.

4.2.     Registration of Transfer of Shares.
         ----------------------------------

         Shares of Preferred Shares shall be registered solely in the name of
the Securities Depository or its nominee. If the Securities Depository shall
give notice of its intention to resign as such and if the Fund shall not have
selected a substitute Securities Depository, then upon such resignation, the
Preferred Shares shall be registered for transfer or exchange, and a new
certificate or certificates shall be issued in the name or names of the
designated transferee or transferees upon surrender of the old certificate or
certificates in form deemed by the Auction Agent properly endorsed for transfer
with all necessary endorsers' signatures guaranteed, in such manner and form as
the Auction Agent may require, by a guarantor reasonably believed by the Auction
Agent to be responsible, accompanied by such assurances as the Auction Agent
shall deem necessary or appropriate to evidence the genuineness and
effectiveness of each necessary endorsement and satisfactory evidence of
compliance with all applicable laws relating to the collection of taxes or funds
necessary for the payment of such taxes.


     4.3. [Reserved.]






                                      -15-

<PAGE>


     4.4. [Reserved]
          ----------



     4.5. [Reserved]
          ----------




     4.6. Stock or Record Books.
          ---------------------
          For so long as the Auction Agent is acting as the transfer agent for
Preferred Shares pursuant to this Agreement, it shall maintain a stock or record
book containing a list of the Holders of the shares of Preferred Shares who are
Broker-Dealers. In case of any request or demand for the inspection of the stock
books of the Fund or any other books in the possession of the Auction Agent, the
Auction Agent will notify the Fund and secure instructions as to permitting or
refusing such inspection. The Auction Agent reserves the right, however, to
exhibit the stock books or other books to any Person in case it is advised by
its counsel that its failure to do so would be unlawful.



     4.7. Return of Funds.
          ---------------

          Any funds deposited with the Auction Agent hereunder by the Fund for
any reason, including but not limited to the redemption of shares of Preferred
Shares, that remain unpaid after ninety days shall be repaid to the Fund upon
the written request of the Fund, together with interest, if any, received
thereon.

       5. Representations and Warranties of the Fund.
          ------------------------------------------

          The Fund represents and warrants to the Auction Agent that:






                                      -16-

<PAGE>

          (a) the Fund is a duly incorporated and validly existing limited
liability company in good standing under the laws of the State of Maryland and
has full corporate power to execute and deliver this Agreement and to authorize,
create and issue the shares of Preferred Shares and the shares of Preferred
Shares when issued, will be duly authorized, validly issued, fully paid and
nonassessable;

          (b) this Agreement has been duly and validly authorized, executed and
delivered by the Fund and, when executed and delivered by the other parties
hereto, will constitute the legal, valid, binding and enforceable obligation
of the Fund, subject, as to enforceability, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights and to general equitable principles;

          (c) the form of the certificate evidencing the shares of Preferred
Shares complies with all applicable laws of the State of Maryland;

          (d) when issued, the shares of Preferred Shares will have been duly
registered under the Securities Act of 1933, as amended, and no further action
by or before any governmental body or authority of the United States or of any
state thereof is required in connection with the execution and delivery of this
Agreement or will have been required in connection with the issuance of the
shares of Preferred Shares (except such as may be required for compliance with
the state securities or blue sky laws of various jurisdictions);

          (e) the execution and delivery of this Agreement and the issuance and
delivery of the shares of Preferred Shares do not and will not conflict with,
violate or result in a breach of, the terms, conditions or provisions of, or
constitute a default under, the Articles of Incorporation (as amended by one or
more Articles Supplementary) or the By Laws of the Fund, any law or regulation,
any order or decree of any court or public authority having jurisdiction, or any
mortgage, indenture, contract, agreement or undertaking to which the Fund is a
party or by which it is bound, the effect of which conflict, violation, default
or breach would be material to the Fund and its subsidiaries, taken as a whole;
and

          (f) no taxes are payable upon or in respect of the execution of this
Agreement or the issuance of the shares of Preferred Shares.

6.   The Auction Agent.
     -----------------

     6.1. Duties and Responsibilities.
          ---------------------------

          (a) The Auction Agent is acting solely as agent for the Fund hereunder
and owes no fiduciary duties to any Person, other than the Fund, by reason of
this Agreement.

          (b) The Auction Agent undertakes to perform such duties and only such
duties as are specifically set forth in this Agreement, and no implied covenants
or obligations shall be read into this Agreement against the Auction Agent.

          (c) In the absence of bad faith or negligence on its part, the Auction
Agent shall 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 this
Agreement. The Auction Agent shall not be liable

                                      -17-

<PAGE>

for any error of judgment made in good faith unless the Auction Agent shall have
been negligent in ascertaining the pertinent facts.

     6.2. Rights of the Auction Agent.
          ---------------------------

          (a) The Auction Agent may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and upon any
written instruction, notice, request, direction, consent, report, certificate,
share certificate or other instrument, paper or document believed in good faith
by it to be genuine. The Auction Agent shall not be liable for acting upon any
telephone communication authorized hereby which the Auction Agent believes in
good faith to have been given by the Fund or by a Broker-Dealer. The Auction
Agent may record telephone communications with the Fund or with the
Broker-Dealers or both.

          (b) The Auction Agent may consult with counsel of its choice and the
advice of such counsel shall be full and complete authorization and protection
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.

          (c) The Auction Agent shall not be required to advance, expend or risk
its own funds or otherwise incur or become exposed to financial liability in the
performance of its duties hereunder.

          (d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys.

     6.3. Auction Agent's Disclaimer.
          --------------------------

          The Auction Agent makes no representation as to the validity or
adequacy of this Agreement, the Broker-Dealer Agreements or the shares of
Preferred Shares, except that the Auction Agent hereby represents that the
Agreement has been duly authorized, executed and delivered by the Auction Agent
and constitutes the legal and binding obligation of the Auction Agent,
enforceable in accordance with its terms.

     6.4. Compensation, Expenses and Indemnification.
          ------------------------------------------

          (a) The Fund shall pay the Auction Agent from time to time reasonable
compensation for all services rendered by it under this Agreement and the
Broker-Dealer Agreements.

          (b) The Fund shall reimburse the Auction Agent upon its request for
all reasonable out-of-pocket expenses, disbursements and advances incurred or
made by the Auction Agent in accordance with any provision of this Agreement and
the Broker-Dealer Agreements (including the reasonable compensation and the
expenses and disbursements of its agents and counsel), except any expense or
disbursement attributable to its negligence or bad faith.

          (c) The Fund shall indemnify the Auction Agent for and hold it
harmless against any loss, liability or expense incurred without negligence or
bad faith on its part, arising

                                      -18-

<PAGE>

out of or in connection with its agency under this Agreement and the
Broker-Dealer Agreements, including the costs and expenses of defending itself
against any such claim or liability in connection with its exercise or
performance of any of its duties hereunder and thereunder for which it is
entitled to indemnification hereunder or thereunder.

7.   Miscellaneous.
     -------------

     7.1. Term of Agreement.
          -----------------

          (a) The term of this Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Fund may terminate this
Agreement at any time by so notifying the Auction Agent; provided that the Fund
                                                         --------
has entered into an agreement in substantially the form of this Agreement with a
successor Auction Agent or no shares of Preferred Shares remain outstanding. The
Auction Agent may terminate this Agreement upon written notice to the Fund on
the date specified in such notice, which termination shall be no earlier than 45
days after the date of delivery of such notice.

