FILE 
NO 2-25890

	SECURITIES AND EXCHANGE COMMISSION
	Washington, D.C. 20549

	_________________________________________________

	FORM N-1A
	__________________________________________________

	POST-EFFECTIVE AMENDMENT NO. 60
	To The
	REGISTRATION STATEMENT
	Under
	THE SECURITIES ACT OF 1933
	and
	POST-EFFECTIVE AMENDMENT NO. 40
	under 
	THE INVESTMENT COMPANY ACT OF 1940
	__________________________________________________
	SMITH BARNEY FUNDS, INC.
	(Exact name of Registrant as specified in Charter)

	388 Greenwich Street, New York, New York 10013
	(Address of principal executive offices)

	(212) 816-6474          
	(Registrant's telephone number)

	Christina T. Sydor
	388 Greenwich Street, New York, New York 10013
	(22nd Floor)
	(Name and address of agent for service)
	__________________________________________________
	To Register Additional Securities under Reg. 270.24e-2
 
		 		  
Title of                           Share
securities                        Amount
being                              being
registered                        registered
			

U.S. Government            5,155,581
Securities Portfolio

Income Return                797,588
Account Portfolio

During its fiscal year ended December 31, 1996, the U.S. 
Government Securities Portfolio 
redeemed 7,198,066 shares.

During its current fiscal year, the U.S. Government 
Securities
Portfolio used  2,042,485 shares it redeemed 
during its fiscal year ended December 31, 1996, for a 
reduction pursuant to 
Rule 24f-2(c).  

The U.S. Government Securities Portfolio currently is 
registering 5,155,581 shares
pursuant to Reg. 270.24e-2.
	
During its fiscal year ended December 31, 1996, the  
Income Return Account Portfolio 
redeemed 1,184,355 shares.

During its current fiscal year, Income Return Account
Portfolio used  386,767 shares it redeemed 
during its fiscal year ended December 31, 1996, for a 
reduction pursuant to 
Rule 24f-2(c).  

The Income Return Account Portfolio currently is 
registering 797,588 shares
pursuant to Reg. 270.24e-2.
	Rule 24f-2 (1) Declaration:

Registrant filed its Rule 24f-2 Notice on February 26, 
1997 for its 
most recent fiscal year ended December 31, 1996.

It is proposed that this Post-Effective Amendment will 
become effective immediately upon filing pursuant to 
paragraph (b) of Rule 485.

		

	

	CROSS REFERENCE SHEET
	(as required by 495 (a))
Part A of
Form N-1A
	Prospect
us Caption

1.	Cover Page		cover 
page

2.	Synopsis	
	"Prospectus Summary"

3.	Condensed Financial Information	
	"Financial Highlights"

4.	General Description of Registrant	
"Additional 
Information"
cover 
page   
		
"Investment Objective and 		
Management Policies" 
			
5.	Management of the Fund	
"Management 
of the 
Fund" 
"Prospectus 
Summary"
             
6.	Capital Stock and Other Securities	
"Additional 
Information"
		
"Redemption of Shares" 
cover 
page  
		
"Dividends, Distributions and 			
Taxes"

7.	Purchase of Securities Being Offered	
"Prospectus 
Summary" 
"Purchase of 
Shares" 
"Management of 
the Fund" 
	
"Valuation 
of 
Shares" 
	
	
	

8.	Redemption or Repurchase	
"Redemption 
of  Shares" 
"Minimum 
Account Size"

9.	Legal Proceedings
not 
applicable


Part B of	
Form N-1A
Statement 
of Additional Informat ion Caption

10. Cover page		
cover 
page

11. Table of Contents		
"Table 
of Contents"

12. General Information and History	
not 
applicable

13. Investment Objectives and Policies	
"Investment 
Policies"

		
"Investment Restrictions"

14. Management of the Registrant	
"Directors 
and 
Officers"

15. Control Persons and Principal
 Holders of Securities		
See 
Prospectus -- 
"Additional 
Information"
		
"Directors and Officers"



16. Investment Advisory and other Services		
See Prospectus -- 
"Management of 
the Fund" 
		
"Directors and Officers" 		
"Investment Management 		
Agreement and Other Services" 		
"Custodian" 
		
"Independent Auditors"

17. Brokerage Allocation	
"Investment 
Management 
Agreement and 
Other 
Services
"

18. Capital Stock and Other Securities		
See 
Prospectus -- 
"Additional 
Information"  
See Prospectus -- 
"Dividends, 
Distributions 
and 
Taxes" 
		
"Investment Policies" 
"Voting"

19. Purchase, Redemption and Pricing
  of Securities Being Offered		
See Prospectus -- 
"Purchase of 
Shares" 
and
"Prospectus Summary" 
"IRA and 
other Prototype 		
Retirement Plans" 
See 
Prospectus -- "Valuation of                                                
		Shares"
		
"Financial Statements" 		
"Redemption of Shares"

20. Tax Status		
See 
Prospectus -- 
"Dividends, 
Distributions 
and 
Taxes" 
"Additional Tax 
Information"

21. Underwriters		
See 
Prospectus -- 
"Management of 
the 
Fund" 
"Investment 
Management 
Agreement and 
Other 
Services
"

22. Calculation of Performance Data	
"Performance 
Information"

23. Financial Statements	
"Financial 
Statements"

Part C of
Form N-1A

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


<PAGE>
 
P R O S P E C T U S
 
 
                                                        SMITH BARNEY FUNDS, INC.
                                                                   Equity Income
                                                                       Portfolio
                                                                
                                                             APRIL 30, 1997     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
[LOGO] SMITH BARNEY MUTUAL FUNDS
       Investing for your future.
       Every day.
<PAGE>
 
       
PROSPECTUS                                                    
                                                           April 30, 1997      
   
Smith Barney Funds, Inc.     
   
Equity Income Portfolio     
388 Greenwich Street
New York, New York 10013
   
(800) 451-2010     
   
  The Equity Income Portfolio (the "Portfolio") is one of four investment
portfolios that currently comprise Smith Barney Funds, Inc. (the "Fund"). The
 Portfolio  seeks current income and long-term
growth of income and capital. It invests primarily, but not exclusively, in
common stocks.     
 
  This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.
   
  Additional information about the Portfolio is contained in a Statement of
Additional Information dated April 30, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by con-
tacting a Smith Barney Financial Consultant. The Statement of Additional Infor-
mation has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety.     
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
       
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            9
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   12
-------------------------------------------------
VALUATION OF SHARES                            13
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             13
-------------------------------------------------
PURCHASE OF SHARES                             15
-------------------------------------------------
EXCHANGE PRIVILEGE                             25
-------------------------------------------------
REDEMPTION OF SHARES                           28
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           30
-------------------------------------------------
PERFORMANCE                                    31
-------------------------------------------------
MANAGEMENT OF THE FUND                         31
-------------------------------------------------
DISTRIBUTOR                                    33
-------------------------------------------------
ADDITIONAL INFORMATION                         34
-------------------------------------------------
APPENDIX                                      A-1
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
--------------------------------------------------------------------------------
 
2
<PAGE>
 
       
PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
   
INVESTMENT OBJECTIVES The Equity Income Portfolio is an open-end, management
investment company whose investment objective is to seek current income and
long-term growth of income and capital by investing primarily, but not exclu-
sively, in common stocks. See "Investment Objective and Management Policies."
    
ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of
shares ("Classes") to investors designed to provide them with the flexibility
of selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. In addi-
tion, a fifth Class, Class Z shares, which is offered pursuant to a separate
prospectus, is offered exclusively to tax-exempt employee benefit and retire-
ment plans of Smith Barney Inc. ("Smith Barney") and its affiliates. See "Pur-
chase of Shares" and "Redemption of Shares."
   
  Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of
$500,000 or more, will be made at net asset value with no initial sales charge,
but will be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary--Reduced
or No Initial Sales Charge."     
 
  Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year
after the date of purchase to zero. This CDSC may be waived for certain redemp-
tions. Class B shares are subject to an annual service fee of 0.25% and an
annual distribution fee of 0.75% of the average daily net assets of the Class.
The Class B shares' distribution fee may cause that Class to have higher
expenses and pay lower dividends than Class A shares.
 
  Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and dis-
tributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
 
                                                                               3
<PAGE>
 
       
PROSPECTUS SUMMARY (CONTINUED)
 
 
  Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class C
shares, and investors pay a CDSC of 1.00% if they redeem Class C shares within
12 months of purchase. The CDSC may be waived for certain redemptions. The
Class C shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares. Purchases of Portfolio shares,
which when combined with current holdings of Class C shares of the Portfolio
equal or exceed $500,000 in the aggregate, should be made in Class A shares at
net asset value with no sales charge, and will be subject to a CDSC of 1.00%
on redemptions made within 12 months of purchase.
 
  Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any serv-
ice or distribution fees.
 
  In deciding which Class of Portfolio shares to purchase, investors should
consider the following factors, as well as any other relevant facts and cir-
cumstances:
 
  Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regu-
lar investment may wish to consider Class A shares; as the investment accumu-
lates shareholders may qualify for reduced sales charges and the shares are
subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Portfolio.
Any investment return on these additional invested amounts may partially or
wholly offset the higher annual expenses of these Classes. Because the Portfo-
lio's future return cannot be predicted, however, there can be no assurance
that this would be the case.
 
  Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature, and therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.
          
  Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Portfolio. In addition, Class A
share purchases, of $500,000 or more, will be made at net asset value with no
initial sales charge, but will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase. The $500,000 investment may be met by add-
ing the purchase to the net     
 
4
<PAGE>
 
       
PROSPECTUS SUMMARY (CONTINUED)
 
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney listed under "Exchange Privilege." Class A share pur-
chases also may be eligible for a reduced initial sales charge. See "Purchase
of Shares." Because the ongoing expenses of Class A shares may be lower than
those for Class B and Class C shares, purchasers eligible to purchase Class A
shares at net asset value or at a reduced sales charge should consider doing
so.
   
  Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.     
 
  See "Purchase of Shares" and "Management of the Fund" for a complete descrip-
tion of the sales charges and service and distribution fees for each Class of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and "Ex-
change Privilege" for other differences between the Classes of shares.
   
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without sales
charge as investment alternatives under both of these programs. See "Purchase
of Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs."     
   
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained with Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
other institutional investors, may purchase shares directly from the Fund
through the Fund's transfer agent, First Data Investor Services Group, Inc.
("First Data"). See "Purchase of Shares."     
   
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed Retire-
ment Plan. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes is $25. The minimum investment requirements
for purchase of Portfolio     
 
                                                                               5
<PAGE>
 
       
PROSPECTUS SUMMARY (CONTINUED)
   
shares through the Systematic Investment Plan are described below. See "Pur-
chase of Shares."     
   
SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A, Class B and Class C shares and the subse-
quent investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a quar-
terly basis is $50. See "Purchase of Shares."     
 
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
 
MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc. (the
"Manager") serves as the Portfolio's investment manager. The Manager is a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is
a wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a diversified
financial services holding company engaged, through its subsidiaries,
principally in four business segments: Investment Services, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
See "Management of the Fund."
   
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined. See "Exchange Privilege."     
 
VALUATION OF SHARES Net asset value of the Portfolio for the prior day gener-
ally is quoted daily in the financial section of most newspapers and is also
available from a Smith Barney Financial Consultant. See "Valuation of Shares."
 
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid quar-
terly on shares of the Portfolio. Distributions of net realized capital gains,
if any, are paid annually. See "Dividends, Distributions and Taxes."
 
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution rein-
vestments will become eligible for conversion to Class A shares on a pro rata
basis. See "Dividends, Distributions and Taxes."
 
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The value of the Portfolio's
investments, and thus the net asset value of the Portfolio's shares, will fluc-
tuate in
 
6
<PAGE>
 
       
PROSPECTUS SUMMARY (CONTINUED)
 
response to changes in market and economic conditions, as well as the financial
condition and prospects of issuers in which the Portfolio invests. The Portfo-
lio may invest in foreign securities. Investments in foreign securities incur
higher costs than investments in U.S. securities, including higher costs in
making securities transactions as well as foreign government taxes which may
reduce the investment return of the Portfolio. In addition, foreign investments
may include additional risks associated with currency exchange rates, less com-
plete financial information about individual companies, less market liquidity
and political instability. See "Investment Objective and Management Policies"
and "Appendix."
 
THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, the Portfolio's operating
expenses for its most recent fiscal year:
 
<TABLE>   
<CAPTION>
            EQUITY INCOME PORTFOLIO             CLASS A CLASS B CLASS C CLASS Y
-------------------------------------------------------------------------------
 <S>                                            <C>     <C>     <C>     <C>
 SHAREHOLDER TRANSACTION EXPENSES
   Maximum sales charge imposed on purchases
     (as a percentage of offering price)         5.00%   None    None    None
   Maximum CDSC (as a percentage of original
     cost or redemption proceeds, whichever is   None*   5.00%   1.00%   None
     lower)
</TABLE>    
 
<TABLE>   
<CAPTION>
                                       CLASS A CLASS B CLASS C CLASS Y
----------------------------------------------------------------------
 <S>                                   <C>     <C>     <C>     <C>
 ANNUAL PORTFOLIO OPERATING EXPENSES
   (as a percentage of average net assets)
   Management fees                      0.58%   0.58%   0.58%   0.58%
   12b-1 fees**                         0.25    1.00    1.00     --
   Other expenses                       0.12    0.13    0.15    0.08
----------------------------------------------------------------------
 TOTAL PORTFOLIO OPERATING EXPENSES     0.95%   1.71%   1.73%   0.66%
----------------------------------------------------------------------
</TABLE>    
   
  * Purchases of Class A shares of $500,000 or more, will be made at net asset
    value with no sales charge, but will be subject to a CDSC of 1.00% on
    redemptions made within 12 months of purchase.     
 ** Upon conversion of Class B shares to Class A shares, such shares will no
    longer be subject to a distribution fee. Class C shares do not have a
    conversion feature and, therefore, are subject to an ongoing distribution
    fee. As a result, long-term shareholders of Class C shares may pay more
    than the economic equivalent of the maximum front-end sales charge
    permitted by the National Association of Securities Dealers, Inc.
          
  Class A shares of the Portfolio purchased through the Smith Barney Asset One
Program will be subject to an annual asset-based fee, payable quarterly, in
lieu of the initial sales change. The fee will vary to a maximum of 1.50%,
depending on the amount of assets held through the Program. For more informa-
tion, please call your Smith Barney Financial Consultant.     
 
 
                                                                               7
<PAGE>
 
       
PROSPECTUS SUMMARY (CONTINUED)
   
  The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of the Portfolio's shares and
investors may actually pay lower or no charges, depending on the amount pur-
chased and, in the case of Class B, Class C and certain Class A shares, the
length of time the shares are held and whether the shares are held through the
Smith Barney 401(k) and ExecChoice(TM) Programs. See "Purchase of Shares" and
"Redemption of Shares." Smith Barney receives an annual 12b-1 service fee of
0.25% of the value of average daily net assets of Class A shares. Smith Barney
also receives with respect to Class B and Class C shares an annual 12b-1 fee of
1.00% of the value of average daily net assets of the respective Classes, con-
sisting of a 0.75% distribution fee and a 0.25% service fee. "Other expenses"
in the above table include fees for shareholder services, custodial fees, legal
and accounting fees, printing costs and registration fees.     
 
EXAMPLE
 
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Portfolio will bear directly or indirect-
ly. The example assumes payment by the Portfolio of operating expenses at the
levels set forth in the table above. See "Purchase of Shares," "Redemption of
Shares" and "Management of the Fund."
 
<TABLE>   
<CAPTION>
  EQUITY
  INCOME
  PORTFOLIO   1 YEAR 3 YEARS 5 YEARS 10 YEARS*
----------------------------------------------
  <S>         <C>    <C>     <C>     <C>
  An investor
  would pay the
  following
  expenses on a
  $1,000
  investment,
  assuming (1)
  5.00% annual
  return and (2)
  redemption
  at the end of
  each time
  period:
    Class A    $59     $79    $100     $161
    Class B     68      84     104      184
    Class C     28      54      94      204
    Class Y      7      21      37       82
  An investor
  would pay the
  following
  expenses on the
  same investment,
  assuming the
  same annual
  return and no
  redemption:
    Class A    $59     $79    $100     $161
    Class B     18      54      94      184
    Class C     18      54      94      204
    Class Y      7      21      37       82
----------------------------------------------
</TABLE>    
* Ten-year figures assume conversion of Class B shares to Class A shares at the
  end of the eighth year following the date of purchase.
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, each Portfolio's actual return will vary and may be
greater or less than 5.00% THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
8
<PAGE>
 
       
FINANCIAL HIGHLIGHTS
   
 The following information has been audited by KPMG Peat Marwick LLP, indepen-
dent auditors, whose report thereon appears in the Fund's annual report dated
December 31, 1996. The information set out below should be read in conjunction
with the financial statements and related notes that also appear in the Fund's
Annual Report to Shareholders, which is incorporated by reference into the
Statement of Additional Information.     
       
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
 
<TABLE>   
<CAPTION>
EQUITY INCOME PORTFOLIO
CLASS A SHARES                        1996      1995      1994(1)    1993      1992      1991
------------------------------------------------------------------------------------------------
<S>                                 <C>       <C>       <C>        <C>       <C>       <C>
NET ASSET VALUE, BEGINNING OF YEAR    $14.59    $12.18    $13.31     $12.48    $12.51    $10.54
------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income                  0.36      0.39      0.43       0.46      0.50      0.56
 Net realized and unrealized gain
  (loss)                                1.99      3.59     (1.00)      1.56      0.38      2.19
------------------------------------------------------------------------------------------------
Total Income (Loss) from
 Operations                             2.35      3.98     (0.57)      2.02      0.88      2.75
------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                 (0.36)    (0.39)    (0.42)     (0.46)    (0.51)    (0.73)
 Net realized gains (2)                (1.79)    (1.18)    (0.14)     (0.73)    (0.40)    (0.05)
------------------------------------------------------------------------------------------------
Total Distributions                    (2.15)    (1.57)    (0.56)     (1.19)    (0.91)    (0.78)
------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR          $14.79    $14.59    $12.18     $13.31    $12.48    $12.51
------------------------------------------------------------------------------------------------
TOTAL RETURN (P)                       16.06%    33.05%    (4.31)%    16.38%     7.23%    26.57%
------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)      $645,935  $617,431  $544,572   $627,870  $573,085  $583,686
------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                               0.95%     1.02%     0.96%      0.91%     0.92%     0.84%
 Net investment income                  2.28      2.78      3.31       3.42      3.97      4.80
------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                   49%       51%       27%        46%       39%       45%
------------------------------------------------------------------------------------------------
AVERAGE COMMISSION PER SHARE PAID
 ON EQUITY TRANSACTIONS(3)             $0.06     $0.06       --         --        --        --
</TABLE>    
 
<TABLE>   
-------------------------------------------------------------------------------
<CAPTION>
CLASS A SHARES (CONTINUED)              1990       1989      1988      1987
-------------------------------------------------------------------------------
<S>                               <C> <C>        <C>       <C>       <C>
NET ASSET VALUE, BEGINNING OF
 YEAR                                   $12.69     $11.00    $10.05    $11.40
-------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income                    0.67       0.70      0.61      0.71
 Net realized and unrealized gain
  (loss)                                 (1.87)      2.00      1.14     (0.93)
-------------------------------------------------------------------------------
Total Income (Loss) from
 Operations                              (1.20)      2.70      1.75     (0.22)
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                   (0.70)     (0.70)    (0.63)    (0.50)
 Net realized gains (2)                  (0.25)     (0.31)    (0.17)    (0.63)
-------------------------------------------------------------------------------
Total Distributions                      (0.95)     (1.01)    (0.80)    (1.13)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR            $10.54     $12.69    $11.00    $10.05
-------------------------------------------------------------------------------
TOTAL RETURN (P)                         (9.46)%    25.11%    17.67%    (2.83)%
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)        $513,586   $589,952  $517,948  $546,974
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                 0.45%      0.44%     0.49%     0.45%
 Net investment income                    5.69       5.65      5.58      5.90
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                     48%        38%       26%       51%
-------------------------------------------------------------------------------
</TABLE>    
(1) On October 10, 1994, former Class C shares were exchanged into Class A
    shares and therefore Class C share activity for the period from January 1,
    1994 through October 9, 1994 is included with Class A Share activity.
(2)Net short term gains, if any, are included and reported as ordinary income
    for income tax purposes.
   
(3)As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of the average commissions per share.     
 (P) Total returns do not reflect any sales charges.
 
                                                                              9
<PAGE>
 
       
FINANCIAL HIGHLIGHTS (CONTINUED)
   
FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:     
 
 
<TABLE>   
<CAPTION>
EQUITY INCOME PORTFOLIO
CLASS B SHARES            1996     1995    1994(1)
---------------------------------------------------------------------------------
<S>                      <C>      <C>      <C>         <C>       <C>          <C>
NET ASSET VALUE,
 BEGINNING OF YEAR        $14.54   $12.15   $12.54
---------------------------------------------------------------------------------
INCOME (LOSS) FROM
 OPERATIONS:
 Net investment income      0.25     0.24     0.03
 Net realized and
  unrealized gains
  (loss)                    1.98     3.62    (0.19)
---------------------------------------------------------------------------------
Total Income (Loss)
 from Operations            2.23     3.86    (0.16)
---------------------------------------------------------------------------------
LESS DISTRIBUTIONS
 FROM:
 Net investment income     (0.24)   (0.29)   (0.09)
 Net realized gains (2)    (1.79)   (1.18)   (0.14)
---------------------------------------------------------------------------------
Total Distributions        (2.03)   (1.47)   (0.23)
---------------------------------------------------------------------------------
NET ASSET VALUE, END OF
 YEAR                     $14.74   $14.54   $12.15
---------------------------------------------------------------------------------
TOTAL RETURN (P)           15.22%   32.07%   (1.28)%++
---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
 (000S)                  $14,883   $6,065     $354
---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
 ASSETS:
 Expenses                   1.71%    1.73%    1.59%+*
 Net investment income      1.55     1.83     2.11+
---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE       49%      51%      27%
---------------------------------------------------------------------------------
AVERAGE COMMISSION PER
 SHARE PAID ON EQUITY
 TRANSACTIONS(3)           $0.06    $0.06      ---
---------------------------------------------------------------------------------
<CAPTION>
CLASS C SHARES            1996     1995    1994(4)       1993    1992(5)
---------------------------------------------------------------------------------
<S>                      <C>      <C>      <C>         <C>       <C>          <C>
NET ASSET VALUE,
 BEGINNING OF YEAR        $14.57   $12.18   $13.30       $12.48    $12.87
---------------------------------------------------------------------------------
INCOME (LOSS) FROM
 OPERATIONS:
 Net investment income      0.24     0.27     0.31         0.38      0.17
 Net realized and
  unrealized
  gain (loss)               1.98     3.59    (0.95)        1.53     (0.10)
---------------------------------------------------------------------------------
Total Income (Loss)
 from Operations            2.22     3.86    (0.64)        1.91      0.07
---------------------------------------------------------------------------------
LESS DISTRIBUTIONS
 FROM:
 Net investment income     (0.24)   (0.29)   (0.34)       (0.36)    (0.06)
 Net realized gains (2)    (1.79)   (1.18)   (0.14)       (0.73)    (0.40)
---------------------------------------------------------------------------------
Total Distributions        (2.03)   (1.47)   (0.48)       (1.09)    (0.46)
---------------------------------------------------------------------------------
NET ASSET VALUE, END OF
 YEAR                     $14.76   $14.57   $12.18       $13.30    $12.48
---------------------------------------------------------------------------------
TOTAL RETURN (P)           15.15%   32.01%   (4.91)%      15.46%    (0.57)%++
---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
 (000S)                  $33,365  $29,758  $27,507      $15,408    $1,504
---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
 ASSETS:
 Expenses                   1.73%    1.79%    1.75%        1.65%     1.58%+
 Net investment income      1.50     2.00     2.49         2.59      1.80+
---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE       49%      51%      27%          46%       39%
---------------------------------------------------------------------------------
AVERAGE COMMISSION PER
 SHARE PAID ON EQUITY
 TRANSACTIONS(3)           $0.06    $0.06      --           --        --
---------------------------------------------------------------------------------
</TABLE>    
(1)For the period from November 7, 1994 (inception date) to December 31, 1994.
(2) Net short term gains, if any, are included and reported as ordinary income
    for income tax purposes.
   
(3)As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.     
   
(4)On November 7, 1994 former Class B shares were renamed Class C shares.     
   
(5) For the period from December 2, 1992 (inception date) to December 31, 1992.
        
 ++ Total return is not annualized, as it may not be representative of the
    total return for the year.
 +  Annualized.
 (P) Total returns do not reflect any sales charges.
 * Amount has been restated from the December 31, 1994 Annual Report.
 
10
<PAGE>
 
   
FINANCIAL HIGHLIGHTS (CONTINUED)     
          
FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:     
 
<TABLE>   
<CAPTION>
EQUITY INCOME PORTFOLIO
CLASS Y SHARES                                                 1996(1)(2)
--------------------------------------------------------------------------
<S>                                                            <C>
NET ASSET VALUE, BEGINNING OF YEAR                               $15.06
--------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income                                             0.36
 Net realized and unrealized gain                                  1.58
--------------------------------------------------------------------------
Total Income from Operations                                       1.94
--------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                                            (0.41)
 Net realized gains(3)                                            (1.79)
--------------------------------------------------------------------------
Total Distributions                                               (2.20)
--------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR                                     $14.80
--------------------------------------------------------------------------
TOTAL RETURN                                                      12.86%++
--------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)                                  $30,169
--------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                                          0.66%+
 Net investment income                                             3.02+
--------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                                              49%
--------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS (4)     $0.06
--------------------------------------------------------------------------
</TABLE>    
   
(1) Per share amounts have been calculated using the monthly average shares
    method, which more appropriately presents per share data for this year
    since the use of the undistributed income method did not accord with
    results of operations.     
   
(2) For the period from February 6, 1996 (inception date) to December 31,
    1996.     
   
(3) Net short term gains, if any, are included and reported as ordinary income
    for income tax purposes.     
   
(4) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.     
++Total return is not annualized, as it may not be representative of the total
  return for the year.
   
+ Annualized.     
 
                                                                             11
<PAGE>
 
       
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
 
  The Portfolio seeks current income and long-term growth of income and capi-
tal by investing primarily, but not exclusively, in common stocks.
   
