FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                 (X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)

                     OF THE SECURITIES EXCHANGE ACT OF 1934

               OR ( ) TRANSITION REPORT UNDER SECTION 13 or 15(d)

                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter ended September 30, 1998

Commission File Number 0-26132

            SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
             (Exact name of registrant as specified in its charter)

      New York                                                 13-3729162
 (State or other jurisdiction of                            (I.R.S. Employer
 incorporation or organization)                             Identification No.)


                    c/o Smith Barney Futures Management Inc.
                           390 Greenwich St. - 1st Fl.
                            New York, New York 10013
              (Address and Zip Code of principal executive offices)


                                 (212) 723-5424
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
                                                Yes   X    No


<PAGE>



                                     SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
                                                      FORM 10-Q
                                                        INDEX

                                                                       Page
                                                                      Number
PART I - Financial Information:

   Item 1. Financial Statements:

           Statement of Financial Condition at
           September 30, 1998 and December 31,
           1997.                                                         3

           Statement of Income and Expenses and  Partners'
           Capital  for the  three and nine  months  ended
           September 30, 1998
           and 1997.                                                     4

           Notes to Financial Statements                               5 - 8

  Item 2.  Management's Discussion and
           Analysis of Financial Condition
           and Results of Operations                                   9 - 11

  Item 3.  Quantitative and Qualitative
           Disclosures of Market Risk                                    12

PART II - Other Information                                           13 - 14


                                       2

<PAGE>


                                     PART I
                          ITEM 1. FINANCIAL STATEMENTS



                    SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
                        STATEMENT OF FINANCIAL CONDITION


<TABLE>
<CAPTION>

                                             SEPTEMBER 30,    DECEMBER 31,
                                                 1998             1997
                                             -------------   ------------
                                              (Unaudited)
<S>                                               <C>                <C>

ASSETS:                                      

Equity in commodity futures trading account:
  Cash and cash equivalents                   $131,197,341   $142,852,854

  Net unrealized appreciation
   on open futures contracts                    21,785,278     11,184,770


                                              ------------   ------------
                                               152,982,619    154,037,624
Interest receivable                                419,385        518,917

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

                                              $153,402,004   $154,556,541

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

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities:
 Accrued expenses:
  Commissions                                 $    674,407   $    721,970
  Management fees                                  357,923        359,579
  Incentive fees                                 2,731,567        492,736
  Other                                             84,683         79,457
 Redemptions payable                             1,021,934      1,521,538

                                              ------------   ------------
                                                 4,870,514      3,175,280

                                              ------------   ------------
Partners' Capital:

General Partner, 2,048.9308 Unit
   equivalents outstanding in 1998 and 1997      2,909,810      2,660,393
Limited Partners, 102,538.6658 and
  114,539.1563 Units of Limited Partnership
  Interest outstanding in 1998 and 1997,
  respectively                                 145,621,680    148,720,868

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

                                               148,531,490    151,381,261

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

                                              $153,402,004   $154,556,541

                                              ============   ============
</TABLE>

See Notes to Financial Statements


                                                           3

<PAGE>


                   SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
             STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                                               THREE MONTHS ENDED                     NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                         SEPTEMBER 30,
                                                           -------------------------------    -----------------------------
                                                                  1998              1997             1998              1997

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

Income:
  Net gains (losses) on trading of commodity
   futures:
  Realized gains on closed positions                        $   3,144,783    $   1,272,924    $  10,044,167    $   2,753,659
  Change in unrealized gains/losses on open
   positions                                                   22,514,363        2,840,871       10,600,508          827,978

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

                                                               25,659,146        4,113,795       20,644,675        3,581,637
Less, brokerage commissions and clearing fees
  ($54,068, $83,076, $212,966 and $246,584, respectively)      (2,075,208)      (2,451,605)      (6,400,051)      (7,581,705)

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

  Net realized and unrealized gains (losses)                   23,583,938        1,662,190       14,244,624       (4,000,068)
  Interest income                                               1,315,045        1,579,945        4,127,469        4,898,034