          (b) Except as otherwise provided in this paragraph (b), the respective
rights and duties of the Fund and the Auction Agent under this Agreement with
respect to Preferred Shares shall cease upon termination of this Agreement. The
Fund's representations, warranties, covenants and obligations to the Auction
Agent under Sections 5 and 6.4 hereof shall survive the termination of this
Agreement. Upon termination of this Agreement, the Broker-Dealer Agreements
shall automatically terminate and the duties of the Auction Agent under each of
the Broker-Dealer Agreements shall cease and at the Fund's request, the Auction
Agent shall promptly deliver to the Fund copies of all books and records
maintained by it with respect to Preferred Shares in connection with its duties
hereunder.

     7.2. Communications.
          --------------

          Except for (i) communications authorized to be by telephone pursuant
to this Agreement or the Auction procedures and (ii) communications in
connection with Auctions (other than those expressly required to be in writing),
all notices, requests and other communications to any party hereunder shall be
in writing (including telecopy or similar writing) and shall be given to such
party, addressed to it, at its address or telecopy number set forth below:

If to the Fund,                          Intermediate Muni Fund, Inc.
     addressed:                          c/o Smith Barney Fund Management, LLC
                                         125 Broad Street
                                         New York, New York 10004
                                         Attention:
                                         Telecopier No.:
                                         Telephone No.:

                                      -19-


<PAGE>


If to the Auction                        Bankers Trust Company,
     Agent, addressed:                   as Auction Agent
                                         100 Plaza One
                                         6th Floor
                                         Jersey City, NJ 07311
                                         New York, New York
                                         Attention: Lisa McDermid
                                         Telecopier No.: 201 593-6447
                                         Telephone No.: 201 860-2415

or such other address or telecopy number as such party may hereafter specify for
such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
communications shall be given on behalf of the Fund by a Fund Officer and on
behalf of the Auction Agent by an Authorized Officer.

     7.3. Entire Agreement.
          ----------------

          This Agreement contains the entire agreement between the parties
relating to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or implied,
between the parties relating to the subject matter hereof except for agreements
relating to the compensation of the Auction Agent.

     7.4. Benefits.
          --------

          Nothing herein, express or implied, shall give to any Person, other
than the Fund, the Auction Agent and their respective successors and assigns,
any benefit of any legal or equitable right, remedy or claim hereunder.

     7.5. Amendment; Waiver.
          -----------------

          (a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by the parties hereto.

          (b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by the other party shall not
constitute a waiver of any such right or remedy with respect to any subsequent
breach.

     7.6. Successor and Assigns.
          ---------------------

          This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and assigns of each of the Fund and
the Auction Agent.

                                      -20-

<PAGE>

     7.7. Severability.
          ------------

          If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.

     7.8. Execution in Counterparts.
          -------------------------

          This Agreement may be executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.

     7.9. Governing Law.
          -------------

          This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed in New York without giving effect to the choice of law provisions
thereof.

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the date first above written.

                                         INTERMEDIATE MUNI FUND, INC.

                                         By:
                                                --------------------------------
                                                Title:

                                         BANKERS TRUST COMPANY

                                         By:
                                                --------------------------------
                                                Title:

                                      -21-


<PAGE>

                                                                       EXHIBIT A

                        [Form of Broker-Dealer Agreement]

<PAGE>

                                                                       EXHIBIT B

                         [Form of Settlement Procedures]

                              SETTLEMENT PROCEDURES

          Capitalized terms used herein have the respective meanings specified
in the forepart of this Prospectus or the Glossary, as the case may be.

          (a) On each Auction Date, the Auction Agent shall notify by telephone
the Broker-Dealers that participated in the Auction held on such Auction Date
and submitted an Order on behalf of an Existing Holder or Potential Holder of:

          (i) the Applicable Rate fixed for the next succeeding Rate Period;

          (ii) whether Sufficient Clearing Bids existed for the determination of
     the Applicable Rate;

          (iii) if such Broker-Dealer submitted a Bid or a Sell order on behalf
     of an Existing Holder, whether such Bid or Sell Order was accepted or
     rejected, in whole or in part, and the number of shares, if any, of
     Preferred Shares then outstanding to be sold by such Existing Holder;

          (iv) if such Broker-Dealer submitted a Bid on behalf of a Potential
     Holder, whether such Bid was accepted or rejected, in whole or in part, and
     the number of shares, if any, of Preferred Shares to be purchased by such
     Potential Holder;

          (v) if the aggregate number of shares of Preferred Shares to be sold
     by all Existing Holders on whose behalf such Broker-Dealer submitted Bids
     or Sell orders exceeds the aggregate number of shares of Preferred Shares
     to be purchased by all Potential Holders on whose behalf such Broker-Dealer
     submitted a Bid, the name or names of one or more other Broker-Dealers (and
     the Agent member, if any, of each such other Broker-Dealer) and the number
     of shares of Preferred Shares to be (x) purchased from one or more Existing
     Holders on whose behalf such other Broker-Dealers submitted Bids or Sell
     Orders or (y) sold to one or more Potential Holders on whose behalf such
     other Broker-Dealers submitted Bids; and

          (vi) the scheduled Auction Date of the next succeeding Auction.

          (b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Existing Holder or Potential Holder shall:

          (i) advise each Existing Holder and Potential Holder on whose behalf
     such Broker-Dealer submitted a Bid or Sell Order whether such Bid or Sell
     Order was accepted or rejected, in whole or in part;

                                         B-1

<PAGE>

          (ii) instruct each Potential Holder on whose behalf such Broker-Dealer
     submitted a Bid that was accepted, in whole or in part, to instruct such
     Bidder's Agent Member to pay to such Broker-Dealer (or its Agent Member)
     through the Securities Depository the amount necessary to purchase the
     number of shares of Preferred Shares to be purchased pursuant to such Bid
     against receipt of such shares;

          (iii) instruct each Existing Holder on whose behalf such Broker-Dealer
     submitted a Bid that was accepted, in whole or in part, or a Sell Order
     that was accepted, in whole or in part, to instruct such Bidder's Agent
     Member to deliver to such Broker-Dealer (or its Agent Member) through the
     Securities Depository the number of shares of Preferred Shares to be sold
     pursuant to such Bid or Sell Order against payment therefor;

          (iv) advise each Existing Holder on whose behalf such Broker-Dealer
     submitted an Order and each Potential Holder on whose behalf such
     Broker-Dealer submitted a Bid of the Applicable Rate for the next
     succeeding Rate Period;

          (v) advise each Existing Holder on whose behalf such Broker-Dealer
     submitted an Order of the Auction Date of the next succeeding Auction; and

          (vi) advise each Potential Holder on whose behalf such Broker-Dealer
     submitted a Bid that was accepted, in whole or in part, of the Auction Date
     of the next succeeding Auction.

          (c) on the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell order shall
allocate any funds received by it pursuant to paragraph (b)(ii) above, and any
shares of Preferred Shares received by it pursuant to paragraph (b)(iii) above,
among the Potential Holders, if any, on whose behalf such Broker-Dealer
submitted Bids, the Existing Holders, if any, on whose behalf such Broker-Dealer
submitted Bids or Sell orders, and any Broker-Dealers identified to it by the
Auction Agent pursuant to paragraph (a)(v) above.

          (d) On the Business Day after the Auction Date, the securities
Depository shall execute the transactions described above, debiting and
crediting the accounts of the respective Agent Members as necessary to effect
the purchases and sale of shares of Preferred Shares as determined in the
Auction for such series.

          (e) Any delivery or nondelivery of shares which shall represent any
departure from the results of an Auction, as determined by the Auction Agent,
shall be of no effect unless and until the Auction Agent shall have been
notified of such delivery or nondelivery in accordance with the provisions of
the Auction Agency Agreement and the Broker-Dealer Agreement.

