Smith Barney
Investment Funds Inc.
388 Greenwich Street
New York, New York  10013
(212) 723-9218


Statement of Additional Information
April 30, 1997
								
	As Amended April 6, 1998
This Statement of Additional Information 
expands upon and supplements the information 
contained in the current Prospectuses of Smith 
Barney Investment Funds Inc. (the Company), 
dated April 30, 1997, as amended or 
supplemented from time to time, and should read 
in conjunction with the Companys Prospectuses.  
The Company issues a Prospectus for each of the 
investment funds offered by the Company (the 
Funds).  The Companys Prospectuses may be 
obtained from a Smith Barney Financial 
Consultant, or by writing or calling the 
Company at the address or telephone number 
listed above.  This Statement of Additional 
Information, although not in itself a 
prospectus, is incorporated by reference into 
the Prospectuses in its entirety.

CONTENTS
For ease of reference, the same section 
headings are used in the Prospectuses and this 
Statement of Additional Information, except 
where shown below:

	Management of the Company (see in the 
Prospectuses Management of the Company and the
	  Fund)		1
	Investment Objectives and Management 
Policies.......................................
 ..............................		5
	Purchase of Shares		15
	Redemption of Shares		16
	Distributor		16
	Valuation of Shares		19
	Exchange Privilege		20
	Performance Data (See in the Prospectus 
Performance)		20
	Taxes (See in the Prospectus Dividends, 
Distributions and Taxes)		24
	Additional Information		28
	Financial Statements		28
	Appendix		A-1

MANAGEMENT OF THE COMPANY
The executive officers of the Company are 
employees of certain of the organizations that 
provide services to the Company.  These 
organizations are the following:

Name
Service
Smith Barney Inc. (Smith Barney)	
Distributor
PFS Distributors, Inc.(PFS) 
 .....................................

Smith Barney Mutual Funds Management 
Inc. (SBMFM)	
Distributor (Growth Opportunity 
Fund and Investment Grade Bond 
Fund)

Investment Adviser and 
Administrator
PNC Bank, National Association (PNC)	
Custodian
First Data Investor Services Group, Inc. 
(First Data)	......
Transfer Agent

These organizations and the functions they 
perform for the Company are discussed in the 
Prospectuses and in this Statement of 
Additional Information.

Directors and Executive Officers of the Company

The names of the Directors and executive 
officers of the Company, together with 
information as to their principal business 
occupations during the past five years, are 
shown below.  Each Director who is an 
interested person of the Company, as defined in 
the Investment Company Act of 1940, as amended 
(the 1940 Act), is indicated by an asterisk.

	Paul R. Ades, Director (Age 56). Partner in 
the law firm of Murov & Ades.  His address is 
272 South Wellwood Avenue, P.O. Box 504, 
Lindenhurst, New York 11757.
	Herbert Barg, Director (Age 73). Private 
investor. His address is 273 Montgomery Avenue, 
Bala Cynwyd, Pennsylvania 19004.

	Alger B. Chapman, Director (Age 65). Chairman 
and Chief Operating Officer of the Chicago 
Board of Options Exchange. His address is 
Chicago Board of Options Exchange, LaSalle at 
Van Buren, Chicago, Illinois 60605.

	Dwight B. Crane, Director (Age 59). 
Professor, Graduate School of Business 
Administration, Harvard University. His address 
is Graduate School of Business Administration, 
Harvard University, Boston, Massachusetts 
02163.

Harvey Eisen, Senior Vice President and 
Investment Officer. Vice President of 
Investment Funds of Travelers Group Inc.  His 
address is 388 Greenwich Street, New York, NY  
10013. 

	Frank G. Hubbard, Director (Age 61).  Vice 
President, S&S Industries; Former Corporate 
Vice President, Materials Management and 
Marketing Services of Huls America, Inc.  His 
address is 80 Centennial Avenue P.O. Box 456, 
Piscataway, New Jersey 08855-0456.

	Allan R. Johnson, Director Emeritus (Age 80). 
Retired; Former Chairman, Retail Division of 
BATUS, Inc., and Chairman and Chief Executive 
Officer of Saks Fifth Avenue, Inc. His address 
is 2 Sutton Place South, New York, New York 
10022.

	*Heath B. McLendon, Chairman of the Board 
(Age 63). Managing Director of Smith Barney and 
Chairman of the Board of Smith Barney Strategy 
Advisers Inc.; prior to July 1993, Senior 
Executive Vice President of Shearson Lehman 
Brothers Inc. (Shearson Lehman Brothers); 
Vice Chairman of Shearson Asset Management; a 
Director of PanAgora Asset Management, Inc. and 
PanAgora Asset Management Limited.  Mr. 
McLendon is a director of 41 investment 
companies associated with Smith Barney.  His 
address is 388 Greenwich Street, New York, New 
York 10013.

	Ken Miller, Director (Age 55). President of 
Young Stuff Apparel Group, Inc.  His address is 
1411 Broadway, New York, New York 10018.

	John F. White, Director (Age 79). President 
Emeritus of The Cooper Union for the 
Advancement of Science and Art; Special 
Assistant to the President of the Aspen 
Institute.  His address is Crows Nest Road, 
Tuxedo Park, New York 10987.

Jessica M. Bibliowicz, President (Age 37). 
Executive Vice President of Smith Barney; prior 
to 1994, Director of Sales and Marketing for 
Prudential Mutual Funds.  Ms. Bibliowicz serves 
as President of 40 investment companies 
associated with Smith Barney.  Her address is 
388 Greenwich Street, New York, New York 10013.

	James Conroy, Vice President and Investment 
Officer.  Managing Director of Smith Barney. 
His address is 388 Greenwich Street, New York, 
New York 10013.

Douglas H. Johnson, Vice President and 
Investment Officer.  Director of Mutual Fund 
Division of Smith Barney.  Prior to January 
1995, Vice President of SafeCo Asset Management 
Company.  His address is 500 108th Avenue, 
North E., Bellevue, Washington 98004.

George E. Mueller, Jr., Vice President and 
Investment Officer.  Managing Director of 
SBMFM; prior to July 1993, Managing Director of 
Shearson Lehman Advisors. His address is 388 
Greenwich Street, New York, New York 10013.

George V. Novello, Vice President and 
Investment Officer.  Managing Director of 
SBMFM; prior to July 1993, Managing Director of 
Shearson Lehman Advisors.  Prior to September 
1990, Mr. Novello was a Managing Director at 
McKinley-Allsopp, where he served as Head of 
Research.  His address is 388 Greenwich Street, 
New York, New York 10013. 

Lewis E. Daidone, Senior Vice President and 
Treasurer (Age 39). Director and Senior Vice 
President of SBMFM.  Mr. Daidone serves as 
Senior Vice President and Treasurer of 41 
investment companies associated with Smith 
Barney.  His address is 388 Greenwich Street, 
New York, New York 10013. 

Christina T. Sydor, Secretary (Age 46).  
Managing Director of Smith Barney and Secretary 
of SBMFM; General Counsel and  Secretary of 
SBMFM.  Ms. Sydor serves as Secretary of 41 
investment companies associated with Smith 
Barney.  Her address is 388 Greenwich Street, 
New York, New York 10013. 

Each Director also serves as a director, 
trustee and/or general partner of certain other 
mutual funds for which Smith Barney serves as 
distributor.  As of January 31, 1997, the 
Directors and officers of the Company, as a 
group, owned less than 1.00% of the outstanding 
common stock of the Company.

No officer, director or employee of Smith 
Barney or any parent or subsidiary receives any 
compensation from the Company for serving as an 
officer or Director of the Company.  The 
Company pays each Director who is not an 
officer, director or employee of Smith Barney 
or any of its affiliates a fee of $16,000 per 
annum plus $2,500 per meeting attended and 
reimburses travel and out-of-pocket expenses.  
For the fiscal year ended December 31, 1996, 
the Directors of the Company were paid the 
following compensation:





Director

Aggregate 
Compensation
from the Company
Aggregate 
Compensation
from the Smith 
Barney
Mutual Funds
Paul R. Ades (5)	
	$28,600.00
	$52,475.00
Herbert Barg (20)	
	28,600.00
	105,175.00
Alger B. Chapman (9)	
	26,000.00
	76,775.00
Dwight B. Crane (26)	
	26,100.00
	140,375.00
Frank G. Hubbard (5)	
	28,600.00
	52,475.00
Heath McLendon (41)	
	N/A
	N/A
Ken Miller (5)	
	               
26,100.00**  
	49,475.00
John F. White (5)	
	               
28,500.00**
	52,375.00
Allan G. Johnson 
(5)(*)	
	18,035.51
	33,125.00
+	Number of funds for which director serves 
within fund complex
* 	Director Emeritus
**	Mr. Miller and Mr. White have deferred 
$6,500 and $26,000, respectively, of 
compensation from the Company in 1996.

Investment Adviser and Administrator - SBMFM

SBMFM serves as investment adviser to the Funds 
pursuant to separate advisory agreements (the 
Advisory Agreements).  With respect to the 
Investment Grade Bond Fund, Government 
Securities Fund and Special Equities Fund, the 
Advisory Agreements were transferred to SBMFM 
effective November 7, 1994, from its affiliate, 
Mutual Management Corp.  Mutual Management 
Corp. and SBMFM are both wholly owned 
subsidiaries of Smith Barney Holdings Inc. 
(Holdings).  Holdings is a wholly owned 
subsidiary of Travelers Group Inc. (Travelers).  
The Advisory Agreements were most recently 
approved by the Board of Directors, including a 
majority of the Directors who are not 
interested persons of the Company or the 
investment advisers (the Independent 
Directors), on July 25, 1996.  SBMFM bears all 
expenses in connection with the performance of 
its services.  The services provided by SBMFM 
under the Advisory Agreements are described in 
the Prospectuses under Management of the 
Company and the Fund.  SBMFM provides 
investment advisory and management services to 
investment companies affiliated with Smith 
Barney.

As compensation for investment advisory 
services rendered to Investment Grade Bond 
Fund, Special Equities Fund, Managed Growth 
Fund and Growth Opportunity Fund, each Fund 
pays SBMFM a fee computed daily and paid 
monthly at the annual rates of 0.45%, 0.55%, 
0.85% and 1.00%, respectively, of the value of 
their average daily net assets.

As compensation for investment advisory 
services rendered to Government Securities 
Fund, the Fund pays SBMFM a fee computed daily 
and paid monthly at the following annual rates 
of average daily net assets:  0.35% up to $2 
billion; 0.30% on the next $2 billion; 0.25% on 
the next $2 billion; 0.20% on the next $2 
billion; and 0.15% on net assets thereafter.

For the fiscal years ended December 31, 1994, 
1995 and 1996, the Funds accrued advisory fees 
as follows:

Fund
1994
1995
1996
Investment Grade Bond Fund
	
	$1,926,359
	$2,067,222
	$2,198,162
Government Securities Fund
	
	2,578,209
	2,287,647
	1,979,639
Special Equities Fund	
	1,052,635
	1,276,355
	3,094,925
Managed Growth Fund	
	-
	2,022,754
	6,034,652
Growth Opportunity Fund	
	-
	390,902
	1,040,355

SBMFM also serves as administrator to 
Investment Grade Bond Fund, Government 
Securities Fund and Special Equities Fund 
pursuant to a written agreement dated May 5, 
1994 (the Administration Agreement), which was 
first approved by the Board of Directors, 
including a majority of the Independent 
Directors, on May 5, 1994.  The services 
provided by SBMFM under the Administration 
Agreement are described in the Prospectuses 
under Management of the Company and the Fund.  
SBMFM pays the salary of any officer and 
employee who is employed by both it and the 
Fund and bears all expenses in connection with 
the performance of its services.  Prior to May 
5, 1994, The Boston Company Advisors (Boston 
Advisors) served as the Companys sub-
investment adviser and/or administrator.

As compensation for administrative services 
rendered to each of Investment Grade Bond Fund, 
Government Securities Fund and Special Equities 
Fund, SBMFM receives a fee computed daily and 
paid monthly at the annual rate of 0.20 of the 
value of the Funds average daily net assets.  
For the fiscal years ended December 31, 1994, 
1995 and 1996, these Funds paid administrative 
fees to Boston Advisors or SBMFM as follows:

Boston 
Advisors
SBMFM



Fund
For the 
Fiscal
Period From
1/1/94
through 
5/4/94
For the 
Fiscal 
Period From
5/5/94
through 
12/31/94
For the 
Fiscal
Year Ended
12/31/95
For the 
Fiscal
Year Ended
 12/31/96
Investment Grade Bond 
Fund	
	$	290,859
	$	565,300
	$918,76
5	
	$	976,938
Government Securities 
Fund	
		500,505
		972,757
	1,307,2
22	
		1,131,222
Special Equities Fund	
		130,039
		252,737
	464,129	
		1,125,428

Counsel and Auditors

Willkie Farr & Gallagher L.L.P.serves as 
counsel to the Company.  The Directors who are 
not interested persons of the Company have 
selected Stroock & Stroock & Lavan LLP as their 
legal counsel.