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

                                                               24,898,983        3,242,135       18,372,093          897,966

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

Expenses:
  Management fees                                               1,015,615        1,100,450        3,000,767        3,411,173
  Incentive fees                                                2,731,568           61,032        2,973,642          808,726
  Other                                                            27,147           15,220           99,854          111,358

                                                            -------------    -------------    -------------    -------------
                                                                3,774,330        1,176,702        6,074,263        4,331,257

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

  Net income (loss)                                            21,124,653        2,065,433       12,297,830       (3,433,291)

  Additions                                                        27,051           42,621           86,357          295,260
  Redemptions                                                  (3,831,733)      (9,643,369)     (15,233,958)     (18,924,943)

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

  Net increase (decrease) in Partners' capital                 17,319,971       (7,535,315)      (2,849,771)     (22,062,974)

Partners' capital, beginning of period                        131,211,519      157,059,602      151,381,261      171,587,261

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

Partners' capital, end of period                            $ 148,531,490    $ 149,524,287    $ 148,531,490    $ 149,524,287
                                                            -------------    -------------    -------------    -------------

Net asset value per Unit
  (104,587.5966 and 122,319.6742 Units outstanding
  at September 30, 1998 and 1997, respectively)             $    1,420.16    $    1,222.41    $    1,420.16    $    1,222.41
                                                            -------------    -------------    -------------    -------------

Net gain (loss) per Unit of Limited Partnership
  Interest and General Partner Unit equivalent              $      199.47    $       15.37    $      121.73    $      (27.95)
                                                            -------------    -------------    -------------    -------------
</TABLE>


See Notes to Financial Statements

                                                           4

<PAGE>



                   SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
                          NOTES TO FINANCIAL STATEMENTS
                               September 30, 1998
                                   (Unaudited)

1.       General:

         Smith Barney  Diversified  Futures Fund L.P. (the  "Partnership")  is a
limited partnership organized under the laws of the State of New York, on August
13, 1993 to engage in the  speculative  trading of a  diversified  portfolio  of
commodity interests including futures contracts,  options and forward contracts.
The  commodity  interests  that are traded by the  Partnership  are volatile and
involve  a high  degree  of  market  risk.  The  Partnership  commenced  trading
operations on January 12, 1994.

     Smith  Barney  Futures  Management  Inc.  acts as the general  partner (the
"General  Partner") of the Partnership.  On September 1, 1998, the Partnership's
commodity  broker,  Smith  Barney  Inc.,  merged with  Salomon  Brothers Inc and
changed its name to Salomon  Smith Barney Inc.  ("SSB").  SSB is an affiliate of
the General Partner. The General Partner is wholly owned by Salomon Smith Barney
Holdings Inc.  ("SSBH"),  which is the sole owner of SSB. SSBH is a wholly owned
subsidiary  of  Travelers  Group Inc.  All  trading  decisions  are made for the
Partnership by Campbell & Company, Inc., John W. Henry & Company Inc., Trendview
Management Inc.,  Telesis  Management Inc., Rabar Market Research,  Inc. and AIS
Futures Management, Inc. (collectively, the "Advisors"). (see Note 5)

         The accompanying financial statements are unaudited but, in the opinion
of management,  include all  adjustments  (consisting  only of normal  recurring
adjustments)  necessary for a fair presentation of the  Partnership's  financial
condition at September 30, 1998 and the results of its  operations for the three
and nine months ended September 30, 1998 and 1997.  These  financial  statements
present  the  results of interim  periods  and do not  include  all  disclosures
normally  provided in annual  financial  statements.  It is suggested that these
financial  statements be read in conjunction  with the financial  statements and
notes  included  in the  Partnership's  annual  report on Form 10-K  filed  with
Securities and Exchange Commission for the year ended December 31, 1997.

         Due to the nature of commodity  trading,  the results of operations for
the interim periods presented should not be considered indicative of the results
that may be expected for the entire year.