                                      B-2

<PAGE>


                                                                       EXHIBIT C
                                                                       ---------

                          INTERMEDIATE MUNI FUND, INC.

                           NOTICE OF AUCTION DATE FOR
           MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK, SERIES M
                              ("Preferred Shares")

     NOTICE IS HEREBY GIVEN that the Auction Date of the next Auction for the
Fund's Preferred Shares is scheduled to be ___________, 20__ and the next
Dividend Payment Date for the Fund's Preferred Shares will be __________, 20__.

     [A Failure to Deposit in respect of the Preferred Shares currently exists.
If such Failure to Deposit is not cured prior to 12 Noon on the fourth Business
Day prior to the next scheduled Auction Date of the Preferred Shares, the next
Auction will not be held. Notice of the next Auction for the Preferred Shares
will be delivered when such Failure to Deposit is cured./1/]

                                                INTERMEDIATE MUNI FUND, INC.





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

/1/ Include this language if a Failure to Deposit exists.


                                      C-1


<PAGE>


                                                                       EXHIBIT D
                                                                       ---------

                          INTERMEDIATE MUNI FUND, INC.

                          NOTICE OF PROPOSED CHANGE OF

                            LENGTH OF RATE PERIOD OF

           MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK, SERIES M

                              ("Preferred Shares")

     NOTICE IS HEREBY GIVEN that INTERMEDIATE MUNI FUND, INC. (the "Fund") may
exercise its option to designate the Rate Period of its Preferred Shares
commencing [the first day of the Special Rate Period] as a Special Rate Period.

     By 11:00 A.M. on the second Business Day preceding the first day of such
proposed Special Rate Period, the Fund will notify [the Auction Agent] of either
(a) its determination to exercise such option, designating the length of such
Special Rate Period for Preferred Shares or (b) its determination not to
exercise such option.

                                                INTERMEDIATE MUNI FUND, INC.
Dated:  ___________, 20__


                                      D-1

<PAGE>


                                                                       EXHIBIT E
                                                                       ---------

                          INTERMEDIATE MUNI FUND, INC.

                  NOTICE OF CHANGE OF LENGTH OF RATE PERIOD OF

           MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK, SERIES M

                              ("Preferred Shares")

     NOTICE IS HEREBY GIVEN that INTERMEDIATE MUNI FUND, INC. (the "Fund") has
determined to designate the Rate Period of its Preferred Shares commencing on
[the first day of the Special Rate Period] as a Special Rate Period.

     The Special Rate Period will be ______________ [days] [year(s)].

     The Auction Date for the Special Rate Period is (the Business Day next
preceding the first day of such Special Rate Period).

     As a result of the Special Rate Period designation, the amount of dividends
payable on Preferred Shares during the special Rate Period will be based on a
360-day year.

     The Special Rate Period shall not commence if (a) on such Auction Date
Sufficient Clearing Bids shall not exist or (b) if a Failure to Deposit shall
have occurred prior to the first day thereof with respect to shares of Preferred
Shares.

     The scheduled Dividend Payment Dates for Preferred Shares during such
Special Rate Period will be ________________________.


                                                INTERMEDIATE MUNI FUND, INC.



Dated: ___________, 20__

                                      E-1

<PAGE>

                                                                       EXHIBIT F
                                                                       ---------

                          INTERMEDIATE MUNI FUND, INC.

                      NOTICE OF DETERMINATION NOT TO CHANGE

                            LENGTH OF RATE PERIOD OF

                MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK, SERIES M

                              ("Preferred Shares")

     NOTICE IS HEREBY GIVEN that INTERMEDIATE MUNI FUND, INC. (the "Fund") has
determined not to exercise its option to designate a Special Rate Period of its
Preferred Shares and the next succeeding Rate Period of Preferred Shares will be
a Minimum Rate Period of _________ Rate Period Days.

                                                INTERMEDIATE MUNI FUND, INC.
Dated:  __________, 20__


                                      F-1

<PAGE>

                                                                       EXHIBIT G
                                                                       ---------

                          INTERMEDIATE MUNI FUND, INC.

                                NOTICE OF CURE OF

                              FAILURE TO DEPOSIT ON

           MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK, SERIES M

                              ("Preferred Shares")

     NOTICE IS HEREBY GIVEN that INTERMEDIATE MUNI FUND, INC. (the "Fund") has
cured its Failure to Deposit with respect to its Preferred Shares. The dividend
rate on the shares of Preferred Shares for the current Dividend Period is _ %
per annum, the Dividend Payment Date for the current Dividend Period is
scheduled to be __________ 20_ and the next Auction Date is scheduled to be
__________ 20__.

                                                INTERMEDIATE MUNI FUND, INC.
Dated:  ___________, 20


                                      G-1

<PAGE>

                                                                       EXHIBIT H
                                                                       ---------

                          INTERMEDIATE MUNI FUND, INC.

                                NOTICE OF CURE OF

                              FAILURE TO DEPOSIT ON

           MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK, SERIES M

                              ("Preferred Shares")

     NOTICE IS HEREBY GIVEN that INTERMEDIATE MUNI FUND, INC. (the "Fund") has
cured its Failure to Deposit with respect to its Preferred Shares. The next
Auction Date for the Preferred Shares is scheduled to be on ______________ 20__.

                                                INTERMEDIATE MUNI FUND, INC.
Dated:  ________________, 20__



                                      H-1

<PAGE>

                                                                       EXHIBIT I
                                                                       ---------

                          INTERMEDIATE MUNI FUND, INC.

      NOTICE OF [CAPITAL GAINS] [AND] [TAXABLE ORDINARY INCOME](1) DIVIDEND
         FOR MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK, SERIES M

                              ("Preferred Shares")

     NOTICE IS HEREBY GIVEN that the amount of the dividend payable on
________________, 20____ for Preferred Shares will be determined by the Auction
to be held on _______________, 20___. Up to [$ A](2)[$ B ](3) per share of the
dividend payable on such date as determined by such Auction will consist of
[capital gains](2) [ordinary income taxable for Federal income tax purposes](3).
If the dividend amount payable on such date as determined by such Auction is
less than [$ A ](2) [$ B ](3) per share, the entire amount of the dividend will
consist of [capital gains](2) [ordinary income taxable for Federal income tax
purposes](3). [To the extent such dividend amount exceeds [$ A ] per share, any
excess up to [$ B ] per share will consist of ordinary income taxable for
Federal income tax purposes.](4) Accordingly, the aforementioned composition of
the dividend payable on _______________, 20___ should be considered in
determining Orders to be submitted with respect to the Auction to be held on
________________, 20__. The Rate Multiple in effect for such Auction will be
____%.

                                                INTERMEDIATE MUNI FUND, INC.

                                      I-1

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.K3
<SEQUENCE>6
<FILENAME>dex99k3.txt
<DESCRIPTION>FORM OF BROKER DEALER AGREEMENT
<TEXT>
<PAGE>



                                                                     Exhibit k.3


                          INTERMEDIATE MUNI FUND, INC.

                             BANKERS TRUST COMPANY,
                                as Auction Agent

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

                         FORM OF BROKER-DEALER AGREEMENT

                        dated as of [____________], 2002

                                   Relating to
                  Auction Rate Cumulative Preferred Shares, Series M

                                       of

                          INTERMEDIATE MUNI FUND, INC.

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

                           SALOMON SMITH BARNEY, INC.