KPMG Peat Marwick LLP, 345 Park Avenue, New 
York, New York 10154, has been selected as the 
Funds independent auditor to examine and 
report on the Funds financial statements and 
highlights for the fiscal year ending December 
31, 1997.


INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES

The Prospectuses discuss the investment 
objectives of each Fund and the policies they 
employ to achieve such objectives.  The 
following discussion supplements the 
description of the Funds investment objectives 
and management policies contained in the 
Prospectuses.

Repurchase Agreements.  As described in the 
applicable Prospectus, each Fund may enter into 
repurchase agreements.  A repurchase agreement 
is a contract under which a Fund acquires a 
security for a relatively short period (usually 
not more than one week) subject to the 
obligation of the seller to repurchase and the 
Fund to resell such security at a fixed time and 
price (representing the Funds cost plus 
interest).  It is each Funds present intention 
to enter into repurchase agreements only upon 
receipt of fully adequate collateral and only 
with commercial banks (whether U.S. or foreign) 
and registered broker-dealers.  Repurchase 
agreements may also be viewed as loans made by a 
Fund which are collateralized primarily by the 
securities subject to repurchase.  A Fund bears 
a risk of loss in the event that the other party 
to a repurchase agreement defaults on its 
obligations and the Fund is delayed or prevented 
from exercising its rights to dispose of the 
collateral securities.  Pursuant to policies 
established by the Board of Directors, SBMFM 
monitors the creditworthiness of all issuers 
with which each Fund enters into repurchase 
agreements. 

Reverse Repurchase Agreements.  Each Fund may 
enter into reverse repurchase agreements. A 
reverse repurchase agreement involves the sale 
of a money market instrument held by a Fund 
coupled with an agreement by a Fund to 
repurchase the instrument at a stated price, 
date and interest payment.  A Fund will use the 
proceeds of a reverse repurchase agreement to 
purchase other money market instruments which 
either mature at a date simultaneous with or 
prior to the expiration of the reverse 
repurchase agreement or which are held under an 
agreement to resell maturing as of that time.

A Fund will enter into a reverse repurchase 
agreement only when the interest income to be 
earned from the investment of the proceeds of 
the transaction is greater than the interest 
expense of the transaction.  Under the 1940 
Act, reverse repurchase agreements may be 
considered to be borrowings by the seller.  A 
Fund may not enter into a reverse repurchase 
agreement if, as a result, its current 
obligations under such agreements would exceed 
one-third of the current market value of a 
Funds total assets (less all of its liabilities 
other than obligations under such agreements).

A Fund may enter into reverse repurchase 
agreements with banks or broker-dealers.  Entry 
into such agreements with broker-dealers 
requires the creation and maintenance of a 
segregated account with the Companys custodian 
consisting of U.S. government securities, cash 
or cash equivalents.

Warrants.  All Funds except the Government 
Securities Fund may purchase warrants.  A 
warrant is a security that gives the holder the 
right, but not the obligation, to subscribe for 
newly created securities of the issuer at a 
fixed price either at a certain date or during a 
set period. The Investment Grade Bond Fund and 
the Special Equities Fund will not invest in 
warrants if, as a result of such investment, 
the value of their investments in warrants, 
valued at the lower of cost or market, exceeds 
5% of the value of the Funds net assets.  
Included in this 5% limitation, but not to 
exceed 2% of the Funds net assets, may be 
warrants which are not listed on either the New 
York Stock Exchange (the NYSE) or the American 
Stock Exchange.  Warrants acquired by the Fund 
in units or attached to securities will be 
deemed to be without value for purposes of this 
restriction.  These limits are not fundamental 
policies of either Fund and may be changed by 
the Board of Directors without shareholder 
approval.

Short Sales Against the Box.  Each Fund may sell 
securities short against the box which means 
that at all times when the short position is 
open, the Fund owns an equal amount of the 
securities or securities convertible into, or 
exchangeable without further consideration for, 
securities of the same issue as the securities 
sold short.  Short sales against the box are 
used to defer recognition of capital gains or 
losses or to extend the holding period of 
securities for certain Federal income tax 
purposes.

Firm Commitment Agreements and When-Issued 
Purchases.  The Government Securities Fund, 
Investment Grade Bond Fund and Growth 
Opportunity Fund may enter into firm commitment 
agreements and purchase when-issued securities, 
as described more fully in each Funds 
Prospectus. Firm commitment agreements and when-
issued purchases involve the purchase of 
securities at an agreed-upon price on a 
specified future date.  Such agreements might 
be entered into, for example, when a decline in 
the yield of securities of a given issuer is 
anticipated and a more advantageous yield may 
be obtained by committing currently to purchase 
securities to be issued later.  Liability for 
the purchase price, and all the rights and 
risks of ownership of the securities, accrue to 
the Fund at the time it becomes obligated to 
purchase such securities, although delivery and 
payment occur at a later date.  Accordingly, if 
the market price of the security should 
decline, the effect of the agreement would be 
to obligate the Fund to purchase the security 
at a price above the current market price on 
the date of delivery and payment.  During the 
time a Fund is obligated to purchase such 
securities, it will maintain in a segregated 
account with the Companys custodian, eligible 
segregated assets (as defined in each Funds 
Prospectus) equal to the aggregate current 
value sufficient to make payment for the 
securities. The Government Securities Fund and 
Investment Grade Bond Fund will not enter into 
such agreements for the purpose of investment 
leverage

Lending Portfolio Securities.  Each Fund has the 
ability to lend securities from its portfolio 
to brokers, dealers and other financial 
organizations.  Such loans, if and when made, 
may not exceed 33 1/3% of a Funds total assets 
taken at value.  A Fund will not lend its 
portfolio securities to Smith Barney or its 
affiliates unless it has applied for and 
received specific authority to do so from the 
SEC.  Loans of portfolio securities will be 
collateralized by cash, letters of credit or 
U.S. government securities which are maintained 
at all times in an amount at least equal to the 
current market value of the loaned securities.  
From time to time, a Fund may return a part of 
the interest earned from the investment of 
collateral received for securities loaned to 
the borrower and/or a third party, which is 
unaffiliated with the Fund or with Smith 
Barney, and which is acting as a finder.

In lending its securities, a Fund can increase 
its income by continuing to receive interest on 
the loaned securities as well as by either 
investing the cash collateral in short-term 
instruments or obtaining yield in the form of 
interest paid by the borrower when U.S. 
government securities are used as collateral.  
Requirements of the SEC, which may be subject 
to further modifications, currently provide 
that the following conditions must be met 
whenever a Funds portfolio securities are 
loaned: (a) the Fund must receive at least 100% 
cash collateral or equivalent securities from 
the borrower; (b) the borrower must increase 
such collateral whenever the market value of 
the securities loaned rises above the level of 
such collateral; (c) the Fund must be able to 
terminate the loan at any time; (d) the Fund 
must receive reasonable interest on the loan, 
as well as an amount equal to dividends, 
interest or other distributions on the loaned 
securities, and any increase in market value; 
(e) the Fund may pay only reasonable custodian 
fees in connection with the loan; and (f) 
voting rights on the loaned securities may pass 
to the borrower; provided, however, that if a 
material event adversely affecting the 
investment in the loaned securities occurs, the 
Board of Directors must terminate the loan and 
regain the right to vote the securities.  The 
risks in lending portfolio securities, as with 
other extensions of secured credit, consist of 
possible delay in receiving additional 
collateral or in the recovery of the securities 
or possible loss of rights in the collateral 
should the borrower fail financially.  Loans 
will be made to firms deemed by SBMFM to be of 
good standing and will not be made unless, in 
the judgment of SBMFM, the consideration to be 
earned from such loans would justify the risk.

Government Securities.  Direct obligations of 
the United States Treasury include a variety of 
securities, which differ in their interest 
rates, maturities and dates of issuance.  
Treasury Bills have maturities of one year or 
less; Treasury Notes have maturities of one to 
ten years and Treasury Bonds generally have 
maturities of greater than ten years at the 
date of issuance.

In addition to direct obligations of the United 
States Treasury, securities issued or 
guaranteed by the United States government, its 
agencies or instrumentalities include 
securities issued or guaranteed by the Federal 
Housing Administration, Federal Financing Bank, 
Export-Import Bank of the United States, Small 
Business Administration, Government National 
Mortgage Association (GNMA), General Services 
Administration, Federal Home Loan Banks, 
Federal Home Loan Mortgage Corporation, Federal 
National Mortgage Association (FNMA), Federal 
Maritime Administration, Tennessee Valley 
Authority, Resolution Trust Corporation, 
District of Columbia Armory Board, Student Loan 
Marketing Association and various institutions 
that previously were or currently are part of 
the Farm Credit System (which has been 
undergoing a reorganization since 1987).  
Because the United States government is not 
obligated by law to provide support to an 
instrumentality that it sponsors, a Fund will 
invest in obligations of an instrumentality to 
which the United States government is not 
obligated by law to provide support only if 
SBMFM determines that the credit risk with 
respect to the instrumentality does not make 
its securities unsuitable for investment by a 
Fund.

Exchange Rate-Related U.S. Government 
Securities.  The Government Securities Fund may 
invest up to 5% of its net assets in U.S. 
government securities for which the principal 
repayment at maturity, while paid in U.S. 
dollars, is determined by reference to the 
exchange rate between the U.S. dollar and the 
currency of one or more foreign countries 
(Exchange Rate-Related Securities).  The 
interest payable on these securities is 
denominated in U.S. dollars, is not subject to 
foreign currency risks and, in most cases, is 
paid at rates higher than most other U.S. 
government securities in recognition of the 
foreign currency risk component of Exchange 
Rate-Related Securities.

Exchange Rate-Related Securities are issued in 
a variety of forms, depending on the structure 
of the principal repayment formula.  The 
principal repayment formula may be structured 
so that the securityholder will benefit if a 
particular foreign currency to which the 
security is linked is stable or appreciates 
against the U.S. dollar.  In the alternative, 
the principal repayment formula may be 
structured so that the securityholder benefits 
if the U.S. dollar is stable or appreciates 
against the linked foreign currency.  Finally, 
the principal repayment formula can be a 
function of more than one currency and, 
therefore, be designed in either of the 
aforementioned forms or a combination of those 
forms.

Investments in Exchange Rate-Related Securities 
entail special risks.  There is the possibility 
of significant changes in rates of exchange 
between the U.S. dollar and any foreign 
currency to which an Exchange Rate-Related 
Security is linked.  If currency exchange rates 
do not move in the direction or to the extent 
anticipated at the time of purchase of the 
security, the amount of principal repaid at 
maturity might be significantly below the par 
value of the security, which might not be 
offset by the interest earned by the Fund over 
the term of the security.  The rate of exchange 
between the U.S. dollar and other currencies is 
determined by the forces of supply and demand 
in the foreign exchange markets.  These forces 
are affected by the international balance of 
payments and other economic and financial 
conditions, government intervention, 
speculation and other factors.  The imposition 
or modification of foreign exchange controls by 
the United States or foreign governments or 
intervention by central banks also could affect 
exchange rates.  Finally, there is no assurance 
that sufficient trading interest to create a 
liquid secondary market will exist for 
particular Exchange Rate-Related Securities due 
to conditions in the debt and foreign currency 
markets.  Illiquidity in the forward foreign 
exchange market and the high volatility of the 
foreign exchange market may from time to time 
combine to make it difficult to sell an 
Exchange Rate-Related Security prior to 
maturity without incurring a significant price 
loss.

Special Considerations Relating to Options on 
Certain U.S. Government Securities

	Treasury Bonds and Notes.  Because 
trading interest in U.S. Treasury bonds and 
notes tends to center on the most recently 
auctioned issues, the exchanges will not 
continue indefinitely to introduce new 
expirations to replace expiring options on 
particular issues.  The expirations introduced 
at the commencement of options trading on a 
particular issue will be allowed to run, with 
the possible addition of a limited number of 
new expirations as the original expirations 
expire.  Options trading on each issue of bonds 
or notes will thus be phased out as new options 
are listed on more recent issues, and a full 
range of expirations will not ordinarily be 
available for every issue on which options are 
traded.