  The Portfolio invests primarily in common stocks offering a current return
from dividends and will also normally include some interest-paying debt obli-
gations (such as U.S. Government Obligations, investment grade bonds and
debentures) and high quality short-term debt obligations (such as commercial
paper and repurchase agreements collateralized by U.S. Government securities
with broker/dealers or other financial institutions, including the Fund's cus-
todian). At least 65% of the Portfolio's assets will at times be invested in
equity securities. The Portfolio may also purchase preferred stocks and con-
vertible securities. Temporary defensive investments or a higher percentage of
debt securities may be held when deemed advisable by the Manager. To the
extent the Portfolio's assets are invested for temporary defensive purposes,
such assets will not be invested in a manner designed to achieve the Portfo-
lio's investment objective. In the selection of common stock investments,
emphasis is generally placed on issues with established dividend records as
well as potential for price appreciation. From time to time, however, a por-
tion of the assets may be invested in non-dividend paying stocks. The Portfo-
lio may make investments in foreign securities, though management currently
intends to limit such investments to 5% of the Portfolio's assets (including
EDRs, CDRs and GDRs), and an additional 10% of its assets may be invested in
sponsored American Depositary Receipts representing shares in foreign securi-
ties that are traded in United States securities markets.     
 
  The Portfolio's investment objective and policies, are non-fundamental and,
as such, may be changed by the Board of Directors, provided such change is not
prohibited by the investment restrictions (which are set forth in the State-
ment of Additional Information) or applicable law, and any such change will
first be disclosed in the then current prospectus.
    
The Portfolio may also invest in (I)
options (including swaps, collars, floors and caps) ; (ii) REITs;(iii)
unseasoned issuers;( iv) investment companies; and 
borrow money on a temporary basis.
    
 

  PORTFOLIO TRANSACTIONS AND TURNOVER
 
  All orders for transactions in securities and options on behalf of the Port-
folio are placed by the Manager with broker/dealers that the Manager selects,
including Smith Barney and other affiliated brokers. Brokerage will be allo-
cated to Smith Barney, to the extent and in the manner permitted by applicable
law, provided that, in the judgment of the Board of Directors of the Fund, the
commission, fee or other remuneration received or to be received by Smith Bar-
ney (or any broker/dealer affiliate of Smith Barney that is also a member of a
securities exchange) is reasonable and fair compared to the commission, fee or
other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a securi-
ties exchange during the same or comparable period of time. The Fund normally
expects to allocate to Smith Barney between
 
12
<PAGE>
 
       
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
50% and 60% of the Portfolio's transactions to be executed for such account on
an agency basis. In all trades directed to Smith Barney, the Fund has been
assured that its orders will be accorded priority over those received from
Smith Barney for its own account or for any of its directors, officers or
employees. The Fund will not deal with Smith Barney in any transaction in which
Smith Barney acts as principal.
 
  Although it is anticipated that most investments of the Portfolio will be
long-term in nature, the rate of portfolio turnover will depend upon market and
other conditions, and it will not be a limiting factor when the Manager
believes that portfolio changes are appropriate. It is expected that the Port-
folio's annual turnover rate will not exceed 100%. As the portfolio turnover
rate increases, so will the Portfolio's brokerage and other transaction related
expenses. Investors should realize that risk of loss is inherent in the owner-
ship of any securities and that shares of the Portfolio will fluctuate with the
market values of its securities.
 
VALUATION OF SHARES
 
 
  The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Portfolio's net assets attributable to each Class by the total
number of shares of the Class outstanding.
 
  Securities that are listed or traded on a securities exchange are valued at
the last sale price on the principal exchange on which they are listed and
securities trading on the NASDAQ System are valued at the last sale price
reported as of the close of the NYSE. If no last sale is reported, the forego-
ing securities and over-the-counter securities other than those traded on the
NASDAQ System are valued at the mean between the last reported bid and asked
prices. Debt obligations are valued at the mean between the bid and asked quo-
tations for those securities or if no quotations are available, then for secu-
rities of similar type, yield and maturity. Short-term investments that have a
maturity of more than 60 days are valued at prices based on market quotations
for securities of similar type, yield and maturity. Short-term investments that
have a maturity of 60 days or less are valued at amortized cost when the Board
of Directors has determined that amortized cost equals fair value, unless mar-
ket conditions dictate otherwise. Other investments of the Portfolio, if any,
including restricted securities, are valued at a fair value determined by the
Board of Directors in good faith.
   
DIVIDENDS, DISTRIBUTIONS AND TAXES     
 
 
  DIVIDENDS AND DISTRIBUTIONS
 
  The Fund declares quarterly income dividends on shares of the Portfolio and
makes annual distributions of capital gains, if any, on such shares.
 
                                                                              13
<PAGE>
 
       
          
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)     
 
 
  If a shareholder does not otherwise instruct, dividends and capital gain dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.
 
  Income dividends and capital gain distributions that are invested are cred-
ited to shareholders' accounts in additional shares at the net asset value as
of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by First Data should notify First Data in writing at
least five business days prior to the payment date to permit the change to be
entered in the shareholder's account.
 
  The per share dividends on Class B and Class C shares of the Portfolio may be
lower than the per share dividends on Class A and Class Y shares principally as
a result of the distribution fee applicable with respect to Class B and Class C
shares. The per share dividends on Class A shares of the Portfolio may be lower
than the per share dividends on Class Y shares principally as a result of the
service fee applicable to Class A shares. Distributions of capital gains, if
any, will be in the same amount for Class A, Class B, Class C and Class Y
shares.
 
  TAXES
 
  The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Code to be relieved of federal income tax on that part of
its net investment income and realized capital gains which it pays out to its
shareholders. To qualify, the Portfolio must meet certain tests, including dis-
tributing at least 90% of its investment company taxable income, and deriving
less than 30% of its gross income from the sale or other disposition of certain
investments held for less than three months.
 
  Dividends from net investment income and distributions of realized short-term
capital gains on the sale of securities, whether paid in cash or automatically
invested in additional shares of the same Portfolio, are taxable to sharehold-
ers of the Portfolio as ordinary income. The Portfolio's dividends will not
qualify for the dividends received deduction for corporations. Dividends and
distributions declared by the Portfolio may also be subject to state and local
taxes. Distributions out of net long-term capital gains (i.e., net long-term
capital gains in excess of net short-term capital losses) are taxable to share-
holders as long-term capital gains. Information as to the tax status of divi-
dends paid or deemed paid in each calendar year will be mailed to shareholders
as early in the succeeding year as practical but not later than January 31.
 
14
<PAGE>
 
          
PURCHASE OF SHARES     
 
 
  GENERAL
   
  The Portfolio offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC
and are available only to investors investing a minimum of $5,000,000 (except
for purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount). The Portfolio also
offers a fifth class of shares: Class Z shares, which are offered without a
sales charge, CDSC, service fee or distribution fee, exclusively to tax-exempt
employee benefit and retirement plans of Smith Barney and its affiliates.
Investors meeting these criteria who are interested in acquiring Class Z
shares should contact a Smith Barney Financial Consultant for a Class Z Pro-
spectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to pur-
chase.     
   
  Purchases of Portfolio shares must be made through a brokerage account main
tained with Smith Barney, an Introducing Broker or an investment dealer in the
selling group. In addition, certain investors, including qualified retirement
plans and certain other institutional investors, may purchase shares directly
from the Fund through First Data. When purchasing shares of the Portfolio,
investors must specify whether the purchase is for Class A, Class B, Class C
or Class Y shares. Smith Barney and other broker/dealers may charge their cus-
tomers an annual account maintenance fee in connection with a brokerage
account through which an investor purchases or holds shares. Accounts held
directly at First Data are not subject to a maintenance fee.     
   
  Investors in Class A, Class B and Class C shares may open an account by mak-
ing an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan in the Portfolio. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000. Sub-
sequent investments of at least $50 may be made for all Classes. For partici-
pants in retirement plans qualified under Section 403(b)(7) or Section 401(a)
of the Code, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes
in the Portfolio is $25. For shareholders purchasing shares of the Portfolio
through the Systematic Investment Plan on a monthly basis, the minimum initial
investment requirement for Class A, Class B and Class C shares and the subse-
quent investment requirement for all Classes is $25. For shareholders purchas-
ing shares of the Portfolio through the Systematic Investment Plan on a quar-
terly basis, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes
is $50. There are no minimum investment requirements     
 
                                                                             15
<PAGE>
 
       
PURCHASE OF SHARES (CONTINUED)
 
 
in Class A shares for employees of Travelers and its subsidiaries, including
Smith Barney, Directors or Trustees of any of the Smith Barney Mutual Funds,
and their spouses and children. The Fund reserves the right to waive or change
minimums, to decline any order to purchase its shares and to suspend the
offering of shares from time to time. Shares purchased will be held in the
shareholder's account by the Fund's transfer agent, First Data. Share certifi-
cates are issued only upon a shareholder's written request to First Data.
 
  Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day a Portfolio calculates its net asset
value, are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or Introducing Brokers prior to the
close of regular trading on the NYSE on any day a Portfolio calculates its net
asset value, are priced according to the net asset value determined on that
day, provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers, purchasing through Smith Barney, payment for Portfolio
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.
 
 SYSTEMATIC INVESTMENT PLAN
   
  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on
a quarterly basis to charge the regular bank account or other financial insti-
tution indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
First Data. The Systematic Investment Plan also authorizes Smith Barney to
apply cash held in the shareholder's Smith Barney brokerage account or redeem
the shareholder's shares of a Smith Barney money market fund to make additions
to the account. Additional information is available from the Fund or a Smith
Barney Financial Consultant.     
 
16
<PAGE>
 
       
PURCHASE OF SHARES (CONTINUED)
 
 
 INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
 
  The sales charges applicable to purchases of Class A shares of each Portfolio
are as follows:
 
<TABLE>   
<CAPTION>
                                  SALES CHARGE
                         ------------------------------
                                                             DEALERS'
                              % OF           % OF       REALLOWANCE AS % OF
  AMOUNT OF INVESTMENT   OFFERING PRICE AMOUNT INVESTED   OFFERING PRICE
---------------------------------------------------------------------------
  <S>                    <C>            <C>             <C>
  Less than $25,000           5.00%          5.26%             4.50%
  $ 25,000 -  49,999          4.00           4.17              3.60
   50,000 -  99,999           3.50           3.63              3.15
   100,000 - 249,999          3.00           3.09              2.70
   250,000 - 499,999          2.00           2.04              1.80
   500,000   and over          *               *                 *
---------------------------------------------------------------------------
</TABLE>    
   
* Purchases of Class A shares of $500,000 or more, will be made at net asset
  value without any initial sales charge, but will be subject to a CDSC of
  1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
  shares is payable to Smith Barney, which compensates Smith Barney Financial
  Consultants and other dealers whose clients make purchases of $500,000 or
  more. The CDSC is waived in the same circumstances in which the CDSC
  applicable to Class B and Class C shares is waived. See "Deferred Sales
  Charge Alternatives" and "Waivers of CDSC."     
 
  Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
   
  The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Portfolio made at one time by "any person," which
includes an individual, and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.     
 
 INITIAL SALES CHARGE WAIVERS
   
  Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families
of such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such per-
sons and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect with the combination of such
company with the Portfolio by merger, acquisition of assets or otherwise; (c)
purchases of Class A shares by any client of a newly employed Smith Barney
Financial Consultant (for a period up to 90 days from the commencement of the
Financial Consultant's employment with Smith Barney), on the     
 
                                                                              17
<PAGE>
 
       
PURCHASE OF SHARES (CONTINUED)
   
condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the Financial Con-
sultant and (iii) was subject to a sales charge; (d) purchases by shareholders
who have redeemed Class A shares in a Portfolio (or Class A shares of another
fund of the Smith Barney Mutual Funds that are offered with a sales charge) and
who wish to reinvest their redemption proceeds in the Portfolio, provided the
reinvestment is made within 60 calendar days of the redemption; (e) purchases
by accounts managed by registered investment advisory subsidiaries of Travel-
ers; and (f) direct rollovers by plan participants of distributions from a
401(k) plan offered to employees of Travelers or its subsidiaries or a 401(k)
plan enrolled in the Smith Barney 401(k) Program (Note: subsequent investments
will be subject to the applicable sales charge); (g) purchases by separate
accounts used to fund certain unregistered variable annuity contracts; and (h)
purchases by investors participating in a Smith Barney fee-based arrangement.
In order to obtain such discounts, the purchaser must provide sufficient infor-
mation at the time of purchase to permit verification that the purchase would
qualify for the elimination of the sales charge.     
 
 RIGHT OF ACCUMULATION
 
  Class A shares of a Portfolio may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Portfolio and of funds sponsored by Smith Barney which
are offered with a sales charge listed under "Exchange Privilege" then held by
such person and applying the sales charge applicable to such aggregate. In
order to obtain such discount, the purchaser must provide sufficient informa-
tion at the time of purchase to permit verification that the purchase qualifies
for the reduced sales charge. The right of accumulation is subject to modifica-
tion or discontinuance at any time with respect to all shares purchased there-
after.
 
 GROUP PURCHASES
 
  Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership- sanctioned plan
meeting certain require-
 
18
<PAGE>
 
       
PURCHASE OF SHARES (CONTINUED)
 
ments. One such requirement is that the plan must be open to specified part-
ners or employees of the employer and its subsidiaries, if any. Such plan may,
but is not required to, provide for payroll deductions, IRAs or investments
pursuant to retirement plans under Sections 401 or 408 of the Code. Smith Bar-
ney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales related expenses. An indi-
vidual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales
charge is based upon the aggregate dollar value of Class A shares offered with
a sales charge that have been previously purchased and are still owned by the
group, plus the amount of the current purchase. A "qualified group" is one
which (a) has been in existence for more than six months, (b) has a purpose
other than acquiring Portfolio shares at a discount and (c) satisfies uniform
criteria which enable Smith Barney to realize economies of scale in its costs
of distributing shares. A qualified group must have more than 10 members, must
be available to arrange for group meetings between representatives of the
Portfolio and the members, and must agree to include sales and other materials
related to the Portfolio in its publications and mailings to members at no
cost to Smith Barney. In order to obtain such reduced sales charge or to pur-
chase at net asset value, the purchaser must provide sufficient information at
the time of purchase to permit verification that the purchase qualifies for
the reduced sales charge. Approval of group purchase reduced sales charge
plans is subject to the discretion of Smith Barney.
 
  LETTER OF INTENT
 
  Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of each Portfolio and other funds of the Smith
Barney Mutual Funds offered with a sales charge over a 13 month period based
on the total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13
month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay the difference between
the sales charges applicable to the purchases made and the charges previously
paid, or an appropriate number of escrowed shares will be redeemed. Please
contact a Smith Barney Financial Consultant or First Data to obtain a Letter
of Intent application.
 
 
                                                                             19
<PAGE>
 
       
PURCHASE OF SHARES (CONTINUED)
 
  Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
make an initial minimum purchase of $1,000,000 in Class Y shares of the Portfo-
lio and agree to purchase a total of $5,000,000 of Class Y shares of the same
Portfolio within six months from the date of the Letter. If a total investment
of $5,000,000 is not made within the six-month period, all Class Y shares pur-
chased to date will be transferred to Class A shares, where they will be sub-
ject to all fees (including a service fee of 0.25%) and expenses applicable to
the Portfolio's Class A shares, which may include a CDSC of 1.00%. Please con-
tact a Smith Barney Financial Consultant or First Data for further information.
 
  DEFERRED SALES CHARGE ALTERNATIVES
   
  CDSC Shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in a Portfolio. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to CDSC.     
 
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Portfolio assets; (b) reinvestment of dividends or capital gain distribu-
tions; (c) with respect to Class B shares, shares redeemed more than five years
after their purchase; or (d) with respect to Class C shares and Class A shares
that are CDSC Shares, shares redeemed more than 12 months after their purchase.
   
  Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
purchases by Participating Plans, as described below. See "Purchase of
Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs."     
 
 
20
<PAGE>
 
       
PURCHASE OF SHARES (CONTINUED)
 
<TABLE>
<CAPTION>
      YEAR SINCE PURCHASE
      PAYMENT WAS MADE      CDSC
    -----------------------------
      <S>                   <C>
      First                 5.00%
      Second                4.00
      Third                 3.00
      Fourth                2.00
      Fifth                 1.00
      Sixth                 0.00
      Seventh               0.00
      Eighth                0.00
    -----------------------------
</TABLE>
   
  Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There will also be converted at that time such pro-
portion of Class B Dividend Shares owned by the shareholder as the total number
of his or her Class B shares converting at the time bears to the total number
of outstanding Class B shares (other than Class B Dividend Shares) owned by the
shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements --
 Class B Shares Conversion Feature."     
 
  In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that CDSC Shares acquired through an
exchange have been held will be calculated from the date that the shares
exchanged were initially acquired in one of the other Smith Barney Mutual
Funds, and Portfolio shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax purposes, the amount
of the CDSC will reduce the gain or increase the loss, as the case may be, on
the amount realized on redemption. The amount of any CDSC will be paid to Smith
Barney.
 
  To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 addi-
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
 
 
                                                                              21
<PAGE>
 
       
PURCHASE OF SHARES (CONTINUED)
 
  WAIVERS OF CDSC
   
  The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic cash withdrawals in amounts equal to or less than 2.00% per month of the
value of the shareholder's shares will be permitted for withdrawal plans that
were established prior to November 7, 1994); (c) redemptions of shares within
twelve months following the death or disability of the shareholder; (d)
redemption of shares made in connection with qualified distributions from
retirement plans or IRAs upon the attainment of age 59 1/2; (e) involuntary
redemptions; and (f) redemptions of shares to effect a combination of the
Portfolio with any investment company by merger, acquisition of assets or oth-
erwise. In addition, a shareholder who has redeemed shares from other funds of
the Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption.     
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
     
  SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS     
   
  Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice (TM) Program. To the extent applicable, the
same terms and conditions, which are outlined below, are offered to all plans
participating ("Participating Plans") in these Programs.     
   
  The Portfolio offers to Participating Plans Class A and Class C shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Pro-
grams. Class A and Class C shares acquired through the Participating Plans are
subject to the same service and/or distribution fees as the Class A and Class
C shares acquired by other investors; however, they are not subject to any
initial sales charge or contingent deferred sales charge ("CDSC"). Once a Par-
ticipating Plan has made an initial investment in the Portfolio, all of its
subsequent investments in the Portfolio must be in the same Class of shares,
except as otherwise described below.     
   
  Class A Shares. Class A shares of the Portfolio are offered without any ini-
tial sales charge or CDSC to any Participating Plan that purchases from
$1,000,000 or more of Class A shares of one or more funds of the Smith Barney
Mutual Funds.     
 
 
22
<PAGE>
 
       
PURCHASE OF SHARES (CONTINUED)
   
  Class C Shares. Class C shares of the Portfolio are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
one or more funds of the Smith Barney Mutual Funds.     
   
  401(k) and ExecChoice(TM) Plans On or After June 21, 1996. At the end of the
fifth year after the date the Participating Plan enrolled in the Smith Barney
401(k) Program or the Smith Barney ExecChoice(TM) Program, if its total Class C
holdings in all non-money market Smith Barney Mutual Funds equal at least
$1,000,000, it will be offered the opportunity to exchange all of its Class C
shares for Class A shares of the Portfolio. (For Participating Plans that 
were orig-
inally established through a Smith Barney retail brokerage account, the five
year period will be calculated from the date the retail brokerage account was
opened.) Such Participating Plans will be notified of the pending exchange in
writing within 30 days after the fifth anniversary of the enrollment date and,
unless the exchange offer has been rejected in writing, the exchange will occur
on or about the 90th day after the fifth anniversary date. If the Participating
Plan does not qualify for the five year exchange to Class A shares, a review of
the Participating Plan's holdings will be performed each quarter until either
the Participating Plan qualifies or the end of the eighth year.     
   
  401(k) Plans Opened Prior to June 21, 1996. In any year after the date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if its total
Class C holdings in all non-money market Smith Barney Mutual Funds equal at
least $500,000 as of the calendar year-end, the Participating Plan will be
offered the opportunity to exchange all of its Class C shares for Class A
shares of the Portfolio. Such Plans will be notified in writing within 30 days
after the last business day of the calendar year and, unless the exchange offer
has been rejected in writing, the exchange will occur on or about the last
business day of the following March.     
   
  Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Program,
whether opened before or after June 21, 1996 that has not previously qualified
for an exchange into Class A shares will be offered the opportunity to exchange
all of its Class C shares for Class A shares of the Portfolio, regardless of
asset size, at the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) or ExecChoice Programs. Such Plans will be
notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth anniversary
date. Once an exchange has occurred, a Participating Plan will not be eligible
to acquire additional Class C shares of the Portfolio but instead may acquire
Class A shares of the Portfolio. Any Class C shares not converted will continue
to be subject to the distribution fee.     
   
  Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
    
                                                                              23
<PAGE>
 
       
PURCHASE OF SHARES (CONTINUED)
   
such shares directly from First Data. For further information regarding the
these Programs, investors should contact a Smith Barney Financial Consultant.
       
  Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Smith Barney Mutual Funds are not available for purchase by Participating Plans
opened on or after June 21, 1996, but may continue to be purchased by any
Participating Plan in the Smith Barney 401(k) Program opened prior to such date
and originally investing in such Class. Class B shares acquired are subject to
a CDSC of 3.00% of redemption proceeds, if the Participating Plan terminates
within eight years of the date the Participating Plan first enrolled in the
Smith Barney 401(k) Program.     
   
  At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, it will be offered the opportunity to
exchange all of its Class B shares for Class A shares of a Fund. Such Partici-
pating Plan will be notified of the pending exchange in writing approximately
60 days before the eighth anniversary of the enrollment date and, unless the
exchange has been rejected in writing, the exchange will occur on or about the
eighth anniversary date. Once the exchange has occurred, a Participating Plan
will not be eligible to acquire additional Class B shares of a Fund but instead
may acquire Class A shares of the Portfolio. If the Participating Plan elects 
not to
exchange all of its Class B shares at that time, each Class B share held by the
Participating Plan will have the same conversion feature as Class B shares held
by other investors. See "Purchase of Shares--Deferred Sales Charge Alterna-
tives".     
   
  No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years sine those shareholders made the purchase pay-
ment from which the amount is being redeemed.     
   
  The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of any employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee     
 
24
<PAGE>
 
       
PURCHASE OF SHARES (CONTINUED)
   
in the Participating Plan; (e) hardship of an employee in the Participating
Plan to the extent permitted under Section 401(k) of the Code; or (f) redemp-
tions of shares in connection with a loan made by the Participating Plan to an
employee.     
 
EXCHANGE PRIVILEGE
   
  Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, Class B and Class C shares are subject to min-
imum investment requirements and all shares are subject to the other require-
ments of the fund into which exchanges are made.     
 
 FUND NAME
 
 Growth Funds
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Growth Opportunity Fund
    Smith Barney Managed Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Special Equities Fund
           
 Growth and Income Funds
       
    Concert Social Awareness Fund     
    Smith Barney Convertible Fund
    Smith Barney Growth and Income Fund
    Smith Barney Premium Total Return Fund
           
    Smith Barney Utilities Fund
 
 Taxable Fixed-Income Funds
   **Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
           
  +++Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities
  Portfolio
    Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
 
 Tax-Exempt Funds
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
    *Smith Barney Intermediate Maturity California Municipals Fund
    *Smith Barney Intermediate Maturity New York Municipals Fund
 
                                                                              25
<PAGE>
 
       
EXCHANGE PRIVILEGE (CONTINUED)
 
    Smith Barney Managed Municipals Fund Inc.
           
    Smith Barney Massachusetts Municipals Fund
    Smith Barney Muni Funds -- Florida Portfolio
    Smith Barney Muni Funds -- Georgia Portfolio
    *Smith Barney Muni Funds -- Limited Term Portfolio
    Smith Barney Muni Funds -- National Portfolio
    Smith Barney Muni Funds -- New York Portfolio
    Smith Barney Muni Funds -- Ohio Portfolio
    Smith Barney Muni Funds -- Pennsylvania Portfolio
    Smith Barney New Jersey Muncipals Fund Inc.
    Smith Barney Oregon Municipals Fund
    Smith Barney Tax-Exempt Income Fund
 
 International Funds
    Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
    Smith Barney World Funds, Inc. -- European Portfolio
    Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
    Smith Barney World Funds, Inc. -- International Balanced Portfolio
    Smith Barney World Funds, Inc. -- International Equity Portfolio
    Smith Barney World Funds, Inc. -- Pacific Portfolio
    
 Smith Barney Concert Allocation Series Inc.     
       
    Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio     
       
    Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
           
    Smith Barney Concert Allocation Series Inc. -- Growth Portfolio     
       
    Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
        
              
    Smith Barney Concert Allocation Series Inc. -- Income Portfolio     
 
 Money Market Funds
    +Smith Barney Exchange Reserve Fund
   ++Smith Barney Money Funds, Inc. -- Cash Portfolio
   ++Smith Barney Money Funds, Inc. -- Government Portfolio
  ***Smith Barney Money Funds, Inc. -- Retirement Portfolio
  +++Smith Barney Municipal Money Market Fund, Inc.
  +++Smith Barney Muni Funds -- California Money Market Portfolio
  +++Smith Barney Muni Funds -- New York Money Market Portfolio.
-------------------------------------------------------------------------------
  * Available for exchange with Class A, Class C and Class Y shares of the
    Portfolio.
   
 ** Available for exchange with Class A, and Class B shares of the Portfolio.
    In addition, shareholders who own Class C shares of the Portfolio through
    the Smith Barney 401(k) Program may exchange those shares for Class C
    shares of this fund.     
*** Available for exchange with Class A shares of the Portfolio.
  + Available for exchange with Class B and Class C shares of the Portfolio.
   
 ++ Available for exchange with Class A and Class Y shares of the Portfolio.
    In addition, Participating Plans prior to June 21, 1996 and investing in
    Class C shares may exchange Portfolio shares for Class C shares of this
    fund.     
+++ Available for exchange with Class A and Class Y shares of each Portfolio.
 
26
<PAGE>
 
       
EXCHANGE PRIVILEGE (CONTINUED)
   
  Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by a Portfolio, the exchanged Class B shares will be subject
to the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Portfolio that have been exchanged.     
 
  Class C Exchanges. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Portfolio
that have been exchanged.
   