<PAGE>

     BROKER-DEALER AGREEMENT dated as of ____________, 2002 among INTERMEDIATE
MUNI FUND, INC., a Maryland corporation (the "Company"), BANKERS TRUST COMPANY,
a New York corporation (the "Auction Agent") (not in its individual capacity but
solely as agent for the Fund pursuant to authority granted to it in the Auction
Agency Agreement (as defined below)), and SALOMON SMITH BARNEY, INC. a New York
corporation (together with its successors and assigns, "SSB").

     WHEREAS, the Company proposes to issue 1,600 shares of Auction Rate
Cumulative Preferred Shares, Series M pursuant to its Articles of Incorporation
and the Articles Supplementary (as defined below);

     WHEREAS, the Articles Supplementary will provide that, for each Subsequent
Dividend Period of Preferred Shares then outstanding, the Applicable Rate for
Preferred Shares for such Subsequent Dividend Period shall, under certain
conditions, be equal to the rate per annum that results from an Auction for
Outstanding Preferred Shares on the respective date therefor next preceding such
Subsequent Dividend Period. The Board of Directors has adopted a resolution
appointing Bankers Trust Company as Auction Agent for purposes of the Auction
Procedures for Preferred Shares; and

     WHEREAS, the Auction Procedures require the participation of one or more
Broker-Dealers for Preferred Shares.

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Company, the Auction Agent and SSB agree as follows:

1.   Definitions and Rules of Construction.
     --------------------------------------

     1.1. Terms Defined by Reference to the Articles Supplementary.
          ---------------------------------------------------------

          Capitalized terms not defined herein shall have the respective
meanings specified in Parts I and II of the Articles Supplementary.

     1.2. Terms Defined Herein.
          ---------------------

          As used herein and in the Settlement Procedures, the following terms
shall have the following meanings, unless the context otherwise requires:

          (a) "Articles Supplementary" shall mean the Articles Supplementary by
which the Company's Board of Directors will classify 2,000 shares of authorized
and unissued preferred stock, $.001 par value, and authorize the issuance of a
series of such preferred stock designated Auction Rate Cumulative Preferred
Stock, Series M, as such Articles Supplementary, attached hereto as Exhibit A,
were filed by the Company on ____________, 2002 with the State Department of
Assessments and Taxation of the State of Maryland, and as may be amended from
time to time.

          (b) "Auction" shall have the meaning specified in Section 2.1 hereof.

                                      -1-

<PAGE>

          (c) "Auction Agency Agreement" shall mean the Auction Agency
Agreement, dated as of ____________, 2002, between the Company and the Auction
Agent relating to the Preferred Shares.

          (d) "Auction Procedures" shall mean the auction procedures
constituting Part II of the Articles Supplementary as of the filing thereof.

          (e) "Authorized Officer" shall mean each Managing Director, Vice
President, Assistant Vice President, and Associate of the Auction Agent assigned
to its Corporate Trust and Agency Group and every other officer or employee of
the Auction Agent designated as an "Authorized Officer" for purposes of this
Agreement in a communication to SBFM.

          (f) "Broker-Dealer" shall mean SSB and any other broker-dealer who
signs a substantially similar agreement with the Auction Agent.

          (g) "Broker-Dealer Agreement" shall mean this Agreement and any
substantially similar agreement between the Auction Agent and a Broker-Dealer.

          (h) "Preferred Shares" shall mean the preferred stock, par value $.001
per share, of the Company designated as its "Auction Rate Cumulative Preferred
Shares".

          (i) "SSB Officer" shall mean each officer or employee of SSB
designated as a "SSB Officer" for purposes of this Agreement in a communication
to the Auction Agent.

          (j) "Settlement Procedures" shall mean the Settlement Procedures
attached hereto as Exhibit B.



     1.3. Rules of Construction.
          ----------------------

          Unless the context or use indicates another or different meaning or
intent, the following rules shall apply to the construction of this Agreement:

          (a) Words importing the singular number shall include the plural
number and vice versa.

          (b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement nor shall they
affect its meaning, construction or effect.

          (c) The words "hereof", "herein", "hereto", and other words of
similar import refer to this Agreement as a whole.

          (d) All references herein to a particular time of day shall be to New
York City time.

                                      -2-

<PAGE>

2.   The Auction.
     ------------

     2.1. Purpose; Incorporation by Reference of Auction Procedures and
          -------------------------------------------------------------
          Settlement Procedures.
          ---------------------

          (a) The provisions of the Auction Procedures will be followed by the
Auction Agent for the purpose of determining the Applicable Rate for any
subsequent Dividend Period of Preferred Shares for which the Applicable Rate is
to be determined by an Auction. Each periodic operation of such procedures is
hereinafter referred to as an "Auction."

          (b) All of the provisions contained in the Auction Procedures and the
Settlement Procedures are incorporated herein by reference in their entirety and
shall be deemed to be a part hereof to the same extent as if such provisions
were fully set forth herein.

          (c) SSB agrees to act as, and assumes the obligations of, and
limitations and restrictions placed upon, a Broker-Dealer under this Agreement
for Preferred Shares. SSB understands that other Persons meeting the
requirements specified in the definition of "Broker-Dealer" contained in the
Auction Procedures may execute Broker-Dealer Agreements and participate as
Broker-Dealers in Auctions.

     2.2. Preparation for Each Auction.
          ----------------------------

          (a) Not later than 9:30 A.M. on each Auction Date for Preferred
Shares, the Auction Agent shall advise the Broker-Dealers for Preferred Shares
by telephone of the Maximum Rate therefor and the Reference Rate(s) and
Treasury Rate(s), as the case may be, used in determining such Maximum Rate.

          (b) In the event that any Auction Date shall be changed after the
Auction Agent has given the notice referred to in clause (vi) of paragraph (a)
of the Settlement Procedures, or after the notice referred to in Section 2.5(a)
hereof, if applicable, the Auction Agent, by such means as the Auction Agent
deems practicable, shall give notice of such change to SSB not later than the
earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M. on the old Auction
Date. Thereafter, SSB shall promptly notify customers of SSB that SSB
believes are Existing Holders of Preferred Shares of such change in the Auction
Date.

          (c) The Auction Agent from time to time may request the Broker-Dealers
to provide the Auction Agent with a list of their respective customers that such
Broker-Dealers believe are Existing Holders of shares of Preferred Shares. SSB
shall comply with any such request, and the Auction Agent shall keep
confidential any such information so provided by SSB and shall not disclose any
information so provided by SSB to any Person other than the Company and SSB.
The Auction Agent shall transmit any list of customers SSB believes are
Existing Holders of Preferred Shares and information related thereto only to its
officers, employees, agents or representatives who need to know such information
for the purposes of acting in accordance with this Agreement and shall use its
reasonable efforts to prevent the transmission of such information to others and
shall cause its officers, employees, agents and representatives to abide by the
foregoing confidentiality restrictions; provided, however, that the

                                      -3-

<PAGE>

Auction Agent shall have no responsibility or liability for the actions of any
of its officers, employees, agents or representatives after they have left the
employ of the Auction Agent.

          (d) SSB agrees to maintain a list of Potential Holders and to use its
best efforts, subject to existing laws and regulations, to contact the Potential
Holders on such list whom SSB believes may be interested in participating in
such Auction on each Auction Date for the purposes set forth in the Auction
Procedures. Nothing herein shall require SSB to submit an Order for any
customer in any Auction.

          (e) The Auction Agent's registry of Existing Holders of shares of a
series of Preferred Shares shall be conclusive and binding on SSB. SSB may
inquire of the Auction Agent between 3:00 P.M. on the Business Day preceding an
Auction for shares of Preferred Shares and 9:30 A.M. on the Auction Date for
such Auction to ascertain the number of shares in respect of which the Auction
Agent has determined SSB to be an Existing Holder. If SSB believes it is the
Existing Holder of fewer shares than specified by the Auction Agent in response
to SSB's inquiry, SSB may so inform the Auction Agent of that belief. SSB
shall not, in its capacity as Existing Holder of shares, submit Orders in such
Auction in respect of shares covering in the aggregate more than the number of
shares specified by the Auction Agent in response to SSB's inquiry.