	Treasury Bills.  Because the deliverable 
U.S. Treasury bill changes from week to week, 
writers of U.S. Treasury bill calls cannot 
provide in advance for their potential exercise 
settlement obligations by acquiring and holding 
the underlying security.  However, if the Fund 
holds a long position in U.S. Treasury bills 
with a principal amount corresponding to the 
contract size of the option, it may be hedged 
from a risk standpoint.  In addition, the Fund 
will maintain U.S. Treasury bills maturing no 
later than those which would be deliverable in 
the event of the exercise of a call option it 
has written in a segregated account with its 
custodian so that it will be treated as being 
covered for margin purposes.

	GNMA Certificates.  GNMA Certificates are 
mortgage-backed securities representing part 
ownership of a pool of mortgage loans.  These 
loans are made by private lenders and are 
either insured by the Federal Housing 
Administration or guaranteed by the Veterans 
Administration.  Once approved by GNMA, the 
timely payment of interest and principal on 
each mortgage in a pool of such mortgages is 
guaranteed by the full faith and credit of the 
U.S. government.  Unlike most debt securities, 
GNMA Certificates provide for repayment of 
principal over the term of the loan rather than 
in a lump sum at maturity.  GNMA Certificates 
are called pass-through securities because both 
interest and principal payments on the 
mortgages are passed through to the holder.

Since the remaining principal balance of GNMA 
Certificates declines each month as mortgage 
payments are made, the Fund as a writer of a 
GNMA call may find that the GNMA Certificates 
it holds no longer have a sufficient remaining 
principal balance to satisfy its delivery 
obligation in the event of exercise of the call 
options it has written.  Should this occur, 
additional GNMA Certificates from the same pool 
(if obtainable) or replacement GNMA 
Certificates will have to be purchased in the 
cash market to meet delivery obligations.


The Fund will either replace GNMA Certificates 
representing cover for call options it has 
written or will maintain in a segregated 
account with its custodian cash, cash 
equivalents or U.S. government securities 
having an aggregate value equal to the market 
value of the GNMA Certificates underlying the 
call options it has written.

	Other Risks.  In the event of a shortage 
of the underlying securities deliverable on 
exercise of an option, the Options Clearing 
Corporation has the authority to permit other, 
generally comparable securities to be delivered 
in fulfillment of option exercise obligations.  
If the Options Clearing Corporation exercises 
its discretionary authority to allow such other 
securities to be delivered it may also adjust 
the exercise prices of the affected options by 
setting different prices at which otherwise 
ineligible securities may be delivered.  As an 
alternative to permitting such substitute 
deliveries, the Options Clearing Corporation 
may impose special exercise settlement 
procedures.

The hours of trading for options on U.S. 
government securities may not conform to the 
hours during which the underlying securities 
are traded.  To the extent that the options 
markets close before the markets for the 
underlying securities, significant price and 
rate movements can take place in the underlying 
markets that cannot be reflected in the options 
markets.

Options are traded on exchanges on only a 
limited number of U.S. government securities, 
and exchange regulations limit the maximum 
number of options which may be written or 
purchased by a single investor or a group of 
investors acting in concert.  The Company and 
other clients advised by affiliates of Smith 
Barney may be deemed to constitute a group for 
these purposes.  In light of these limits, the 
Board of Directors may determine at any time to 
restrict or terminate the public offering of 
the Funds shares (including through exchanges 
from the other Funds).

Exchange markets in options on U.S. government 
securities are a relatively new and untested 
concept.  It is impossible to predict the 
amount of trading interest that may exist in 
such options, and there can be no assurance 
that viable exchange markets will develop or 
continue.

Leverage Through Borrowing.  The Government 
Securities Fund may borrow up to 25% of the 
value of its net assets on an unsecured basis 
from banks to increase its holdings of 
portfolio securities or to acquire securities 
to be placed in a segregated account with its 
custodian for various purposes (e.g., to secure 
puts written by the Fund).  The Fund is 
required to maintain continuous asset coverage 
of 300% with respect to such borrowings, and to 
sell (within three days) sufficient portfolio 
holdings to restore such coverage, if it should 
decline to less than 300% due to market 
fluctuations or otherwise, even if 
disadvantageous from an investment standpoint.  
Leveraging will exaggerate the effect of any 
increase or decrease in the value of portfolio 
securities on the Funds net asset value, and 
money borrowed will be subject to interest 
costs (which may include commitment fees and/or 
the cost of maintaining minimum average 
balances) which may or may not exceed the 
interest and option premiums received from the 
securities purchased with borrowed funds.

Special Risks Involving Investments in Smaller, 
Newer Companies.  The Special Equities Fund 
invests primarily in equity securities of 
secondary companies that have yet to reach a 
fully mature stage of earnings growth.  A 
significant number of these companies may be in 
technology areas and may have annual sales less 
than $300 million.  Some of the securities in 
which the Fund invests may not be listed on a 
national securities exchange, but such 
securities will usually have an established 
over-the-counter market.  Investors should 
realize that the very nature of investing in 
smaller, newer companies involves greater risk 
than is customarily associated with investing 
in larger, more established companies.  
Smaller, newer companies often have limited 
product lines, markets or financial resources, 
and they may be dependent for management upon 
one of a few key persons.  The securities of 
such companies may be subject to more abrupt or 
erratic market movements than securities of 
larger, more established companies or than the 
market averages in general.  In accordance with 
its investment objective of long-term capital 
appreciation, securities purchased for the Fund 
will not generally be traded for short-term 
profits, but will be retained for their longer-
term appreciation potential.  This general 
practice limits the Funds ability to adopt a 
defensive position by investing in money market 
instruments during periods of market downturn.  
Accordingly, while in periods of market upturn 
the Fund may outperform the market averages, in 
periods of downturn, it is likely to 
underperform the market averages.  Thus, 
investing in Special Equities Fund may involve 
greater risk than investing in other Funds.

Investment Restrictions

The Funds investment objectives and investment 
restrictions 1-7 set forth below are 
fundamental policies of each Fund, i.e., they 
may not be changed with respect to a Fund 
without a majority vote of the outstanding 
shares of that Fund.  Investment Restrictions 8 
through 15 may be changed by the Board of 
Directors without the approval of shareholders. 
(All other investment practices described in 
the Prospectuses and the Statement of 
Additional Information may be changed by the 
Board of Directors without the approval of 
shareholders.)

Unless otherwise indicated, all percentage 
limitations apply to each Fund on an individual 
basis, and apply only at the time a transaction 
is entered into.  (Accordingly, if a percentage 
restriction is complied with at the time of 
investment, a later increase or decrease in the 
percentage which results from a relative change 
in values or from a change in the Funds net 
assets will not be considered a violation.)

Restrictions Applicable to All Funds.  No Fund 
may:

1. Invest in a manner that would cause 
it to fail to be a diversified 
company under the 1940 Act and the 
rules, regulations and orders 
thereunder. 

	2.	Purchase or sell real estate, real 
estate mortgages, commodities or 
commodity contracts, but this restriction 
shall not prevent the Fund from (a) 
investing in securities of issuers 
engaged in the real estate business or 
the business of investing in real estate 
(including interests in limited 
partnerships owning or otherwise engaging 
in the real estate business or the 
business of investing in real estate) and 
securities which are secured by real 
estate or interests therein; (b) holding 
or selling real estate received in 
connection with securities it holds or 
held; (c) trading in futures contracts 
and options on futures contracts 
(including options on currencies to the 
extent consistent with the Funds 
investment objective and policies); or 
(d) investing in real estate investment 
trust securities. 

 ..	3.	Make loans.  This restriction does 
not apply to: (a) the purchase of debt 
obligations in which the Fund may invest 
consistent with its investment objectives 
and policies; (b) repurchase agreements; 
and (c) loans of its portfolio 
securities, to the fullest extent 
permitted under the 1940 Act.


	.4. 	Invest more than 25% of its total 
assets in securities, the issuers of 
which conduct their principal business 
activities in the same industry.  For 
purposes of this limitation, securities 
of the U.S. government (including its 
agencies and instrumentalities) and 
securities of state or municipal 
governments and their political 
subdivisions are not considered to be 
issued by members of any industry.
		.	
              5. 	Issue senior securities as 
defined in the 1940 Act and the rules, 
regulations and orders thereunder, except 
as permitted under the 1940 Act and the 
rules, regulations and orders thereunder.

             6.	Borrow money, except that (a) 
the Fund may borrow from banks for 
temporary or emergency (not leveraging) 
purposes, including the meeting of 
redemption requests which might otherwise 
require the untimely disposition of 
securities, and (b) the Fund may, to the 
extent consistent with its investment 
policies, enter into reverse repurchase 
agreements, forward roll transactions and 
similar investment strategies and 
techniques.  To the extent that it 
engages in transactions described in (a) 
and (b), the Fund will be limited so that 
no more than 33-l/3 of the value of its 
total assets (including the amount 
borrowed), valued at the lesser of cost 
or market, less liabilities (not 
including the amount borrowed) valued at 
the time the borrowing is made, is 
derived from such transactions. 

             7.	Restriction Applicable to all 
funds except Special Equities Fund, 
Concert Peachtree Growth Fund and Managed 
Growth Fund.  The Funds may not: Act as 
an  underwriter of securities.  
Restrictions Applicable to Special 
Equities Fund.  Special Equities Fund may 
not act as an underwriter of securities, 
except that the Fund may invest up to 10% 
of its total assets in securities which 
it may not be free to resell without 
registration under the 1933 Act, in which 
registration the Fund may technically be 
deemed an underwriter for purposes of the 
1933 Act.

            8.	Invest in oil, gas or other 
mineral exploration or development 
programs	
 .
            9.	Purchase securities of any 
other investment company, except in 
connection with a merger,  consolidation, 
reorganization, or acquisition or assets.  
(For purposes of this limitation, foreign 
banks or their agencies or subsidiaries 
are not considered investment companies) 
(the Managed Growth Fund may purchase the 
securities of closed-end investment 
companies to the extent permitted by law);

           10.	Make investments in 
securities for the purpose of exercising 
control over or management of the issuer;

          11.	Purchase any securities on 
margin (except for such short-term credits 
as are necessary for the clearance of 
purchases and sales of portfolio 
securities) or sell any securities short 
(except against the box).  For purposes of 
this restriction, the deposit or payment by 
the Fund of underlying securities and other 
assets in escrow and collateral agreements 
with respect to initial or maintenance 
margin in connection with futures contracts 
and related options and options on 
securities, indexes or similar items is not 
considered to be the purchase of a security 
on margin.

         12. 	Invest in securities of an 
issuer which, together with any 
predecessor, has been in operation for less 
than three years if, as a result, more than 
5% of the total assets of the Fund would 
then be invested in such securities (for 
purposes of this restriction, issuers 
include predecessors, sponsors, controlling 
persons, general guarantors and originators 
of underlying assets);


            13.	Purchase or otherwise acquire 
any security if, as a result, more than 
15% of its net assets would be invested 
in securities that are illiquid. 

            14.	Purchase the securities of an 
issuer if one or more of the Directors of 
officers of the Company individually own 
beneficially more than 1/2 of 1% of the 
outstanding securities of such issuer or 
together own benefically more than 5% of 
such securities.

            15.	Restrictions Applicable to 
all funds except Government Securities 
Fund.  The Funds may not:  Write, 
purchase or sell puts, calls, straddles, 
spreads or any combinations thereof (the 
Managed Growth Fund and the Concert 
Peachtree Growth  Fund each may write or 
purchase puts, calls, straddles, spreads 
and any combination thereof up to 5% of 
their assets). 