  Class A and Class Y Exchanges. Class A and Class Y shareholders of the Port-
folio who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without imposi-
tion of any charge.     
 
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Portfolio's performance and its shareholders. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Portfolio's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, the Fund will provide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege and during the 15 day period the shareholder
will be required to (a) redeem his or her shares in the Portfolio or (b) remain
invested in the Portfolio or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.
 
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined, plus any applicable
sales charge differential. Redemption procedures discussed below are also
applicable for exchanging shares, and exchanges will be made upon receipt of
all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the
shares of the fund exchanged, no signature guarantee is required. A capital
gain or loss for tax purposes will be realized upon the exchange, depending
upon the cost or other basis of shares redeemed. Before exchanging shares,
investors should read the current prospectus describing the shares to be
acquired. The Portfolio reserves the right to modify or discontinue exchange
privileges upon 60 days' prior notice to share- holders.
 
                                                                              27
<PAGE>
 
          
REDEMPTION OF SHARES     
 
 
  The Fund is required to redeem the shares of the Portfolio tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
   
  If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following 
receipt of
proper tender, except on any days on which the NYSE is closed or as permitted
under the Investment Company Act of 1940, as amended (the "1940 Act") in
extraordinary circumstances. Generally, if the redemption proceeds are remitted
to a Smith Barney brokerage account, these funds will not be invested for the
shareholder's benefit without specific instruction and Smith Barney will bene-
fit from the use of temporarily uninvested funds. Redemption proceeds for
shares purchased by check, other than a certified or official bank check, will
be remitted upon clearance of the check, which may take up to ten days or more.
    
  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
 
  Smith Barney Funds, Inc./(Equity Income Portfolio)
  Class A, B, C or Y (please specify)
  c/o First Data Investor Services Group, Inc.
     
  P.O. Box 5128     
     
  Westborough, Massachusetts 01581-5128     
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a written redemption request in excess of
$2,000 or share certificate stock power must be guaranteed by an eligible
guarantor institution, such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Fed-
 
28
<PAGE>
 
       
REDEMPTION OF SHARES (CONTINUED)
       
eral Reserve System or member firm of a national securities exchange. Written
redemption requests of $2,000 or less do not require a signature guarantee
unless more than one such redemption request is made in any 10-day period.
Redemption proceeds will be mailed to an investor's address of record. First
Data may require additional supporting documents for redemptions made by corpo-
rations, executors, administrators, trustees or guardians. A redemption request
will not be deemed properly received until First Data receives all required
documents in proper form.
 
 AUTOMATIC CASH WITHDRAWAL PLAN
 
  The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the share-
holder is eligible to receive qualified distributions and has an account value
of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of a Portfolio. Any applicable CDSC will not be waived
on amounts withdrawn by a shareholder that exceed 1.00% per month of the value
of the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not
exceed 2.00% per month of the value of the shareholder's shares subject to the
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
  TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
 
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Portfolio shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a sig-
nature guarantee, that will be provided by First Data upon request. (Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with the applicant's signature guarantee when making his/her ini-
tial investment in the Porttfolio.)
 
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Portfolio's shares, may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this pro-
gram.
 
 
                                                                              29
<PAGE>
 
       
REDEMPTION OF SHARES (CONTINUED)
 
  A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal
fee for each wire redemption. Such charges, if any, will be assessed against
the shareholder's account from which shares were redeemed. In order to change
the bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee
and certain other documentation.
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day on which the NYSE is open. Exchange
requests received after the close of regular trading on the NYSE are processed
at the net asset value next determined.
 
  Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven (7) days prior notice to shareholders.
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in a Portfolio if the aggregate net asset value of the shares held in
that Portfolio account is less than $500. (If a shareholder has more than one
account in a Portfolio, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely on market reductions in
net asset value. Before the Fund exercises such right, shareholders will
receive written notice and will be permitted 60 days to bring accounts up to
the minimum to avoid involuntary liquidation.
 
30
<PAGE>
 
          
PERFORMANCE     
 
 
 
  From time to time the Portfolio may include its total return, average annual
total return, yield and current dividend return in advertisements and/or other
types of sales literature. These figures are computed separately for Class A,
Class B, Class C and Class Y shares of each Portfolio. These figures are based
on historical earnings and are not intended to indicate future performance.
Total return is computed for a specified period of time assuming deduction of
the maximum sales charge, if any, from the initial amount invested and rein-
vestment of all income dividends and capital gain distributions on the rein-
vestment dates at prices calculated as stated in this Prospectus, then dividing
the value of the investment at the end of the period so calculated by the ini-
tial amount invested and subtracting 100%. The standard average annual total
return, as prescribed by the SEC is derived from this total return, which pro-
vides the ending redeemable value. Such standard total return information may
also be accompanied with nonstandard total return information for differing
periods computed in the same manner but without annualizing the total return or
taking sales charges into account. The Portfolio calculates current dividend
return for each of its Classes by dividing the current dividend by the net
asset value or the maximum public offering price (including sales charge) on
the last day of the period for which current dividend return is presented. Each
Class' current dividend return may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating cur-
rent dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Portfolio may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.
 
MANAGEMENT OF THE FUND
 
 
  BOARD OF DIRECTORS
 
  Overall responsibility for management and supervision of the Portfolio 
rests with
the Fund's Board of Directors. The Directors approve all significant agreements
between the Fund and the companies that furnish services to the Fund and the
Portfolio, including agreements with the Fund's distributor, investment manag-
er, custodian and transfer agent. The day-to-day operations of the Portfolio
are delegated to the Manager. The Statement of Additional Information contains
background information regarding each Director and executive officer of the
Fund.
 
  MANAGER
 
  Smith Barney Mutual Funds Management Inc. (the "Manager") manages the day-to-
day operations of the Portfolio pursuant to a management agreement entered
 
                                                                              31
<PAGE>
 
       
MANAGEMENT OF THE FUND (CONTINUED)
 
 
into by the Fund on behalf of the Portfolio under which the Manager offers the
Portfolio advice and assistance with respect to the acquisition, holding or
disposal of securities and recommendations with respect to other aspects and
affairs of the Portfolio and furnishes the Portfolio with bookkeeping, account-
ing and administrative services, office space and equipment, and the services
of the officers and employees of the Fund. By written agreement the Research
and other departments and staff of Smith Barney will furnish the Manager with
information, advice and assistance and will be available for consultation on
the Portfolios, thus Smith Barney may also be considered an investment adviser
to the Fund. Smith Barney's services are paid for by the Manager on the basis
of direct and indirect costs to Smith Barney of performing such services; there
is no charge to the Fund for such services.
   
  For the Portfolio's last fiscal year the management fee was 0.58% of the
Portfolio's average net assets. Total operating expenses of the Portfolio were
0.95%, 1.71%, 1.73% and 0.66% of average net assets for Class A, Class B, Class
C and Class Y shares, respectively.     
   
  The Manager was incorporated on March 12, 1968 under the laws of Delaware. As
of January 31, 1997 the Manager had aggregate assets under management in excess
of $80 billion. The Manager, Smith Barney and Holdings are each located at 388
Greenwich Street, New York, New York 10013. The term "Smith Barney" in the
title of the Fund has been adopted by permission of Smith Barney and is subject
to the right of Smith Barney to elect that the Fund stop using the term in any
form or combination of its name.     
 
 PORTFOLIO MANAGEMENT
   
  Bruce D. Sargent, a Vice President and Director of the Manager, is also a
Vice President and Director of Smith Barney Funds, Inc. and the portfolio man-
ager of the Portfolio. Mr. Sargent co-manages the day to day operations of the
Portfolio and has been involved in equity investing for over 25 years.     
   
  Ayako Weissman, Managing Director of Smith Barney, serves as co-manager of
the Portfolio. Ms. Weissman has been involved in equity investing for Smith
Barney for over 8 years.     
   
  Management's discussion and analysis, and additional performance information
regarding each Portfolio during the fiscal year ended December 31, 1996 is
included in the Annual Report dated December 31, 1996. A copy of the Annual
    
32
<PAGE>
 
          
MANAGEMENT OF THE FUND (CONTINUED)     
 
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
 
DISTRIBUTOR
 
 
  Smith Barney distributes shares of the Portfolio as principal underwriter and
as such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Portfolio
under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a serv-
ice fee with respect to Class A, Class B and Class C shares of the Portfolio at
the annual rate of 0.25% of the average daily net assets attributable to these
Classes. Smith Barney is also paid a distribution fee with respect to Class B
and Class C shares at the annual rate of 0.75% of the average daily net assets
attributable to these Classes. Class B shares that automatically convert to
Class A shares eight years after the date of original purchase will no longer
be subject to a distribution fee. The fees are used by Smith Barney to pay its
Financial Consultants for servicing shareholder accounts and, in the case of
Class B and Class C shares, to cover expenses primarily intended to result in
the sale of those shares. These expenses include: advertising expenses; the
cost of printing and mailing prospectuses to potential investors; payments to
and expenses of Smith Barney Financial Consultants and other persons who pro-
vide support services in connection with the distribution of shares; interest
and/or carrying charges; and indirect and overhead costs of Smith Barney asso-
ciated with the sale of Portfolio shares, including lease, utility, communica-
tions and sales promotion expenses.
 
  The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
 
  Payments under the Plan with respect to Class B and Class C shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Directors will evaluate the appropriate-
ness of the Plan and its payment terms on a continuing basis and in so doing
will consider all relevant factors, including expenses borne by Smith Barney,
amounts received under the Plan and proceeds of the CDSC.
 
 
                                                                              33
<PAGE>
 
          
ADDITIONAL INFORMATION     
 
 
  The Fund, an open-end, diversified investment company, was incorporated in
Maryland on December 2, 1966. The Fund has an authorized capital of
2,000,000,000 shares with a par value of $.01 per share. The Board of Direc-
tors has authorized the issuance of fifteen series of shares, each represent-
ing shares in one of fifteen separate Portfolios and may authorize the issu-
ance of additional series of shares in the future. The assets of each Portfo-
lio are segregated and separately managed and a shareholder's interest is in
the assets of the Portfolio in which he or she holds shares. Class A, Class B,
Class C, Class Y and Class Z (where available) shares of a Portfolio represent
interests in the assets of that Portfolio and have identical voting, dividend,
liquidation and other rights on the same terms and conditions except that
expenses related to the distribution of each Class of shares are borne solely
by each Class and each Class of shares has exclusive voting rights with
respect to provisions of the Fund's Rule 12b-1 distribution plan which pertain
to a particular Class. As described under "Voting" in the Statement of Addi-
tional Information, the Fund ordinarily will not hold shareholder meetings;
however, shareholders have the right to call a meeting upon a vote of 10% of
the Fund's outstanding shares for the purpose of voting to remove directors,
and the Fund will assist shareholders in calling such a meeting as required by
the 1940 Act. Shares do not have cumulative voting rights or preemptive rights
and are fully paid, transferable and nonassessable when issued for payment as
described in this Prospectus.
 
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103 serves as custodian of the Portfolio's invest-
ments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.
   
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund
at the end of the period covered. In an effort to reduce the Fund's printing
and mailing costs, the Fund plans to consolidate the mailing of its semi-
annual and annual reports by household. This consolidation means that a house-
hold having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this con-
solidation to apply to their account should contact their Smith Barney Finan-
cial Consultant or the Fund's transfer agent.     
 
34
<PAGE>
 
       
APPENDIX
 
 
  U.S. GOVERNMENT OBLIGATIONS
 
  In addition to Government National Mortgage Association ("GNMA") securities
and direct obligations of the U.S. Treasury (such as Treasury Bills, Notes and
Bonds), U.S. Government Obligations in which the Fund may invest include: (1)
obligations of, or issued by, Banks for Cooperatives, Federal Land Banks, Fed-
eral Intermediate Credit Banks, Federal Home Loan Banks, the Federal Home Loan
Bank Board, or the Student Loan Marketing Association; (2) other securities
fully guaranteed as to principal and interest by the United States of America;
(3) other obligations of, or issued by, or fully guaranteed as to principal and
interest by the Federal National Mortgage Association or any agency of the
United States; and (4) obligations currently or previously sold by the Federal
Home Loan Mortgage Corporation.
 
  FOREIGN INVESTMENTS
 
  The Portfolio will ordinarily purchase foreign securities that are traded in
the United States or purchase American Depositary Receipts, which are certifi-
cates issued by U.S. banks representing the right to receive securities of a
foreign issuer deposited with that bank or a correspondent bank. However, the
Portfolio may purchase the securities of foreign issuers directly in foreign
markets. Foreign securities may involve a high degree of risk. Foreign securi-
ties usually are denominated in foreign currencies, which means their value
will be affected by changes in exchange rates between other currencies and the
U.S. dollar as well as the other factors that affect securities prices. Foreign
companies may not be subject to accounting standards or governmental supervi-
sion comparable to U.S. companies, and there may be less publicly available
information about their operations. There is generally less governmental regu-
lation of foreign securities markets, and security trading practices abroad may
offer less protection to investors such as the Portfolio. Foreign securities
can also be affected by political or financial instability abroad, and may be
less liquid or more volatile than domestic investments.
 
  SECURITIES LENDING
 
  The Portfolio may seek to increase its net investment income by lending its
securities to unaffiliated brokers, dealers and other financial institutions,
provided such loans are callable at any time and are continuously secured by
cash or U.S. Government securities equal to no less than the market value,
determined daily, of the securities loaned. The risks in lending portfolio
securities consist of possible delay in recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Manage-
ment will limit such lending to not more than twenty percent of the value of
the Portfolio's total assets.
 
                                                                             A-1
<PAGE>
 
       
APPENDIX (CONTINUED)
 
 
  WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
   
  The Portfolio may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when secu-
rities are purchased or sold by the Portfolio with payment and delivery taking
place in the future in order to secure what is considered to be an advanta-
geous price and yield to the Portfolio at the time of entering into the trans-
action. The Fund's Custodian will maintain, in a segregated account of the
Portfolio, cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Portfolio's purchase commitments, provided
such securities have been determined by the Manager to be liquid and unencum-
bered, and are marked to market daily, pursuant to guidelines established by
the Directors; the Custodian will likewise segregate securities sold on a
delayed basis.     
 
  REPURCHASE AGREEMENTS
 
  The Portfolio may on occasion enter into repurchase agreements, wherein the
seller agrees to repurchase a security from the Portfolio at an agreed-upon
future date, normally the next business day. The resale price is greater than
the purchase price, which reflects the agreed-upon rate of return for the
period the Portfolio holds the security and which is not related to the coupon
rate on the purchased security. The Fund requires continual maintenance of the
market value of the collateral in amounts at least equal to the resale price,
thus risk is limited to the ability of the seller to pay the agreed-upon
amount on the delivery date; however, if the seller defaults, realization upon
the collateral by the Portfolio may be delayed or limited or the Portfolio
might incur a loss if the value of the collateral securing the repurchase
agreement declines and might incur disposition costs in connection with liqui-
dating the collateral. The Portfolio will only enter into repurchase agree-
ments with broker/dealers or other financial institutions that are deemed
creditworthy by the Manager under guidelines approved by the Board of Direc-
tors. It is the policy of the Fund not to invest in repurchase agreements that
do not mature within seven days if any such investment together with any other
illiquid assets held by the Portfolio amount to more than 15% of the Portfo-
lio's total assets.
 
A-2
<PAGE>
 
 
                                                                    SMITH BARNEY
                                               ---------------------------------
 
                                               A Member of TravelersGroup [LOGO]
 
 
 
 
 
 
 
 
 
                                                        SMITH BARNEY FUNDS, INC.
                                                                   EQUITY INCOME
                                                                       PORTFOLIO
 
                                                            388 Greenwich Street
                                                        New York, New York 10013
                                                                  
                                                               FD 2320 4/97     
<PAGE>

P R O S P E C T U S 

 
 
 
                                                        SMITH BARNEY FUNDS, INC.
 
                                                                  Equity Income
                                                                      Portfolio
                                                            Class Z Shares Only
                                                                
                                                             APRIL 30, 1997     
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 


[LOGO] SMITH BARNEY MUTUAL FUNDS
       Investing for your future.
       Every day. 
<PAGE>
 
       
PROSPECTUS                                                     
                                                            April 30, 1997     
   
Smith Barney Funds, Inc.     
   
Equity Income Portfolio     
388 Greenwich Street
New York, New York 10013
   
(800) 451-2010     
   
  The Equity Income Portfolio is one of four investment portfolios that cur-
rently comprise Smith Barney Funds, Inc. (the "Fund"). The Equity Income Port-
folio seeks current income and long-term growth of income and capital. It
invests primarily, but not exclusively, in common stocks.     
 
  This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including expenses, that prospective investors will find helpful
in making an investment decision. Investors are encouraged to read this Pro-
spectus carefully and retain it for future reference.
 
  The Class Z shares described in this Prospectus are currently offered exclu-
sively for sale to tax-exempt employee benefit and retirement plans of
Smith Barney Inc. ("Smith Barney") or any of its affiliates ("Qualified
Plans").
   
  Additional information about the Portfolio is contained in a Statement of
Additional Information dated April 30, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by con-
tacting a Smith Barney Financial Consultant. The Statement of Additional Infor-
mation has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety.     
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
       
TABLE OF CONTENTS                                                          DATE
 
<TABLE>   
<S>                                           <C>
PORTFOLIO EXPENSES                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            4
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    5
-------------------------------------------------
VALUATION OF SHARES                             6
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES              7
-------------------------------------------------
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES     7
-------------------------------------------------
PERFORMANCE                                     8
-------------------------------------------------
MANAGEMENT OF THE FUND                          9
-------------------------------------------------
ADDITIONAL INFORMATION                         10
-------------------------------------------------
APPENDIX                                      A-1
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
--------------------------------------------------------------------------------
 
2
<PAGE>
 
       
PORTFOLIO EXPENSES                                                         DATE
   
 The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of Class Z shares of the
Portfolio, based on operating expenses for Class Z shares for the fiscal year
ended December 31, 1996.     
 
<TABLE>   
  <S>                                   <C>   <C>
  ANNUAL PORTFOLIO OPERATING EXPENSES
    (as a percentage of average net assets)
    Management fees                           0.58%
    Other expenses                            0.04
---------------------------------------------------
  TOTAL PORTFOLIO OPERATING EXPENSES    0.62%
---------------------------------------------------
</TABLE>    
 
  The nature of the services for which the Fund pays management fees is
described under "Management of the Fund." "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
 
 EXAMPLE
   
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Portfolio will bear directly or indi-
rectly. The example assumes payment by the Portfolio of operating expenses at
the levels set forth in the table above. See "Purchase, Exchange and Redemp-
tion of Shares" and "Management of the Fund."     
 
<TABLE>   
<CAPTION>
                                                1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
 <S>                                            <C>    <C>     <C>     <C>
 An investor would pay the following expenses
 on a $1,000 investment in Class Z shares of
 the Portfolio, assuming (1) a 5.00% annual
 return and (2) redemption at the end of each
 time period:                                     $6     $20     $35     $77
</TABLE>    
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                              3
<PAGE>
 
       
FINANCIAL HIGHLIGHTS
   
  The following information has been audited by KPMG Peat Marwick LLP, indepen-
dent auditors, whose report thereon appears in the Fund's annual report dated
December 31, 1996. The information set out below should be read in conjunction
with the financial statements and related notes that also appear in the Fund's
Annual Report to Shareholders, which is incorporated by reference into the
Statement of Additional Information.     
   
FOR A SHARE OF CLASS Z CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:     
 
 
<TABLE>   
<CAPTION>
                              1996     1995    1994(1)
----------------------------------------------------------
  <S>                       <C>       <C>      <C>
  NET ASSET VALUE,
  BEGINNING OF YEAR           $14.61   $12.19   $12.54
----------------------------------------------------------
  INCOME (LOSS) FROM
  OPERATIONS:
   Net investment income        0.42     0.43     0.07
   Net realized and
   unrealized gain (loss)       1.99     3.59    (0.16)
----------------------------------------------------------
  Total Income (Loss) From
  Operations                    2.41     4.02    (0.09)
----------------------------------------------------------
  LESS DISTRIBUTIONS FROM:
   Net investment income       (0.41)   (0.42)   (0.12)
   Net realized gains(2)       (1.79)   (1.18)   (0.14)
----------------------------------------------------------
  Total Distributions          (2.20)   (1.60)   (0.26)
----------------------------------------------------------
  NET ASSET VALUE, END OF
  YEAR                        $14.82   $14.61   $12.19
----------------------------------------------------------
  TOTAL RETURN                 16.47%   33.41%   (0.73)%++
----------------------------------------------------------
  NET ASSETS, END OF YEAR
  (000S)                    $113,160  $98,661  $80,010
----------------------------------------------------------
  RATIOS TO AVERAGE NET
  ASSETS:
   Expenses                     0.62%    0.69%    0.42%+
   Net investment income        2.62     3.11     3.88+
----------------------------------------------------------
  PORTFOLIO TURNOVER RATE         49%      51%      27%
----------------------------------------------------------
  AVERAGE COMMISSIONS PER
  SHARE PAID ON
  EQUITY TRANSACTIONS(3)       $0.06    $0.06      --
----------------------------------------------------------
</TABLE>    
(1) For the period from November 7, 1994 (inception date) to December 31, 1994.
(2) Net short term gains, if any, are included and reported as ordinary income
    for income tax purposes.
   
(3) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.     
 ++Total return is not annualized, as it may not be representative of the total
   return for the year.
 + Annualized.
 
4
<PAGE>
 
          
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES     
 
  The Equity Income Portfolio (the "Portfolio") seeks current income and long-
term growth of income and capital by investing primarily, but not exclusively,
in common stocks. Of course, no assurance can be given that the Portfolio's
objective will be achieved.
   
  The Portfolio invests primarily in common stocks offering a current return
from dividends and will also normally include some interest-paying debt obli-
gations (such as U.S. Government Obligations, investment grade bonds and
debentures) and high quality short-term debt obligations (such as commercial
paper and repurchase agreements collateralized by U.S. Government securities
with broker/dealers or other financial institutions, including the Fund's cus-
todian). At least 65% of the Portfolio's assets will at times be invested in
equity securities. The Portfolio may also purchase preferred stocks and con-
vertible securities. Temporary defensive investments or a higher percentage of
debt securities may be held when deemed advisable by the Manager. To the
extent the Portfolio's assets are invested for temporary defensive purposes,
such assets will not be invested in a manner designed to achieve the Portfo-
lio's investment objective. In the selection of common stock investments,
emphasis is generally placed on issues with established dividend records as
well as potential for price appreciation. From time to time, however, a por-
tion of the assets may be invested in non-dividend paying stocks. The Portfo-
lio may make investments in foreign securities, though management currently
intends to limit such investments to 5% of the Portfolio's assets (including
EDRs, CDRs and GDRs), and an additional 10% of its assets may be invested in
sponsored American Depositary Receipts representing shares in foreign securi-
ties that are traded in United States securities markets.     
 
    
The Portfolio may also invest in (I)
options (including swaps, collars, floors and caps) ; (ii) REITs;(iii)
unseasoned issuers;( iv) investment companies; and 
borrow money on a temporary basis.
    

  The Portfolio's investment objective and policies, are non-fundamental and,
as such, may be changed by the Board of Directors, provided such change is not
prohibited by the investment restrictions (which are set forth in the State-
ment of Additional Information) or applicable law, and any such change will
first be disclosed in the then current prospectus.
 
 PORTFOLIO TRANSACTIONS AND TURNOVER
 
  All orders for transactions in securities and options on behalf of the Port-
folio are placed by the Manager with broker/dealers that the Manager selects,
including Smith Barney and other affiliated brokers. Brokerage will be allo-
cated to Smith Barney, to the extent and in the manner permitted by applicable
law, provided that, in the judgment of the Board of Directors of the Fund, the
commission, fee or other remuneration received or to be received by Smith Bar-
ney (or any broker/dealer affiliate of Smith Barney that is also a member of a
securities exchange) is reasonable and fair compared to the commission, fee or
other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a securi-
ties exchange during the same or compara-
 
                                                                              5
<PAGE>
 
       
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
ble period of time. The Fund normally expects to allocate to Smith Barney
between 50% and 60% of the Portfolio's transactions to be executed for such
account on an agency basis. In all trades directed to Smith Barney, the Fund
has been assured that its orders will be accorded priority over those received
from Smith Barney for its own account or for any of its directors, officers or
employees. The Fund will not deal with Smith Barney in any transaction in which
Smith Barney acts as principal.
 
  Although it is anticipated that most investments of the Portfolio will be
long-term in nature, the rate of portfolio turnover will depend upon market and
other conditions, and it will not be a limiting factor when the Manager
believes that portfolio changes are appropriate. It is expected that the Port-
folio's annual turnover rate will not exceed 100%. As the portfolio turnover
rate increases, so will the Portfolio's brokerage and other transaction related
expenses. Investors should realize that risk of loss is inherent in the owner-
ship of any securities and that shares of the Portfolio will fluctuate with the
market values of its securities.
 
VALUATION OF SHARES
 
 
  The net asset value per share of Class Z shares is determined as of the close
of regular trading on the New York Stock Exchange, Inc. ("NYSE") on each day
that the NYSE is open, by dividing the value of the Portfolio's net assets
attributable to Class Z by the total number of shares of the Class outstanding.
The per share net asset value of the Class Z shares may be higher than those of
other Classes because of lower expenses attributable to Class Z shares.
 
  Securities that are listed or traded on a securities exchange are valued at
the last sale price on the principal exchange on which they are listed and
securities trading on the NASDAQ System are valued at the last sale price
reported as of the close of the NYSE. If no last sale is reported, the forego-
ing securities and over-the-counter securities other than those traded on the
NASDAQ System are valued at the mean between the last reported bid and asked
prices. Debt obligations are valued at the mean between the bid and asked quo-
tations for those securities or if no quotations are available, then for secu-
rities of similar type, yield and maturity. Short-term investments that have a
maturity of more than 60 days are valued at prices based on market quotations
for securities of similar type, yield and maturity. Short-term investments that
have a maturity of 60 days or less are valued at amortized cost when the Board
of Directors has determined that amortized cost equals fair value, unless mar-
ket conditions dictate otherwise. Other investments of the Portfolio, if any,
including restricted securities, are valued at a fair value determined by the
Board of Directors in good faith.
 