     2.3. Auction Schedule; Method of Submission of Orders; Solicitation of
          -----------------------------------------------------------------
          Potential Holders.
          -----------------

          (a) The Auction Agent shall conduct Auctions for shares of Preferred
Shares in accordance with the schedule set forth below. Such schedule may be
changed by the Auction Agent with the consent of the Company, which consent
shall not be unreasonably withheld or delayed. The Auction Agent shall give
written notice of any such change to each Broker-Dealer. Such notice shall be
given prior to the close of business on the Business Day next preceding the
first Auction Date on which such change shall be effective.

         Time                                   Event
         ----                                   -----

By 9:30 A.M.               Auction Agent advises the Company and the
                           Broker-Dealers of the applicable Maximum Rate and the
                           Reference Rate(s) and Treasury Rate(s), as the case
                           may be, used in determining such Maximum Rate as set
                           forth in Section 2.2(a) hereof.

                                      -4-

<PAGE>

         Time                                   Event
         ----                                   -----

9:30 A.M. - 1:00 P.M.      Auction Agent assembles information communicated to
                           it by Broker-Dealers as provided in Section 4(a) of
                           the Auction Procedures. Submission Deadline is 1:00
                           P.M.

Not earlier than           Auction Agent makes determinations pursuant to
1:00 P.M.                  Section 5(a) of the Auction Procedures.

By approximately           Auction Agent advises Company of results of the
3:00 P.M.                  Auction as provided in Section 3(b) of the Auction
                           Procedures. Submitted Bids and Submitted Sell Orders
                           are accepted and rejected and shares of Preferred
                           Shares allocated as provided in Section 4 of
                           the Auction Procedures. Auction Agent gives notice
                           of Auction results as set forth in Section (a) of
                           the Settlement Procedures.

          (b) SSB agrees to maintain a list of Potential Holders and to
contact the Potential Holders on such list on each Auction Date for the
purposes set forth in paragraph 2(b) of the Auction Procedures. The Auction
Agent shall have no duty or liability with respect to the enforcement of this
subsection 2.3(b).

          (c) SSB shall submit orders to the Auction Agent writing
substantially in the form attached hereto as Exhibit C. SSB shall submit a
separate Order to the Auction Agent for each Potential Holder or Existing
Holder on whose behalf SSB is submitting an order and shall not net or
aggregate the orders of different Potential Holders or Existing Holders on
whose behalf SSB is submitting Orders.

          (d) SSB shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit D, of transfers of shares
of Preferred Shares made through SSB by an Existing Holder to another Person
other than pursuant to an Auction and (ii) a written notice, substantially in
the form attached hereto as Exhibit E, of the failure of any shares of
Preferred  Shares to be transferred to or by any Person that purchased or sold
shares of Preferred Shares through SSB pursuant to an Auction. 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. on the Business Day preceding
such Auction.

          (e) SSB and other Broker-Dealers may submit orders in Auctions for


                                      -5-

<PAGE>

their own accounts (including Orders for their own accounts where the order is
placed beneficially for a customer) unless the Company shall have notified SSB
and all other 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.

          (f) SSB agrees to handle its own and its customers' orders in
accordance with its duties under applicable securities laws and rules.

     2.4. Notices.
          --------

          (a) On each Auction Date, the Auction Agent shall notify SSB by
telephone or other electronic means of the results of the Auction as set forth
in paragraph (a) of the Settlement Procedures. By approximately 11:30 A.M. on
the Business Day next succeeding such Auction Date, the Auction Agent shall
confirm to SSB in writing the disposition of all Orders submitted by SSB in such
Auction.

          (b) SSB shall notify each Existing Holder or Potential Holder on whose
behalf SSB has submitted an Order as set forth in paragraph (b) of the
Settlement Procedures and take such other action as is required of SSB pursuant
to the Settlement Procedures.

     2.5. Designation of Special Rate Period.
          ----------------------------------

          (a) If the Company delivers to the Auction Agent a notice of the
Auction Date for Preferred Shares for a Rate Period thereof that next succeeds a
Rate Period that is not a Minimum Rate Period in the form of Exhibit C to the
Auction Agency Agreement, the Auction Agent shall deliver such notice to SSB as
promptly as practicable after its receipt of such notice from the Company.

          (b) If the Board of Directors of the Company proposes to designate any
succeeding Subsequent Rate Period of Preferred Shares as a Special Rate Period
and the Company delivers to the Auction Agent a notice of such proposed Special
Rate Period in the form of Exhibit D to the Auction Agency Agreement, the
Auction Agent shall deliver such notice to SBFM as promptly as practicable after
its receipt of such notice from the Company.

          (c) If the Board of Directors of the Company determines to designate
such succeeding Subsequent Rate Period as a Special Rate Period, and the Company
delivers to the Auction Agent a notice of such Special Rate Period in the form
of Exhibit E to the Auction Agency Agreement not later than 11:00 A.M. on the
second Business Day next preceding the first day of such proposed Special Rate
Period, the Auction Agent shall deliver such notice to SBFM not later than 3:00
P.M. on such second Business Day (or, if the Auction Agent has agreed to a later
time or date, as promptly as practicable thereafter).

          (d) If the Company shall deliver to the Auction Agent a notice stating
that the Company has determined not to exercise its option to designate such
succeeding Subsequent Rate Period as a Special Rate Period with respect to which
it has delivered a notice in the form of Exhibit D to the Auction Agency
Agreement not later than 11:00 A.M. on the second Business Day next preceding
the first day of such proposed Special Rate Period, or shall fail to timely

                                      -6-

<PAGE>

deliver either such notice or a notice in the form of Exhibit E to the Auction
Agency Agreement, the Auction Agent shall deliver a notice in the form of
Exhibit F to the Auction Agency Agreement to the Broker-Dealers for Preferred
Shares not later than 3:00 P.M. on such second Business Day.

     2.6. Allocation of Taxable Income.
          -----------------------------

          If the Company delivers to the Auction Agent a notice in the form of
Exhibit I to the Auction Agent Agreement designating all or a portion of any
dividend on shares of Preferred Shares to consist of net capital gains or other
income taxable for Federal income tax purposes, the Auction Agent shall deliver
such notice to SSB not later than the Business Day following its receipt of
such notice from the Company. On or prior to the Auction Date referred to in
such notice, SSB will contact each of its customers that SSB believes to be an
Existing Holder of shares of Preferred Shares or a Potential Holder interested
in submitting an Order with respect to the Auction to be held on such Auction
Date, and SSB will notify such customer of the contents of such notice. SSB
will be deemed to have contacted and notified such Existing Holders and
Potential Holders if, for each such holder, (i) it makes a reasonable effort to
contact such holder by telephone, and (ii) upon failing to contact such holder
by telephone it mails or sends by telecopy written notification to such holder
at the mailing address or telecopy number, as the case may be, indicated in such
holder's most recently submitted Master Purchaser's Letter or at such other
address or telecopy number as is indicated in the account records of SSB.

          The Auction Agent shall be required to notify SSB within two Business
Days after each Auction of the Auction Agent's receipt of notice from the
Company that such Auction involves an allocation of income taxable for Federal
income tax purposes as to the dollar amount per share of such taxable income and
income exempt from Federal income taxation included in the related dividend.