                                  5

<PAGE>



                                     SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
                                            NOTES TO FINANCIAL STATEMENTS
                                                     (continued)


2.      Net Asset Value Per Unit:

        Changes in net asset value per Unit for the three and nine months  ended
September 30, 1998 and 1997, were as follows:

                                  THREE-MONTHS ENDED          NINE-MONTHS ENDED
                                     SEPTEMBER 30,              SEPTEMBER 30,
                                    1998        1997          1998        1997

Net realized and unrealized
 gains (losses)                $  222.74     $  12.20      $140.46      $(32.50)
Interest income                    12.37        12.37        37.24        37.09
Expenses                          (35.64)       (9.20)      (55.97)      (32.54)
                               ---------    ---------    ---------    ---------

Increase (decrease)
  for period                      199.47        15.37       121.73       (27.95)

Net Asset Value per Unit,
  beginning of period           1,220.69     1,207.04     1,298.43     1,250.36
                               ---------    ---------    ---------    ---------

Net Asset Value per Unit,
  end of period                $1,420.16    $1,222.41    $1,420.16    $1,222.41
                               =========    =========    =========    =========


3.  Trading Activities:

        The  Partnership  was formed for the purpose of trading  contracts  in a
variety of commodity interests,  including derivative financial  instruments and
derivative  commodity  instruments.  The  results of the  Partnership's  trading
activity are shown in the statement of income and expenses.

       The  Customer  Agreement  between  the  Partnership  and  SSB  gives  the
Partnership the legal right to net unrealized gains and losses.

       All of the  commodity  interests  owned by the  Partnership  are held for
trading purposes. The fair value of these commodity interests, including options
thereon,  at  September  30,  1998 and  December  31, 1997 was  $21,785,278  and
$11,184,770, respectively, and the average fair value during the nine and twelve
months then ended, based on monthly calculation, was $7,928,180 and $10,552,252,
respectively.

4.   Financial Instrument Risk:

       The Partnership is party to financial instruments with off- balance sheet
risk, including derivative financial instruments and

                                6

<PAGE>



derivative commodity  instruments,  in the normal course of its business.  These
financial  instruments  include  forwards,  futures and options,  whose value is
based  upon an  underlying  asset,  index,  or  reference  rate,  and  generally
represent future  commitments to exchange  currencies or cash flows, to purchase
or sell other financial instruments at specific terms at specified future dates,
or,  in the  case of  derivative  commodity  instruments,  to have a  reasonable
possibility to be settled in cash or with another  financial  instrument.  These
instruments may be traded on an exchange or over-the-counter  ("OTC").  Exchange
traded  instruments  are  standardized  and include  futures and certain  option
contracts.  OTC contracts are negotiated between contracting parties and include
forwards and certain  options.  Each of these  instruments is subject to various
risks similar to those related to the underlying financial instruments including
market and credit risk. In general,  the risks associated with OTC contracts are
greater than those  associated with exchange traded  instruments  because of the
greater risk of default by the counterparty to an OTC contract.

       Market risk is the  potential  for changes in the value of the  financial
instruments traded by the Partnership due to market changes,  including interest
and foreign  exchange rate movements and  fluctuations  in commodity or security
prices.  Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.

       Credit risk is the  possibility  that a loss may occur due to the failure
of a counterparty to perform  according to the terms of a contract.  Credit risk
with  respect to exchange  traded  instruments  is reduced to the extent that an
exchange or clearing  organization  acts as a counterparty to the  transactions.
The Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts  recognized in the  statement of financial  condition and
not  represented  by the contract or notional  amounts of the  instruments.  The
Partnership has concentration  risk because the sole counterparty or broker with
respect to the Partnership's assets is SSB.

       The General Partner monitors and controls the Partnership's risk exposure
on a daily  basis  through  financial,  credit  and risk  management  monitoring
systems  and,   accordingly  believes  that  it  has  effective  procedures  for
evaluating and limiting the credit and market risks to which the  Partnership is
subject.  These  monitoring  systems allow the General Partner to  statistically
analyze actual  trading  results with risk adjusted  performance  indicators and
correlation statistics. In addition,  on-line monitoring systems provide account
analysis  of  futures,   forwards  and  options  positions  by  sector,   margin
requirements, gain and loss transactions and collateral positions.