6
<PAGE>
 
          
DIVIDENDS, DISTRIBUTIONS AND TAXES     
 
 
 DIVIDENDS AND DISTRIBUTIONS
 
  The Fund declares quarterly income dividends on shares of the Equity Income
Portfolio and makes annual distributions of capital gains, if any, on such
shares.
 
  Unless a shareholder is eligible for qualified distributions and instructs
that dividends and capital gain distributions on shares be paid in cash and
credited to the shareholder's account, dividends and capital gain distributions
will be reinvested automatically in additional shares of the Class at net asset
value as of the close of business on the payment date, subject to no sales
charge or CDSC.
 
 TAXES
 
  The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, to be relieved
of Federal income tax on that part of its net investment income and realized
capital gains which it pays out to its shareholders. To qualify, the Portfolio
must meet certain tests, including distributing at least 90% of its investment
company taxable income, and deriving less than 30% of its gross income from the
sale or other disposition of certain investments held for less than three
months.
 
  Dividends from net investment income and distributions of realized short-term
capital gains on the sale of securities, whether paid in cash or automatically
invested in additional shares of the Portfolio, are taxable to shareholders of
the Portfolio as ordinary income. The Portfolio's dividends will not qualify
for the dividends received deduction for corporations. Dividends and distribu-
tions declared by the Portfolio may also be subject to state and local taxes.
Distributions out of net long-term capital gains are taxable to shareholders as
long-term capital gains. Information as to the tax status of dividends deemed
paid in each calendar year will be mailed to shareholders as early in the suc-
ceeding year as practical but not later than January 31. Shareholders should
consult their plan document or tax advisers about the tax consequences associ-
ated with participating in a Qualified Plan.
 
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
 
 
  Purchases of the Portfolio's Class Z shares must be made in accordance with
the terms of a Qualified Plan. Purchases are effected at the net asset value
next determined after a purchase order is received by Smith Barney (the "trade
date"). Payment is due to Smith Barney on the third business day (the "settle-
ment date") after the trade date. Investors who make payment prior to the set-
tlement date may designate a temporary investment (such as a money market fund
of the Smith Barney Mutual Funds) for such payment until settlement date. The
Fund reserves the right to reject any purchase order and to suspend the offer-
ing of shares for a period of time. There are no minimum investment require-
ments for Class Z shares; however, the Fund reserves the right to vary this
policy at any time.
 
                                                                               7
<PAGE>
 
       
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES (CONTINUED)
 
 
  Purchase orders received by Smith Barney prior to the close of regular trad-
ing on the NYSE on any day that the Portfolio calculates its net asset value,
are priced according to the net asset value determined on that day. Orders
received after the close of regular trading on the NYSE are priced as of the
time that the net asset value per share is next determined. See "Valuation of
Shares." Certificates for Portfolio shares are issued upon request to the
Fund's transfer agent.
   
  Shareholders may redeem their shares on any day on which the Portfolio calcu-
lates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form prior to the close of regular trading on the NYSE are
priced at the net asset value per share determined on that day. Redemption
requests received after the close of regular trading on the NYSE are priced at
the net asset value next determined. Shareholders acquiring Class Z shares
should consult the terms of their Qualified Plan for redemption provisions.
    
  Holders of Class Z shares should consult their Qualified Plans for informa-
tion about available exchange options.
 
PERFORMANCE
 
 
  From time to time the Portfolio may include its total return, average annual
total return, yield and current dividend return for Class Z shares in adver-
tisements and/or other types of sales literature. These figures are based on
historical earnings and are not intended to indicate future performance. Total
return is computed for a specified period of time assuming deduction of the
maximum sales charge, if any, from the initial amount invested and reinvestment
of all income dividends and capital gain distributions on the reinvestment
dates at prices calculated as stated in this Prospectus, then dividing the
value of the investment at the end of the period so calculated by the initial
amount invested and subtracting 100%. The standard average annual total return,
as prescribed by the SEC is derived from this total return, which provides the
ending redeemable value. Such standard total return information may also be
accompanied with nonstandard total return information for differing periods
computed in the same manner but without annualizing the total return or taking
sales charges into account. The Portfolio calculates current dividend return
for Class Z by dividing the current dividend by the net asset value on the last
day of the period for which current dividend return is presented. The Portfo-
lio's current dividend return may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating cur-
rent dividend return should be considered when comparing the Portfolio's cur-
rent return to yields published for other investment companies and other
investment vehicles.
 
8
<PAGE>
 
       
PERFORMANCE (CONTINUED)
 
 
The Portfolio may also include comparative performance information in advertis-
ing or marketing Class Z shares. Such performance information may include data
from Lipper Analytical Services, Inc. and other financial publications.
 
MANAGEMENT OF THE FUND
 
 
 BOARD OF DIRECTORS
 
  Overall responsibility for management and supervision of the Portfolio 
rests with
the Fund's Board of Directors. The Directors approve all significant agreements
between the Fund and the companies that furnish services to the Fund and the
Portfolio, including agreements with the Fund's distributor, investment manag-
er, custodian and transfer agent. The day-to-day operations of the Portfolio
are delegated to the Portfolio's investment manager. The Statement of Addi-
tional Information contains background information regarding each Director and
executive officer of the Fund.
 
 MANAGER
 
  Smith Barney Mutual Funds Management Inc. (the "Manager") manages the day-to-
day operations of the Portfolio pursuant to a management agreement entered into
by the Fund on behalf of the Portfolio under which the Manager offers the Port-
folio advice and assistance with respect to the acquisition, holding or dis-
posal of securities and recommendations with respect to other aspects and
affairs of the Portfolio and furnishes the Portfolio with bookkeeping, account-
ing and administrative services, office space and equipment, and the services
of the officers and employees of the Fund. By written agreement research and
other departments and staff of Smith Barney will furnish the Manager with
information, advice and assistance and will be available for consultation on
the Fund's Portfolios, thus Smith Barney may also be considered an investment
adviser to the Fund. Smith Barney's services are paid for by the Manager; there
is no charge to the Fund for such services.
   
  For the Portfolio's last fiscal year the management fee was 0.58% of the
Portfolio's average net assets. The management agreement provides that the
Portfolio's management fee will be computed at the following annual rates:
0.60% of the first $500 million of the Portfolio's average daily net assets,
0.55% of the next $500 million of average daily net assets and 0.50% of average
daily net assets over $1 billion. Total operating expenses were 0.62% of the
Portfolio's average net assets for Class Z shares.     
 
  The Manager, incorporated on March 12, 1968 under the laws of Delaware, is a
wholly-owned subsidiary of Smith Barney Holdings Inc., the parent company of
 
                                                                               9
<PAGE>
 
       
MANAGEMENT OF THE FUND (CONTINUED)
   
Smith Barney. Smith Barney Holdings Inc. is a wholly-owned subsidiary of Trav-
elers Group Inc. ("Travelers"), which is a financial services holding company
engaged, through its subsidiaries, principally in four business segments:
Investment Services, Consumer Finance Services, Life Insurance Services and
Property & Casualty Insurance Services. As of January 31, 1997, the Manager
had aggregate assets under management in excess of $80 billion. The Manager,
Smith Barney and Smith Barney Holdings Inc. are each located at 388 Greenwich
Street, New York, New York 10013. The term "Smith Barney" in the title of the
Fund has been adopted by permission of Smith Barney and is subject to the
right of Smith Barney to elect that the Fund stop using the term in any form
or combination of its name.     
 
 PORTFOLIO MANAGEMENT
   
  Bruce D. Sargent, a Vice President and Director of the Manager, is also a
Vice President and Director of Smith Barney Funds, Inc. and the portfolio man-
ager of the Portfolio. Mr. Sargent co-manages the day to day operations of the
Portfolio and has been involved in equity investing for over 25 years.     
   
  Ayako Weissman, Managing Director of Smith Barney, serves as co-manager of
the Portfolio. Ms. Weissman has been involved in equity investing for Smith
Barney for over 8 years.     
   
  Management's discussion and analysis, and additional performance information
regarding the Portfolio during the fiscal year ended December 31, 1996 is
included in the Annual Report dated December 31, 1996. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.     
 
 DISTRIBUTOR
 
  Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidi-
ary of Travelers.
 
ADDITIONAL INFORMATION
 
 
  The Fund, an open-end, diversified investment company, was incorporated in
Maryland on December 2, 1966. The Fund has an authorized capital of
2,000,000,000 shares with a par value of $.01 per share. The Board of Direc-
tors has authorized the issuance of fifteen series of shares, each represent-
ing
 
10
<PAGE>
 
       
ADDITIONAL INFORMATION (CONTINUED)
 
shares in one of fifteen separate Portfolios and may authorize the issuance of
additional series of shares in the future. The assets of each Portfolio are
segregated and separately managed and a shareholder's interest is in the assets
of the Portfolio in which he or she holds shares. Class A, Class B, Class C,
Class Y and Class Z shares (where available) of a Portfolio represent interests
in the assets of that Portfolio and have identical voting, dividend, liquida-
tion and other rights on the same terms and conditions except that expenses
related to the distribution of each Class of shares are borne solely by each
Class and each Class of shares has exclusive voting rights with respect to pro-
visions of the Fund's Rule 12b-1 distribution plan which pertain to a particu-
lar Class. As described under "Voting" in the Statement of Additional Informa-
tion, the Fund ordinarily will not hold shareholder meetings; however, share-
holders have the right to call a meeting upon a vote of 10% of the Fund's out-
standing shares for the purpose of voting to remove directors and, as required
by the Investment Company Act of 1940, the Fund will assist shareholders in
calling such a meeting. Shares do not have cumulative voting rights or preemp-
tive rights and are fully paid, transferable and nonassessable when issued for
payment as described in this Prospectus.
 
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of the Portfolio's invest-
ments.
 
  First Data Investor Services Group, Inc. located at Exchange Place, Boston,
Massachusetts 02109, serves as the Fund's transfer agent.
 
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered.
 
                                                                              11
<PAGE>
 
       
APPENDIX
 
 U.S. GOVERNMENT OBLIGATIONS
 
  In addition to Government National Mortgage Association ("GNMA") securities
and direct obligations of the U.S. Treasury (such as Treasury Bills, Notes and
Bonds), U.S. Government Obligations in which the Fund may invest include: (1)
obligations of, or issued by, Banks for Cooperatives, Federal Land Banks, Fed-
eral Intermediate Credit Banks, Federal Home Loan Banks, the Federal Home Loan
Bank Board, or the Student Loan Marketing Association; (2) other securities
fully guaranteed as to principal and interest by the United States of America;
(3) other obligations of, or issued by, or fully guaranteed as to principal and
interest by the Federal National Mortgage Association or any agency of the
United States; and (4) obligations currently or previously sold by the Federal
Home Loan Mortgage Corporation.
 
 FOREIGN INVESTMENTS
 
  The Portfolio will ordinarily purchase foreign securities that are traded in
the United States or purchase American Depositary Receipts, which are certifi-
cates issued by U.S. banks representing the right to receive securities of a
foreign issuer deposited with that bank or a correspondent bank. However, the
Portfolio may purchase the securities of foreign issuers directly in foreign
markets. Foreign securities may involve a high degree of risk. Foreign securi-
ties usually are denominated in foreign currencies, which means their value
will be affected by changes in exchange rates between other currencies and the
U.S. dollar as well as the other factors that affect securities prices. Foreign
companies may not be subject to accounting standards or governmental supervi-
sion comparable to U.S. companies, and there may be less publicly available
information about their operations. There is generally less governmental regu-
lation of foreign securities markets, and security trading practices abroad may
offer less protection to investors such as the Portfolios. Foreign securities
can also be affected by political or financial instability abroad, and may be
less liquid or more volatile than domestic investments.
 
 SECURITIES LENDING
 
  The Portfolio may seek to increase its net investment income by lending its
securities to unaffiliated brokers, dealers and other financial institutions,
provided such loans are callable at any time and are continuously secured by
cash or U.S. Government securities equal to no less than the market value,
determined daily, of the securities loaned. The risks in lending portfolio
securities consist of possible delay in recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Manage-
ment will limit such lending to not more than twenty percent of the value of
the Portfolio's total assets.
 
                                                                             A-1
<PAGE>
 
       
APPENDIX (CONTINUED)
 
 
 WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
   
  The Portfolio may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when secu-
rities are purchased or sold by the Portfolio with payment and delivery taking
place in the future in order to secure what is considered to be an advanta-
geous price and yield to the Portfolio at the time of entering into the trans-
action. The Fund's Custodian will maintain, in a segregated account of each
Portfolio, cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Portfolio's purchase commitments, provided
such securities have been determined by the Manager to be liquid and unencum-
bered, and are marked to market daily, pursuant to guidelines established by
the Directors; the Custodian will likewise segregate securities sold on a
delayed basis.     
 
 REPURCHASE AGREEMENTS
 
  The Portfolio may on occasion enter into repurchase agreements, wherein the
seller agrees to repurchase a security from the Portfolio at an agreed-upon
future date, normally the next business day. The resale price is greater than
the purchase price, which reflects the agreed-upon rate of return for the
period the Portfolio holds the security and which is not related to the coupon
rate on the purchased security. The Fund requires continual maintenance of the
market value of the collateral in amounts at least equal to the resale price,
thus risk is limited to the ability of the seller to pay the agreed-upon
amount on the delivery date; however, if the seller defaults, realization upon
the collateral by the Portfolio may be delayed or limited or the Portfolio
might incur a loss if the value of the collateral securing the repurchase
agreement declines and might incur disposition costs in connection with liqui-
dating the collateral. The Portfolio will only enter into repurchase agree-
ments with broker/dealers or other financial institutions that are deemed
creditworthy by the Manager under guidelines approved by the Board of Direc-
tors. It is the policy of the Fund not to invest in repurchase agreements that
do not mature within seven days if any such investment together with any other
illiquid assets held by the Portfolio amount to more than 15% of the Portfo-
lio's total assets.
 
A-2
<PAGE>
 
 
                                               SMITH BARNEY
                                               ---------------------------------
                                               A Member of TravelersGroup [LOGO]
 
 
 
 
 
 
 
 
                                                                    SMITH BARNEY
                                                                     FUNDS, INC.
                                                                   EQUITY INCOME
                                                                       PORTFOLIO
 
 
                                                            388 Greenwich Street
                                                        New York, New York 10013
                                                                  
                                                               FD 0661 4/97     
PROSPECTUS

                                                        SMITH BARNEY FUNDS, INC.

                                                                           U. S.
                                                                      Government
                                                                      Securities
                                                                       Portfolio

   
                                                                  APRIL 30, 1997
    

                                                   Prospectus begins on page one

[LOGO]    Smith Barney Mutual Funds
          Investing for your future.
          Every day.

<PAGE>

   
--------------------------------------------------------------------------------
Prospectus                                                        April 30, 1997
--------------------------------------------------------------------------------

     Smith Barney Funds, Inc.
     U. S. Government Securities Portfolio
     388 Greenwich Street
     New York, New York 10013
     (800) 451-2010

     Smith Barney Funds, Inc. (the "Fund") is an investment company currently
offering a choice of four different Portfolios. The U.S. Government Securities
Portfolio (the "Portfolio") seeks high current income, liquidity and security of
principal from a portfolio of U.S. Government Obligations.

     This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.

     Additional information about the Portfolio is contained in a Statement of
Additional Information dated April 30, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by
contacting a Smith Barney Financial Consultant. The Statement of Additional
Information has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated by reference into this Prospectus in its entirety.

Smith Barney Inc.
Distributor
    

Smith Barney Mutual Funds Management Inc.
Investment Manager

   
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
    


                                                                               1
<PAGE>

--------------------------------------------------------------------------------
Table of Contents
--------------------------------------------------------------------------------

   
Prospectus Summary                                                             3
--------------------------------------------------------------------------------
Financial Highlights                                                          10
--------------------------------------------------------------------------------
Investment Objective and Management Policies                    13
--------------------------------------------------------------------------------
Valuation of Shares                                                           16
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                       17
--------------------------------------------------------------------------------
Purchase of Shares                                                            18
--------------------------------------------------------------------------------
Exchange Privilege                                                            28
--------------------------------------------------------------------------------
Redemption of Shares                                                          31
--------------------------------------------------------------------------------
Minimum Account Size                                                          34
--------------------------------------------------------------------------------
Performance                                                                  34
--------------------------------------------------------------------------------
Management of the Fund                                                  35
--------------------------------------------------------------------------------
Distributor                                                                   36
--------------------------------------------------------------------------------
Additional Information                                                    37
--------------------------------------------------------------------------------
Appendix                                                                     A-1
--------------------------------------------------------------------------------
    


--------------------------------------------------------------------------------
       No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
--------------------------------------------------------------------------------


2
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary
--------------------------------------------------------------------------------

     The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."

   
INVESTMENT OBJECTIVE The Fund is an open-end, management investment company.
The Portfolio seeks high current income, liquidity and security of principal
from a portfolio of U.S. Government Obligations. See "Investment Objective and
Management Policies."

ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. In
addition, a fifth Class, Class Z shares, which is offered pursuant to a separate
prospectus, is offered exclusively to tax-exempt employee benefit and retirement
plans of Smith Barney Inc. ("Smith Barney") and its affiliates. See "Purchase of
Shares" and "Redemption of Shares."

     Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charges may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary-Reduced
or No Initial Sales Charge."

     Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.25% and an annual distribution fee of 0.50% of the average daily net
assets of the Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.
    

     Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B 


                                                                               3
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

Dividend Shares") will be converted at that time. See "Purchase of
Shares-Deferred Sales Charge Alternatives."

   
     Class C Shares. Class C shares are sold at net asset value with no initial
sales charge at the time of purchase. They are subject to an annual service fee
of 0.25% and an annual distribution fee of 0.45% of the average daily net assets
of the Class C shares. All Class C investors pay a CDSC of 1.00% if they redeem
Class C shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. The Class C shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares. Purchases of
Portfolio shares, which when combined with current holdings of Class C shares of
a Portfolio equal or exceed $500,000 in the aggregate, should be made in Class A
shares at net asset value with no sales charge, and will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase.
    

     Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees. Smith Barney Funds, Inc.

     In deciding which Class of Portfolio shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:

     Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B and Class C shares are sold without any initial sales charge so the entire
purchase price is immediately invested in a Portfolio. Any investment return on
these additional invested amounts may partially or wholly offset the higher
annual expenses of these Classes. Because a Portfolio's future return cannot be
predicted, however, there can be no assurance that this would be the case.

     Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.

   
     Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Portfolio. In addition, Class A share
purchases of 
    


4
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

   
$500,000 or more will be made at net asset value with no initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney listed under "Exchange Privilege." Class A share
purchases also may be eligible for a reduced initial sales charge. See "Purchase
of Shares." Because the ongoing expenses of Class A shares may be lower than
those for Class B and Class C shares, purchasers eligible to purchase Class A
shares at net asset value or at a reduced sales charge should consider doing so.

     Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.
    

     See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and Taxes"
and "Exchange Privilege" for other differences between the Classes of shares.

   
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without sales
charge as investment alternatives under both these programs. See "Purchase of
Shares - Smith Barney 401(k) and ExecChoice(TM) Programs."

PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained with Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
other institutional investors, may purchase shares directly from the Fund
through the Fund's transfer agent, First Data Investor Services Group, Inc.
("First Data"). See "Purchase of Shares."
    

INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial


                                                                               5
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

   
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes of shares is $25. The minimum 
investment requirements for purchases of portfolio shares through the Systematic
Investment Plan are described below. See "Purchase of Shares."

SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."
    

REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."

   
MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc. (the
"Manager") serves as the Portfolio's investment manager. The Manager is a wholly
owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a diversified
financial services holding company engaged, through its subsidiaries,
principally in four business segments: Investment Services, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
See "Management of the Fund."

EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined. See "Exchange Privilege."
    

VALUATION OF SHARES Net asset value of the Portfolio for the prior day generally
is quoted daily in the financial section of most newspapers and is also
available from a Smith Barney Financial Consultant. See "Valuation of Shares."

   
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly on shares of the Portfolio. Distributions of net realized capital gains,
if any, are paid annually. See "Dividends, Distributions and Taxes."
    


6
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."

   
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The value of the Portfolio's
investments, and thus the net asset value of the Portfolio's shares, will
fluctuate in response to changes in market and economic conditions, as well as
the financial condition and prospects of issuers in which the Portfolio invests.
See "Investment Objective and Management Policies."

THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and the Portfolio's operating
expenses for its most recent fiscal year:
    

<TABLE>
<CAPTION>
   
U.S. Government Securities Portfolio               Class A      Class B     Class C     Class Y
-----------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>         <C>         <C>
Shareholder Transaction Expenses
      Maximum sales charge imposed on purchases
      (as a percentage of offering price)            4.50%        None        None        None
-----------------------------------------------------------------------------------------------
      Maximum CDSC
      (as a percentage of original cost 
      or redemption proceeds, whichever 
      is lower)                                      None*        4.50%       1.00%       None
-----------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
      (as a percentage of average net assets)
      Management fees                                0.45%        0.45%       0.45%       0.45%
      12b-1 fees**                                   0.25         0.75        0.70        None
      Other expenses                                 0.09         0.08        0.11        0.05
-----------------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES             0.79%     1.28%       1.26%       0.50%
===============================================================================================
</TABLE>

*    Purchases of Class A shares of $500,000 or more will be made at net asset
     value with no sales charge, but will be subject to a CDSC of 1.00% on
     redemptions made within 12 months of purchase.
    

**   Upon conversion of Class B shares to Class A shares, such shares will no
     longer be subject to a distribution fee. Class C shares do not have a
     conversion feature and, therefore, are subject to an ongoing distribution
     fee. As a result, long-term shareholders of Class C shares may pay more
     than the economic equivalent of the maximum front-end sales charge
     permitted by the National Association of Securities Dealers, Inc.


                                                                               7
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

   
     Class A shares of the Portfolio purchased through Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.

      The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Portfolio shares and investors
may actually pay lower or no charges, depending on the amount purchased and, in
the case of Class B, Class C and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
and ExecChoice(TM) Programs. See "Purchase of Shares" 
and "Redemption of Shares."

     Smith Barney receives an annual 12b-1 service fee of 0.25% of the value of
average daily net assets of Class A shares. Smith Barney also receives with
respect to Class B shares an annual 12b-1 fee of 0.75% of the value of average
daily net assets of that Class, consisting of a 0.50% distribution fee and a
0.25% service fee. For Class C shares, Smith Barney also receives an annual
12b-1 fee of 0.70% of the value of average daily net assets of this Class,
consisting of a 0.45% distribution fee and a 0.25% service fee. "Other expenses"
in the above table include fees for shareholder services, custodial fees, legal
and accounting fees, printing costs and registration fees.
    

       


8
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

   
EXAMPLE The following example is intended to assist an investor in understanding
the various costs that an investor in the Portfolio will bear directly or
indirectly. The example assumes payment by the Portfolio of operating expenses
at the levels set forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and "Management of the Fund."

U.S. Government Securities Portfolio       1 year   3 years   5 years  10 years*
--------------------------------------------------------------------------------
An investor would pay the following 
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption 
at the end of each time period:

      Class A                                 $53     $69       $87     $138
      Class B                                  58      71         80      141
      Class C                                  23      40         69       152
      Class Y                                   5      16         28       63

An investor would pay the following 
expenses on the same investment, assuming
the same annual return and no redemption:
      Class A                                  53      69        87       138
      Class B                                  13      41         70       141
      Class C                                  13      40         69       152
      Class Y                                   5      16         28       63
--------------------------------------------------------------------------------
    

*    Ten-year figures assume conversion of Class B shares to Class A shares at
     the end of the eighth year following the date of purchase.

   
     The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
    


                                                                               9
<PAGE>

--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------

   
     The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's annual report
dated December 31, 1996. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report to Shareholders, which is incorporated by reference
into the Statement of Additional Information.

For a share of each Class of capital stock outstanding throughout each year:
    

U.S. Government Securities Portfolio

<TABLE>
<CAPTION>
   
Class A Shares                       1996            1995            1994             1993            1992            1991
-----------------------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>             <C>              <C>             <C>             <C>     
Net Asset Value, Beginning
 of Year                           $  13.59        $  12.50        $  13.66         $  13.87        $  14.10        $  13.22
-----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From
Operations:
  Net investment income                0.84            0.92            0.91             0.98            1.06            1.26
  Net realized and
    unrealized gain (loss)            (0.33)           1.09           (1.11)           (0.10)          (0.13)           0.80
-----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from
 Operations                            0.51            2.01           (0.20)            0.88            0.93            2.06
-----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income               (0.86)          (0.92)          (0.91)           (0.98)          (1.08)          (1.13)
  Net realized gains (1)               --              --             (0.05)           (0.11)          (0.08)          (0.05)
-----------------------------------------------------------------------------------------------------------------------------
Total Distributions                   (0.86)          (0.92)          (0.96)           (1.09)          (1.16)          (1.18)
-----------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
 End of Year                       $  13.24        $  13.59        $  12.50         $  13.66        $  13.87        $  14.10
-----------------------------------------------------------------------------------------------------------------------------
Total Return(P)                        3.97%          16.52%          (1.48)%           6.40%           6.85%          16.29%
-----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year
 (000s)                            $311,875        $384,534        $358,045         $468,278        $459,380        $394,412
-----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                             0.79%**           0.79%           0.76%*           0.49%           0.50%           0.44%
  Net investment income                6.34            6.82            6.83             7.00            7.65            8.31
-----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                 265%          57%          40%           57%          26%           9%
=============================================================================================================================
</TABLE>
    

(1)  Represents distributions from paydown gains which are reported as ordinary
     income for tax purposes.

(P)  Total returns do not reflect any sales charges.

*    Amount has been restated from the December 31, 1994 Annual Report.
**    Amount has been restated from the December 31, 1996 Annual Report.