Brokerage

In selecting brokers or dealers to execute 
securities transactions on behalf of a Fund, 
SBMFM seeks the best overall terms available.  
In assessing the best overall terms available 
for any transaction, SBMFM will consider the 
factors that it deems relevant, including the 
breadth of the market in the security, the 
price of the security, the financial condition 
and execution capability of the broker or 
dealer and the reasonableness of the 
commission, if any, for the specific 
transaction and on a continuing basis.  In 
addition, each investment advisory agreement 
authorizes SBMFM, in selecting brokers or 
dealers to execute a particular transaction and 
in evaluating the best overall terms available, 
to consider the brokerage and research services 
(as those terms are defined in Section 28(e) of 
the Securities Exchange Act of 1934) provided 
to the Company, the other Funds and other 
accounts over which SBMFM or its affiliates 
exercise investment discretion.  The fees under 
the investment advisory agreements and the 
administration agreement between the Company 
and SBMFM are not reduced by reason of their 
receiving such brokerage and research services.  
The Board of Directors periodically will review 
the commissions paid by the Funds to determine 
if the commissions paid over representative 
periods of time were reasonable in relation to 
the benefits inuring to the Company.  SEC rules 
require that commissions paid to Smith Barney 
by a Fund on exchange transactions not exceed 
usual and customary brokerage commissions.  The 
rules define usual and customary commissions to 
include amounts which are reasonable and fair 
compared to the commission, fee or other 
remuneration received or to be received by 
other brokers in connection with comparable 
transactions involving similar securities being 
purchased or sold on a securities exchange 
during a comparable period of time.  The Board 
of Directors, particularly the Independent 
Directors of the Company (as defined in the 
1940 Act), has adopted procedures for 
evaluating the reasonableness of commissions 
paid to Smith Barney and reviews these 
procedures periodically.  In addition, under 
rules adopted by the SEC, Smith Barney may 
directly execute transactions for a Fund on the 
floor of any national securities exchange, 
provided: (a) the Board of Directors has 
expressly authorized Smith Barney to effect 
such transactions; and (b) Smith Barney 
annually advises the Fund of the aggregate 
compensation it earned on such transactions.

To the extent consistent with applicable 
provisions of the 1940 Act and the rules and 
exemptions adopted by the SEC thereunder, the 
Board of Directors has determined that 
transactions for a Fund may be executed through 
Smith Barney and other affiliated broker-
dealers if, in the judgment of SBMFM, the use 
of such broker-dealer is likely to result in 
price and execution at least as favorable as 
those of other qualified broker-dealers, and 
if, in the transaction, such broker-dealer 
charges the Fund a rate consistent with that 
charged to comparable unaffiliated customers in 
similar transactions.

Portfolio securities are not purchased from or 
through Smith Barney or any affiliated person 
(as defined in the 1940 Act) of Smith Barney 
where such entities are acting as principal, 
except pursuant to the terms and conditions of 
exemptive rules or orders promulgated by the 
SEC.  Pursuant to conditions set forth in rules 
of the SEC, the Company may purchase securities 
from an underwriting syndicate of which Smith 
Barney is a member (but not from Smith Barney).  
Such conditions relate to the price and amount 
of the securities purchased, the commission or 
spread paid, and the quality of the issuer.  
The rules further require that such purchases 
take place in accordance with procedures 
adopted and reviewed periodically by the Board 
of Directors, particularly those Directors who 
are not interested persons of the Company.

The Funds may use Smith Barney as a commodities 
broker in connection with entering into futures 
contracts and commodity options.  Smith Barney 
has agreed to charge the Funds commodity 
commissions at rates comparable to those 
charged by Smith Barney to its most favored 
clients for comparable trades in comparable 
accounts.

The following table sets forth certain 
information regarding each Funds payment of 
brokerage commissions to Smith Barney:


Fiscal 
Year
Ended
December 
31,
Special
Equities
Fund
Managed
Growth
Fund
Growth
Opportuni
ty
Fund
Total Brokerage 
Commissions





1994
	$217,269
	N/A
	N/A

1995
	$56,735
	$164,975
	$201,706

1996
	$378,451
	$1,272,7
02
	$716,937
Commissions paid to 
Smith Barney





1994
	$14,280
	N/A
	N/A

1995
	$11,052
	$140,970
	$650

1996
	$47,100
	$166,656
	$21,6
80





% of Total Brokerage
Commissions paid to 
Smith Barney
1996
12.4%
	13.1%
	3.0%





% of Total 
Transactions
Involving 
Commissions paid
to Smith Barney
1996
7.3%
	11.5%
	3.0%
____________________
_




No commissions were paid by the Investment 
Grade Bond Fund and Government Securities Fund.


Portfolio Turnover

For reporting purposes, a Funds portfolio 
turnover rate is calculated by dividing the 
lesser of purchases or sales of portfolio 
securities for the fiscal year by the monthly 
average of the value of the portfolio 
securities owned by the Fund during the fiscal 
year.  In determining such portfolio turnover, 
all securities whose maturities at the time of 
acquisition were one year or less are excluded.  
A 100% portfolio turnover rate would occur, for 
example, if all of the securities in the Funds 
investment portfolio (other than short-term 
money market securities) were replaced once 
during the fiscal year.

Investment Grade Bond Fund will not normally 
engage in the trading of securities for the 
purpose of realizing short-term profits, but it 
will adjust its portfolio as considered 
advisable in view of prevailing or anticipated 
market conditions.  Portfolio turnover will not 
be a limiting factor should SBMFM deem it 
advisable to purchase or sell securities.

Special Equities Fund invests for long-term 
capital appreciation and will not generally 
trade for short-term profits.  However, its 
portfolio will be adjusted as deemed advisable 
by SBMFM, and portfolio turnover will not be a 
limiting factor should SBMFM deem it advisable 
to purchase or sell securities.

The options activities of Government Securities 
Fund may affect its portfolio turnover rate and 
the amount of brokerage commissions paid by the 
Fund.  The exercise of calls written by the 
Fund may cause the Fund to sell portfolio 
securities, thus increasing its turnover rate.  
The exercise of puts also may cause the sale of 
securities and increase turnover; although such 
exercise is within the Funds control, holding a 
protective put might cause the Fund to sell the 
underlying securities for reasons which would 
not exist in the absence of the put.  The Fund 
will pay a brokerage commission each time it 
buys or sells a security in connection with the 
exercise of a put or call.  Some commissions 
may be higher than those which would apply to 
direct purchases or sales of portfolio 
securities.  High portfolio turnover involves 
correspondingly greater commission expenses and 
transaction costs.

For the fiscal years ended December 31, 1995 
and 1996, the portfolio turnover rates were as 
follows:

Fund
1995
1996
Investment Grade Bond Fund	
49%
48%
Government Securities Fund	
294%
420%
Special Equities Fund	
113%
118%
Managed Growth 
Fund.................................
 ......................
6%
34%
Growth Opportunity 
Fund.................................
 ..................
0%
183%

Increased portfolio turnover necessarily 
results in correspondingly greater brokerage 
commissions which must be paid by the Fund.  To 
the extent that portfolio trading results in 
realization of net short-term capital gains, 
shareholders will be taxed on such gains at 
ordinary tax rates (except shareholders who 
invest through IRAs and other retirement plans 
which are not taxed currently on accumulations 
in their accounts).

SBMFM manages a number of private investment 
accounts on a discretionary basis and it is not 
bound by the recommendations of the Smith 
Barney research department in managing the 
Funds.  Although investment decisions are made 
individually for each client, at times 
decisions may be made to purchase or sell the 
same securities for one or more of the Funds 
and/or for one or more of the other accounts 
managed by SBMFM or the Fund manager.  When two 
or more such accounts simultaneously are 
engaged in the purchase or sale of the same 
security, transactions are allocated in a 
manner considered equitable to each, with 
emphasis on purchasing or selling entire orders 
wherever possible.  In some cases, this 
procedure may adversely affect the price paid 
or received by the Fund or the size of the 
position obtained or disposed of by the Fund.



PURCHASE OF SHARES

Volume Discounts

The schedules of sales charges on Class A 
shares described in the Prospectuses apply to 
purchases made by any purchaser, which defined 
to include the following: (a) an individual; 
(b) an individuals spouse and his or her 
children purchasing shares for his or her own 
account; (c) a trustee or other fiduciary 
purchasing shares for a single trust estate or 
single fiduciary account; (d) a pension, 
profit-sharing or other employee benefit plan 
qualified under Section 401(a) of the Internal 
Revenue Code of 1986, as amended (the Code), 
and qualified employee benefit plans of 
employers who are affiliated persons of each 
other within the meaning of the 1940 Act; (e) 
tax-exempt organizations enumerated in Section 
501(c)(3) or (13) of the Code; and (f) a 
trustee or other professional fiduciary 
(including a bank, or an investment adviser 
registered with the SEC under the Investment 
Advisers Act of 1940, as amended) purchasing 
shares of a Fund for one or more trust estates 
of fiduciary accounts.  Purchasers who wish to 
combine purchase orders to take advantage of 
volume discounts on Class A shares should 
contact a Smith Barney Financial Consultant.

Combined Right of Accumulation

Reduced sales charges, in accordance with the 
schedule in the Prospectuses, apply to any 
purchase of Class A shares if the aggregate 
investment of any purchaser in Class A shares 
of a Fund and in Class A shares of the other 
Funds in the Company and of other funds of the 
Smith Barney Mutual Funds that are offered with 
a sales charge, including the purchase being 
made is $25,000 or more.  The reduced sales 
charge is subject to confirmation of the 
shareholders holdings through a check of 
appropriate records.  Each Fund reserves the 
right to terminate or amend the combined right 
of accumulation at any time after written 
notice to shareholders.  For further 
information regarding the right of 
accumulation, shareholders should contact a 
Smith Barney Financial Consultant.

Determination of Public Offering Price

Each Fund offers its shares to the public on a 
continuous basis.  The public offering price 
for a Class A and Class Y share of each Fund is 
equal to the net asset value per share at the 
time of purchase plus, for Class A shares, an 
initial sales charge based on the aggregate 
amount of the investment.  The public offering 
price for a Class B share and Class C share, 
and Class A share purchases, including 
applicable right of accumulation, equaling or 
exceeding $500,000, is equal to the net asset 
value per share at the time of purchase and no 
sales charge is imposed at the time of 
purchase.  A contingent deferred sales charge 
(CDSC), however, is imposed on certain 
redemptions of Class B shares, Class C shares, 
and Class A shares when purchased in amounts 
equaling or exceeding $500,000.  The method of 
computation of the public offering price is 
shown in each Funds financial statements, 
incorporated by reference in their entirety 
into this Statement of Additional Information.



REDEMPTION OF SHARES

The right of redemption may be suspended or the 
date of payment postponed (a) for any period 
during which the NYSE is closed (other than for 
customary weekend and holiday closings), (b) 
when trading in markets a Fund normally 
utilizes is restricted, or an emergency as 
determined by the SEC exists, so that disposal 
of the Funds investments or determination of 
net asset value is not reasonably practicable 
or (c) for such other periods as the SEC by 
order may permit for the protection of the 
Funds shareholders.

Distributions in Kind

If the Board of Directors of the Company 
determines that it would be detrimental to the 
best interests of the remaining shareholders of 
a Fund to make a redemption payment wholly in 
cash, the Fund may pay, in accordance with the 
SEC rules, any portion of a redemption in 
excess of the lesser of $250,000 or 1% of the 
Funds net assets by a distribution in kind of 
portfolio securities in lieu of cash.  
Securities issued as a distribution in kind may 
incur brokerage commissions when shareholders 
subsequently sell those securities.

Automatic Cash Withdrawal Plan

An automatic cash withdrawal plan (the 
Withdrawal Plan) is available to shareholders 
who own shares with a value of at least $10,000 
($5,000 for retirement plan accounts) and who 
wish to receive specific amounts of cash 
monthly or quarterly.  Withdrawals of at least 
$50 may be made under the Withdrawal Plan by 
redeeming as many shares of a Fund as may be 
necessary to cover the stipulated withdrawal 
payment.  Any applicable CDSC will not be 
waived on amounts withdrawn by shareholders 
that exceed 1.00% per month of the value of a 
shareholders shares at the time the Withdrawal 
Plan commences.  To the extent withdrawals 
exceed dividends, distributions and 
appreciation of a shareholders investment in a 
Fund, there will be a reduction in the value of 
the shareholders investment and continued 
withdrawal payments may reduce the shareholders 
investment and ultimately exhaust it.  
Withdrawal payments should not be considered as 
income from investment in the Fund.  
Furthermore, as it generally would not be 
advantageous to a shareholder to make 
additional investments in the Fund at the same 
time that he or she is participating in the 
Withdrawal Plan, purchases by such shareholders 
in amounts of less than $5,000 will not 
ordinarily be permitted.

Shareholders who wish to participate in the 
Withdrawal Plan and who hold their shares in 
certificate form must deposit their share 
certificates with First Data as agent for 
Withdrawal Plan members.  All dividends and 
distributions on shares in the Withdrawal Plan 
are automatically reinvested at net asset value 
in additional shares of the Company.  
Withdrawal Plans should be set up with a Smith 
Barney Financial Consultant.  A shareholder who 
purchases shares directly through First Data 
may continue to do so and applications for 
participation in the Withdrawal Plan must be 
received by First Data no later than the eighth 
day of the month to be eligible for 
participation beginning with that months 
withdrawal.  For additional information, 
shareholders should contract a Smith Barney 
Financial Consultant.