       The  notional  or  contractual  amounts of these  instruments,  while not
recorded in the financial  statements,  reflect the extent of the  Partnership's
involvement  in these  instruments.  At  September  30,  1998,  the  notional or
contractual  amounts of the Partnership's  commitment to purchase and sell these
instruments was

                                                         7

<PAGE>



$1,826,509,763 and $188,947,887,  respectively,  as detailed below. All of these
instruments  mature within one year of September 30, 1998.  However,  due to the
nature  of the  Partnership's  business,  these  instruments  may not be held to
maturity.   At  September  30,  1998,  the  fair  value  of  the   Partnership's
derivatives, including options thereon, was $21,785,278, as detailed below.

                                     SEPTEMBER 30, 1998
                                  NOTIONAL OR CONTRACTUAL
                                   AMOUNT OF COMMITMENTS
                                   TO PURCHASE          TO SELL      FAIR VALUE
                                  Currencies:
- Exchange Traded Contracts $       13,399,663   $    6,489,293   $     357,178
- OTC Contracts                    249,267,963      115,653,090       1,865,948
Energy                              19,687,746                -         168,621
Grains                                 574,835       10,771,265       1,341,992
Interest Rates U.S.                402,124,901                -       6,549,801
Interest Rates Non-U.S           1,129,431,371                -      10,334,535
Livestock                                    -          733,720           7,220
Metals                              10,050,114       17,657,518        (380,080)
Softs                                1,973,170       12,711,418         145,951
Indices                                      -       24,931,583       1,394,112
                                --------------   --------------   --------------

Totals                          $1,826,509,763   $  188,947,887   $  21,785,278
                                ==============   ==============   ==============

         At  December  31,  1997,  the  notional or  contractual  amounts of the
Partnership's commitment to purchase and sell these instruments was $825,601,374
and $788,720,477, respectively, and fair value of the Partnership's derivatives,
including options thereon, was $11,184,770, as detailed below.

                                    DECEMBER 31,1997
                                NOTIONAL OR CONTRACTUAL
                                 AMOUNT OF COMMITMENTS
                               TO PURCHASE        TO SELL     FAIR VALUE
Currencies:
- Exchange Traded Contracts   $ 11,004,227   $ 85,052,231   $    710,480
- OTC Contracts                 91,780,207    172,891,448        430,261
Energy                           2,293,498     51,019,266      2,859,466
Grains                           1,900,330     34,874,210        884,824
Interest Rates U.S.            221,651,270              -      1,004,688
Interest Rates Non-U.S         450,921,559    320,673,268      1,205,068
Livestock                                -      7,873,583        241,315
Metals                          23,394,060     69,472,845      2,414,000
Softs                           18,743,743     20,872,968        934,676
Indices                          3,912,480     25,990,658        499,992
                              ------------   ------------   ------------

Totals                        $825,601,374   $788,720,477   $ 11,184,770
                              ============   ============   ============

5.       Subsequent Events:

         Effective October 1, 1998, AIS Futures Management, Inc. was terminated
as an Advisor.

         On October 8, 1998, Travelers Group Inc. merged with Citicorp Inc. and
changed its name to Citigroup Inc.

                                          8

<PAGE>




Item 2.       Management's Discussion and Analysis of Financial
              Condition and Results of Operations.

Liquidity and Capital Resources

         The Partnership  does not engage in the sale of goods or services.  Its
only assets are its equity in its commodity futures trading account,  consisting
of cash and cash equivalents, net unrealized appreciation (depreciation) on open
futures and  forward  contracts,  commodity  options  and  interest  receivable.
Because  of the low margin  deposits  normally  required  in  commodity  futures
trading,  relatively  small price movements may result in substantial  losses to
the Partnership. While substantial losses could lead to a decrease in liquidity,
no such losses occurred during the third quarter of 1998.

         The Partnership's  capital consists of the capital contributions of the
partners as  increased  or  decreased  by gains or losses on  commodity  futures
trading,  expenses,  interest  income,  additions and  redemptions  of Units and
distributions of profits, if any.

         For the nine months  ended  September  30,  1998,  Partnership  capital
decreased 1.9% from $151,381,261 to $148,531,490. This decrease was attributable
to the redemption of 12,068.8347 Units totaling  $15,233,958 which was partially
offset by additional  sales of 68.3442 Units totaling  $86,357  coupled with net
income from  operations of  $12,297,830.  Additional  Units offered  represent a
reduced brokerage fee to existing limited partners investing $1,000,000 or more.
Future  redemptions  can impact the amount of funds available for investments in
commodity contract positions in subsequent periods.