10
<PAGE>

--------------------------------------------------------------------------------
Financial Highlights (continued)
--------------------------------------------------------------------------------

U.S. Government Securities Portfolio

<TABLE>
<CAPTION>
   
Class A Shares (continued)                       1990            1989            1988              1987
==========================================================================================================
<S>                                            <C>             <C>             <C>               <C>     
Net Asset Value, Beginning of Year             $  13.17        $  12.56        $  12.68          $  13.89
----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income                            1.15            1.19            1.20              1.23
  Net realized and unrealized gain (loss)          0.08            0.63           (0.12)            (0.89)
----------------------------------------------------------------------------------------------------------
Total Income from Operations                       1.23            1.82            1.08              0.34
----------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                           (1.18)          (1.21)          (1.20)            (1.31)
  Net realized gains (1)                           --              --              --               (0.24)
----------------------------------------------------------------------------------------------------------
Total Distributions                               (1.18)          (1.21)          (1.20)            (1.55)
----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year                   $  13.22        $  13.17        $  12.56          $  12.68
----------------------------------------------------------------------------------------------------------
Total Return(P)                                    9.95%          15.11%           8.72%             2.67%
----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s)                 $335,447        $329,186        $328,446          $370,783
----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                         0.41%           0.41%           0.42%             0.36%
  Net investment income                            8.87            9.19            9.25              9.43
----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                           6%          23%           2%           108%
==========================================================================================================

Class B Shares                                   1996            1995           1994(2)
==========================================================================================================
Net Asset Value, Beginning of Year             $  13.61        $  12.51        $  12.47
----------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income                            0.77            0.80            0.08
  Net realized and unrealized gain                (0.33)           1.16            0.17
----------------------------------------------------------------------------------------------------------
Total Income from Operations                       0.44            1.96            0.25
----------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                           (0.79)          (0.86)          (0.21)
----------------------------------------------------------------------------------------------------------
Total Distributions                               (0.79)          (0.86)          (0.21)
----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year                   $  13.26        $  13.61        $  12.51
----------------------------------------------------------------------------------------------------------
Total Return(P)                                    3.44%          16.03%           2.04%++
----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s)                 $ 11,212        $ 11,116        $  1,529
----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                         1.28%**           1.28%           1.21%+*
  Net investment income                            5.85            6.16            6.94+
----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                             265%          57%            40%
==========================================================================================================
</TABLE>
    

(1)  Represents distributions from paydown gains which are reported as ordinary
     income for tax purposes.

(2)  For the period from November 7, 1994 (inception date) to December 31, 1994.

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

+    Annualized.

(P)  Total returns do not reflect any sales charges.

*    Amount has been restated from the December 31, 1994 Annual Report.
**    Amount has been restated from the December 31, 1996 Annual Report.


                                                                              11
<PAGE>

--------------------------------------------------------------------------------
Financial Highlights (continued)
--------------------------------------------------------------------------------

U.S. Government Securities Portfolio

<TABLE>
<CAPTION>
   
Class C Shares                                   1996            1995           1994(1)            1993             1992(2)
==============================================================================================================================
<S>                                            <C>             <C>             <C>               <C>               <C>     
Net Asset Value, Beginning of Year             $  13.58        $  12.50        $  13.66          $  13.86          $  14.01
------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income                            0.78            0.86            0.82              0.89              0.15
  Net realized and unrealized gain (loss)         (0.33)           1.09           (1.11)            (0.10)             --
------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Operations                0.45            1.95           (0.29)             0.79              0.15
------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                           (0.80)          (0.87)          (0.83)            (0.88)            (0.30)
  Net realized gains (3)                           --              --             (0.04)            (0.11)             --
------------------------------------------------------------------------------------------------------------------------------
Total Distributions                               (0.80)          (0.87)          (0.87)            (0.99)            (0.30)
------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year                   $  13.23        $  13.58        $  12.50          $  13.66          $  13.86
------------------------------------------------------------------------------------------------------------------------------
Total Return(P)                                    3.49%          15.93%          (2.11)%            5.74%             1.07%++
------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s)                 $ 17,249        $ 21,559        $ 21,253          $ 19,938          $  1,954
------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                         1.26%*           1.25%           1.21%             1.21%             1.14%+
  Net investment income                            5.87            6.36            6.27              6.23              6.56+
------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                             265%          57%          40%            57%            26%
==============================================================================================================================


Class Y Shares                                   1996            1995             1994(4)           1993(5)
============================================================================================================
Net Asset Value, Beginning of Year             $  13.61        $  12.51        $  13.67          $  13.97
------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income                            0.88            1.00            0.89              0.86
  Net realized and unrealized gain (loss)         (0.33)           1.06           (1.10)            (0.10)
------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Operations                0.55            2.06           (0.21)             0.76
------------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                           (0.89)          (0.96)          (0.91)            (0.95)
  Net realized gains (3)                           --              --             (0.04)            (0.11)
------------------------------------------------------------------------------------------------------------
Total Distributions                               (0.89)          (0.96)          (0.95)            (1.06)
------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year                   $  13.27        $  13.61        $  12.51          $  13.67
------------------------------------------------------------------------------------------------------------
Total Return(P)                                    4.30%          16.88%          (1.53)%            5.55%++
------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s)                 $  5,589        $  6,992        $ 13,903          $ 14,118
------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                         0.50%*           0.49%           0.61%             0.69%+
  Net investment income                            6.64            7.22            6.82              7.29+
------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                             265%          57%            40%            57%
============================================================================================================
</TABLE>
    

(1)  On November 7, 1994 the former Class B shares were renamed Class C shares.

(2)  For the period from December 2, 1992 (inception date) to December 31, 1992.

(3)  Represents distributions from paydown gains which are reported as ordinary
     income for tax purposes.

(4)  On November 7, 1994, the former Class C shares were renamed Class Y shares.

(5)  For the period from January 12, 1993 (inception date) to December 31, 1993.

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

*    Amount has been restated from the December 31, 1996 Annual Report.

  +  Annualized.

(P)  Total returns do not reflect any sales charges.


12
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Management Policies
--------------------------------------------------------------------------------

   
     The Portfolio seeks high current income, liquidity and security of
principal by investing in obligations of the U.S. Government, its agencies or
its instrumentalities and related repurchase and reverse repurchase agreements.
Of course, no assurance can be given that the Portfolio's objective will be
achieved.

     The Portfolio invests primarily in Government National Mortgage Association
("GNMA") Certificates of the modified pass-through type and in mortgage
participation certificates issued by the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") and will also
normally include other "U.S. Government Obligations," i.e., obligations issued
or guaranteed by the United States, its agencies or its instrumentalities and
related repurchase and reverse repurchase agreements( the Portfolio will limit 
its investments in reverse repur-
chase agreements and other borrowings to no more than 33 1/3% of its total
assets). 

Under normal market conditions, the Portfolio will seek to invest
substantially all of its assets - and the Portfolio will invest not less than
65% of its assets - in such securities. GNMA Certificates are debt securities
issued by a mortgage banker or other mortgagee representing an interest in a
pool of mortgages insured by the Federal Housing Administration or the Farmers
Home Administration or guaranteed by the Veterans Administration. The National
Housing Act provides that the full faith and credit of the United States is
pledged to the timely payment of principal and interest by GNMA of amounts due
on these GNMA Certificates. Securities of the type to be purchased for these
Portfolios have historically involved no credit risk; however, due to
fluctuations in interest rates, the market value of such securities will vary
during the period of a shareholder's investment in the Portfolio. The average
life of GNMA Certificates varies with the maturities of the underlying mortgages
(with maximum maturities of 30 years) but is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities as
the result of prepayments, refinancing of such mortgages or foreclosure.
Unscheduled prepayments of mortgages are passed through to the holders of GNMA
Certificates at par and will increase or decrease the yield realized by the
Portfolio, depending on the cost of the underlying Certificate and its market
value at the time of prepayment. As a hedge against changes in interest rates,
the U.S. Government Securities Portfolio may enter into agreements with dealers
in GNMA Certificates to purchase or sell an agreed-upon principal amount of GNMA
Certificates at a specified price on a certain date; provided, however, that
settlement occurs within 120 days of the trade date. FHLMC is a U.S.
Government-created entity controlled by the Federal Home Loan Banks. FNMA is a
government-chartered corporation owned entirely by private stockholders, which
is subject to general regulation by the Secretary of Housing and Urban
Development. Timely payment of principal and interest on these mortgage
participation certificates is guaranteed soley by the issuer of the
certificates. For a detailed explanation, see "Appendix."
    
   
  A reverse repurchase agreement involves the sale of a money market instrument
by the Portfolio and its agreement to repurchase the instrument at a specified
time and price. The Portfolio will maintain a segregated account consisting of
U.S. government securities or cash or cash equivalents to cover its obligations
under reverse repurchase agreements with broker-dealers (but no banks). The
Portfolio will invest the proceeds in other money market instruments or repur-
chase agreements maturing not later than the expiration of the reverse repur-
chase agreement. Under the Investment Company Act of 1940, as amended (the
"1940 Act"), reverse repurchase agreements may be considered borrowings by the
seller.     

                                                                              13
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

   
     The Portfolio may seek to increase its net investment income by lending its
securities to unaffiliated brokers, dealers and other financial institutions,
provided such loans are callable at any time and are continuously secured by
cash or U.S. Government Obligations equal to no less than the market value,
determined daily, of the securities loaned. Management will limit such lending
to not more than one-third of the value of the Portfolio's total assets. The
risks in lending portfolio securities consist of possible delay in recovery of
the securities or possible loss of rights in the collateral should the borrower
fail financially. The Statement of Additional Information contains more detailed
information.


    
   
  The Portfolio may purchase and sell interest rate futures contracts ("futures
contracts") as a hedge against changes in interest rates. A futures contract is
an agreement between two parties to buy and sell a security for a set price on
a future date. Futures contracts are traded on designated "contracts markets"
which, through their clearing corporations, guarantee performance of the con-
tracts. Currently, there are futures contracts based on securities such as
long-term Treasury bonds, Treasury notes, GNMA Certificates and three-month
Treasury bills.     
   
  Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although the sale of the futures contract might be accomplished more easily and
quickly. For example, if the Portfolio holds long-term U.S. government securi-
ties and the Manager anticipates a rise in long-term interest rates, it could,
in lieu of disposing of its portfolio securities, enter into futures contracts
for the sale of similar long-term securities. If interest rates increased and
the value of the Portfolio's securities declined, the value of the Portfolio's
futures contracts would increase, thereby protecting the Portfolio by prevent-
ing the net asset value from declining as much as it otherwise would have. Sim-
ilarly, entering into futures contracts for the purchase of securities has an
effect similar to actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying securities. For exam-
ple, if the     
   
Manager expects long-term interest rates to decline, the Portfolio might enter
into futures contracts for the purchase of long-term securities, so that it
could gain rapid market exposure that may offset anticipated increases in the
cost of securities it intends to purchase, while continuing to hold higher-
yielding short-term securities or waiting for the long-term market to stabi-
lize.     
   
  The Portfolio also may purchase and sell listed put and call options on
futures contracts. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures con-
tract (a long position if the option is a call and a short position if the
option is a put), at a specified exercise price at any time during the option
period. When an option on a futures contract is exercised, delivery of the
futures position is accompanied by cash representing the difference between the
current market price of the futures contract and the exercise price of the
option. The Portfolio may purchase put options on interest rate futures con-
tracts in lieu of, and for the same purpose as, the sale of a futures contract.
It also may purchase such put options in order to hedge a long position in the
underlying futures contract in the same manner as it purchases "protective
puts" on securities. The purchase of call options on interest rate futures con-
tracts is intended to serve the same purpose as the actual purchase of the
futures contract, and the Portfolio will set aside cash or cash equivalents
sufficient to purchase the amount of portfolio securities represented by the
underlying futures contracts. See "Dividends, Distributions and Taxes."     
   
  The Portfolio may not purchase futures contracts or related options if, imme-
diately thereafter, more than 30% of the Portfolio's total assets would be so
invested. In purchasing and selling futures contracts and related options, the
Portfolio will comply with rules and interpretations of the Commodity Futures
Trading Commission ("CFTC"), under which the Fund is excluded from regulation
as a "commodity pool." CFTC regulations permit use of commodity futures and
options for bona fide hedging purposes without limitations on the amount of
assets committed to margin and option premiums.     
   
  The Portfolio will not engage in transactions involving futures contracts or
related options for speculation but only as a hedge against changes in the mar-
ket values of debt securities held, or intended to be purchased, by the Portfo-
lio's risks. The Portfolio's futures transactions will be entered into for tra-
ditional hedging purposes-- that is, futures contracts will be sold (or related
put options purchased) to protect against a decline in the price of securities
that the Portfolio owns, or futures contracts (or related call options) will be
purchased to protect the Fund against an increase in the price of securities it
is committed to purchase.     
   
  There is no assurance that the Portfolio will be able to close out its
futures positions at any time, in which case it would be required to maintain
the margin 
deposits on the contract. There can be no assurance that hedging transactions
will be successful, as there may be an imperfect correlation (or no correla-
tion) between movements in the prices of the futures contracts and of the debt
securities being hedged, or price distortions due to market conditions in the
futures markets. Where futures contracts are purchased to hedge against an
increase in the price of long-term securities, but the long-term market
declines and the Portfolio does not invest in long-term securities, the Portfo-
lio would realize a loss on the futures contracts, which would not be offset by
a reduction in the price of securities purchased. Where futures contracts are
sold to hedge against a decline in the price of the Portfolio's long-term secu-
rities but the long-term market advances, the Portfolio would lose part or all
of the benefit of the advance due to offsetting losses in its futures posi-
tions.     
   
     In addition, the Portfolio may invest in zero-coupon Treasury securities,
which may be subject to greater volatility than other types of Treasury securi-
ties. Because zero-coupon securities do not receive interest payments, such
securities may fall more dramatically when interest rates rise than securities
paying out interest on a current basis. However, when interest rates fall,
zero-coupon securities may rise more rapidly in value because the securities
have locked-in a particular rate of 
reinvestment that becomes more attractive the further rates fall. These assump-
tions are based on a comparison of like maturity securities. Management does
not believe that additional risks exist, however, when comparing securities of
like duration (the weighted average time to full recovery of principal and
interest payments), which is the strategy used by the Manager of the Portfolio.
    
   
The Portfolio may invest in "short sales against the box" and may borrow 
on a temporary basis.
    
   
     The Board of Directors of the Fund may modify the investment objective and
policies of the Portfolio provided such modification is not prohibited by the
investment restrictions (which are set forth in the Statement of Additional
Information) or applicable laws, and any such change will first be disclosed in
the then current prospectus.
    

Portfolio Turnover

   
     The Portfolio will not engage in the trading of securities for the purpose
of realizing short-term profits; however, the Portfolio will adjust its
portfolio as considered advisable in view of prevailing or anticipated market
conditions and the Portfolio's investment objective. As the portfolio turnover
rate increases, so will the Portfolio's dealer mark-ups and other transaction
related expenses. Investors should realize that risk of loss is inherent in the
ownership of any securities and that shares of the Portfolio will fluctuate with
the market value of its securities.
    

--------------------------------------------------------------------------------
Valuation of Shares
--------------------------------------------------------------------------------

   
     The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE, on each day that the NYSE is open, by dividing the
value of the Portfolio's net assets attributable to each Class by the total
number of shares of the Class outstanding.
    

     Obligations are valued at the mean between the bid and asked quotations for
such securities or if no quotations are available, then for securities of
similar type, yield and maturity. Short-term investments that have a maturity of
more than 60 days are valued at prices based on market quotations for securities
of similar type, yield and maturity. Short-term investments that have a maturity
of 60 days or less 


14
<PAGE>

--------------------------------------------------------------------------------
Valuation of Shares (continued)
--------------------------------------------------------------------------------

are valued at amortized cost when the Board of Directors has determined that
amortized cost equals fair value, unless market conditions dictate otherwise.
Other investments of a Portfolio, including restricted securities, if any, are
valued at a fair value determined by the Board of Directors in good faith.

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes
--------------------------------------------------------------------------------
Dividends and Distributions
   
     The Fund declares monthly income dividends on shares of the Portfolio and
makes annual distributions of capital gains, if any, on such shares.
    

     If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.

     Income dividends and capital gain distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by First Data should notify First Data in writing at
least five business days prior to the payment date to permit the change to be
entered in the shareholder's account.

   
     The per share dividends on Class B and Class C shares of the Portfolio may
be lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and Class
C shares. The per share dividends on Class A shares of the Portfolio may be
lower than the per share dividends on Class Y shares principally as a result of
the service fee applicable to Class A shares. Distributions of capital gains, if
any, will be in the same amount for Class A, Class B, Class C and Class Y
shares.
    

     TAXES

   
     The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Code to be relieved of federal income tax on that part of
its net investment income and realized capital gains which it pays out to its
shareholders. To qualify, the Portfolio must meet certain tests, including
distributing at least 90% of its investment company taxable income, and deriving
less than 30% of its gross income from the sale or other disposition of certain
investments held for less than three months.

     Dividends from net investment income and distributions of realized
short-term capital gains on the sale of securities, whether paid in cash or
automatically invested in additional shares of a Portfolio, are taxable to
shareholders as ordinary income. The Portfolio's dividends will not qualify for
the dividends received deduction for corporations. Dividends and distributions
declared by the Portfolio may also be 
    


                                                                              15
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

subject to state and local taxes. Distributions out of net long-term capital
gains (i.e., net long-term capital gains in excess of net short-term capital
losses) are taxable to shareholders as long-term capital gains. Information as
to the tax status of dividends paid or deemed paid in each calendar year will be
mailed to shareholders as early in the succeeding year as practical but not
later than January 31.

   
     It is the policy of the Fund to comply with requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of the taxable income and net taxable gains of the Portfolio to its
shareholders. Dividends derived from net investment income and capital gains on
the sale of securities, whether paid in cash or automatically invested in
additional shares of the same Portfolio, are taxable to shareholders of the
Portfolio. Information as to the tax status of dividends deemed paid in each
calendar year will be mailed to shareholders as early in the succeeding year as
practical but no later than January 31. The foregoing relates to Federal income
taxation. Dividends may also be subject to state and local taxes; investors
should consult with their tax advisors regarding state and local taxes.
    

--------------------------------------------------------------------------------
Purchase of Shares
--------------------------------------------------------------------------------

     GENERAL

   
     The Portfolio offers several Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC and
are available only to investors investing a minimum of $5,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). A fifth class, Class Z shares, are
also offered with respect to the Portfolio. Class Z shares are offered without a
sales charge, CDSC, service fee or distribution fee exclusively to tax-exempt
employee benefit and retirement plans of Smith Barney and its affiliates.
Investors meeting these criteria who are interested in acquiring Class Z shares
should contact a Smith Barney Financial Consultant for a Class Z Prospectus. See
"Prospectus Summary - Alternative Purchase Arrangements" for a discussion of
factors to consider in selecting which Class of shares to purchase.

     Purchases of Portfolio Shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. In addition, certain investors, including qualified
retirement plans and certain other institutional investors, may purchase shares
directly from the Fund through First Data. When purchasing shares of the
Portfolio, investors must specify whether the purchase is for Class A, Class B,
Class C or Class Y shares. Smith 
    


16
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
Barney and other broker/dealers may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at First Data are not subject
to a maintenance fee.

     Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan in the Portfolio. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000.
Subsequent investments of at least $50 may be made for all Classes. For
participants in retirement plans qualified under Section 403(b)(7) or Section
401(a) of the Code, the minimum initial investment requirement for Class A,
Class B and Class C shares and the subsequent investment requirement for all
Classes in the Portfolio is $25. For shareholders purchasing shares of the
Portfolio through the Systematic Investment Plan on a monthly basis, the minimum
initial investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $25. For shareholders
purchasing shares of the Portfolio through the Systematic Investment Plan on a
quarterly basis, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes is
$50. There are no minimum investment requirements in Class A shares for
employees of Travelers and its subsidiaries, including Smith Barney, Directors
or Trustees of any of the Smith Barney Mutual Funds and their spouses and
children. The Fund reserves the right to waive or change minimums, to decline
any order to purchase its shares and to suspend the offering of shares from time
to time. Shares purchased will be held in the shareholder's account by the
Fund's transfer agent, First Data. Share certificates are issued only upon a
shareholder's written request to First Data.
    

     Purchase orders for a Portfolio that are received by the Fund or Smith
Barney prior to the close of regular trading on the NYSE, on any day the
Portfolio calculates its net asset value, are priced according to the net asset
value determined on that day (the "trade date"). Orders received by dealers or
Introducing Brokers prior to the close of regular trading on the NYSE on any day
a Portfolio calculates its net asset value, are priced according to the net
asset value determined on that day, provided the order is received by the Fund
or Smith Barney prior to Smith Barney's close of business. For shares purchased
through Smith Barney or Introducing Brokers purchasing through Smith Barney,
payment for Portfolio shares is due on the third day after the trade date. In
all other cases, payment must be made with the purchase order.

     SYSTEMATIC INVESTMENT PLAN

     Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through


                                                                              17
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
First Data. The Systematic Investment Plan also authorizes Smith Barney to apply
cash held in the shareholder's Smith Barney brokerage account or redeem the
shareholder's shares of a Smith Barney money market fund to make additions to
the account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.
    

     INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES

   
     The sales charges applicable to purchases of Class A shares of the
Portfolio:
    

                               Sales              Sales              Dealers
                             Charge as          Charge as          Reallowance
                               % of               % of               as % of
Amount of Investment       Offering Price     Amount Invested     Offering Price
--------------------------------------------------------------------------------
Less than $25,000               4.50%             4.71%               4.00%

$25,000 - $49,999               4.00%             4.17%               3.60%

$50,000 - $99,999               3.50%              3.63%              3.15%

$100,000 - $249,999             2.50%             2.56%               2.25%

$250,000 - $499,999             1.50%             1.52%               1.35%

$500,000 and over               *                 *                   *
--------------------------------------------------------------------------------

   
*    Purchases of Class A shares of $500,000 or more will be made at net asset
     value without any initial sales charge, but will be subject to a CDSC of
     1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
     shares is payable to Smith Barney, which compensates Smith Barney Financial
     Consultants and other dealers whose clients make purchases of $500,000 or
     more. The CDSC is waived in the same circumstances in which the CDSC
     applicable to Class B and Class C shares is waived. See "Deferred Sales
     Charge Alternatives" and "Waivers of CDSC."

     Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.

     The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of each Portfolio made at one time by "any person," which
includes an individual and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.
    

     INITIAL SALES CHARGE WAIVERS

   
     Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
    


18
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
Funds (including retired Board Members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect with the combination of such
company with a Portfolio by merger, acquisition of assets or otherwise; (c)
purchases of Class A shares by any client of a newly employed Smith Barney
Financial Consultant (for a period up to 90 days from the commencement of the
Financial Consultant's employment with Smith Barney), on the condition the
purchase of Class A shares is made with the proceeds of the redemption of shares
of a mutual fund which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial Consultant and (iii) was
subject to a sales charge; (d) purchases by shareholders who have redeemed Class
A shares in a Portfolio (or Class A shares of another fund of the Smith Barney
Mutual Funds that are offered with a sales charge) and who wish to reinvest
their redemption proceeds in a Portfolio, provided the reinvestment is made
within 60 calendar days of the redemption; and (e) purchases by accounts managed
by registered investment advisory subsidiaries of Travelers; and (f) direct
rollovers by plan participants of distributions from a 401(k) plan offered to
employees of Travelers or its subsidiaries or a 401(k) plan enrolled in the
Smith Barney 401(k) Program (Note: subsequent investments will be subject to the
applicable sales charge); (g) purchases by separate accounts used to fund
certain unregistered variable annuity contracts; and (h) purchases by investors
participating in a Smith Barney fee based arrangement. In order to obtain such
discounts, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
    

     RIGHT OF ACCUMULATION

     Class A shares of a Portfolio may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregating
the dollar amount of the new purchase and the total net asset value of all Class
A shares of a Portfolio and of funds sponsored by Smith Barney which are offered
with a sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.


                                                                              19
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

     GROUP PURCHASES

     Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative - Class A Shares" and will be based upon
the aggregate sales of Class A shares of Smith Barney Mutual Funds offered with
a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Portfolio shares at a discount and (c) satisfies uniform criteria
which enables Smith Barney to realize economies of scale in its costs of
distributing shares. A qualified group must have more than 10 members, must be
available to arrange for group meetings between representatives of the Portfolio
and the members, and must agree to include sales and other materials related to
the Portfolio in its publications and mailings to members at no cost to Smith
Barney. In order to obtain such reduced sales charge or to purchase at net asset
value, the purchaser must provide sufficient information at the time of purchase
to permit verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to the
discretion of Smith Barney.

     LETTER OF INTENT

     Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases 


20
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
of all Class A shares of the Portfolio and other funds of the Smith Barney
Mutual Funds offered with a sales charge over a 13 month period based on the
total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13 month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or First Data to obtain a Letter of Intent
application.

     Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of a
Portfolio and agree to purchase a total of $5,000,000 of Class Y shares of the
same Portfolio within six months from the date of the Letter. If a total
investment of $5,000,000 is not made within the six-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of 0.25%) and expenses
applicable to the Portfolio's Class A shares, which may include a CDSC of 1.00%.
Please contact a Smith Barney Financial Consultant or First Data for further
information.
    

     DEFERRED SALES CHARGE ALTERNATIVES

   
     CDSC Shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in a Portfolio. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.
    

     Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of Portfolio assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class C shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.

     Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the 


                                                                              21
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
amount is being redeemed. Solely for purposes of determining the number of years
since a purchase payment, all purchase payments made during a month will be
aggregated and deemed to have been made on the last day of the preceding Smith
Barney statement month. The following table sets forth the rates of the charge
for redemptions of Class B shares by shareholders, except in the case of
purchases by Participating Plans, as described below. See "Purchase of Shares -
Smith Barney 401(k) and ExecChoice(TM) Programs."
    

     Year Since Purchase
     Payment Was Made                                 CDSC
     -----------------------------------------------------------
         First                                        4.50%
         Second                                       4.00%
         Third                                        3.00%
         Fourth                                       2.00%
         Fifth                                        1.00%
         Sixth                                        0.00%
         Seventh                                      0.00%
         Eighth                                       0.00%
     -----------------------------------------------------------

   
     Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary - Alternative Purchase Arrangements
- Class B Shares Conversion Feature."
    

     In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Portfolio shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.

     To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional 


22
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

shares through dividend reinvestment. During the fifteenth month after the
purchase, the investor decided to redeem $500 of his or her investment. Assuming
at the time of the redemption the net asset value had appreciated to $12 per
share, the value of the investor's shares would be $1,260 (105 shares at $12 per
share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.

     WAIVERS OF CDSC

   
     The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within twelve
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 5911/42; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of a Portfolio with any investment
company by merger, acquisition of assets or otherwise. In addition, a
shareholder who has redeemed shares from other funds of the Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.
    

     CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.

   
     SMITH BARNEY 401(K) AND EXECCHOICE(TM)PROGRAMS

     Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans
participating ("Participating Plans") in these programs.