     2.7. Failure to Deposit.
          -------------------

          (a) If: (i) any Failure to Deposit shall have occurred with respect to
shares of Preferred Shares during any Rate Period thereof (other than any
Special Rate Period consisting of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period consisting of more than 364 Rate
Period Days during which a Failure to Deposit occurred that has not been cured);
and (ii) prior to 12:00 Noon on the third Business Day next succeeding the date
on which such Failure to Deposit occurred, such Failure to Deposit shall have
been cured as described in Section 2.6(a) of the Auction Agency Agreement and
the Company shall have paid to the Auction Agent a late charge as described in
such Section 2.6(a);

then, the Auction Agent shall deliver a notice in the form of Exhibit G to the
Auction Agency Agreement by first-class mail, postage prepaid, to SSB not later
than one Business Day after its receipt of the payment from the Company curing
such Failure to Deposit and such late charge.

          (b) If: (i) any Failure to Deposit shall have occurred with respect to
shares of Preferred Shares during any Rate Period thereof (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 a Failure to Deposit occurred but has not been cured), and,

                                      -7-

<PAGE>

prior to 12:00 Noon on the third Business Day next succeeding the date on which
such Failure to Deposit occurred, such Failure to Deposit shall not have been
cured as described in Section 2.6(a) of the Auction Agency Agreement or the
Company shall not have paid to the Auction Agent the applicable late charge, if
any, described in Section 2.6(a) of the Auction Agency Agreement; or (ii) any
Failure to Deposit shall have occurred with respect to shares of Preferred
Shares during a Special Rate Period thereof of more than 364 Rate Period Days,
or during any Rate Period thereof succeeding any Special Rate Period of more
than 364 Rate Period Days during which a Failure to Deposit occurred that has
not been cured, and, prior to 12:00 noon on the fourth Business Day preceding
the Auction Date for the Rate Period subsequent to such Rate Period, such
Failure to Deposit shall not have been cured as described in Section 2.6(a) of
the Auction Agency Agreement or the Company shall not have paid to the Auction
the applicable late charge described in Section 2.6(a) of the Auction Agency
Agreement; then the Auction Agent shall deliver a notice in the form of Exhibit
H to the Auction Agency Agreement to SSB not later than one Business Day after
the receipt of the payment from the Company curing such Failure to Deposit and
such late charge.

     2.8. Service Charge to be Paid to SSB.
          ---------------------------------

          On the Business Day next succeeding each Auction Date for Preferred
Shares, the Auction Agent shall pay to SSB from moneys received from the
Company an amount equal to the product of (a)(i) in the case of any Auction Date
immediately preceding a Rate Period of Preferred Shares consisting of 364 Rate
Period Days or fewer, or (ii) in the case of any Auction Date immediately
preceding the Rate Period of Preferred Shares consisting of more than 364 Rate
Period Days, such percentage as may be agreed upon by the Company and SSB with
respect to such Rate Period times (b) a fraction, the numerator of which is the
number of days in the Rate Period therefor beginning on such Business Day and
the denominator of which is 365, times (c) $25,000, times (d) the sum of (i) the
aggregate number of shares of Preferred Shares placed by SSB in such Auction
that were (A) the subject Of Submitted Bids of Existing Holders submitted by
SSB and continued to be held as a result of such submission and (B) the subject
of Submitted Bids of Potential Holders submitted by SSB and purchased as a
result of such submission plus (ii) the aggregate number of shares of Preferred
Shares subject to valid Hold orders (determined in accordance with paragraph (d)
of Section 2 of the Auction Procedures) submitted to the Auction Agent by SSB
plus (iii) the number of shares of Preferred Shares deemed to be subject to Hold
Orders by Holders pursuant to paragraph (c) of Section 2 of the Auction
Procedures that were acquired by SSB for its own account or were acquired by
such Existing Holders through SSB.

          For purposes of subclause (d)(iii) of the foregoing paragraph, if any
Existing Holder who acquired shares of Preferred Shares through SSB transfers
those shares to another Person other than pursuant to an Auction, then the
Broker-Dealer for the shares so transferred shall continue to be SSB; provided,
                                                                       --------
however, that if the transfer was effected by, or if the transferee is, a
- -------
Broker-Dealer other than SSB, then such Broker-Dealer shall be the
Broker-Dealer for such shares.

                                      -8-

<PAGE>

     2.9. Settlement.
          ----------

          (a) If any Existing Holder on whose behalf SSB has submitted a Bid or
Sell Order for shares of Preferred Shares that was accepted in whole or in part
fails to instruct its Agent Member to deliver the shares of Preferred Shares
subject to such Bid or Sell Order against payment therefor, SSB shall instruct
such Agent Member to deliver such shares against payment therefor and SSB may
deliver to the potential Holder on whose behalf SSB submitted a Bid for shares
of Preferred Shares that was accepted in whole or in part a number of shares of
Preferred Shares that is less than the number of shares of Preferred Shares
specified in such Bid to be purchased by such Potential Holder.

          (b) Neither the Auction Agent nor the Company shall have any
responsibility or liability with respect to the failure of an Existing Holder, a
Potential Holder or its respective Agent Member to deliver shares of Preferred
Shares or to pay for shares of Preferred Shares sold or purchased pursuant to
the Auction Procedures or otherwise.

          (c) Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event SSB is an Existing Holder
with respect to shares of Preferred Shares and the Auction Procedures provide
that SBFM shall be deemed to have submitted a Sell Order in an Auction with
respect to such shares if SSB fails to submit an Order in that Auction with
respect to such shares, SSB shall have no liability to any Person for failing
to sell such shares pursuant to such a deemed Sell Order if (i) such shares were
transferred by the beneficial owner thereof without notification of such
transfer in compliance with the Auction Procedures or (ii) SSB has indicated to
the Auction Agent pursuant to Section 2.2(e) of this Agreement that, according
to SSB's records, SSB is not the Existing Holder of such shares.

          (d) Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event an Existing Holder of shares
of Preferred Shares with respect to whom a Broker-Dealer submitted a Bid to the
Auction for such shares that was accepted in whole or in part, or submitted or
is deemed to have submitted a Sell Order for such shares that was accepted in
whole or in part, fails to instruct its Agent Member to deliver such shares
against payment therefor, partial deliveries of Preferred Shares that have been
made in respect of potential Holders' Submitted Bids for shares that have been
accepted in whole or in part shall constitute good delivery to such Potential
Holders.

          (e) Notwithstanding the foregoing terms of this Section, any delivery
or non-delivery of Preferred Shares which represents any departure from the
results of an Auction for shares, as determined by the Auction Agent, shall be
of no effect for purposes of the registry of Existing Holders maintained by the
Auction Agent pursuant to the Auction Agency Agreement unless and until the
Auction Agent shall have been notified of such delivery or non-delivery.

          (f) The Auction Agent shall have no duty or liability with respect to
enforcement of this Section 2.9.


                                      -9-

<PAGE>

3.   The Auction Agent.
     ------------------

     3.1. Duties and Responsibilities.
          ----------------------------

          (a) The Auction Agent is acting solely as agent for the company
hereunder and owes no fiduciary duties to any other Person, other than the
Company, by reason of this Agreement.

          (b) The Auction Agent undertakes to perform such duties and only such
duties as are specifically set forth in this Agreement, and no implied covenants
or obligations shall be read into this Agreement against the Auction Agent.

          (c) In the absence of bad faith or negligence on its part, the Auction
Agent shall 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 this
Agreement. The Auction Agent shall not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in ascertaining
(or failing to ascertain) the pertinent facts.