Operational Risk

         The General Partner administers the business of the Partnership through
various  systems and processes  maintained by SSBH. SSBH has analyzed the impact
of the year 2000 on its systems and processes and  modifications  for compliance
are  proceeding  according to plan.  All  modifications  necessary for year 2000
compliance  are expected to be completed by the first  quarter of 1999.  In July
1998, SSB participated in successful  industry-wide  testing  coordinated by the
Securities  Industry  Association  and plans to participate in such tests in the
future.  The  purpose of  industry-wide  testing is to confirm  that  exchanges,
clearing organizations,  and other securities industry participants are prepared
for the year 2000.

              The most  likely  and  most  significant  risk to the  Partnership
associated  with the lack of year  2000  readiness  is the  failure  of  outside
organizations,  including the commodities  exchanges,  clearing organizations or
regulators  with which the  Partnership  interacts  to  resolve  their year 2000
issues in a timely  manner.  This risk could  involve the inability to determine
the value of the  Partnership  at some  point in time and would  make  effecting
purchases  or  redemptions  of Units in the  Partnership  infeasible  until such
valuation was determinable.


                                                           9

<PAGE>


         In  addition,  the  General  Partner  is  addressing the technological
implications that will result from regulatory and market changes due to Europe's
Economic and Monetary Union ("EMU").

         Risks to the Partnership  exist in the lack of experience with this new
currency and the potential impact it can have on the Advisors' trading programs.
Risks  also  exist  in  the  failure  of  external  information  technology  and
accounting  systems to  adequately  prepare  for the  conversion.  This issue is
particularly   acute  in  the  area  of  the  exchanges,   clearing  houses  and
over-the-counter  foreign  exchange  markets  where the  futures  interests  are
traded. If the necessary changes are not properly  implemented,  the Partnership
could suffer failed trade settlements,  inability to reconcile trading positions
and funding  disruptions.  Such events could result in erroneous  entries in the
Partnership's  accounts,  mispriced  transactions,  and a delay or  inability to
provide  timely  pricing of Units for the  purpose of  effecting  purchases  and
redemptions.

         SSB has evaluated its internal  systems and made the necessary  changes
to  accommodate  EMU  transactions  on behalf of the  Partnership.  The  General
Partner will continue to monitor and  communicate  with the Advisors and related
third-party  entities to assure  preparation for the EMU conversion and advanced
notification of impending issues or problems.

Results of Operations

         During the Partnership's third quarter of 1998, the net asset value per
Unit increased 16.3% from $1,220.69 to $1,420.16,  as compared to an increase of
1.3% in the third  quarter of 1997.  The  Partnership  experienced a net trading
gain before brokerage  commissions and related fees in the third quarter of 1998
of  $25,659,146.  Gains were  recognized in the trading of commodity  futures in
livestock,  grains,  U.S.  and non-U.S.   interest  rates  and  energy  and were
partially  offset  by losses in  indices,  currencies,  metals  and  softs.  The
Partnership  experienced  a net trading gain before  brokerage  commissions  and
related fees in the third quarter of 1997 of $4,113,795.  Gains were  recognized
in the trading of commodity  futures in currencies,  U.S. and non-U.S.  interest
rates and indices and were partially offset by losses  recognized in the trading
of energy products, livestock, grains, metals and softs.

         Commodity futures markets are highly volatile. Broad price fluctuations
and rapid inflation increase the risks involved in commodity  trading,  but also
increase the possibility of profit. The profitability of the Partnership depends
on the  existence  of major  price  trends and the  ability of the  Advisors  to
identify  correctly  those price trends.  Price trends are  influenced by, among
other things, changing supply and demand relationships,  weather,  governmental,
agricultural,   commercial  and  trade  programs  and  policies,   national  and
international  political and economic  events and changes in interest  rates. To
the extent that market trends exist and the Advisors are able to identify  them,
the Partnership expects to

                                  10

<PAGE>



increase capital through operations.