     The Portfolio offers to Participating Plans Class A and Class C shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM)
Programs. Class A and Class C shares acquired through the Participating Plans
are subject to the same service and/or distribution fees as the Class A and
Class C shares acquired by other investors; however, they are not subject to any
initial sales charge or CDSC. Once a
Participating Plan has made an initial investment in the Portfolio, all of its
subsequent investments in the 
    


                                                                              23
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
Portfolio must be in the same Class of shares, except as otherwise described
below.

     Class A Shares. Class A shares of the Portfolio are offered without any
sales charge or CDSC to any Participating Plan that purchases $1,000,000 or more
of Class A shares of one or more funds of the Smith Barney Mutual Funds.

     Class C Shares. Class C shares of the Portfolio are offered without any
sales charge or CDSC to any Participating Plan that purchases less than
$1,000,000 of Class C shares of one or more funds of the Smith Barney Mutual
Funds.

     401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. At the
end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, if its
total Class C holdings in all non-money market Smith Barney Mutual Funds equal
at least $1,000,000, it will be offered the opportunity to exchange all of its
Class C shares for Class A shares of a Fund. (For Participating Plans that were
originally established through a Smith Barney retail brokerage account, the five
year period will be calculated from the date the retail brokerage account was
opened.) Such Participating Plans will be notified of the pending exchange in
writing within 30 days after the fifth anniversary of the enrollment date and,
unless the exchange offer has been rejected in writing, the exchange will occur
on or about the 90th day after the fifth anniversary date. If the Participating
Plan does not qualify for the five year exchange to Class A shares, a review of
the Participating Plan's holdings will be performed each quarter until either
the Participating Plan qualifies or the end of the eighth year.

     401(k) Plans Opened Prior to June 21, 1996. In any year after the date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if its total
Class C holdings in all non-money market Smith Barney Mutual Funds equal at
least $500,000 as of the calendar year-end, the Participating Plan will be
offered the opportunity to exchange all of its Class C shares for Class A shares
of the Portfolio. Such Plans will be notified in writing within 30 days after
the last business day of the calendar year and, unless the exchange offer has
been rejected in writing, the exchange will occur on or about the last business
day of the following March.

     Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Program
whether opened before or after June 21, 1996, that has not previously qualified
for an exchange into Class A shares will be offered the opportunity to exchange
all of its Class C shares for Class A shares of the Portfolio, regardless of 
asset size, at the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) or ExecChoice(TM) Programs. Such Plans will
be notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth anniversary
date. Once an exchange has occurred, a Participating Plan will not be eligible
to acquire additional Class C shares of the Portfolio but instead may acquire
Class A shares of the Portfolio. Any Class C
    


24
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
shares not converted will continue to be subject to the distribution fee.

     Participating Plans wishing to acquire shares of a Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from First Data. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.

     Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Smith Barney Mutual Funds are not available for purchase by Participating Plans
opened on or after June 21, 1996, but may continue to be purchased by any
Participating Plan in the Smith Barney 401(k) Program opened prior to such date
and originally investing in such Class. Class B shares acquired are subject to a
CDSC of 3.00% of redemption proceeds, if the Participating Plan terminates
within eight years of the date the Participating Plan first enrolled in the
Smith Barney 401(k) Program.

     At the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) Program, it will be offered the opportunity
to exchange all of its Class B shares for Class A shares of a Fund. Such
Participating Plan will be notified of the pending exchange in writing
approximately 60 days before the eighth anniversary of the enrollment date and,
unless the exchange has been rejected in writing, the exchange will occur on or
about the eighth anniversary date. Once the exchange has occurred, a
Participating Plan will not be eligible to acquire additional Class B shares of
a Fund but instead may acquire Class A shares of the Portfolio. If the 
Participating
Plan elects not to exchange all of its Class B shares at that time, each Class B
share held by the Participating Plan will have the same conversion feature as
Class B shares held by other investors. See "Purchase of Shares -- Deferred
Sales Charge Alternatives" in each Fund's prospectus.

     No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased more
than eight years prior to the redemption, plus increases in the net asset value
of the shareholder's Class B shares above the purchase payments made during the
preceding eight years. Whether or not the CDSC applies to the redemption by a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to redemptions by other shareholders, which depends on
the number of years since those shareholders made the purchase payment from
which the amount is being redeemed.

     The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
    


                                                                              25
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 5911/42 by
an employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
    

--------------------------------------------------------------------------------
Exchange Privilege
--------------------------------------------------------------------------------

   
     Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, Class B and Class C shares are subject to
minimum investment requirements and all shares are subject to the other
requirements of the fund into which exchanges are made.
    

FUND NAME

     Growth Funds
     Smith Barney Aggressive Growth Fund Inc.
     Smith Barney Appreciation Fund Inc.
     Smith Barney Fundamental Value Fund Inc.
     Smith Barney Growth Opportunity Fund
     Smith Barney Managed Growth Fund
     Smith Barney Natural Resources Fund Inc.
     Smith Barney Special Equities Fund

       

   
     Growth and Income Funds
     Concert Social Awareness Fund
     Smith Barney Convertible Fund
     Smith Barney Funds, Inc. - Equity Income Portfolio
     Smith Barney Growth and Income Fund
     Smith Barney Premium Total Return Fund
     Smith Barney Utilities Fund

     Taxable Fixed-Income Funds
  ** Smith Barney Adjustable Rate Government Income Fund
     Smith Barney Diversified Strategic Income Fund
 +++ Smith Barney Funds, Inc. - Short-Term U.S. Treasury Securities Portfolio
     Smith Barney Government Securities Fund
     Smith Barney High Income Fund
     Smith Barney Investment Grade Bond Fund
     Smith Barney Managed Governments Fund Inc.
    


26
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

   
     Tax-Exempt Funds
     Smith Barney Arizona Municipals Fund Inc.
     Smith Barney California Municipals Fund Inc.
   * Smith Barney Intermediate Maturity California Municipals Fund
   * Smith Barney Intermediate Maturity New York Municipals Fund
     Smith Barney Managed Municipals Fund Inc.
     Smith Barney Massachusetts Municipals Fund
     Smith Barney Muni Funds - Florida Portfolio
     Smith Barney Muni Funds - Georgia Portfolio
   * Smith Barney Muni Funds - Limited Term Portfolio
     Smith Barney Muni Funds - National Portfolio
     Smith Barney Muni Funds - New York Portfolio
     Smith Barney Muni Funds - Ohio Portfolio
     Smith Barney Muni Funds - Pennsylvania Portfolio
     Smith Barney New Jersey Municipals Fund Inc.
     Smith Barney Oregon Municipals Fund
     Smith Barney Tax-Exempt Income Fund
    

     International Funds
     Smith Barney World Funds, Inc. - Emerging Markets Portfolio
     Smith Barney World Funds, Inc. - European Portfolio
     Smith Barney World Funds, Inc. - Global Government Bond Portfolio
     Smith Barney World Funds, Inc. - International Balanced Portfolio
     Smith Barney World Funds, Inc. - International Equity Portfolio
     Smith Barney World Funds, Inc. - Pacific Portfolio

   
     Smith Barney Concert Allocation Series Inc.
     Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
     Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
     Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
     Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
     Smith Barney Concert Allocation Series Inc. -- Income Portfolio
    


                                                                              27
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

     Money Market Funds
     Smith Barney Exchange Reserve Fund
     Smith Barney Money Funds, Inc. - Cash Portfolio
     Smith Barney Money Funds, Inc. - Government Portfolio
 *** Smith Barney Money Funds, Inc. - Retirement Portfolio
     Smith Barney Municipal Money Market Fund, Inc.
     Smith Barney Muni Funds - California Money Market Portfolio
     Smith Barney Muni Funds - New York Money Market Portfolio

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

   
*    Available for exchange with Class A, Class C and Class Y shares of each
     Portfolio.

**   Available for exchange with Class A and Class B shares of each Portfolio.
     In addition, shareholders who own Class C shares of a Portfolio through the
     Smith Barney 401(k) Program may exchange those shares for Class C shares of
     this fund.
    

***  Available for exchange with Class A shares of each Portfolio.

+    Available for exchange with Class B and Class C shares of each Portfolio.

   
++   Available for exchange with Class A and Class Y shares of each Portfolio.
     In addition, Participating Plans opened prior to June 21, 1996 and
     investing in Class C shares may exchange Fund shares for Class C shares of
     this fund.
    

+++  Available for exchange with Class A and Class Y shares of each Portfolio.

   
     Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by a Portfolio, the exchanged Class B shares will be subject
to the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Portfolio that have been exchanged.
    

     Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of a Portfolio
that have been exchanged.

   
     Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to exchange all or a portion of their shares for shares of
the respective class in any of the funds identified above may do so without
imposition of any charge.

     Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Portfolio's performance and its shareholders. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Portfolio's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, the Fund will provide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege and during the 15 day period the shareholder
will be required to (a) redeem his or her shares in the Portfolio or (b) remain
invested in the Portfolio 
    


28
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

or exchange into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.

   
     Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares - Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined, plus any applicable
sales charge differential. Redemption procedures discussed below are also
applicable for exchanging shares, and exchanges will be made upon receipt of all
supporting documents in proper form. If the account registration of the shares
of the fund being acquired is identical to the registration of the shares of the
fund exchanged, no signature guarantee is required. A capital gain or loss for
tax purposes will be realized upon the exchange, depending upon the cost or
other basis of shares redeemed. Before exchanging shares, investors should read
the current prospectus describing the shares to be acquired. The Portfolio
reserves the right to modify or discontinue exchange privileges upon 60 days'
prior notice to shareholders.
    

--------------------------------------------------------------------------------
Redemption of Shares
--------------------------------------------------------------------------------

   
      The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined. If a shareholder holds shares in more than one Class, any request
for redemption must specify the Class being redeemed. In the event of a failure
to specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third day following receipt of proper
tender, except on any days on which the NYSE is closed or as permitted under the
1940 Act in extraordinary circumstances. Generally, if the redemption proceeds
are remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.
    

     Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those


                                                                              29
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:

   
     Smith Barney Funds, Inc./U.S. Government Securities Portfolio
     Class A,B,C or Y (please specify)
     c/o First Data Investor Services Group, Inc.
     P.O. Box 5128
     Westborough, Massachusetts 01581-5128

     A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a written redemption request in excess of $2,000or share
certificate stock power must be guaranteed by an eligible guarantor
institution, such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
    

     AUTOMATIC CASH WITHDRAWAL PLAN

   
     The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Portfolio. Any applicable CDSC will not be
waived on amounts withdrawn by a shareholder that exceed 1.00% per month of the
value of the shareholder's shares subject to the CDSC at the time the withdrawal
plan commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month of the value of the shareholder's shares subject to the CDSC.)
For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
    


30
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

     TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

     Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Portfolio shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Portfolio.)

     Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares, may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.

     A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the case
may be, on the next business day following the redemption request. In order to
use the wire procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.

     Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.

     Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller 


                                                                              31
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

and legitimacy of instructions (for example, a shareholder's name and account
number will be required and phone calls may be recorded). The Fund reserves the
right to suspend, modify or discontinue the telephone redemption and exchange
program or to impose a charge for this service at any time following at least
seven (7) days prior notice to shareholders.

--------------------------------------------------------------------------------
Minimum Account Size
--------------------------------------------------------------------------------

     The Fund reserves the right to redeem involuntarily any shareholder's
account in a Portfolio if the aggregate net asset value of the shares held in
that Portfolio account is less than $500. (If a shareholder has more than one
account in any Portfolio, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely on market reductions in
net asset value. Before the Fund exercises such right, shareholders will receive
written notice and will be permitted 60 days to bring accounts up to the minimum
to avoid involuntary liquidation.

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

   
     From time to time a Portfolio may include its total return, average annual
total return, yield and current dividend return in advertisements and/or other
types of sales literature. These figures are computed separately for Class A,
Class B, Class C and Class Y shares of the Portfolio. These figures are based on
historical earnings and are not intended to indicate future performance. Total
return is computed for a specified period of time assuming deduction of the
maximum sales charge, if any, from the initial amount invested and reinvestment
of all income dividends and capital gain distributions on the reinvestment dates
at prices calculated as stated in this Prospectus, then dividing the value of
the investment at the end of the period so calculated by the initial amount
invested and subtracting 100%. The standard average annual total return, as
prescribed by the SEC is derived from this total return, which provides the
ending redeemable value. Such standard total return information also may be
accompanied with nonstandard total return information for differing periods
computed in the same manner but without annualizing the total return or taking
sales charges into account. The yield of a Portfolio Class refers to the net
investment income earned by investments in the class over a thirty-day period.
This net investment income is then annualized, i.e., the amount of income earned
by the investment during that thirty-day period is assumed to be earned each
30-day period for twelve periods and is expressed as a percentage of the
investments. The yield quotation is calculated according to a formula prescribed
by the SEC to facilitate comparison with yields quoted by other investment
companies.
    


32
<PAGE>

--------------------------------------------------------------------------------
Performance (continued)
--------------------------------------------------------------------------------

   
The Portfolio calculates current dividend return for each Class by annualizing
the most recent monthly distribution, including net equalization credits or
debits, and dividing by the net asset value or the maximum public offering price
(including sales charge) on the last day of the period for which current
dividend return is presented. The current dividend return for each Class may
vary from time to time depending on market conditions, the composition of its
investment portfolio and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return should be
considered when comparing a Class' current return to yields published for other
investment companies and other investment vehicles. The Portfolio may also
include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
    

--------------------------------------------------------------------------------
Management of the Fund
--------------------------------------------------------------------------------

     BOARD OF DIRECTORS

   
     Overall responsibility for management and supervision of the Portfolio 
rests with the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the companies that furnish services to the Fund
and the Portfolio, including agreements with the Fund's distributor, investment
manager, custodian and transfer agent. The day-to-day operations of the
Portfolio is delegated to the investment manager. The Statement of Additional
Information contains background information regarding each Director and
executive officer of the Fund.

     MANAGER

     Smith Barney Mutual Funds Management, Inc. (the "Manager") manages the
day-to-day operations of the Portfolio pursuant to a management agreement
entered into by the Fund on behalf of the Portfolio under which the Manager
offers the Portfolio advice and assistance with respect to the acquisition,
holding or disposal of securities and recommendations with respect to other
aspects and affairs of the Portfolio and furnishes the Portfolio with
bookkeeping, accounting and administrative services, office space and equipment,
and the services of the officers and employees of the Fund. By written agreement
the research and other departments and staff of Smith Barney will furnish the
Manager with information, advice and assistance and will be available for
consultation on the Fund's Portfolios, thus Smith Barney may also be considered
an investment adviser to the Fund. Smith Barney's services are paid for by the
Manager on the basis of direct and indirect costs to Smith Barney of performing
such services; there is no charge to the Fund for such services.
    


                                                                              33
<PAGE>

--------------------------------------------------------------------------------
Management of the Fund (continued)
--------------------------------------------------------------------------------

   
     For the Portfolio's last fiscal year the management fee was 0.45% of the
Portfolio's average net assets. Payment under the Portfolio's management
agreement is made as promptly as possible after the last day of each month and
is computed on the aggregate net assets of the Portfolio during the month. Total
operating expenses for the Portfolio's average net assets for the last fiscal
year were: 0.79%, 1.28%, 1.26% and 0.50% for Class A, Class B, Class C and Class
Y shares, respectively.

     The Manager was incorporated on March 12, 1968 under the laws of Delaware.
As of January 31, 1997 the Manager had aggregate assets under management in
excess of  $80 billion. The Manager, Smith Barney and Holdings are
each located at 388 Greenwich Street, New York, New York 10013. The term "Smith
Barney" in the title of the Fund has been adopted by permission of Smith Barney
and is subject to the right of Smith Barney to elect that the Fund stop using
the term in any form or combination of its name.
    

     PORTFOLIO MANAGEMENT

   
     James Conroy, Vice President of the Manager is Portfolio Manager of the
Portfolio and is responsible for managing the day-to-day operations of the
Portfolio, including the making of investment decisions since January 1996. Mr.
Conroy is also Portfolio Manager of the Fund's Short-Term U.S. Treasury
Securities Portfolio. Mr. Conroy has also served as Vice President and
Investment Officer of Smith Barney Managed Governments Fund Inc. since February
1990 and as First Vice President and Investment Officer of Smith Barney
Government Securities Fund since its inception in March 1984.

     Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended December 31,
1996 is included in the Annual Report dated December 31, 1996. A copy of the
Annual Report may be obtained upon request and without charge from a Smith
Barney Financial Consultant or by writing or calling the Fund at the address or
phone number listed on page one of this Prospectus.
    
Distributor
   
     Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution under Rule 12b-1
under the 1940 Act (the "Plan") adopted by the Portfolio, Smith Barney is paid a
service fee with respect to Class A, Class B and Class C shares at the annual
rate of 0.25% of the average daily net assets attributable to these Classes.
Smith Barney is also paid a distribution fee with respect to Class B and Class C
shares of such Portfolio at the annual rate of 0.50% and 0.45%, respectively, of
the average daily net assets attributable to these Classes. Class B shares that
automatically convert to Class A shares eight years after the date of original
purchase will no longer be subject to a distribution fee.
    


34
<PAGE>

--------------------------------------------------------------------------------
Distributor (continued)
--------------------------------------------------------------------------------

     The fees are used by Smith Barney to pay its Financial Consultants for
servicing shareholder accounts and, in the case of Class B and Class C shares,
to cover expenses primarily intended to result in the sale of those shares.
These expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of
Portfolio shares, including lease, utility, communications and sales promotion
expenses.

   
     The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to the Class A, Class B and Class C shares of the
Portfolio, a continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. Smith Barney Financial Consultants
may receive different levels of compensation for selling different Classes of
shares.
    

     Payments under the Plan with respect to Class B and Class C shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Directors will evaluate the
appropriateness of the Plan and its payment terms on a continuing basis and in
so doing will consider all relevant factors, including expenses borne by Smith
Barney, amounts received under the Plan and proceeds of the CDSC.

--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------

   
     The Fund, an open-end, diversified investment company, was incorporated in
Maryland on December 2, 1966. The Fund has an authorized capital of
2,000,000,000 shares with a par value of $.01 per share. The Board of Directors
has authorized the issuance of fifteen series of shares, each representing
shares in one of fifteen separate Portfolios and may authorize the issuance of
additional series of shares in the future. The assets of the Portfolio are
segregated and separately managed and a shareholder's interest is in the assets
of the Portfolio in which he or she holds shares. Class A, Class B, Class C,
Class Y and Class Z (where available) shares of the Portfolio represent
interests in the assets of that Portfolio and have identical voting, dividend,
liquidation and other rights on the same terms and conditions except that
expenses related to the distribution of each Class of shares are borne solely by
each Class and each Class of shares has exclusive voting rights with respect to
provisions of the Fund's Rule 12b-1 distribution plan which pertain to a
particular Class. As described under "Voting" in the Statement of Additional
Information, the Fund ordinarily will not hold shareholder meetings; however,
    


                                                                              35
<PAGE>

--------------------------------------------------------------------------------
Additional Information (continued)
--------------------------------------------------------------------------------

shareholders have the right to call a meeting upon a vote of 10% of the Fund's
outstanding shares for the purpose of voting to remove directors and, as
required by the 1940 Act, the Fund will assist shareholders in calling such a
meeting. Shares do not have cumulative voting rights or preemptive rights and
are fully paid, transferable and nonassessable when issued for payment as
described in this Prospectus.

   
     PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, serves as custodian of the Portfolio's
investments.
    

     First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.

   
     The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply to
their account should contact their Smith Barney Financial Consultant or the
Fund's transfer agent.
    


36
<PAGE>

--------------------------------------------------------------------------------
Appendix
--------------------------------------------------------------------------------

     GNMA Securities. Government National Mortgage Association ("GNMA"), an
agency of the United States Government, guarantees the timely payment of monthly
installments of principal and interest on modified pass-through Certificates,
whether or not such amounts are collected by the issuer of these Certificates on
the underlying mortgages. Scheduled payments of principal and interest are made
each month to holders of GNMA Certificates (such as the U.S. Government
Securities Portfolio). Unscheduled prepayments of mortgages are passed through
to holders of GNMA Certificates at par with the regular monthly payments of
principal and interest, which have the effect of reducing future payments on
such Certificates. The income portions of monthly payments received by these
Portfolios will be included in their net investment income. See "Dividends,
Distributions and Taxes."

     GNMA Certificates have historically involved no credit risk; however, due
to fluctuations in interest rates, the market value of such securities will vary
during the period of a shareholder's investment in the U.S. Government
Securities Portfolio. Prepayments and scheduled payments of principal will be
reinvested by the U.S. Government Securities Portfolio in then available GNMA
Certificates which may bear interest at a rate lower or higher than the
Certificate from which the payment was received. As with other debt securities,
the price of GNMA Certificates is likely to decrease in times of rising interest
rates; however, in periods of falling interest rates the potential for
prepayment may reduce the general upward price increase of GNMA Certificates
that might otherwise occur. If the U.S. Government Securities Portfolio buys
GNMA Certificates at a premium, mortgage foreclosures or prepayments may result
in a loss to the Portfolio of up to the amount of the premium paid since only
timely payment of principal and interest is guaranteed.
   
     FHLMC and FNMA Securities. FHLMC is a U.S.
Government-created entity controlled by the Federal Home Loan Banks. FNMA is a
government-chartered corporation owned entirely by private stockholders, which
is subject to general regulation by the Secretary of Housing and Urban
Development. Timely payment of principal and interest on these mortgage
participation certificates is guaranteed soley by the issuer of the
certificates.

    
     Other U.S. Government Obligations. In addition to GNMA Securities and
direct obligations of the U.S. Treasury (such as Treasury Bills, Notes and
Bonds), U.S. Government Obligations in which the Fund may invest include: (1)
obligations of, or issued by, Banks for Cooperatives, Federal Land Banks,
Federal Intermediate Credit Banks, Federal Home Loan Banks, the Federal Home
Loan Bank Board, or the Student Loan Marketing Association; and
(2) other securities fully guaranteed as to principal and interest 
by the United States of America.

     Repurchase Agreements. A repurchase agreement arises when the Fund
purchases a security for a Portfolio and simultaneously agrees to resell it to
the vendor at an agreed-upon future date, normally the next business day. The
resale price is greater than the purchase price, which reflects an agreed-upon
rate of return for the period the Portfolio holds the security and which is not
related to the coupon rate on the purchased security. The Fund requires
continual maintenance of the 


                                                                             A-1
<PAGE>

--------------------------------------------------------------------------------
Additional Information (continued)
--------------------------------------------------------------------------------

market value of the collateral in amounts at least equal to the resale price,
thus risk is limited to the ability of the seller to pay the agreed-upon amount
on the delivery date; however, if the seller defaults, realization upon the
collateral by the Fund may be delayed or limited or the Portfolio might incur a
loss if the value of the collateral securing the repurchase agreement declines
and might incur disposition costs in connection with liquidating the collateral.
A Portfolio will only enter into repurchase agreements with broker/dealers or
other financial institutions that are deemed creditworthy by the Manager under
guidelines approved by the Board of Directors. It is the policy of the Fund not
to invest in repurchase agreements that do not mature within seven days if any
such investment together with any other illiquid assets held by the Portfolio
amount to more than 15% of that Portfolio's total assets.

     Delayed Delivery. A delayed delivery transaction involves the purchase of
securities at an agreed-upon price on a specified future date. At the time the
Fund enters into a binding obligation to purchase securities on a delayed
delivery basis the Portfolio has all the rights and risks attendant to the
ownership of the security and therefore must maintain with the Custodian a
segregated account with assets of a dollar amount sufficient to make payment for
the securities to be purchased. The value of the securities on the delivery date
may be more or less than their purchase price. Securities purchased on a delayed
delivery basis do not generally earn interest until their scheduled delivery
date.


A-2
<PAGE>

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                                                                             A-3
<PAGE>

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A-4
                                                        SMITH BARNEY FUNDS, INC.

                                                                           U. S.
                                                                      Government
                                                                      Securities
                                                                       Portfolio


                                                             Class Z Shares Only

                                                                  APRIL 30, 1997

                                                   Prospectus begins on page one


PROSPECTUS


[LOGO]         Smith Barney Mutual Funds
               Investing for your future.
               Every day.

<PAGE>

--------------------------------------------------------------------------------
Prospectus                                                        April 30, 1997
--------------------------------------------------------------------------------

   
     Smith Barney Funds, Inc.
     U. S. Government Securities Portfolio
     388 Greenwich Street
     New York, New York 10013
     (800) 451-2010

     The U.S. Government Securities Portfolio (the "Portfolio") is one of the
investment portfolios that currently comprises Smith Barney Funds, Inc. (the
"Fund"). The Portfolio seeks high current income, liquidity and security of
principal from a portfolio of U.S. Government Obligations.
    

     This Prospectus sets forth concisely certain information about the Fund and
each Portfolio, including expenses, that prospective investors will find helpful
in making an investment decision. Investors are encouraged to read this
Prospectus carefully and retain it for future reference. The Class Z shares
described in this Prospectus are currently offered exclusively for sale to
tax-exempt employee benefit and retirement plans of Smith Barney Inc. ("Smith
Barney") or any of its affiliates ("Qualified Plans").

   
     Additional information about the Portfolio is contained in a Statement of
Additional Information dated April 30, 1997, amended or supplemented from time
to time, that is available upon request and without charge by calling or writing
the Fund at the telephone number or address set forth above or by contacting a
Smith Barney Financial Consultant. The Statement of Additional Information has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.
    

Smith Barney Inc.
Distributor

Smith Barney Mutual Funds Management Inc.
Investment Manager



THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.


                                                                               1
<PAGE>

--------------------------------------------------------------------------------
Table of Contents
--------------------------------------------------------------------------------

   
The Portfolio's Expenses                                                       3
    
--------------------------------------------------------------------------------
Financial Highlights                                                           4
--------------------------------------------------------------------------------
   
Investment Objective and Management Policies                                   5
    
--------------------------------------------------------------------------------
Valuation of Shares                                                            8
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                      9
--------------------------------------------------------------------------------
Purchase, Exchange and Redemption of Shares                      10
--------------------------------------------------------------------------------
Performance                                                        10
--------------------------------------------------------------------------------
Management of the Fund                                                     11
--------------------------------------------------------------------------------
Additional Information                                                        13
--------------------------------------------------------------------------------
Appendix                                                                     A-1
--------------------------------------------------------------------------------



--------------------------------------------------------------------------------
     No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
--------------------------------------------------------------------------------


2
<PAGE>

--------------------------------------------------------------------------------
The Portfolio's Expenses
--------------------------------------------------------------------------------

   
     The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of Class Z shares of the
Portfolio, based on the Portfolio's operating expenses for Class Z share for the
fiscal year ended December 31, 1996:

U.S. Gov't Securities Portfolio
--------------------------------------------------------------------------------
Annual Portfolio Operating Expenses
  (as a percentage of average net assets)
  Management fees                                                          0.45%
  Other expenses                                                           0.04
--------------------------------------------------------------------------------
  TOTAL PORTFOLIO OPERATING EXPENSES             0.49%
================================================================================
    

     The nature of the services for which the Fund pays management fees is
described under "Management of the Fund." "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.