DISTRIBUTORS

Smith Barney serves as the Companys distributor 
on a best efforts basis pursuant to a 
distribution agreement (the Distribution 
Agreement) which was most recently approved by 
the Companys Board of Directors on July 25, 
1996.

PFS serves as one of the Companys distributors 
with respect to the Growth Opportunity Fund and 
Investment Grade Bond Fund pursuant to a 
Distribution Agreement which was most recently 
approved by the Companys Board of Directors on 
July 25, 1996.

When payment is made by the investor before the 
settlement date, unless otherwise directed by 
the investor, the funds will be held as a free 
credit balance in the investors brokerage 
account, and Smith Barney may benefit from the 
temporary use of the funds.  The investor may 
designate another use for the funds prior to 
settlement date, such as investment in a money 
market fund (other than Smith Barney Exchange 
Reserve Fund) of the Smith Barney Mutual Funds.  
If the investor instructs Smith Barney to 
invest the funds in a Smith Barney money market 
fund, the amount of the investment will be 
included as part of the average daily net 
assets of both the Company and the money market 
fund, and affiliates of Smith Barney that serve 
the funds in an investment advisory capacity 
will benefit from the fact that they are 
receiving fees from both such investment 
companies for managing these assets computed on 
the basis of their average daily net assets.  
The Companys Board of Directors has been 
advised of the benefits to Smith Barney 
resulting from these settlement procedures and 
will take such benefits into consideration when 
reviewing the Advisory, Administration and 
Distribution Agreements for continuance.

For the fiscal year ended December 31, 1996, 
Smith Barney incurred distribution expenses 
totaling approximately $11,195,985, consisting 
of approximately $834,786 for advertising, 
$82,862 for printing and mailing of 
Prospectuses, $6,683,975 for support services, 
$14,110,451 to Smith Barney Financial 
Consultants, and $850,755 in accruals for 
interest on the excess of Smith Barney expenses 
incurred in distributing the Funds shares over 
the sum of the distribution fees and CDSC 
received by Smith Barney from the Fund.

Distribution Arrangements

To compensate Smith Barney for the services it 
provides and for the expense it bears under the 
Distribution Agreement, the Company has adopted 
a services and distribution plan (the Plan) 
pursuant to Rule 12b-1 under the 1940 Act.  
Under the Plan, each Fund pays Smith Barney 
and, with respect to the Class A and Class B 
shares of Growth Opportunity Fund and 
Investment Grade Bond Fund, PFS a service fee, 
accrued daily and paid monthly, calculated at 
the annual rate of 0.25% of the value of each 
Funds average daily net assets attributable to 
the Class A, Class B and Class C shares.  In 
addition, the Fund pays Smith Barney, and  with 
respect to the Class B shares of Growth 
Opportunity Fund and Investment Grade Bond 
Fund, PFS, a distribution fee with respect to 
the Class B and Class C shares primarily 
intended to compensate Smith Barney and/or PFS 
for its initial expense of paying its Financial 
Consultants and Registered Representatives, 
respectively, a commission upon sales of those 
shares.  Such shares distribution fees, which 
are accrued daily and paid monthly, are 
calculated at the annual rate of 0.75% of the 
value of average daily net assets attributable 
to the Class B and Class C shares with respect 
to Special Equities Fund, Managed Growth Fund 
and Growth Opportunity Fund, and 0.50% of the 
value of average daily net assets attributable 
to the Class B shares and 0.45% of the value of 
average daily net assets attributable to Class 
C shares, with respect to Government Securities 
Fund and Investment Grade Bond Fund.

The following expenses were incurred during the 
periods indicated:

Sales Charges paid to Smith Barney.



Class A

Name of Fund
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund 
	
	$	114,571
	$	181,000
	$	182,000
Government Securities Fund	
		66,217
		63,000
		65,000
Special Equities Fund	
		186,104
		347,000
		1,800,000
Managed Growth 
Fund.......................
 ........
	-
		5,400,000
		1,700,000
Growth Opportunity 
Fund.......................
 ....
	-
		18,000
		18,000

CDSC paid to Smith Barney.



Class B

Name of Fund
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund 
	
	$	556,007
	$	541,000
	$422,000
Government Securities Fund	
		629,700
		 512,000
	  305,000
Special Equities Fund	
		288,013
		 379,000
	  658,000 
Managed Growth 
Fund.......................
 ........
	-
		174,000
	       
1,112,000
Growth Opportunity 
Fund.......................
 ...
	-
	-
  	  3,000



Class C

Name of Fund
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund 
	
	-
	$	5,000
	$1,000
Government Securities Fund	
	-
		 1,000
	0
Special Equities Fund	
	-
		 1,000
	22,000
Managed Growth 
Fund.......................
 ........
	-
		10,000
	27,000
Growth Opportunity 
Fund.......................
 ....
	-
	-
	1,000

Service Fees


Class A

Name of Fund
Fiscal Year
Ended 12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund 
	
	$	147,152
	$	505,094 
	$	524,533 
Government Securities Fund	
		334,848
	     
1,212,522
	1,026,748
	
Special Equities Fund	
		147,488
		286,910 
		525,204 
Managed Growth 
Fund.......................
 ........
	-
		189,955
		495,536
Growth Opportunity 
Fund.......................
 ...
	-
		63,606
		162,606



Class B

Name of Fund
Fiscal Year
Ended 
12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund 
	.
	$	922,038
	$	638,293 
	$	662,187 
Government Securities Fund	.
		1,505,763
		419,433 
		340,572 
Special Equities Fund	.
		329,007
		283,978 
		696,750 
Managed Growth 
Fund.......................
 ........
	-
		351,874
		1,024,802
Growth Opportunity 
Fund.......................
 ...
	-
		34,096
		  96,931


Class C
(formerly designated as Class D)

Name of Fund
Fiscal Year
Ended 
12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund 
	
	$	1,009
	$	5,068 
	$14,456
Government Securities Fund	
		967
		 2,078
	 3,050
Special Equities Fund	
		1,975
		8,675
		56,094
Managed Growth 
Fund.......................
 ........
	-
		47,170
		141,702
Growth Opportunity 
Fund.......................
 ...
	-
		23
		 552



Distribution Fees


Class B

Name of Fund
Fiscal Year
Ended 
12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund 
	
	$	1,844,077
	$	1,276,588
	$	1,324,350
Government Securities Fund	
		3,011,526
		838,868
		681,144
Special Equities Fund	
		987,022
		851,933
		2,090,250
Managed Growth 
Fund.......................
 ........
	-
		1,055,621
		3,074,405
Growth Opportunity 
Fund.......................
 ....
	-
		102,289
		290,792


Class C
(formerly designated as Class D)

Name of Fund
Fiscal Year
Ended 
12/31/94
Fiscal Year
Ended 12/31/95
Fiscal Year
Ended 12/31/96
Investment Grade Bond Fund 
	
	$	1,958
	$	9,124 
	$	 26,020
Government Securities Fund	
		  1,893
		3,741
		 5,491
Special Equities Fund	
		  5,927
		26,026
		168,282
Managed Growth 
Fund.......................
 ........
	-
		141,508
		425,107
Growth Opportunity 
Fund.......................
 ....
	-
		71
		1,657


Under its terms, the Plan continues from year 
to year, provided such continuance is approved 
annually by vote of the Board of Directors, 
including a majority of the Independent 
Directors. The Plan may not be amended to 
increase the amount to be spent for the 
services provided by Smith Barney or PFS 
without shareholder approval, and all 
amendments of the Plan also must be approved by 
the Directors in the manner described above. 
The Plan may be terminated at any time, without 
penalty, by vote of a majority of the 
Independent Directors or by a vote of a 
majority of the outstanding voting securities 
of the Company (as defined in the 1940 Act). 
Pursuant to the Plan, Smith Barney and PFS will 
provide the Board of Directors periodic reports 
of amounts expended under the Plan and the 
purpose for which such expenditures were made.

VALUATION OF SHARES

Each Class net asset value per share is 
calculated on each day, Monday through Friday, 
except days on which the NYSE is closed.  The 
NYSE currently is scheduled to be closed on New 
Years Day, Presidents Day, Good Friday, 
Memorial Day, Independence Day, Labor Day, 
Thanksgiving and Christmas, and on the 
preceding Friday or subsequent Monday when one 
of these holidays falls on a Saturday or 
Sunday, respectively.  Because of the 
differences in distribution fees and Class-
specific expenses, the per share net asset 
value of each Class may differ.  The following 
is a description of the procedures used by the 
Funds in valuing its assets.

A security which is listed or traded on more 
than one exchange is valued at the quotation on 
the exchange determined to be the primary 
market for such security.  All assets and 
liabilities initially expressed in foreign 
currency values will be converted into U.S. 
dollar values at the mean between the bid and 
offered quotations of such currencies against 
U.S. dollars as last quoted by any recognized 
dealer. If such quotations are not available, 
the rate of exchange will be determined in good 
faith by the Board of Directors.  In carrying 
out the Board of Directors valuation policies, 
SBMFM, as administrator, may consult with an 
independent pricing service (the Pricing 
Service) retained by the Company.

Debt securities of United States issuers (other 
than U.S. government securities and short-term 
investments) are valued by SBMFM, as 
administrator, after consultation with the 
Pricing Service approved by the Board of 
Directors.  When, in the judgment of the 
Pricing Service, quoted bid prices for 
investments are readily available and are 
representative of the bid side of the market, 
these investments are valued at the mean 
between the quoted bid prices and asked prices.  
Investments for which, in the judgment of the 
Pricing Service, there are not readily 
obtainable market quotations are carried at 
fair value as determine by the Pricing Service.  
The procedures of the Pricing Service are 
reviewed periodically by the officers of the 
Company under the general supervision and 
responsibility of the Board of Directors.

EXCHANGE PRIVILEGE

Except as noted below, shareholders of any fund 
of the Smith Barney Mutual Funds may exchange 
all or part of their shares for shares of the 
same class of other funds of the Smith Barney 
Mutual Funds, to the extent such shares are 
offered for sale in the shareholders state of 
residence and provided your Registered 
Representative or your investment dealer is 
authorized to distribute shares of the fund, on 
the basis of relative net asset value per share 
at the time of exchange.  Class B shares of any 
fund may be exchanged without a CDSC.  Class B 
shares of the Fund exchanged for Class B shares 
of another fund will be subject to the higher 
applicable CDSC of the two funds and, for the 
purposes of calculating CDSC rates and 
conversion periods, will be deemed to have been 
held since the date the shares being exchanged 
were deemed to be purchased.

The exchange privilege enables shareholders to 
acquire shares of the same Class in a fund with 
different investment objectives when they 
believe that a shift between funds is an 
appropriate investment decision.  This 
privilege is available to shareholders residing 
in any state in which the fund shares being 
acquired may legally be sold.  Prior to any 
exchange, the shareholder should obtain and 
review a copy of the current prospectus of each 
fund into which an exchange is being 
considered.  Prospectuses may be obtained from 
a Smith Barney Financial Consultant or 
Registered Representative of PFS Investments 
Inc..

Upon receipt of proper instructions and all 
necessary supporting documents, shares 
submitted for exchange are redeemed at the 
then-current net asset value and, subject to 
any applicable CDSC, the proceeds are 
immediately invested at a price as described 
above, in shares of the fund being acquired.  
Smith Barney reserves the right to reject any 
exchange request.  The exchange privilege may 
be modified or terminated at any time after 
written notice to shareholders.

PERFORMANCE DATA

From time to time, a Fund may quote its yield 
or total return in advertisements or in reports 
and other communications to shareholders.  The 
Fund may include comparative performance 
information in advertising or marketing the 
Funds shares.  Such performance information may 
include the following industry and financial 
publications:  Barrons, Business Week, CDA 
Investment Technologies, Inc., Changing Times, 
Forbes, Fortune, Institutional Investor, 
Investors Daily, Money, Morningstar Mutual Fund 
Values, The New York Times, USA Today and The 
Wall Street Journal.  To the extent any 
advertisement or sales literature of a Fund 
describes the expenses or performance of a 
Class, it will also disclose such information 
for the other Classes.