         Interest income on 80% of the Partnership's  daily equity maintained in
cash was earned on the monthly average 30-day U.S. Treasury bill rate determined
weekly by SSB based on the noncompetitive  yield on three  month  U.S.  Treasury
bills maturing in 30 days from the date in which such weekly rate is determined.
Interest income for the three and nine months ended September 30, 1998 decreased
by $264,900 and $770,565, respectively, as compared to the corresponding periods
in 1997.  The  decrease in  interest  income is  primarily  due to the effect of
redemptions on the Partnership's equity maintained in cash.

         Brokerage  commissions  are calculated on the  Partnership's  net asset
value as of the last day of each month and, therefore, vary according to trading
performance and redemptions.  Accordingly,  they must be compared in relation to
the fluctuations in monthly net asset values. Commissions and fees for the three
and nine months ended  September 30, 1998  decreased by $376,397 and  $1,181,654
respectively, as compared to the corresponding periods in 1997.

         Management fees are calculated on the portion of the  Partnership's net
asset value  allocated to each  Advisor at the end of the month and,  therefore,
are affected by trading  performance  and  redemptions.  Management fees for the
three and nine  months  ended  September  30,  1998  decreased  by  $84,835  and
$410,406, respectively, as compared to the corresponding periods in 1997.

         Incentive fees are based on the new trading  profits  generated by each
Advisor at the end of the quarter, as defined in the advisory agreements between
the Partnership,  the General Partner and each Advisor.  Trading performance for
the three and nine months ended September 30, 1998 resulted in incentive fees of
$2,731,568 and $2,973,642,  respectively.  Trading performance for the three and
nine months ended  September 30, 1997 resulted in incentive  fees of $61,032 and
$808,726, respectively.

                                                          11

<PAGE>



Item 3.       Quantitative and Qualitative Disclosures of Market Risk

         The Partnership is subject to SEC Financial  Reporting  Release No. 48,
regarding  quantitative  and  qualitative  disclosures  of market  risk and will
comply with the  disclosure  and reporting  requirements  in its Form 10-K as of
December 31, 1998.

                                                          12

<PAGE>




                        PART II OTHER INFORMATION

Item 1.       Legal Proceedings

                      Between   May 1994 and the present, Salomon Brothers Inc.
                      ("SBI"),   Smith   Barney  Inc.  ("SB")  and The Robinson
                      Humphrey   Company,   Inc.   ("R-H"),     all   currently
                      subsidiaries of   Salomon   Smith  Barney  Holdings  Inc.
                      ("SSBH"), along with a number of  other   broker-dealers,
                      were named  as defendants  in  approximately  25  federal
                      court lawsuits  and two state court lawsuits, principally
                      alleging that  companies  that make markets in securities
                      traded on NASDAQ  violated  the federal antitrust laws by
                      conspiring to  maintain  a minimum spread of $.25 between
                      the  bid  and  asked  price  for certain securities.  The
                      federal     lawsuits  and  one  state  court  case   were
                      consolidated  for  pre-trial  purposes  in  the  Southern
                      District of New York in  the  fall   of  1994  under  the
                      caption In re NASDAQ  Market-Makers Antitrust Litigation,
                      United States District  Court,  Southern  District of New
                      York No. 94-CIV-3996  (RWS); M.D.L. No.  1023.  The other
                      state court suit,  Lawrence  A.  Abel  v. Merrill Lynch &
                      Co., Inc. et al.; Superior Court of  San  Diego, Case No.
                      677313,  has   been   dismissed   without  prejudice   in
                      conjunction with a tolling agreement.

                      In  consolidated   action,   the  plaintiffs   purport  to
                      represent  a class of  persons  who  bought one or more of
                      what they  currently  estimate to be  approximately  1,650
                      securities on NASDAQ between May 1, 1989 and May 27, 1994.
                      They seek  unspecified  monetary  damages,  which would be
                      trebled under the antitrust laws. The plaintiffs also seek
                      injunctive  relief,  as well as  attorney's  fees  and the
                      costs  of  the  action.  (The  state  cases  seek  similar
                      relief.)  Plaintiffs in the  consolidated  action filed an
                      amended consolidated complaint that defendants answered in
                      December 1995. On November 26, 1996, the Court certified a
                      class composed of retail  purchasers.  A motion to include
                      institutional  investors  in the  class  and to add  class
                      representatives was granted. In December 1997, SBI, SB and
                      R-H,  along with several other  broker-dealer  defendants,
                      executed a settlement agreement with the plaintiffs.  This
                      agreement  has  been  preliminarily  approved  by the U.S.
                      District  Court for the Southern  District of New York but
                      is subject to final approval.