     EXAMPLE

   
     The following example is intended to assist an investor in understanding
the various costs that an investor in the Portfolio will bear directly or
indirectly. The example assumes payment by the Portfolio of operating expenses
at the levels set forth in the table above. See "Purchase, Exchange and
Redemption of Shares" and "Management of the Fund."


                                          1 year    3 years   5 years   10 years
--------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment in
Class Z shares of the Portfolio,
assuming(1) a 5.00% annual return
and (2) redemption at the end of
each time period:
  U.S. Government Securities Portfolio      $5        $16       $28   $63
--------------------------------------------------------------------------------

     The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
    


                                                                               3
<PAGE>

--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------

   
     The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's Annual Report
dated December 31, 1996. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report to Shareholders, which is incorporated by reference
into the Statement of Additional Information.

For a share of Class Z capital stock outstanding throughout each year:


U.S. Government Securities Portfolio         1996         1995        1994(1)
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Year          $13.60       $12.50       $12.47
--------------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income                       0.88         0.94         0.14
  Net realized and unrealized gain (loss)    (0.33)        1.11         0.13
--------------------------------------------------------------------------------
Total Income  From Operations                 0.55         2.05         0.27
--------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                      (0.89)       (0.95)       (0.24)
--------------------------------------------------------------------------------
Total Distributions                          (0.89)       (0.95)       (0.24)
--------------------------------------------------------------------------------
Net Asset Value, End of Year                $13.26       $13.60       $12.50
--------------------------------------------------------------------------------
Total Return                                  4.31%       16.89%       (2.15)%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000s)             $19,511      $20,093      $18,580
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                    0.49%*        0.50%        0.34%+
  Net investment income                       6.64         7.12         7.55+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                        265%       57%       40%
================================================================================
    
(1)  For the period from November 7, 1994 (inception date) to December 31, 1994.
++   Total return is not annualized, as it may not be representative of the
     total return for the year.
   
+    Annualized.
* Amount restated from the December 31, 1996 Annual Report.
    


4
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Management Policies
--------------------------------------------------------------------------------

   
     The Portfolio seeks high current income, liquidity and security of
principal by investing in obligations of the U.S. Government, its agencies or
its instrumentalities and related repurchase and reverse repurchase agreements.
Of course, no assurance can be given that a Portfolio's objective will be
achieved.

     The Portfolio invests primarily in Government National Mortgage Association
("GNMA") Certificates of the modified pass-through type and in mortgage
participation certificates issued by the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") and will also
normally include other "U.S. Government Obligations," i.e., obligations issued
or guaranteed by the United States, its agencies or its instrumentalities and
related repurchase and reverse repurchase agreements ( the Portfolio will limit 
its investments in reverse repur-chase agreements and other borrowings 
to no more than 33 1/3% of its total assets).


Under normal market conditions, the Portfolio will seek to invest
substantially all of its assets - and will invest not less than 65% of its
assets - in such securities. GNMA Certificates are debt securities issued by a
mortgage banker or other mortgagee representing an interest in a pool of
mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The National
Housing Act provides that the full faith and credit of the United States is
pledged to the timely payment of principal and interest by GNMA of amounts due
on these GNMA Certificates. Securities of the type to be purchased for this
Portfolio have historically involved no credit risk; however, due to
fluctuations in interest rates, the market value of such securities will vary
during the period of a shareholder's investment in the Portfolio. The average
life of GNMA Certificates varies with the maturities of the underlying mortgages
(with maximum maturities of 30 years) but is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities as
the result of prepayments, refinancing of such mortgages or foreclosure.
Unscheduled prepayments of mortgages are passed through to the holders of GNMA
Certificates at par and will increase or decrease the yield realized by the
Portfolio, depending on the cost of the underlying Certificate and its market
value at the time of prepayment. As a hedge against changes in interest rates,
the Portfolio may enter into agreements with dealers in GNMA Certificates to
purchase or sell an agreed-upon principal amount of GNMA Certificates at a
specified price on a certain date; provided, however, that settlement occurs
within 120 days of the trade date. FHLMC is a U.S. Government-created entity
controlled by the Federal Home Loan Banks. FNMA is a government-chartered
corporation owned entirely by private stockholders, which is subject to general
regulation by the Secretary of Housing and Urban Development. Timely payment of
principal and interest on these mortgage participation certificates is
guaranteed solely by the issuer of the certificates. For a detailed explanation,
see "Appendix."
    
   
  A reverse repurchase agreement involves the sale of a money market instrument
by the Portfolio and its agreement to repurchase the instrument at a specified
time and price. The Portfolio will maintain a segregated account consisting of
U.S. government securities or cash or cash equivalents to cover its obligations
under reverse repurchase agreements with broker-dealers (but no banks). The
Portfolio will invest the proceeds in other money market instruments or repur-
chase agreements maturing not later than the expiration of the reverse repur-
chase agreement. Under the Investment Company Act of 1940, as amended (the
"1940 Act"), reverse repurchase agreements may be considered borrowings by the
seller.     


                                                                               5
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

   
     The Portfolio may seek to increase its net investment income by lending its
securities to unaffiliated brokers, dealers and other financial institutions,
provided such loans are callable at any time and are continuously secured by
cash or U.S. Government Obligations equal to no less than the market value,
determined daily, of the securities loaned. Management will limit such lending
to not more than one-third of the value of the Portfolio's total assets. The
risks in lending portfolio securities consist of possible delay in recovery of
the securities or possible loss of rights in the collateral should the borrower
fail financially. The Statement of Additional Information contains more detailed
information.


    
   
  The Portfolio may purchase and sell interest rate futures contracts ("futures
contracts") as a hedge against changes in interest rates. A futures contract is
an agreement between two parties to buy and sell a security for a set price on
a future date. Futures contracts are traded on designated "contracts markets"
which, through their clearing corporations, guarantee performance of the con-
tracts. Currently, there are futures contracts based on securities such as
long-term Treasury bonds, Treasury notes, GNMA Certificates and three-month
Treasury bills.     
   
  Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although the sale of the futures contract might be accomplished more easily and
quickly. For example, if the Portfolio holds long-term U.S. government securi-
ties and the Manager anticipates a rise in long-term interest rates, it could,
in lieu of disposing of its portfolio securities, enter into futures contracts
for the sale of similar long-term securities. If interest rates increased and
the value of the Portfolio's securities declined, the value of the Portfolio's
futures contracts would increase, thereby protecting the Portfolio by prevent-
ing the net asset value from declining as much as it otherwise would have. Sim-
ilarly, entering into futures contracts for the purchase of securities has an
effect similar to actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying securities. For exam-
ple, if the     
   
Manager expects long-term interest rates to decline, the Portfolio might enter
into futures contracts for the purchase of long-term securities, so that it
could gain rapid market exposure that may offset anticipated increases in the
cost of securities it intends to purchase, while continuing to hold higher-
yielding short-term securities or waiting for the long-term market to stabi-
lize.     
   
  The Portfolio also may purchase and sell listed put and call options on
futures contracts. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures con-
tract (a long position if the option is a call and a short position if the
option is a put), at a specified exercise price at any time during the option
period. When an option on a futures contract is exercised, delivery of the
futures position is accompanied by cash representing the difference between the
current market price of the futures contract and the exercise price of the
option. The Portfolio may purchase put options on interest rate futures con-
tracts in lieu of, and for the same purpose as, the sale of a futures contract.
It also may purchase such put options in order to hedge a long position in the
underlying futures contract in the same manner as it purchases "protective
puts" on securities. The purchase of call options on interest rate futures con-
tracts is intended to serve the same purpose as the actual purchase of the
futures contract, and the Portfolio will set aside cash or cash equivalents
sufficient to purchase the amount of portfolio securities represented by the
underlying futures contracts. See "Dividends, Distributions and Taxes."     
   
  The Portfolio may not purchase futures contracts or related options if, imme-
diately thereafter, more than 30% of the Portfolio's total assets would be so
invested. In purchasing and selling futures contracts and related options, the
Portfolio will comply with rules and interpretations of the Commodity Futures
Trading Commission ("CFTC"), under which the Fund is excluded from regulation
as a "commodity pool." CFTC regulations permit use of commodity futures and
options for bona fide hedging purposes without limitations on the amount of
assets committed to margin and option premiums.     
   
  The Portfolio will not engage in transactions involving futures contracts or
related options for speculation but only as a hedge against changes in the mar-
ket values of debt securities held, or intended to be purchased, by the Portfo-
lio's risks. The Portfolio's futures transactions will be entered into for tra-
ditional hedging purposes-- that is, futures contracts will be sold (or related
put options purchased) to protect against a decline in the price of securities
that the Portfolio owns, or futures contracts (or related call options) will be
purchased to protect the Fund against an increase in the price of securities it
is committed to purchase.     
   
  There is no assurance that the Portfolio will be able to close out its
futures positions at any time, in which case it would be required to maintain
the margin 
deposits on the contract. There can be no assurance that hedging transactions
will be successful, as there may be an imperfect correlation (or no correla-
tion) between movements in the prices of the futures contracts and of the debt
securities being hedged, or price distortions due to market conditions in the
futures markets. Where futures contracts are purchased to hedge against an
increase in the price of long-term securities, but the long-term market
declines and the Portfolio does not invest in long-term securities, the Portfo-
lio would realize a loss on the futures contracts, which would not be offset by
a reduction in the price of securities purchased. Where futures contracts are
sold to hedge against a decline in the price of the Portfolio's long-term secu-
rities but the long-term market advances, the Portfolio would lose part or all
of the benefit of the advance due to offsetting losses in its futures posi-
tions.     
   
In addition, the Portfolio may invest in zero-coupon Treasury securities,
which may be subject to greater volatility than other types of Treasury securi-
ties. Because zero-coupon securities do not receive interest payments, such
securities may fall more dramatically when interest rates rise than securities
paying out interest on a current basis. However, when interest rates fall,
zero-coupon securities may rise more rapidly in value because the securities
have locked-in a particular rate of 
reinvestment that becomes more attractive the further rates fall. These assump-
tions are based on a comparison of like maturity securities. Management does
not believe that additional risks exist, however, when comparing securities of
like duration (the weighted average time to full recovery of principal and
interest payments), which is the strategy used by the Manager of the Portfolio.
    
   
The Fund may invest in "short sales against the box" and borrow money
on a temporary  basis.
    
   
     The Board of Directors of the Fund may modify the investment objective and
policies of the Portfolio provided such modification is not prohibited by the
investment restrictions (which are set forth in the Statement of Additional
Information) or applicable laws, and any such change will first be disclosed in
the then current prospectus. 
    

     PORTFOLIO TURNOVER

   
     The Portfolio will not engage in the trading of securities for the purpose
of realizing short-term profits; however, the Portfolio will adjust its
portfolio as considered advisable in view of prevailing or anticipated market
conditions and the Portfolio's investment objective. As the portfolio turnover
rate increases, so will the Portfolio's dealer mark-ups and other transaction
related expenses. Investors should realize that risk of loss is inherent in the
ownership of any securities and that shares of a Portfolio will fluctuate with
the market value of its securities.
    

--------------------------------------------------------------------------------
Valuation of Shares
--------------------------------------------------------------------------------

      The net asset value per share of Class Z shares is determined as of the
close of regular trading on the New York Stock Exchange, Inc. ("NYSE") on each
day that the NYSE is open, by dividing the value of the Portfolio's net assets
attributable to Class Z by the total number of shares of the Class outstanding.
The per share net asset value of the Class Z shares may be higher than those of
other Classes because of the lower expenses attributable to Class Z shares.

     Obligations are valued at the mean between the bid and asked quotations for
such securities or if no quotations are available, then for securities of
similar type, yield and maturity. Short-term investments that have a maturity of
more than 60 days are valued at prices based on market quotations for securities
of similar type, yield and maturity. Short-term investments that have a maturity
of 60 days or less


6
<PAGE>

--------------------------------------------------------------------------------
Valuation of Shares (continued)
--------------------------------------------------------------------------------

are valued at amortized cost when the Board of Directors has determined that
amortized cost equals fair value, unless market conditions dictate otherwise.
Other investments of a Portfolio, including restricted securities, if any, are
valued at a fair value determined by the Board of Directors in good faith.

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes
--------------------------------------------------------------------------------

     DIVIDENDS AND DISTRIBUTIONS

   
     The Fund declares monthly income dividends on shares of the Portfolio and
makes annual distributions of capital gains, if any, on such shares.
    

     Unless a shareholder is eligible for qualified distributions and instructs
that dividends and capital gain distributions on shares be paid in cash and
credited to the shareholder's account, dividends and capital gain distributions
will be reinvested automatically in additional shares of the Class at net asset
value as of the close of business on the payment date, subject to no sales
charge or CDSC.

     TAXES

   
     The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, to be relieved of
Federal income tax on that part of its net investment income and realized
capital gains which it pays out to its shareholders. To qualify, a Portfolio
must meet certain tests, including distributing at least 90% of its investment
company taxable income, and deriving less that 30% of its gross income from the
sale or other disposition of certain investments held for less than three
months.

     It is the policy of the Fund to comply with requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of the taxable income and net taxable gains of the Portfolio to its
shareholders. Dividends derived from net investment income and capital gains on
the sale of securities, whether paid in cash or automatically invested in
additional shares of the same Portfolio, are taxable to shareholders of the
Portfolio. Information as to the tax status of dividends deemed paid in each
calendar year will be mailed to shareholders as early in the succeeding year as
practical but no later than January 31. Shareholders should consult their plan
document or tax advisers about the tax consequences associated with
participating in a Qualified Plan.
    


                                                                               7
<PAGE>

--------------------------------------------------------------------------------
Purchase, Exchange and Redemption of Shares
--------------------------------------------------------------------------------

   
     Purchases of the Portfolio's Class Z shares must be made in accordance with
the terms of a Qualified Plan. Purchases are effected at the net asset value
next determined after a purchase order is received by Smith Barney (the "trade
date"). Payment is due to Smith Barney on the third business day (the
"settlement date") after the trade date. Investors who make payment prior to the
settlement date may designate a temporary investment (such as a money market
fund in the Smith Barney Mutual Funds) for such payment until settlement date.
The Fund reserves the right to reject any purchase order and to suspend the
offering of shares for a period of time. There are no minimum investment
requirements for Class Z shares; however, the Fund reserves the right to vary
this policy at any time.
    

     Purchase orders received by Smith Barney prior to the close of regular
trading on the NYSE on any day that the Portfolio calculates its net asset
value, are priced according to the net asset value determined on that day.
Orders received after the close of regular trading on the NYSE are priced as of
the time that the net asset value per share is next determined. See "Valuation
of Shares." Certificates for Portfolio shares are issued upon request to the
Fund's transfer agent.

   
     Shareholders may redeem their shares on any day on which a Portfolio
calculates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form prior to the close of regular trading on the NYSE are
priced at the net asset value per share determined on that day. Redemption
requests received after the close of regular trading on the NYSE are priced at
the net asset value next determined. Shareholders acquiring Class Z shares
should consult the terms of their Qualified Plan for redemption provisions.
    

     Holders of Class Z shares should consult their Qualified Plans for
information about available exchange options.

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

     From time to time the Portfolio may include its total return, average
annual total return, yield and current dividend return for Class Z shares in
advertisements and/or other types of sales literature. These figures are based
on historical earnings and are not intended to indicate future performance.
Total return is computed for a specified period of time assuming deduction of
the maximum sales charge, if any, from the initial amount invested and
reinvestment of all income dividends and capital gain distributions on the
reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calculated by
the initial amount invested and subtracting 100%. The standard average annual
total return, as prescribed by the SEC is derived from this total return, which
provides the ending redeemable value. Such standard total return information may
also be accompanied with nonstandard total return information for


8
<PAGE>

--------------------------------------------------------------------------------
Performance (continued)
--------------------------------------------------------------------------------

   
differing periods computed in the same manner but without annualizing the total
return or taking sales charges into account. The yield of a Portfolio Class
refers to the net investment income earned by investments in the Class over a
thirty-day period. This net investment income is then annualized, i.e., the
amount of income earned by the investment during that thirty-day period is
assumed to be earned each 30-day period for twelve periods and is expressed as a
percentage of the investments. The yield quotation is calculated according to a
formula prescribed by the SEC to facilitate comparison with yields quoted by
other investment companies. The Portfolio calculates current dividend return for
Class Z by annualizing the most recent quarterly distribution from investment
income, including net equalization credits or debits, and dividing by the net
asset value on the last day of the period for which current dividend return is
presented. Current dividend return may vary from time to time depending on
market conditions, the composition of its investment portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating current dividend return should be considered when comparing a Class'
current return to yields published for other investment companies and other
investment vehicles. The Portfolio may also include comparative performance
information in advertising or marketing Class Z shares. Such performance
information may include data from Lipper Analytical Services, Inc. and other
financial publications.
    

--------------------------------------------------------------------------------
Management of the Fund
--------------------------------------------------------------------------------

     BOARD OF DIRECTORS

   
Overall responsibility for management and supervision of the Portfolio rests
with the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the companies that furnish services to the Fund
and each Portfolio, including agreements with the Fund's distributor, investment
manager, custodian and transfer agent. The day-to-day operations of the
Portfolio are delegated to the investment manager. The Statement of Additional
Information contains background information regarding each Director and
executive officer of the Fund.
    

     MANAGER

   
     Smith Barney Mutual Funds Management Inc. (the "Manager") manages the
day-to-day operations of the Portfolio pursuant to a management agreement
entered into by the Fund on behalf of the Portfolio under which the Manager
offers each Portfolio advice and assistance with respect to the acquisition,
holding or disposal of securities and recommendations with respect to other
aspects and affairs of the Portfolio and furnishes the Portfolio with
bookkeeping, accounting and
    


                                                                               9
<PAGE>

--------------------------------------------------------------------------------
Management of the Fund (continued)
--------------------------------------------------------------------------------

administrative services, office space and equipment, and the services of the
officers and employees of the Fund. By written agreement the research and other
departments and staff of Smith Barney will furnish the Manager with information,
advice and assistance and will be available for consultation on the Fund's
Portfolios, thus Smith Barney may also be considered an investment adviser to
the Fund. Smith Barney's services are paid for by the Manager on the basis of
direct and indirect costs to Smith Barney of performing such services; there is
no charge to the Fund for such services.

   
     For the last fiscal year, the management fee for the Portfolio was
 0.45% of the Portfolio's average
net assets. Payment under the Portfolio's management agreement is made as
promptly as possible after the last day of each month and is computed on the
aggregate net assets of all Portfolios during the month. For the 
last fiscal year, total operating
expenses of the Class Z Shares for the Portfolio were 0.49% of average net
assets, respectively.

     The Manager, incorporated on March 12, 1968 under the laws of Delaware, is
a wholly-owned subsidiary of Smith Barney Holdings ("Holdings"), the parent
company of Smith Barney. Holdings is a wholly owned subsidiary of Travelers
Group Inc. ("Travelers"), which is a financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services, Consumer Finance Services, Life Insurance Services and Property &
Casualty Insurance Services. As of January 31, 1997, the Manager had aggregate
assets under management in excess of  $80 billion. The Manager,
Smith Barney and Holdings are each located at 388 Greenwich Street, New York,
New York 10013. The term "Smith Barney" in the title of the Fund has been
adopted by permission of Smith Barney and is subject to the right of Smith
Barney to elect that the Fund stop using the term in any form or combination of
its name.
    

     PORTFOLIO MANAGEMENT

   
     James Conroy, Vice President of the Manager, has served as Portfolio
Manager of the Portfolio since January 1996 and is responsible for managing the
day-to-day operations of the Portfolio, including the making of investment
decisions. Mr. Conroy also manages the Fund's Short-Term U.S. Treasury
Securities Portfolio. Mr. Conroy has also served as Vice President and
Investment Officer of Smith Barney Managed Governments Fund Inc. since February
1990 and as First Vice President and Investment Officer of Smith Barney
Government Securities Fund since its inception in March 1984.

     Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended December
31,1996 is included in the Annual Report dated December 31, 1996. A copy of the
Annual Report may be obtained upon request and without charge from a Smith
Barney Financial Consultant or by writing or calling the Fund at the address or
phone number listed on page one of this Prospectus.
    


10
<PAGE>

--------------------------------------------------------------------------------
Management of the Fund (continued)
--------------------------------------------------------------------------------

     DISTRIBUTOR

     Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary
of Travelers.

--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------

     The Fund, an open-end, diversified investment company, was incorporated in
Maryland on December 2, 1966. The Fund has an authorized capital of
2,000,000,000 shares with a par value of $.01 per share. The Board of Directors
has authorized the issuance of fifteen series of shares, each representing
shares in one of fifteen separate Portfolios and may authorize the issuance of
additional series of shares in the future. The assets of the Portfolio are
segregated and separately managed and a shareholder's interest is in the assets
of the Portfolio in which he or she holds shares. Class A, Class B, Class C,
Class Y and Class Z shares (where available) of a Portfolio represent interests
in the assets of the Portfolio and have identical voting, dividend, liquidation
and other rights on the same terms and conditions except that expenses related
to the distribution of each Class of shares are borne solely by each Class and
each Class of shares has exclusive voting rights with respect to provisions of
the Fund's Rule 12b-1 distribution plan which pertain to a particular Class. As
described under "Voting" in the Statement of Additional Information, the Fund
ordinarily will not hold shareholder meetings; however, shareholders have the
right to call a meeting upon a vote of 10% of the Fund's outstanding shares for
the purpose of voting to remove directors and, as required by the 1940 Act, the
Fund will assist shareholders in calling such a meeting. Shares do not have
cumulative voting rights or preemptive rights and are fully paid, transferable
and nonassessable when issued for payment as described in this Prospectus.

     PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, serves as custodian of the Portfolio's
investments.

     First Data Investor Services Group Inc., located at Exchange Place, Boston,
Massachusetts 02109, serves as the Fund's transfer agent.

     The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered.


                                                                              11
<PAGE>

--------------------------------------------------------------------------------
Appendix
--------------------------------------------------------------------------------

     GNMA Securities. Government National Mortgage Association ("GNMA"), an
agency of the United States Government, guarantees the timely payment of monthly
installments of principal and interest on modified pass-through Certificates,
whether or not such amounts are collected by the issuer of these Certificates on
the underlying mortgages. Scheduled payments of principal and interest are made
each month to holders of GNMA Certificates (such as the U.S. Government
Securities Portfolio). Unscheduled prepayments of mortgages are passed through
to holders of GNMA Certificates at par with the regular monthly payments of
principal and interest, which have the effect of reducing future payments on
such Certificates. The income portions of monthly payments received by these
Portfolios will be included in their net investment income. See "Dividends,
Distributions and Taxes."

     GNMA Certificates have historically involved no credit risk; however, due
to fluctuations in interest rates, the market value of such securities will vary
during the period of a shareholder's investment in the U.S. Government
Securities Portfolio. Prepayments and scheduled payments of principal will be
reinvested by the Portfolio in then available GNMA Certificates which may bear
interest at a rate lower or higher than the Certificate from which the payment
was received. As with other debt securities, the price of GNMA Certificates is
likely to decrease in times of rising interest rates; however, in periods of
falling interest rates the potential for prepayment may reduce the general
upward price increase of GNMA Certificates that might otherwise occur. If the
Portfolio buys GNMA Certificates at a premium, mortgage foreclosures or
prepayments may result in a loss to the Portfolio of up to the amount of the
premium paid since only timely payment of principal and interest is guaranteed.
   
     FHLMC and FNMA Securities. FHLMC is a U.S. Government-created entity
controlled by the Federal Home Loan Banks. FNMA is a government-chartered
corporation owned entirely by private stockholders, which is subject to general
regulation by the Secretary of Housing and Urban Development. Timely payment of
principal and interest on these mortgage participation certificates is
guaranteed solely by the issuer of the certificates.
    	
     Other U.S. Government Obligations. In addition to GNMA Securities and
direct obligations of the U.S. Treasury (such as Treasury Bills, Notes and
Bonds), U.S. Government Obligations in which the Fund may invest include: (1)
obligations of, or issued by, Banks for Cooperatives, Federal Land Banks,
Federal Intermediate Credit Banks, Federal Home Loan Banks, the Federal Home
Loan Bank Board, or the Student Loan Marketing Association and 
(2) other securities fully guaranteed as to principal and interest by 
the United States of America.

     Repurchase Agreements. A repurchase agreement arises when the Fund
purchases a security for a Portfolio and simultaneously agrees to resell it to
the vendor at an agreed-upon future date, normally the next business day. The
resale price is greater than the purchase price, which reflects an agreed-upon
rate of return 


                                                                             A-1
<PAGE>

--------------------------------------------------------------------------------
Appendix (continued)
--------------------------------------------------------------------------------

for the period the Portfolio holds the security and which is not related to the
coupon rate on the purchased security. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the resale
price, thus risk is limited to the ability of the seller to pay the agreed-upon
amount on the delivery date; however, if the seller defaults, realization upon
the collateral by the Fund may be delayed or limited or the Portfolio might
incur a loss if the value of the collateral securing the repurchase agreement
declines and might incur disposition costs in connection with liquidating the
collateral. A Portfolio will only enter into repurchase agreements with
broker/dealers or other financial institutions that are deemed creditworthy by
the Manager under guidelines approved by the Board of Directors. It is the
policy of the Fund not to invest in repurchase agreements that do not mature
within seven days if any such investment together with any other illiquid assets
held by the Portfolio amount to more than 15% of that Portfolio's total assets.