Yield

A Funds 30-day yield figure described below is 
calculated according to a formula prescribed by 
the SEC.  The formula can be expressed as 
follows:

YIELD = 2[(a-bcd + 1)6 - 1]


Where:
a = 
dividends and interest earned during the period.

b = 
expenses accrued for the period (net of 
reimbursement).

c =
the average daily number of shares outstanding 
during the period that were entitled to receive 
dividends.

d =
the maximum offering price per share on the last day 
of the period.

For the purpose of determining the interest 
earned (variable a in the formula) on debt 
obligations purchased by the Fund at a discount 
or premium, the formula generally calls for 
amortization of the discount or premium; the 
amortization schedule will be adjusted monthly 
to reflect changes in the market values of the 
debt obligations.

Investors should recognize that in periods of 
declining interest rates a Funds yield will 
tend to be somewhat higher than prevailing 
market rates, and in periods of rising interest 
rates, the Funds yield will tend to be somewhat 
lower.  In addition, when interest rates are 
falling, the inflow of net new money to the 
Fund from the continuous sales of its shares 
will likely be invested in portfolio 
instruments producing lower yields than the 
balance of the Funds investments, thereby 
reducing the current yield of the Fund.  In 
periods of rising interest rates, the opposite 
can be expected to occur.

Average Annual Total Return

Average annual total return figures, as 
described below, are computed according to a 
formula prescribed by the SEC.  The formula can 
be expressed as follows:

P(1+T)n = ERV

Where:
P 	=
a hypothetical initial payment of $1,000.

T	=
average annual total return.

n 	=
number of years.

ERV	=
Ending Redeemable Value of a hypothetical 
$1,000 investment made at the beginning of a 1-
, 5- or 10-year period at the end of the 1-5- 
or 10- year period (or fractional portion 
thereof), assuming reinvestment of all 
dividends and distributions.  A Class total 
return figures calculated in accordance with 
the above formula assume that the maximum 
applicable sales charge or maximum applicable 
CDSC, as the case may be, has been deducted 
from the hypothetical $1,000 initial investment 
at the time of purchase or redemption, as 
applicable.


Class A average annual total returns were as 
follows for the periods indicated:


Name of Fund
Year Ended
December 31, 1996
Inception*
Through December 31, 
1996
Investment Grade Bond Fund 
	
(4.92)%
9.02%
Government Securities Fund	
(2.62)%
5.15%
Special Equities Fund	
(10.51)%
18.36%
Managed Growth Fund	
10.54%
7.94%
Growth Opportunity Fund 
8.28%
14.44%
__________________
* 	The Investment Grade Bond, Government 
Securities and Special Equities Funds 
commenced selling Class A shares on November 
6, 1992.  The Managed Growth Fund and Growth 
Opportunity Fund Commenced Selling Class A 
shares on June 30, 1995 and July 3, 1995, 
respectively.
	Performance calculations include the 
historical return information related to the 
Common Sense II Aggressive Opportunity Fund 
of the Common Sense Trust (for the period 
from May 3, 1994 through June 30, 1995.)

Class Bs average annual total returns were as 
follows for the periods indicated:



Name of Fund

Year Ended
December 31, 
1996
Five Year
Period Ended
December 31, 
1996
Ten Year
Period Ended
December 31, 
1996(1)

Inception 
Through 
December 31, 
1996
Investment Grade Bond 
Fund	 
(5.07)%
9.11%
8.83%
11.39%
Government Securities 
Fund	
(2.89)%
5.26%
6.50%
8.04%
Special Equities Fund	
(11.03)%
15.31%
10.26%
10.55%
Managed Growth Fund	
10.55%
N/A
N/A
8.30%
Growth Opportunity 
Fund 	
8.12%
N/A
N/A
15.14%
__________________
(1)	Class B shares automatically convert to 
Class A shares eight years after date of 
original purchase.  Thus, a shareholders 
actual return for the ten years ended 
December 31, 1994 would be different than 
that reflected above.
 Performance calculations include the 
historical return information related to the 
Common Sense II Aggressive Opportunity Fund 
of the Common Sense Trust (for the period 
from May 3, 1994 through June 30, 1995.)

Class Cs average annual total returns were as 
follows for the periods indicated:



Name of Fund
One Year
Period Ended
12/31/96

Inception
Through 12/31/96
Investment Grade Bond Fund (1)
	
(1.76)%
7.83%
Government Securities Fund (2)
	
0.52%
4.87%
Special Equities Fund (3)	
(7.38)%
8.11%
Managed Growth Fund (4)	
14.45%
10.83%
Growth Opportunity Fund (5)
	.............
12.24%
15.98%
__________________
(1) The Fund commenced selling Class C shares 
on February 26, 1993.
(2)	The Fund commenced selling Class C shares 
on February 4, 1993.
(3)	The Fund commenced selling Class C shares 
on October 18, 1993.
(4)	The Fund commenced selling Class C shares 
on June 30, 1995.
(5)	The Fund commenced selling Class C shares 
on July 3, 1995.

Aggregate Total Return

Aggregate total return figures, as described 
below, represent the cumulative change in the 
value of an investment in the Class of the 
specified period and are computed by the 
following formula:


	AGGREGATE TOTAL RETURN = 		
	ERV-P
				P

Where:
P 	=
a hypothetical initial payment of $1,000.

ERV	=
Ending Redeemable Value of a hypothetical 
$10,000 investment made at the beginning of a 
1-, 5- or 10-year period (a fractional portion 
thereof) at the end of the 1-5- or 10- year 
period (or fractional portion thereof), 
assuming reinvestment of all dividends and 
distributions.


Class As aggregate total returns were as 
follows for the periods indicated:





        Name of Fund

One Year
Period Ended
December 31, 
1996**
Period from
Inception
through
December 31,
1996**

One Year
Period Ended
December 31,
1996***
Period from
Inception
through
December 31,
1996***
Investment Grade 
Bond Fund 	
(0.47)%
49.96%
(4.92)%
43.21%
Government 
Securities Fund	
1.96%
29.01%
(2.62)%
23.21%
Special Equities 
Fund	
(5.81)%
111.55%
(10.51)%
101.02%
Managed Growth Fund	
	16.33%
18.12%
	10.54%
12.22%
Growth Opportunity 
Fund+
13.96%
50.83%
8.28%
43.31%
__________________
*	The Investment Grade Bond Fund, Government 
Securities Fund, and Special Equities Fund 
commenced selling Class A shares on November 
6, 1992.  The Managed Growth Fund and Growth 
Opportunity Fund commenced selling Class A 
shares on June 30, 1995 and July 3, 1995, 
respectively.
**	Figures do not include the effect of the 
maximum sales charge.
***	Figures include the effect of the maximum 
sales charge.
+	Performance calculations include the 
historical return information related to the 
Common Sense II Aggressive Opportunity Fund 
of the Common Sense Trust (for the period 
from May 3, 1994 through June 30, 1995.

Class Bs aggregate total returns were as 
follows for the periods indicated:






       Name 
of Fund

One 
Year
Period 
Ended
Dec. 
31,
1996*

Five 
Year
Period 
Ended
Dec. 
31,
1996*

Ten 
Year
Period
Ended
Dec. 
31,
1996*

Period 
from
Incepti
on
through 
Dec. 
31, 
1996*

One Year
Period
Ended
Dec. 31,
1996**

Five 
Year
Period
Ended
Dec. 31,
1996**

Ten Year
Period
Ended
Dec. 31, 
1996**(1)

Period 
from
Inception
through 
Dec. 31, 
1996**
Investment 
Grade
Bond Fund	

(0.89)%

54.64%

133.15%

441.23%

(5.07)%

53.64%

133.15%

441.23%
Government
Securities 
Fund	

1.42%

30.23%

87.74%

168.75%

(2.89)%

29.23%

87.74%

168.75%
Special 
Equities
Fund	

(6.44)%

104.83%

165.64%

309.77%

(11.03)%

103.83%

165.64%

309.77%
Managed 
Growth
Fund	

15.55%

-

-

16.79%

10.55%

-

-

12.79%
Growth 
Opportunity
Fund+	

13.12%

-

-

48.68%

8.12%

-

-

45.07%
__________________
*	Figures do not include the effect of the CDSC 
(maximum 4.50% for Investment Grade Bond Fund 
and Government Securities Fund and 5.00% for 
the other Funds).
**	Figures include the effect of the maximum 
applicable CDSC, if any.
(1)	Class B shares automatically convert to 
Class A shares eight years after date of 
original purchase.  Thus, a shareholders 
actual return for the ten years ended 
December 31, 1995 would be different than 
that reflected above.
+	Performance calculations include the 
historical return information related to the 
Common Sense II Aggressive Opportunity Fund 
of the Common Sense Trust (for the period 
from May 3, 1994 through June 30, 1995.


Class Cs aggregate total returns were as 
follows for the periods indicated:




        Name of Fund

One Year
Period Ended
Dec. 31, 
1996**
Period from
Inception*
through
Dec. 
31,1996**

One Year
Period Ended
Dec. 31, 
1996***
Period from
Inception*
through
Dec. 31, 
1996*** 
Investment Grade Bond 
Fund 	
(0.83)%
33.62%
(1.76)%
33.62%
Government Securities 
Fund	
1.47%
20.41%
0.52%
20.41%
Special Equities Fund	
(6.44)%
28.40%
(7.38)%
28.40%
Managed Growth Fund	
15.45%
16.79%
14.45%
16.79%
Growth Opportunity Fund	
13.24%
23.07%
12.24%
23.07%
__________________
*	Investment Grade Bond Fund, Government 
Securities Fund, Special Equities Fund, 
Managed Growth Fund and Growth Opportunity 
Fund commenced selling Class C shares on 
February 26, 1993, February 4, 1993 October 
18, 1993, June 30, 1995 and July 3, 1995, 
respectively.  Class C shares are sold at net 
asset value without any sales charge or CDSC.
**	Figures do not include the effect of the 
CDSC.
***	Figures include the effect of the 
applicable CDSC (1.00%)

It is important to note that the yield and 
total return figures set forth above are based 
on historical earnings and are not intended to 
indicate future performance.  A Class 
performance will vary from time to time 
depending upon market conditions, the 
composition of the Funds investment portfolio 
and operating expenses and the expenses 
exclusively attributable to the Class.  
Consequently, any given performance quotation 
should not be considered representative of the 
Class performance for any specified period in 
the future.  Because performance will vary, it 
may not provide a basis for comparing an 
investment in the Class with certain bank 
deposits or other investments that pay a fixed 
yield for a stated period of time.  Investors 
comparing the Class performance with that of 
other mutual funds should give consideration to 
the quality and maturity of the respective 
investment companies portfolio securities.


TAXES

The following is a summary of certain Federal 
income tax considerations that may affect the 
Company and its shareholders.  The summary is 
not intended as a substitute for individual tax 
advice, and investors are urged to consult 
their tax advisors as to the tax consequences 
of an investment in any Fund of the Company.

Tax Status of the Funds

Each Fund will be treated as a separate taxable 
entity for Federal income tax purposes.

Each Fund has qualified and the Company intends 
that each Fund will continue to qualify 
separately each year as a regulated investment 
company under the Code.  A qualified Fund will 
not be liable for Federal income taxes to the 
extent that its taxable net investment income 
and net realized capital gains are distributed 
to its shareholders, provided that each Fund 
distributes at least 90% of its net investment 
income.

Each Fund intends to accrue dividend income for 
Federal income tax purposes in accordance with 
the rules applicable to regulated investment 
companies.  In some cases, these rules may have 
the effect of accelerating (in comparison to 
other recipients of the dividend) the time at 
which the dividend is taken into account by a 
Fund as taxable income.

Certain options, futures contracts and forward 
contracts in which the Funds may invest are 
section 1256 contracts.  Gains or losses on 
1256 contracts generally are considered 60% 
long-term and 40% short-term capital gains or 
losses (60/40); however, foreign currency gains 
or losses arising from certain section 1256 
contracts may be treated as ordinary income or 
loss.  Also, section 1256 contracts held by a 
Fund at the end of each taxable year are 
marked-to-market with the result that 
unrealized gains or losses are treated as 
though they were realized and the resulting 
gain or loss is treated as 60/40 gain or loss 
as ordinary income or loss, as the case may be.  
These contracts also may be marked-to-market 
for purposes of the 4% excise tax under rules 
prescribed in the Code.