     3.2. Rights of the Auction Agent.
          ----------------------------

          (a) The Auction Agent may rely and shall be protected in acting or
refraining from acting upon any communication authorized hereby and upon any
written instruction, notice, request, direction, consent, report, certificate,
share certificate or other instrument, paper or document believed in good faith
by it to be genuine. The Auction Agent shall not be liable for acting upon any
telephone communication authorized by this Agreement which the Auction Agent
believes in good faith to have been given by the Company or by a Broker-Dealer.
The Auction Agent may record telephone communications with the Broker-Dealers.

          (b) The Auction Agent may consult with counsel of its choice and the
advice of such counsel shall be full and complete authorization and protection
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.

          (c) The Auction Agent shall not be required to advance, expend or risk
its own funds or otherwise incur or become exposed to financial liability in the
performance of its duties hereunder.

     3.3. Auction Agent's Disclaimer.
          ---------------------------

          The Auction Agent makes no representation as to the validity or
adequacy of this Agreement, the Auction Agency Agreement, the Articles
Supplementary (which include the Auction Procedures) or the Preferred Shares.

                                      -10-

<PAGE>

4.   Miscellaneous.
     --------------

     4.1. Termination.
          ------------

          Any party may terminate this Agreement at any time on five days' prior
notice to the other parties. This Agreement shall automatically terminate upon
the termination of the Auction Agency Agreement.

     4.2. Participant in Securities Depository.
          -------------------------------------

          (a) SSB is, and shall remain for the term of this agreement, a member
of, or participant in, the Securities Depository (or an affiliate of such a
member or participant).

          (b) SSB represents that it (or if SSB does not act as Agent Member,
one of its affiliates) shall make all dividend payments on the Preferred Shares
available in same-day funds on each Dividend Payment Date to customers that use
SSB or an affiliate of SSB as Agent Member.

     4.3. Communications.
          ---------------

          Except for (i) communications authorized to be made by telephone
pursuant to this Agreement or the Auction Procedures and (ii) communications in
connection with Auctions (other than those expressly required to be in writing),
all notices, requests and other communications to either party hereunder shall
be in writing (including telecopy or similar writing) and shall be given to such
party, addressed to it, at its address or telecopy number set forth below:

If to the Company,              Intermediate Muni Fund, Inc.
 addressed:                     c/o Smith Barney Fund Management, LLC
                                125 Broad Street
                                New York, New York  10004
                                Attention:
                                Telecopier No.:
                                Telephone No.:

If to SSB,                      Salomon Smith Barney, Inc.
 addressed:                     388 Greenwich Street
                                New York, New York
                                Attention:
                                Telecopier No.:
                                Telephone No.:

                                      -11-

<PAGE>

If to the Auction               Bankers Trust Company,
 Agent, addressed:              as Auction Agent
                                100 Plaza One
                                6th Floor
                                Jersey City, New Jersey 07311
                                Attention: Auction Rate Securities Group
                                Telecopier No.: 201-593-6447
                                Telephone No.: 201-860-2415

or at such other address or telecopy number as such party may hereafter specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of SSB by a SSB officer and on behalf
of the Auction Agent by an Authorized Officer. SSB may record telephone
communications with the Auction Agent.

     4.4. Entire Agreement.
          -----------------

          This Agreement contains the entire agreement among the parties hereto
relating to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or implied,
between the parties hereto relating to the subject matter hereof.

     4.5. Benefits.
          ---------

          Nothing in this Agreement, express or implied, shall give to any
person, other than the Company, the Adviser, the Auction Agent, SSB and their
respective successors and assigns, any benefit of any legal or equitable right,
remedy or claim hereunder.

     4.6. Amendment; Waiver.
          ------------------

          (a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged. No modification or amendment shall be effective without the written
consent of the Company effected thereby.

          (b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by any other party shall not
constitute a waiver of any such right or remedy with respect to any subsequent
breach.

          (c) Notwithstanding any provision to the contrary, the Company may,
upon five Business Days' notice to the Auction Agent and SSB, amend, alter or
repeal any of the provisions contained herein, it being understood that you
shall be deemed to have accepted any such amendment, alteration or repeal if,
after the expiration of such five Business Day period, you submit an order to
the Auction Agent in respect of the Preferred Shares.

                                      -12-

<PAGE>

     4.7. Successors and Assigns.
          -----------------------

          This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the respective successors and assigns of each of the Company, the
Adviser, the Auction Agent and SBFM.

     4.8. Severability.
          -------------

          If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.

     4.9. Execution in Counterparts.
          --------------------------

          This Agreement may be executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.

     4.10. Governing Law.
           --------------

           This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed in said State without giving effect to the choice of law provisions
thereof.

           IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the date first above written.

                                   INTERMEDIATE MUNI FUND, INC.

                                   By:
                                        ----------------------------------------
                                   Name:
                                          --------------------------------------
                                   Title:
                                           -------------------------------------


                                   BANKERS TRUST COMPANY, as Auction Agent

                                   By:
                                        ----------------------------------------
                                   Name:
                                          --------------------------------------
                                   Title:
                                           -------------------------------------


                                   SALOMON SMITH BARNEY, INC.

                                   By:
                                        ----------------------------------------
                                   Name:
                                          --------------------------------------
                                   Title:
                                           -------------------------------------

                                      -13-

<PAGE>

                                                                       EXHIBIT A
                                                                       ---------

                             ARTICLES SUPPLEMENTARY

                                      -14-

<PAGE>

                                                                       EXHIBIT B
                                                                       ---------

                              SETTLEMENT PROCEDURES


<PAGE>

                              SETTLEMENT PROCEDURES

          Capitalized terms used herein have the respective meanings specified
in the forepart of this Prospectus or the Glossary, as the case may be.

          (a) On each Auction Date, the Auction Agent shall notify by telephone
the Broker-Dealers that participated in the Auction held on such Auction Date
and submitted an Order on behalf of an Existing Holder or Potential Holder of:

          (i)   the Applicable Rate fixed for the next succeeding Rate Period;

          (ii)  whether Sufficient Clearing Bids existed for the determination
     of the Applicable Rate;

          (iii) if such Broker-Dealer submitted a Bid or a Sell order on behalf
     of an Existing Holder, whether such Bid or Sell Order was accepted or
     rejected, in whole or in part, and the number of shares, if any, of
     Preferred Shares then outstanding to be sold by such Existing Holder;

          (iv)  if such Broker-Dealer submitted a Bid on behalf of a Potential
     Holder, whether such Bid was accepted or rejected, in whole or in part, and
     the number of shares, if any, of Preferred Shares to be purchased by such
     Potential Holder;

          (v)   if the aggregate number of shares of Preferred Shares to be sold
     by all Existing Holders on whose behalf such Broker-Dealer submitted Bids
     or Sell orders exceeds the aggregate number of shares of Preferred Shares
     to be purchased by all Potential Holders on whose behalf such Broker-Dealer
     submitted a Bid, the name or names of one or more other Broker-Dealers (and
     the Agent member, if any, of each such other Broker-Dealer) and the number
     of shares of Preferred Shares to be (x) purchased from one or more Existing
     Holders on whose behalf such other Broker-Dealers submitted Bids or Sell
     Orders or (y) sold to one or more Potential Holders on whose behalf such
     other Broker-Dealers submitted Bids; and

          (vi)  the scheduled Auction Date of the next succeeding Auction.