                      On  July 17,  1996,     the   Antitrust  Division  of the
                      Department of Justice filed a complaint against a  number
                      of firms that act as market makers in NASDAQ stocks.  The

                                                          13

<PAGE>



                      complaint  basically  alleged that a common  understanding
                      arose among  NASDAQ  market  makers  which  worked to keep
                      quote   spreads  in  NASDAQ  stocks   artificially   wide.
                      Contemporaneous with the filing of the complaint,  SBI, SB
                      and other defendants entered into a stipulated  settlement
                      agreement,  pursuant to which the  defendants  would agree
                      not to engage in certain practices relating to the quoting
                      of NASDAQ  securities and would further agree to implement
                      a program to ensure compliance with federal antitrust laws
                      and with the terms of the settlement. In entering into the
                      stipulated  settlement,  SBI  and SB  did  not  admit  any
                      liability.   There  are  no  fines,  penalties,  or  other
                      payments of monies in connection with the  settlement.  In
                      April  1997,  the U.S.  District  Court  for the  Southern
                      District of New York approved the settlement. In May 1997,
                      plaintiffs in the related civil action (who were permitted
                      to intervene for limited  purposes)  appealed the district
                      court's approval of the settlement.  The appeal was argued
                      in March 1998 and was affirmed in August 1998.

                      The  Securities  and Exchange  Commission  ("SEC") is also
                      conducting  a review  of the  NASDAQ  marketplace,  during
                      which it has subpoenaed  documents and taken the testimony
                      of various individuals including SBI and SB personnel.  In
                      July 1996, the SEC reached a settlement  with the National
                      Association  of  Securities  Dealers  and  issued a report
                      detailing certain conclusions with respect to the NASD and
                      the NASDAQ market.

                      In   December  1996,  a   complaint   seeking unspecified
                      monetary damages   was filed by Orange County, California
                      against numerous brokerage  firms,  including  SB, in the
                      U.S.   Bankruptcy  Court  for  the  Central  District  of
                      California.  Plaintiff  alleged, among other things, that
                      the    defendants   recommended  and  sold  to  plaintiff
                      unsuitable securities.  The case (County of Orange et al.
                      v.  Bear  Stearns  & Co.  Inc. et al.) has been stayed by
                      agreement of the parties.

Item 2.       Changes in Securities and Use of Proceeds - None

Item 3.       Defaults Upon Senior Securities - None

Item 4.       Submission of Matters to a Vote of Security Holders -None

Item 5.       Other Information - None

Item 6.       (a) Exhibits - None

              (b) Reports on Form 8-K - None

                                       14

<PAGE>



                                 SIGNATURES

           Pursuant  to  the  requirements  of  Section  13 or  15  (d)  of  the
Securities  Exchange Act of 1934,  the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.


SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.


By:        Smith Barney Futures Management Inc.
           (General Partner)



By:
           David J. Vogel, President



Date:

           Pursuant to the requirements of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

By:        Smith Barney Futures Management Inc.
           (General Partner)



By:
           David J. Vogel, President


Date:


By
           Daniel A. Dantuono
           Chief Financial Officer and
           Director

Date:

                                                          15

<PAGE>


                         SIGNATURES
           Pursuant  to  the  requirements  of  Section  13 or  15  (d)  of  the
Securities  Exchange Act of 1934,  the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.


By:        Smith Barney Futures Management Inc.
           (General Partner)


By:        /s/ David J. Vogel, President
           David J. Vogel, President

Date:      11/12/98


  Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

By:        Smith Barney Futures Management Inc.
           (General Partner)


By:        /s/ David J. Vogel, President
           David J. Vogel, President


Date:      11/12/98


By        /s/ Daniel A. Dantuono
          Daniel A. Dantuono
          Chief Financial Officer and
          Director

Date: 11/12/98


                                                          15

<PAGE>