Many of the hedging transactions undertaken by 
the Funds will result in straddles for Federal 
income tax purposes.  Straddles are defined to 
include offsetting positions in actively traded 
personal property.  It is not entirely clear 
under what circumstances one investment made by 
a Fund will be treated as offsetting another 
investment held by the Fund.  In general, 
positions are offsetting if there is a 
substantial diminution in the risk of loss from 
holding one position by reason of holding one 
or more other positions.  The straddle rules 
may affect the character of gains (or losses) 
realized on straddle positions.  In addition, 
losses realized by a Fund on straddle positions 
may be deferred under the straddle rules, 
rather than being taken into account in 
calculating the taxable income for the taxable 
year in which losses are realized.  The hedging 
transactions may also increase the amount of 
gains from assets held less than three months.  
As a result, the 30% limit on gains from 
certain assets held less then three months, 
which applies to regulated investment 
companies, may restrict a Fund in the amount of 
hedging transactions which it may undertake.  
In addition, hedging transactions may increase 
the amount of short-term capital gain realized 
by a Fund which is taxed as ordinary income 
when distributed to the shareholders.  The Fund 
may make one or more of the elections available 
under the Code which are applicable to 
straddles.  If a Fund makes any of the 
elections, the amount, character and timing of 
the recognition of gain or losses from the 
effected straddle positions will be determined 
under rules that vary according to the 
election(s) made.

Distributions of investment company taxable 
income generally are taxable to shareholders as 
ordinary income.  In view of each Funds 
investment policy, it is expected that 
dividends from domestic corporations will 
constitute a portion of the gross income of 
several of the Funds but not of others.  
Therefore, it is expected that a portion of the 
income distributed by the Special Equities Fund 
but not others (Investment Grade Bond Fund and 
Government Securities Fund) may be eligible for 
the dividends-received deduction for 
corporations.  

Distributions of net realized capital gains 
designated by a Fund as capital gains dividends 
are taxable to shareholders as long-term 
capital gain, regardless of the length of time 
the shares of a Fund have been held by a 
shareholder.  Distributions of capital gains, 
whether long or short-term, are not eligible 
for the dividends-received deduction.

Dividends (including capital gain dividends) 
declared by a Fund in October, November or 
December of any calendar year to shareholders 
of record on a date in such a month will be 
deemed to have been received by shareholders on 
December 31 of that calendar year, provided 
that the dividend is actually paid by the Fund 
during January of the following calendar year.

All dividends are taxable to the shareholder 
whether reinvested in additional shares or 
received in cash.  Shareholders receiving 
distributions in the form of additional shares 
will have a cost basis for Federal income tax 
purposes in each share received equal to the 
net asset value of a share of the Fund on the 
reinvestment date.  Shareholders will be 
notified annually as to the Federal tax status 
of distributions.

Under the Code, gains or losses attributable to 
fluctuations in currency exchange rates which 
occur between the time a Fund accrues income or 
other receivables or accrues expenses or other 
liabilities denominated in a foreign currency 
and the time a Fund actually collects such 
receivables or pays such liabilities, generally 
are treated as ordinary income or ordinary 
loss.  Similarly, on disposition of debt 
securities denominated in a foreign currency 
and on disposition of certain futures 
contracts, forward contracts and options, gains 
or losses attributable to fluctuations in the 
value of certain currency between the date of 
acquisition of the security and the date of 
disposition also are treated as ordinary gain 
or loss.  These gains or losses, referred to 
under the Code as section 988 gains or losses, 
may increase or decrease the amount of a Funds 
investment company taxable income to be 
distributed to its shareholders as ordinary 
income.

It is expected that certain dividends and 
interest received by the Fund will be subject 
to foreign withholding taxes.  So long as more 
than 50% in value of a Funds total assets at 
the close of a given taxable year consists of 
stocks or securities of foreign corporations, 
the Fund may elect to treat any foreign taxes 
paid or accrued by it as paid by its 
shareholders.  Each Fund will notify 
shareholders in writing each year whether it 
makes the election and the amount of foreign 
taxes it has elected to have treated as paid by 
the shareholders.  If a Fund makes the 
election, shareholders will be required to 
include as income their proportionate share of 
the amount of foreign taxes paid or accrued by 
the Fund and generally be entitled to claim 
either a credit or deduction (as an itemized 
deduction) for their share of the taxes in 
computing their Federal income tax, subject to 
limitations.

Generally, a credit for foreign taxes is 
subject to the limitation that it may not 
exceed the shareholders United States tax 
attributable to his or her total foreign source 
taxable income.  For this purpose, if the pass-
through election is made, the source of the 
electing Funds income will flow through to its 
shareholders.  With respect to a Fund, gains 
from the sales of securities generally will be 
treated as derived from United States sources 
and certain currency fluctuation gains, 
including fluctuation gains from foreign 
currency denominated debt securities, 
receivables and payables, will be treated as 
ordinary income derived from United States 
sources.  The limitation on the foreign tax 
credit is applied separately to foreign source 
passive income (as defined for purposes of the 
foreign tax credit), including the foreign 
source passive income passed through by a Fund.  
Shareholders may be unable to claim a credit 
for the full amount of their proportionate 
share of the foreign tax paid or accrued by a 
Fund.  A foreign tax credit can be used to 
offset only 90% of the alternative minimum tax 
(as computed under the Code for purposes of the 
limitation) imposed on corporations and 
individuals.  If a Fund is not eligible to make 
the election to pass through to its 
shareholders its foreign taxes, the foreign 
taxes it pays will reduce investment company 
taxable income and the distributions by that 
Fund will be treated as United States source 
income.

The foregoing is only a general description of 
the foreign tax credit.  Because application of 
the credit depends on the particular 
circumstances of each shareholder, shareholders 
are advised to consult their own tax advisors.

Distributions by a Fund reduces the net asset 
value of the Funds shares.  Should a 
distribution reduce the net asset value below a 
shareholders cost basis, such distribution 
nevertheless generally would be taxable to the 
shareholder as ordinary income or capital gains 
as described above, even though, from an 
investment standpoint, it may constitute a 
partial return of capital.  In particular, 
investors should be careful to consider the tax 
implications of buying shares just prior to a 
distribution.  The price of shares purchased at 
that time includes the amount of the 
forthcoming distribution but the distribution 
generally would be taxable to him.

Upon redemption, sale or exchange of his 
shares, a shareholder will realize a taxable 
gain or loss depending upon his basis for his 
shares.  Such gain or loss will be treated as 
capital gain or loss if the shares are capital 
assets in the shareholders hands.  Such gain or 
loss generally will be long-term or short-term 
depending upon the shareholders holding period 
for the shares.  However, a loss realized by a 
shareholder on the sale of shares of a Fund 
with respect to which capital gain dividends 
have been paid will, to the extent of such 
capital gain dividends, be treated as long-term 
capital loss if such shares have been held by 
the shareholder for six months or less.  A gain 
realized on a redemption, sale or exchange will 
not be affected by a reacquisition of shares.  
A loss realized on a redemption, sale or 
exchange, however, will be disallowed to the 
extent the shares disposed of are replaced 
(whether through reinvestment of distributions 
or otherwise) within a period of 61 days 
beginning 30 days before and ending 30 days 
after the shares are disposed of.  In such a 
case, the basis of the shares acquired will be 
adjusted to reflect the disallowed loss.

For the purposes of computing the revised 
alternative minimum tax of 20% for 
corporations, 75% of the excess of the adjusted 
current earnings (as defined in the Code) over 
other alternative minimum taxable income is 
treated as an adjustment item.  Shareholders 
are advised to consult their own tax advisors 
for details regarding the alternative minimum 
tax.

If a Fund purchases shares in certain foreign 
investment funds classified under the Code as a 
passive foreign investment company, the Fund 
may be subject to Federal income tax on a  
portion of an excess distribution and gain from 
the disposition of such shares, even though 
such income may have to be distributed as a 
taxable dividend by the Fund to its 
shareholders.  In addition, gains on the 
disposition of shares in a passive foreign 
investment company generally are treated as 
ordinary income even though the shares are 
capital assets in the hands of the Company.  
Certain interest charges may be imposed on 
either the Fund or its shareholders in respect 
of any taxes arising from such distributions or 
gains.  A Fund may be eligible to elect to 
include in its gross income its share of 
earnings of a passive foreign investment 
company on a current basis.  Generally the 
election would eliminate the interest charge 
and the ordinary income treatment on the 
disposition of stock, but such an election may 
have the effect of accelerating the recognition 
of income and gains by the Fund compared to a 
fund that did not make the election.  In 
addition, another election may be available 
that would involve marking to market a Funds 
passive foreign investment company shares at 
the end of each taxable year (and on certain 
other dates prescribed in the Code), with the 
result that unrealized gains are treated as 
though they were realized.  If this election 
were made, tax at the Fund level under the 
passive foreign investment company rules would 
generally be eliminated, but the Fund could, in 
limited circumstances, incur nondeductible 
interest charges.  Each Funds intention to 
qualify annually as a regulated investment 
company may limit its elections with respect to 
shares of passive foreign investment companies.

Because the application of the passive foreign 
investment company rules may affect, among 
other things, the character of gains, the 
amount of gain or loss and the timing of the 
recognition of income with respect to passive 
foreign investment company shares, as well as 
subject a Fund itself to tax on certain income 
from such shares, the amount that must be 
distributed to shareholders, and which will be 
taxed to shareholders as ordinary income or 
long-term capital gain, may be increased or 
decreased substantially as compared to a fund 
that did not invest in passive foreign 
investment companies.

If a shareholder (a) incurs a sales charge in 
acquiring shares of the Company, (b) disposes 
of those shares within 90 days and (c) acquires 
shares in a mutual fund for which the otherwise 
applicable sales charge is reduced by reason of 
a reinvestment right (i.e., exchange 
privilege), the original sales charge increases 
the shareholders tax basis in the original 
shares only to the extent the otherwise 
applicable sales charge for the second 
acquisition is not reduced.  The portion of the 
original sales charge that does not increase 
the shareholders tax basis in the original 
shares would be treated as incurred with 
respect to the second acquisition and, as a 
general rule, would increase the shareholders 
tax basis in the newly acquired shares.  
Furthermore, the same rule also applies to a 
disposition of the newly acquired shares made 
within 90 days of a subsequent acquisition.  
This provision prevents a shareholder from 
immediately deducting the sales charge by 
shifting his or her investment in a family of 
mutual funds.

Backup Withholding.  If a shareholder fails to 
furnish a correct taxpayer identification 
number, fails to fully report dividend or 
interest income, or fails to certify that he or 
she has provided a correct taxpayer 
identification number and that he or she is not 
subject to such withholding, then the 
shareholder may be subject to a 31% backup 
withholding tax with respect to (a) any taxable 
dividends and distributions and (b) any 
proceeds of any redemption of Company shares.  
An individuals taxpayer identification number 
is his or her social security number.  The 
backup withholding tax is not an additional tax 
and may be credited against a shareholders 
regular federal income tax liability.

The foregoing discussion relates only to 
Federal income tax law as applicable to United 
States citizens.  Distributions by the Funds 
also may be subject to state, local and foreign 
taxes, and their treatment under state, local 
and foreign income tax laws may differ from the 
Federal income tax treatment.  The Government 
Securities Funds dividends, to the extent they 
consist of interest from obligations of the 
United States government and certain of its 
agencies and instrumentalities, may be exempt 
from state and local income taxes in some 
jurisdictions.  The Company intends to advise 
shareholders of the proportion of that Funds 
dividends which are derived from such interest.  
Shareholders should consult their tax advisors 
with respect to particular questions of 
Federal, state, local and foreign taxation. 

ADDITIONAL INFORMATION

The Company was incorporated on September 29, 
1981 under the name Hutton Investment Series 
Inc.  The Companys corporate name was changed 
on December 29, 1988, July 30, 1993 and October 
28, 1994, to SLH Investment Portfolios Inc., 
Smith Barney Shearson Investment Funds Inc., 
and Smith Barney Investment Funds, Inc., 
respectively.

PNC Bank, located at 17th and Chestnut Streets, 
Philadelphia, Pennsylvania 19103, serves as the 
custodian of the Company.  Under its custody 
agreement with the Company, PNC Bank holds the 
Companys fund securities and keeps all 
necessary accounts and records.  For its 
services, PNC Bank receives a monthly fee based 
upon the month-end market value of securities 
held in custody and also receives transaction 
charges.  PNC bank is authorized to establish 
separate accounts for foreign securities owned 
by the Company to be held with foreign branches 
of other domestic banks as well as with certain 
foreign banks and securities depositories.  The 
assets of the Company are held under bank 
custodianship in compliance with the 1940 Act.

First Data located at Exchange Place, Boston, 
Massachusetts 02109, serves as the Companys 
transfer agent.  For these services, First Data 
receives a monthly fee computed on the basis of 
the number of shareholder accounts it maintains 
with the Company during the month and is 
reimbursed for out-of-pocket expenses.