          (b)   On each Auction Date, each Broker-Dealer that submitted an Order
     on behalf of any Existing Holder or Potential Holder shall:

          (i)   advise each Existing Holder and Potential Holder on whose behalf
     such Broker-Dealer submitted a Bid or Sell Order whether such Bid or Sell
     Order was accepted or rejected, in whole or in part;

          (ii)  instruct each Potential Holder on whose behalf such Broker-
     Dealersubmitted a Bid that was accepted, in whole or in part, to instruct
     such Bidder's Agent Member to pay to such Broker-Dealer (or its Agent
     Member) through the Securities

                                     B-1

<PAGE>

     Depository the amount necessary to purchase the number of shares of
     Preferred Shares to be purchased pursuant to such Bid against receipt of
     such shares;

          (iii) instruct each Existing Holder on whose behalf such Broker-Dealer
     submitted a Bid that was accepted, in whole or in part, or a Sell Order
     that was accepted, in whole or in part, to instruct such Bidder's Agent
     Member to deliver to such Broker-Dealer (or its Agent Member) through the
     Securities Depository the number of shares of Preferred Shares to be sold
     pursuant to such Bid or Sell Order against payment therefor;

           (iv) advise each Existing Holder on whose behalf such Broker-Dealer
     submitted an Order and each Potential Holder on whose behalf such
     Broker-Dealer submitted a Bid of the Applicable Rate for the next
     succeeding Rate Period;

            (v) advise each Existing Holder on whose behalf such Broker-Dealer
     submitted an Order of the Auction Date of the next succeeding Auction; and

           (vi) advise each Potential Holder on whose behalf such Broker-Dealer
     submitted a Bid that was accepted, in whole or in part, of the Auction Date
     of the next succeeding Auction.

            (c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell order shall
allocate any funds received by it pursuant to paragraph (b)(ii) above, and any
shares of Preferred Shares received by it pursuant to paragraph (b)(iii) above,
among the Potential Holders, if any, on whose behalf such Broker-Dealer
submitted Bids, the Existing Holders, if any, on whose behalf such Broker-Dealer
submitted Bids or Sell orders, and any Broker-Dealers identified to it by the
Auction Agent pursuant to paragraph a(v) above.

            (d) On the Business Day after the Auction Date, the securities
Depository shall execute the transactions described above, debiting and
crediting the accounts of the respective Agent Members as necessary to effect
the purchases and sale of shares of Preferred Shares as determined in the
Auction for such series.

            (e) Any delivery or nondelivery of shares which shall represent any
departure from the results of an Auction, as determined by the Auction Agent,
shall be of no effect unless and until the Auction Agent shall have been
notified of such delivery or nondelivery in accordance with the provisions of
the Auction Agency Agreement and the Broker-Dealer Agreement.

                                      B-2

<PAGE>

                                                                       EXHIBIT C
                                                                       ---------

                   (Submit only one Order on this Order form)

                          INTERMEDIATE MUNI FUND, INC.
                AUCTION RATE CUMULATIVE PREFERRED STOCK, SERIES M
                              ("Preferred Shares")

ORDER FORM
                                                      __________________________
                                                           (Date of Auction)
To: Bankers Trust Company
    [Address]
    Attention:  [___________________]

          The undersigned Broker-Dealer submits the following order on behalf of
the Bidder listed below:

          Name of Bidder: _________________________________________

          Bidder places the Order listed below covering the number of shares
indicated (complete only one blank):

          _______ shares now held by Bidder (an Existing Holder), and the order
                  is a (check one):

          [_}     Hold Order; or
                              --

          [_]     Bid at a rate of _______%; or

          [_]     Sell Order;

                                      -or-

          _______ shares not now held by Bidder (a Potential Holder), and the
                  Order is a:

          Bid at a rate of _____%.

Notes:

(1)  If submitting more than one Order for one Bidder, use additional Order
     forms.

(2)  If one or more orders covering in the aggregate more than the number of
     outstanding shares of Preferred Shares held by any Existing Holder are
     submitted, such Orders shall be considered valid in the order of priority
     set forth in the Auction Procedures.

                                      C-1

<PAGE>


(3)  A Hold order may be placed only by an Existing Holder covering a number of
     shares of Preferred Shares not greater than the number of Shares of
     Preferred Shares currently held by such Existing Holder.

(4)  Potential Holders may make only Bids, each of which must specify a rate. If
                                ----
     more than one Bid is submitted on behalf of any Potential Holder, each Bid
     submitted shall be a separate Bid with the rate specified.

(5)  Bids may contain no more than three figures to the right of the decimal
     point (.001 of 1%) .

(6)  An Order submitted must cover only whole shares of Preferred Shares.

          Name of Broker-Dealer:

                                           By:
                                               ---------------------------------

                                      C-2

<PAGE>


                                                                       EXHIBIT D
                                                                       ---------

                       (To be used only for transfers made
                       other than pursuant to an Auction)

                          INTERMEDIATE MUNI FUND, INC.

                AUCTION RATE CUMULATIVE PREFERRED STOCK, SERIES M
                              ("Preferred Shares")

                                  TRANSFER FORM

We are (check one):

          [_] the Existing Holder named below;

          [_] the Broker-Dealer named below; or

          [_] the Agent Member for such Existing Holder.

We hereby notify YOU that such Existing Holder has transferred ____________
shares of Preferred Shares to:

Name/Social Security or Tax ID. No.:
                                    --------------------------------------------
Address:
                                    --------------------------------------------

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

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



                                          --------------------------------------
                                          (Name of Existing Holder)


                                          --------------------------------------
                                          (Name of Broker-Dealer)


                                          --------------------------------------
                                          (Name of Agent Member)


                                          By:
                                              ----------------------------------
                                          Printed Name:
                                          Title:

                                      D-1

<PAGE>

                                                                       EXHIBIT E
                                                                       ---------

               (To be used only for failures to deliver shares of
                  Preferred Shares sold pursuant to an Auction)

                          INTERMEDIATE MUNI FUND, INC.

                AUCTION RATE CUMULATIVE PREFERRED STOCK, SERIES M
                              ("Preferred Shares")

                         NOTICE OF A FAILURE TO DELIVER

Complete either I or II
- -----------------------

     I.   We are a Broker-Dealer for ________________________ (the "Purchaser"),
          which purchased ____________ shares of Preferred Shares (the
          "Purchased Shares") in the Auction held on ____________ from the
          seller of such shares.

     II.  We are a Broker-Dealer for ________________________ (the "Seller"),
          which sold ____________ shares of Preferred Shares (the "Sold Shares")
          in the Auction held on ____________ to the purchaser of such shares.

We hereby notify you that (check one)--

     [_]   the Seller failed to deliver the Purchased Shares to the Purchaser

     [_]   the Purchaser failed to make payment to the Seller upon delivery of
           the Sold Shares

                                             -----------------------------------
                                             (Name of Broker-Dealer)

                                             By:
                                                --------------------------------
                                             Printed Name:
                                             Title:

                                       E-1


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.N1
<SEQUENCE>7
<FILENAME>dex99n1.txt
<DESCRIPTION>CONSENT OF KPMG LLP
<TEXT>
<PAGE>


                          Independent Auditors' Consent


To the Shareholders and Board of Directors of the
Intermediate Muni Fund, Inc.:

We consent to the incorporation by reference, in this Prospectus and Statement
of Additional Information, of our report dated February 8, 2001, on the
statement of assets and liabilities for the Intermediate Muni Fund, Inc. (the
"Fund") as of December 31, 2000, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the years
in the two-year period then ended and the financial highlights for each of the
years in the five-year period then ended. These financial statements and
financial highlights and our report thereon are included in the Annual Report of
the Fund as filed on Form N-30D.

We also consent to the references to our firm under the headings "Financial
Highlights" in the Prospectus and "Experts" in the Statement of Additional
Information.


                                            KPMG LLP


New York, New York

January 23, 2002

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