FINANCIAL STATEMENTS

The Annual Reports for each Fund for the fiscal 
year ended December 31, 1996 are incorporated 
herein by reference in their entirety.


APPENDIX

BOND (AND NOTE) RATINGS

Moodys Investors Service, Inc. (Moodys)

	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 that 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 that 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 in 
fact 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. 

	B - Bonds that are rated B generally lack 
characteristics of desirable investments.  
Assurance of interest and principal payments or 
of maintenance of other terms of the contract 
over any long period of time may be small. 

	Caa - Bonds that are rated Caa are of poor 
standing.  These issues may be in default or 
present elements of danger may exist with 
respect to principal or interest. 

	Ca - Bonds that are rated Ca represent 
obligations which are speculative in a high 
degree.  Such issues are often in default or 
have other marked short-comings. 

	C - Bonds that are rated C are the lowest 
rated class of bonds, and issues so rated can be 
regarded as having extremely poor prospects of 
ever attaining any real investment standing. 

	Moodys applies the numerical modifiers 1, 
2 and 3 in each generic rating classification 
from Aa through B.  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. 


Standard & Poors Ratings Group (Standard & 
Poors) 

	AAA - Debt rated AAA has the highest 
rating assigned by Standard & Poors.  Capacity 
to pay interest and repay principal is extremely 
strong. 

	AA - Debt rated AA has a very strong 
capacity to pay interest and repay principal and 
differs from the highest rated issues only in 
small degree. 

	A - Debt rated A has a strong capacity 
to pay interest and repay principal although it 
is somewhat more susceptible to the adverse 
effects of changes in circumstances and economic 
conditions than debt in higher rated categories. 

	BBB - Debt rated BBB is regarded as 
having an adequate capacity to pay interest and 
repay principal.  Whereas it normally exhibits 
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. 

	BB, B and CCC - Bonds rated BB and B are 
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 represents a 
lower degree if speculation than B and CCC the 
highest degree of speculation.  While such bonds 
will likely have some quality and protective 
characteristics, these are outweighed by large 
uncertainties or major risk exposures to adverse 
conditions. 

	C - The rating C is reserved for income 
bonds on which no interest is being paid. 

	D - Bonds rated D are in default, and 
payment of interest and/or repayment of 
principal is in arrears. 

	S&Ps letter ratings may be modified by 
the addition of a plus or a minus sign, which is 
used to show relative standing within the major 
rating categories, except in the AAA category. 

COMMERCIAL PAPER RATINGS

Moodys Investors Service, Inc. 

Issuers rated Prime-1 (or related supporting 
institutions) have a superior capacity for 
repayment of short-term promissory obligations.  
Prime-1 repayment capacity will normally be 
evidenced by the following characteristics: 
leading market positions in well-established 
industries; high rates of return on funds 
employed; conservative capitalization structures 
with moderate reliance on debt and ample asset 
protection; broad margins in earnings coverage 
of fixed financial charges and high internal 
cash generation; well-established access to a 
range of financial markets and assured sources 
of alternate liquidity. 

Issuers rated Prime-2 (or related supporting 
institutions) have a strong capacity for 
repayment of short-term promissory obligations.  
This will normally be evidenced by many of the 
characteristics cited above 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 alternate liquidity is 
maintained. 


Standard & Poors Ratings Group

		A-1 - This designation indicates that the 
degree of safety regarding timely payment is 
either overwhelming or very strong.  Those 
issues determined to possess overwhelming safety 
characteristics will be denoted with a plus (+) 
sign designation.

     A-2 - Capacity for timely payment on issues 
with this designation is strong.  However, the 
relative degree of safety is not as high as for 
issues designated A-1.

Supplementary Description of Interest Rate 
Futures Contracts and Related Options

Characteristics of Futures Contracts.  
Currently, futures contracts can be purchased 
and sold on such securities as U.S. Treasury 
bonds, U.S. Treasury notes, GNMAs and U.S. 
Treasury bills.  Unlike when the Fund purchases 
or sells a security, no price is paid or 
received by the Fund upon the purchase or sales 
of a futures contract.  The Fund will initially 
be required to deposit with the custodian or 
the broker an amount of initial margin of cash 
of U.S. Treasury bills.  The nature of initial 
margin in futures transactions is different 
from that of margin in security transactions in 
that futures contract initial margin does not 
involve the borrowing of funds by their 
customer to finance the transaction.  Rather, 
the initial margin is in the nature of a 
performance bond or good faith deposit on the 
contract which is returned to the Fund upon 
termination of the futures contract, assuming 
all contractual obligations have been 
satisfied.  Subsequent payments, called 
maintenance margin, to and from the broker, 
will be made on a daily basis as the price of 
the underlying debt security fluctuates, making 
the long and short positions in the futures 
contract more or less valuable, a process known 
as marked-to-market.  For example, when the 
Fund has purchased a futures contract and the 
price of the underlying debt security has 
risen, that position will have increased in 
value and the Fund will receive from the broker 
a maintenance margin payment equal to that 
increase in value.  Conversely, when the Fund 
has purchased a futures contract and the price 
of the underlying debt security has declined, 
the position would be less valuable and the 
Fund would be required to make a maintenance 
margin payment to the broker.  At any time 
prior to expiration of the futures contract, 
the Fund may elect to close the position by 
taking an opposite position which will operate 
to terminate the Funds position in the futures 
contract.  A final determination of maintenance 
margin is then made, additional cash is 
required to be paid by or released to the Fund, 
and the Fund realizes a loss or a gain.

While futures contracts based on debt 
securities do provide for the delivery and 
acceptance of securities, such deliveries and 
acceptances are very seldom made.  Generally, 
the futures contract is terminated by entering 
into an offsetting transaction.  An offsetting 
transaction for a futures contract sale is 
effected by the Fund entering into a futures 
contract purchase for the same aggregate amount 
of the specific type of financial instrument 
and same delivery date.  If the price in the 
sale exceeds the price in the offsetting 
purchase, the Fund pays the difference and 
realizes the loss.  Similarly, the closing out 
of a futures contract purchase is effected by 
the Fund entering into a futures contract sale.  
If the offsetting sale price exceeds the 
purchase price, the Fund realizes a gain, and 
if the purchase price exceeds the offsetting 
price, the Fund realizes a loss.

Risks of Transactions in Futures Contracts.  
There are several risks in connection with the 
use of futures contracts by Government 
Securities Fund as a hedging device.  One risk 
arises because of the imperfect correlation 
between movements in the price of the futures 
contracts and movements in the price of the 
debt securities which are the subject of the 
hedge.  The price of the futures contract may 
move more than or less than the price of the 
debt securities being hedged.  If the price of 
the futures contract moves less than the price 
of the securities which are the subject of the 
hedge, the hedge will not be fully effective, 
but, if the price of the securities being 
hedged has moved in an unfavorable direction, 
the Fund would be in a better position than if 
it has not hedged at all.  If the price of the 
securities being hedged has moved in a 
favorable direction, this advantage will be 
partially offset by the movement in the price 
of the futures contract.  If the price of the 
futures contracts moves more than the price of 
the security, the Fund will experience either a 
loss or a gain on the future which will not be 
completely offset by movements in the prices of 
the debt securities which are the subject of 
the hedge.  To compensate for the imperfect 
correlation of movements in the price of debt 
securities being hedged and movements in the 
prices of the futures contracts, the Fund may 
buy or sell futures contracts in a greater 
dollar amount of the securities being hedged if 
the historical volatility of the prices of such 
securities has been greater than the historical 
volatility of the futures contracts.  
Conversely, the Fund may buy or sell fewer 
futures contracts if the historical volatility 
of the price of the securities being hedged is 
less than the historical volatility of the 
futures contracts.  It is also possible that, 
where the Fund has sold futures to hedge its 
portfolio against decline in the market, the 
market may advance and the value of securities 
held in the Funds portfolio may decline.  If 
this occurred, the Fund would lose money on the 
futures contracts and also experience a decline 
in value in its portfolio securities.  However, 
while this could occur for a very brief period 
or to a very small degree, over time the value 
of a diversified portfolio will tend to move in 
the same direction as the futures contracts.  
Where futures are purchased to hedge against a 
possible increase in prices of securities 
before the Fund is able to invest its cash (or 
cash equivalents) in U.S. government securities 
(or options) in an orderly fashion, it is 
possible that the market may decline instead; 
if the Fund then concludes not to invest in 
U.S. government securities or options at that 
time because of concern as to possible further 
market decline or for other reasons, the Fund 
will realize a loss on the futures contract 
that is not offset by a reduction in the price 
of securities purchased.

In addition to the possibility that there may 
be an imperfect correlation, or no correlation 
at all, between movements in the futures 
contracts and the portion of the portfolio 
being hedged, the market prices of futures 
contracts may be affected by certain factors.  
First, all participants in the futures market 
are subject to margin deposit and maintenance 
requirements.  Rather than meeting additional 
margin deposit requirements, investors may 
close futures contracts though offsetting 
transactions which could distort the normal 
relationship between the debt securities and 
futures markets; second, from the point of view 
of speculators, the deposit requirements in the 
futures market are less onerous than margin 
requirements in the securities market.  
Therefore, increased participation by 
speculators in the futures market may also 
cause temporary price distortions.  Due to the 
possibility of price distortion in the futures 
market and because of the imperfect correlation 
between movements in the debt securities and 
movements in the prices of futures contracts, a 
correct forecast of interest rate trends by the 
investment advisor may still not result in a 
successful hedging transaction over a very 
short time frame.

Positions in futures contracts may be closed 
out only on an exchange or board of trade which 
provides a secondary market for such futures.  
Although Government Securities Fund intends to 
purchase or sell futures only on exchanges or 
boards of trade where there appears to be an 
active secondary market, there is no assurance 
that a liquid secondary market on an exchange 
or board of trade will exist for any particular 
contract or at any particular time.  In such 
event, it may not be possible to close a 
futures position, and in the event of adverse 
price movements, the Fund would continue to be 
required to make daily cash payments of 
variation margin.  However, in the event that 
the futures contracts have been used to hedge 
portfolio securities, such securities will not 
be sold until the futures contracts can be 
terminated.  In such circumstances, an increase 
in the price of the securities, if any, may 
partially or completely offset losses on the 
futures contracts.  However, as described 
above, there is no guarantee that the price of 
the securities will, in fact, correlate with 
the price movements of the futures contracts 
and thus provide an offset to losses on futures 
contracts.  Successful use of futures contracts 
by the Fund is also subject to the investment 
advisers ability to predict correctly movements 
in the direction of interest rates and other 
factors affecting markets of debt securities.  
For example, if the Fund has hedged against the 
possibility of an increase in interest rates 
which would adversely affect debt securities 
held in its portfolio and prices of such 
securities increase instead, the Fund will lose 
part or all of the benefit of the increased 
value of its securities which it has hedged 
because it will have offsetting losses in its 
futures positions.  In addition, in such 
situations, if the Fund has insufficient cash, 
it may have to sell securities to meet daily 
variation margin requirements.  Such sale 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 may be disadvantageous to do 
so.

Characteristics of Options on Futures 
Contracts.  As with options on debt securities, 
the holder of an option may terminate his 
position by selling an option of the same 
series.  There is no guarantee that such 
closing transactions can be effected.  The Fund 
will be required to deposit initial margin and 
maintenance margin with respect to put and call 
options on futures contracts described above, 
and, in addition, net option premiums received 
will be included as initial margin deposits.

In addition to the risks which apply to all 
options transaction, there are several special 
risks relating to options on futures contracts.  
Trading in such options commenced in October 
1982.  The ability to establish and close out 
positions on such options will be subject to 
the development and maintenance of a liquid 
secondary market.  It is not certain that this 
market will develop.  The Fund will not 
purchase options on futures contracts on any 
exchange unless and until, in the investment 
advisors opinion, the market for such options 
had developed sufficiently that the risks in 
connection with options on futures contracts 
are not greater than the risks in connection 
with futures contracts.  Compared to the use of 
futures contracts, the purchase of options on 
futures contracts involves less potential risk 
to the Fund because the maximum amount of risk 
is the premium paid for the options (plus 
transaction costs).  However, there may be 
circumstances when the use of an option on a 
futures contract would result in a loss to the 
Fund when the use of a futures contract would 
not, such as when there is no movement in the 
prices of debt securities.  Writing an option 
on a futures contract involves risks similar to 
those arising in the sale of futures contracts, 
as described above.





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