     Delayed Delivery. A delayed delivery transaction involves the purchase of
securities at an agreed-upon price on a specified future date. At the time the
Fund enters into a binding obligation to purchase securities on a delayed
delivery basis the Portfolio has all the rights and risks attendant to the
ownership of the security and therefore must maintain with the Custodian a
segregated account with assets of a dollar amount sufficient to make payment for
the securities to be purchased. The value of the securities on the delivery date
may be more or less than their purchase price. Securities purchased on a delayed
delivery basis do not generally earn interest until their scheduled delivery
date.


A-2
<PAGE>

                                               SMITH BARNEY
                                               ------------
                                               A Member of Travelers Group[Logo]





                                                                    Smith Barney
                                                                     Funds, Inc.

                                                                U. S. Government
                                                            Securities Portfolio


                                                            388 Greenwich Street
                                                        New York, New York 10013


                                                                    FD 0662 4/97
<PAGE>
 
P R O S P E C T U S
 
                                                        SMITH BARNEY FUNDS, INC.
                                                                      Short-Term
                                                                   U.S. Treasury
                                                                      Securities
                                                                       Portfolio
                                                                
                                                             APRIL 30, 1997     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE


[LOGO] SMITH BARNEY MUTUAL FUNDS
       Investing for your future.
       Every day.
<PAGE>
 
PROSPECTUS                                                     
                                                            April 30, 1997     
   
Smith Barney Funds, Inc.     
   
Short-Term U.S. Treasury Securities Portfolio     
388 Greenwich Street
New York, New York 10013
   
(800) 451-2010     
   
  The Short-Term U.S. Treasury Securities Portfolio (the "Portfolio") is one of
four investment portfolios that currently comprise Smith Barney Funds, Inc.
(the "Fund"). The Portfolio seeks current income, preservation of capital and
liquidity. The Portfolio seeks to achieve its objective by investing its assets
in U.S. Treasury securities backed by the full faith and credit of the U.S.
Government. Shares of the Portfolio are not issued, insured or guaranteed, as
to value or yield, by the U.S. Government or its agencies or instrumentalities.
    
  This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including distribution and service fees and expenses, that pro-
spective investors will find helpful in making an investment decision. Invest-
ors are encouraged to read this Prospectus carefully and retain it for future
reference.
   
  Additional information about the Portfolio is contained in a Statement of
Additional Information dated April 30, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by con-
tacting a Smith Barney Financial Consultant. The Statement of Additional Infor-
mation has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety.     
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            7
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    9
-------------------------------------------------
VALUATION OF SHARES                            12
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             13
-------------------------------------------------
PURCHASE OF SHARES                             14
-------------------------------------------------
EXCHANGE PRIVILEGE                             18
-------------------------------------------------
REDEMPTION OF SHARES                           20
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           24
-------------------------------------------------
PERFORMANCE                                    24
-------------------------------------------------
MANAGEMENT OF THE FUND                         25
-------------------------------------------------
DISTRIBUTOR                                    26
-------------------------------------------------
ADDITIONAL INFORMATION                         27
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
--------------------------------------------------------------------------------
 
2
<PAGE>
 
PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
 
INVESTMENT OBJECTIVE The Portfolio is an open-end, management investment com-
pany. The Portfolio seeks current income, preservation of capital and liquidi-
ty. The Portfolio seeks to achieve its objective by investing its assets in
U.S. Treasury securities backed by the full faith and credit of the U.S. Gov-
ernment. Shares of the Portfolio are not issued, insured or guaranteed, as to
value or yield, by the U.S. Government or its agencies or instrumentalities.
See "Investment Objective and Management Policies."
 
ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers two classes of shares
("Classes") to investors. The general public is offered Class A shares. Class
Y shares are offered only to investors meeting an initial investment minimum
of $5,000,000. See "Purchase of Shares" and "Redemption of Shares."
 
  Class A Shares. Class A shares are sold at net asset value without a sales
charge. Class A shares acquired as part of an exchange privilege transaction,
which were originally acquired in one of the other funds of the Smith Barney
Mutual Funds at net asset value subject to a contingent deferred sales charge
("CDSC"), remain subject to the original fund's CDSC while held in the Portfo-
lio. Class A shares are subject to an annual service fee of 0.25% and an
annual distribution fee of 0.10% of the average daily net assets of this
Class.
 
  Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any serv-
ice or distribution fees.
 
  See "Distributor" for a complete description of the service and distribution
fees for Class A shares and "Valuation of Shares," "Dividends, Distributions
and Taxes" and "Exchange Privilege" for other differences between the Classes
of shares.
   
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A shares are available as investment alterna-
tives under both these programs. See "Purchase of Shares -- Smith Barney
401(k) and ExecChoice(TM) Programs."     
 
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained with Smith Barney Inc. ("Smith Barney"). Shares may also be purchased
through a broker that clears securities transactions through Smith Barney on
 
                                                                              3
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
a fully disclosed basis (an "Introducing Broker") or an investment dealer in
the selling group. In addition, certain investors, including qualified retire-
ment plans and certain other institutional investors, may purchase shares
directly from the Fund through the Fund's transfer agent, First Data Investors
Services Group, Inc. ("First Data"). See "Purchase of Shares."     
   
INVESTMENT MINIMUMS Investors in Class A shares may open an account by making
an initial investment of at least $1,000 for each account, or $250 for an indi-
vidual retirement account ("IRA") or a Self-Employed Retirement Plan. Investors
in Class Y shares may open an account for an initial investment of $5,000,000.
Subsequent investments of at least $50 may be made in either Class. For partic-
ipants in retirement plans qualified under Section 403(b)(7) or Section 401(a)
of the Code, the minimum initial investment requirement for Class A shares and
the subsequent investment requirement for both Class A and Class Y shares is
$25. The minimum  investment requirements for purchases of Portfolio shares
through the
Systematic Investment Plan are described below. See "Purchase of Shares."     
   
SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A shares and the subsequent investment
requirement for all Classes for Shareholders purchasing shares through the Sys-
tematic Investment Plan on a monthly basis is $25 and on a quarterly basis is
$50. See "Purchase of Shares."     
 
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
 
MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc. (the
"Manager") serves as the Portfolio's investment manager. The Manager is a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is
a wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a diversified
financial services holding company engaged, through its subsidiaries, princi-
pally in four business segments: Investment Services, Consumer Finance Servic-
es, Life Insurance Services and Property & Casualty Insurance Services. See
"Management of the Fund."
   
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined. See "Exchange Privilege."     
 
VALUATION OF SHARES Net asset value of the Portfolio for the prior day gener-
ally is quoted daily in the financial section of most newspapers and is also
available from a Smith Barney Financial Consultant. See "Valuation of Shares."
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly from net investment
income. Distributions of net realized capital gains, if any, are paid annually.
See "Dividends, Distributions and Taxes."
 
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of the
Portfolio will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
See "Dividends, Distributions and Taxes."
 
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The value of the Portfolio's
investments, and thus the net asset value of the Portfolio's shares, will fluc-
tuate in response to changes in market and economic conditions, as well as the
financial condition and prospects of issuers in which the Portfolio invests.
See "Investment Objective and Management Policies."
 
THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio based, unless otherwise noted, on the Portfolio's operating
expenses for its most recent fiscal year:
 
<TABLE>   
<CAPTION>
  SHORT-TERM U.S. TREASURY SECURITIES PORTFOLIO        CLASS A CLASS Y
----------------------------------------------------------------------
  <S>                                                  <C>     <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Maximum sales charge imposed on purchases
      (as a percentage of offering price)               None    None
    Maximum CDSC
      (as a percentage of original cost or redemption
      proceeds, whichever is lower)                     None*   None
----------------------------------------------------------------------
  ANNUAL PORTFOLIO OPERATING EXPENSES
    (as a percentage of average net assets)
    Management fees                                     0.45%   0.45%
    12b-1 fees                                          0.35     --
    Other expenses                                      0.18    0.13
----------------------------------------------------------------------
  TOTAL PORTFOLIO OPERATING EXPENSES                    0.98%   0.58%
----------------------------------------------------------------------
</TABLE>    
* Class A shares acquired as part of an exchange privilege transaction, which
  were originally acquired in one of the other funds of the Smith Barney Mutual
  Funds at net asset value subject to a CDSC, remain subject to the original
  fund's CDSC while held in the Portfolio.
          
  Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly. The
fee will vary to a maximum of 1.50%, depending on the amount of assets held
through the Program. For more information, please call your Smith Barney Finan-
cial Consultant.     
 
                                                                               5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
  Smith Barney receives an annual 12b-1 fee of 0.35% of the value of average
daily net assets of Class A shares, consisting of a 0.10% distribution fee and
a 0.25% service fee. "Other expenses" in the above table include fees for
shareholder services, custodial fees, legal and accounting fees, printing costs
and registration fees.
 
 EXAMPLE
 
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Portfolio will bear directly or indirect-
ly. The example assumes payment by the Portfolio of operating expenses at the
levels set forth in the table above. See "Purchase of Shares," "Redemption of
Shares" and "Management of the Fund."
 
<TABLE>   
<CAPTION>
  SHORT-TERM U.S. TREASURY SECURITIES
  PORTFOLIO                                     1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
  <S>                                           <C>    <C>     <C>     <C>
  An investor would pay the following expenses
  on
  a $1,000 investment, assuming (1) 5.00%
  annual return and (2) redemption at the
  end of each time period:
   Class A....................................   $10     $31     $54     $120
   Class Y....................................     6      19      32       73
-------------------------------------------------------------------------------
</TABLE>    
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
6
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
 The following information has been audited by KPMG Peat Marwick LLP, indepen-
dent auditors, whose report thereon appears in the Fund's annual report dated
December 31, 1996. The information set out below should be read in conjunction
with the financial statements and related notes that also appear in the Fund's
Annual Report to Shareholders, which is incorporated by reference into the
Statement of Additional Information.     
   
FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR: 
    
<TABLE>   
<CAPTION>
SHORT-TERM U.S. TREASURY
SECURITIES PORTFOLIO
CLASS A SHARES               1996      1995     1994       1993      1992   1991(a)
-------------------------------------------------------------------------------------
<S>                       <C>      <C>       <C>       <C>       <C>       <C>
NET ASSET VALUE, BEGIN-
 NING OF YEAR               $4.19     $3.91    $4.16      $4.12     $4.09    $4.01
-------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPER-
 ATIONS:
Net investment income        0.23      0.22     0.18       0.18      0.19     0.03
Net realized and
 unrealized gain (loss)     (0.14)     0.28    (0.25)      0.06      0.04     0.09
-------------------------------------------------------------------------------------
Total Income (Loss) from
 Operations                  0.09      0.50    (0.07)      0.24      0.23     0.12
-------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income       (0.23)    (0.22)   (0.18)     (0.18)    (0.19)   (0.03)
Net realized gains            --         --       --      (0.02)    (0.01)   (0.01)
-------------------------------------------------------------------------------------
Total Distributions         (0.23)    (0.22)   (0.18)     (0.20)    (0.20)   (0.04)
-------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
 YEAR                       $4.05     $4.19    $3.91      $4.16     $4.12    $4.09
-------------------------------------------------------------------------------------
TOTAL RETURN                 2.17%    13.16%   (2.15)%     6.01%     5.92%    2.85%++
-------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
 (000S)                   $83,324  $107,099  $88,707   $205,758  $130,280  $93,946
-------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
 ASSETS:
 Expenses                    0.98%     0.98%    0.91%      0.88%     0.91%    0.80%+
 Net investment income       5.62      5.29     4.54       4.40      4.76     4.89+
-------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE       130%       29%      25%        41%       45%       5%
-------------------------------------------------------------------------------------
</TABLE>    
(a)For the period from November 11, 1991 (commencement of operations) to
    December 31, 1991.
   
 +Annualized.     
   
 ++Total return is not annualized, as it may not be representative of the total
    return for the year.     
 
                                                                               7
<PAGE>
 
   
FINANCIAL HIGHLIGHTS (CONTINUED)     
 
<TABLE>   
<S>                                            <C>
SHORT-TERM U.S. TREASURY SECURITIES PORTFOLIO
CLASS Y SHARES                                 1996(1)
-------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR               $4.19
-------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income                            0.22
 Net realized and unrealized loss                (0.14)
-------------------------------------------------------
 Total Income From Operations                     0.08
-------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                           (0.22)
-------------------------------------------------------
 Total Distributions                             (0.22)
-------------------------------------------------------
 NET ASSET VALUE, END OF YEAR                    $4.05
-------------------------------------------------------
 TOTAL RETURN++                                   2.08%
-------------------------------------------------------
 NET ASSETS, END OF YEAR (000S)                $32,114
-------------------------------------------------------
 RATIOS TO AVERAGE NET ASSETS+:
 Expenses                                         0.58%
 Net investment income                            5.99
-------------------------------------------------------
PORTFOLIO TURNOVER RATE                            130%
-------------------------------------------------------
</TABLE>    
   
(1) For the period February 7, 1996 (inception date)through December 31, 1996. 
    
   
 ++  Total return is not annualized, as it may not be representative of the
   total return for the year.     
   
 +  Annualized.     
 
 
8
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
  The investment objective of the Portfolio is current income, preservation of
capital and liquidity. There can be no assurance that the investment objective
of the Portfolio will be achieved.
 
  The Portfolio will seek to achieve its objective by investing its assets in
U.S. Treasury debt securities guaranteed by the direct "full faith and credit"
pledge of the United States Government. U.S. Treasury debt securities (includ-
ing Treasury bills, notes and bonds) are direct obligations of the U.S. Trea-
sury. The payment of principal and interest on such securities is uncondition-
ally guaranteed by the U.S. Government and, therefore, they are deemed to be of
the highest possible credit quality.
 
  Though U.S. Treasury debt securities have historically not involved risk of
loss of principal if held to maturity, they are subject to variations in market
value due to fluctuations in interest rates. Changes in the value of portfolio
securities will not affect interest income from those securities but will be
reflected in the Portfolio's net asset value. Thus, a decrease in interest
rates will generally result in an increase in the value of the Portfolio's
shares. Conversely, during periods of rising interest rates, the value of the
Portfolio's shares will generally decline. In an effort to minimize fluctua-
tions in market value of its portfolio securities, the Portfolio is expected to
maintain a dollar-weighted average maturity of approximately 3 years.
 
  Pending direct investment in U.S. Treasury debt securities, the Portfolio may
enter into repurchase agreements secured by such securities in order to earn
income on available cash but only in an amount up to 10% of the value of its
total assets. A repurchase agreement arises when the Portfolio acquires a secu-
rity and simultaneously agrees to resell it to the vendor at an agreed-upon
future date, normally the next business day. The resale price is greater than
the purchase price and reflects an agreed-upon return unrelated to the coupon
rate on the purchased security. Such transactions afford an opportunity for the
Portfolio to invest temporarily available cash at no market risk. The Portfolio
requires continual maintenance of the market value of the collateral in amounts
at least equal to the resale price. The Portfolio's risk is limited to the
ability of the seller to pay the agreed-upon amount on the delivery date; how-
ever, if the seller defaults, realization upon the collateral by the Portfolio
may be delayed or limited, or the Portfolio might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur dis-
position costs in connection with liquidating the collateral.
 
  In addition, the Portfolio may invest in zero-coupon Treasury securities,
which may be subject to greater volatility than other types of Treasury securi-
ties. Because zero-coupon securities do not receive interest payments, such
securities may fall more dramatically when interest rates rise than securities
paying out interest on a current basis. However, when interest rates fall,
zero-coupon securities may rise more rapidly in value because the securities
have locked-in a particular rate of
 
                                                                               9
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
reinvestment that becomes more attractive the further rates fall. These assump-
tions are based on a comparison of like maturity securities. Management does
not believe that additional risks exist, however, when comparing securities of
like duration (the weighted average time to full recovery of principal and
interest payments), which is the strategy used by the Manager of the Portfolio.
 
  The Portfolio may, to a limited degree, engage in short-term trading to
attempt to take advantage of short-term market variations, or may dispose of a
portfolio security prior to its maturity if it believes such disposition advis-
able or it needs to generate cash to satisfy redemptions. As the portfolio
turnover rate increases, so will the Portfolio's dealer mark-ups and other
transaction related expenses. Investors should realize that risk of loss is
inherent in the ownership of any securities and that shares of the Portfolio
will fluctuate with the market value of its securities.
 
  As a matter of fundamental policy, the Portfolio may borrow money from banks
for temporary purposes but only in an amount up to 10% of the value of its
total assets and may pledge its assets in an amount up to 10% of the value of
its total assets to secure such borrowings. The Portfolio will borrow money
only to accommodate requests for the redemption of shares while effecting an
orderly liquidation of portfolio securities or to clear securities transactions
and not for leveraging purposes. Whenever borrowings exceed 5% of the value of
its total assets, the Portfolio will not make any additional investments.
   
  The Portfolio may purchase and sell interest rate futures contracts ("futures
contracts") as a hedge against changes in interest rates. A futures contract is
an agreement between two parties to buy and sell a security for a set price on
a future date. Futures contracts are traded on designated "contracts markets"
which, through their clearing corporations, guarantee performance of the con-
tracts. Currently, there are futures contracts based on securities such as
long-term Treasury bonds, Treasury notes, GNMA Certificates and three-month
Treasury bills.     
   
  Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although the sale of the futures contract might be accomplished more easily and
quickly. For example, if the Portfolio holds long-term U.S. government securi-
ties and the Manager anticipates a rise in long-term interest rates, it could,
in lieu of disposing of its portfolio securities, enter into futures contracts
for the sale of similar long-term securities. If interest rates increased and
the value of the Portfolio's securities declined, the value of the Portfolio's
futures contracts would increase, thereby protecting the Portfolio by prevent-
ing the net asset value from declining as much as it otherwise would have. Sim-
ilarly, entering into futures contracts for the purchase of securities has an
effect similar to actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying securities. For exam-
ple, if the     
 
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
Manager expects long-term interest rates to decline, the Portfolio might enter
into futures contracts for the purchase of long-term securities, so that it
could gain rapid market exposure that may offset anticipated increases in the
cost of securities it intends to purchase, while continuing to hold higher-
yielding short-term securities or waiting for the long-term market to stabi-
lize.     
   
  The Portfolio also may purchase and sell listed put and call options on
futures contracts. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures con-
tract (a long position if the option is a call and a short position if the
option is a put), at a specified exercise price at any time during the option
period. When an option on a futures contract is exercised, delivery of the
futures position is accompanied by cash representing the difference between the
current market price of the futures contract and the exercise price of the
option. The Portfolio may purchase put options on interest rate futures con-
tracts in lieu of, and for the same purpose as, the sale of a futures contract.
It also may purchase such put options in order to hedge a long position in the
underlying futures contract in the same manner as it purchases "protective
puts" on securities. The purchase of call options on interest rate futures con-
tracts is intended to serve the same purpose as the actual purchase of the
futures contract, and the Portfolio will set aside cash or cash equivalents
sufficient to purchase the amount of portfolio securities represented by the
underlying futures contracts. See "Dividends, Distributions and Taxes."     
   
  The Portfolio may not purchase futures contracts or related options if, imme-
diately thereafter, more than 30% of the Portfolio's total assets would be so
invested. In purchasing and selling futures contracts and related options, the
Portfolio will comply with rules and interpretations of the Commodity Futures
Trading Commission ("CFTC"), under which the Fund is excluded from regulation
as a "commodity pool." CFTC regulations permit use of commodity futures and
options for bona fide hedging purposes without limitations on the amount of
assets committed to margin and option premiums.     
   
  The Portfolio will not engage in transactions involving futures contracts or
related options for speculation but only as a hedge against changes in the mar-
ket values of debt securities held, or intended to be purchased, by the Portfo-
lio's risks. The Portfolio's futures transactions will be entered into for tra-
ditional hedging purposes-- that is, futures contracts will be sold (or related
put options purchased) to protect against a decline in the price of securities
that the Portfolio owns, or futures contracts (or related call options) will be
purchased to protect the Fund against an increase in the price of securities it
is committed to purchase.     
   
  There is no assurance that the Portfolio will be able to close out its
futures positions at any time, in which case it would be required to maintain
the margin     
 
                                                                              11
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
deposits on the contract. There can be no assurance that hedging transactions
will be successful, as there may be an imperfect correlation (or no correla-
tion) between movements in the prices of the futures contracts and of the debt
securities being hedged, or price distortions due to market conditions in the
futures markets. Where futures contracts are purchased to hedge against an
increase in the price of long-term securities, but the long-term market
declines and the Portfolio does not invest in long-term securities, the Portfo-
lio would realize a loss on the futures contracts, which would not be offset by
a reduction in the price of securities purchased. Where futures contracts are
sold to hedge against a decline in the price of the Portfolio's long-term secu-
rities but the long-term market advances, the Portfolio would lose part or all
of the benefit of the advance due to offsetting losses in its futures posi-
tions.     
   
  A reverse repurchase agreement involves the sale of a money market instrument
by the Portfolio and its agreement to repurchase the instrument at a specified
time and price. The Portfolio will maintain a segregated account consisting of
U.S. government securities or cash or cash equivalents to cover its obligations
under reverse repurchase agreements with broker-dealers (but no banks). The
Portfolio will invest the proceeds in other money market instruments or repur-
chase agreements maturing not later than the expiration of the reverse repur-
chase agreement. Under the Investment Company Act of 1940, as amended (the
"1940 Act"), reverse repurchase agreements may be considered borrowings by the
seller; accordingly, the Portfolio will limit its investments in reverse repur-
chase agreements and other borrowings to no more than 33 1/3% of its total
assets.     
   
  The Portfolio's investment objective may be changed only by the "vote of a
majority of the outstanding voting securities" as defined in the 1940 Act.
Except as specifically noted, the Portfolio's investment policies are not fun-
damental and, as such, may be modified by the directors of the Fund provided
such modification is not prohibited by the investment restrictions (which are
set forth in the Statement of Additional Information) or applicable law, and
any such change will first be disclosed in the then current prospectus.     
 
VALUATION OF SHARES
 
 
  The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Portfolio's net assets attributable to each Class by the total
number of shares of the Class outstanding.
 
  Securities owned by the Portfolio are valued at the mean between the bid and
asked quotations for those securities or if no quotations are available, then
for secu-
 
12
<PAGE>
 
VALUATION OF SHARES (CONTINUED)
 
rities of similar type, yield and maturity. Short-term investments that have a
maturity of more than 60 days are valued at prices based on market quotations
for securities of similar type, yield and maturity. Short-term investments with
a remaining maturity of 60 days or less are valued at amortized cost where the
Board has determined that amortized cost is fair value. Other investments of
the Portfolio, if any, are valued at a fair value determined by the Board of
Directors in good faith.
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
 
  The Portfolio declares a dividend of substantially all of its net investment
income on each day the NYSE is open. Net investment income includes interest
accrued and discount earned and all short-term realized gains and losses on
portfolio securities and is less premium amortized and expenses accrued. Income
dividends are paid monthly. Distributions of net realized capital gains, if
any, are paid annually.
 
  If a shareholder does not otherwise instruct, dividends and capital gain dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value.
 
  Income dividends and capital gain distributions that are invested are cred-
ited to shareholders' accounts in additional shares at the net asset value as
of the close of business on the payment date. A shareholder may change the
option at any time by notifying a Smith Barney Financial Consultant. Accounts
held directly by First Data should notify First Data in writing at least five
business days prior to the payment date to permit the change to be entered in
the share holder's account. If a shareholder redeems in full an account between
payment dates, all dividends accrued to the date of liquidation will be paid
with the proceeds from the redemption of shares.
 
  The per share dividends on Class A shares of the Portfolio may be lower than
the per share dividends on Class Y shares principally as a result of the serv-
ice and distribution fees applicable to Class A shares. Distributions of capi-
tal gains, if any, will be in the same amount for Class A and Class Y shares.
 
 TAXES
 
  The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Code to be relieved of Federal income tax on that part of
its net investment income and realized capital gains which it pays out to its
shareholders. To qualify, the Portfolio must meet certain tests, including dis-
tributing at least 90% of its investment company taxable income, and deriving
less than 30% of its gross income from the sale or other disposition of certain
investments held for less than three months.
 
                                                                              13
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
 
  Dividends from net investment income and distributions of realized short-term
capital gains on the sale of securities, whether paid in cash or automatically
invested in additional shares of the Portfolio, are taxable to shareholders of
the Portfolio as ordinary income. The Portfolio's dividends will not qualify
for the dividends received deduction for corporations. Distributions out of net
long-term capital gains (i.e., net long-term capital gains in excess of net
short-term capital losses) are taxable to shareholders as long-term capital
gains. Information as to the tax status of dividends paid or deemed paid in
each calendar year will be mailed to shareholders as early in the succeeding
year as practical but not later than January 31.
 
  The Fund is required to withhold and remit to the U.S. Treasury 31% of divi-
dends, distributions and redemption proceeds to shareholders who fail to pro-
vide a correct taxpayer identification number (the Social Security number in
the case of an individual) or to make the required certifications, or who have
been notified by the Internal Revenue Service that they are subject to backup
withholding and who are not otherwise exempt. The 31% withholding tax is not an
additional tax, but is creditable against a shareholder's Federal income tax
liability.
 
  State Taxes. The Fund believes that dividends paid by the Portfolio are
exempt from state income taxation.
 
  Prior to investing in shares of the Portfolio, investors should consult with
their tax advisors concerning the Federal, state and local tax consequences of
such an investment.
 
PURCHASE OF SHARES
 
 
 GENERAL
   
  The Portfolio offers two Classes of shares. Class A shares are sold to
investors without an initial sales charge or CDSC but are subject to annual
service and distribution fees. (In addition, Class A shares acquired as part of
an exchange privilege transaction, which were originally acquired in one of the
other funds of the Smith Barney Mutual Funds at net asset value subject to a
CDSC, remain subject to the original fund's CDSC while held in the Portfolio.)
Class Y shares are sold without an initial sales charge or CDSC or service or
distribution fees, and are available only to investors investing a minimum of
$5,000,000 (except for purchases of Class Y shares by Smith Barney Concert
Allocation Series Inc., for which there is no minimum purchase amount).     
   
  Purchases of Portfolio shares must be made through a brokerage account main-
tained with Smith Barney, an Introducing Broker or an investment dealer in the
selling group. In addition, certain investors, including qualified retirement
plans and certain other institutional investors, may purchase shares directly
from the Fund through First Data. When purchasing shares of the Portfolio,
investors must specify whether the purchase is for Class A or Class Y shares.
Smith Barney and other     
 
14
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
broker/dealers may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or
holds shares. Accounts held directly at First Data are not subject to a mainte-
nance fee.     
   
  Investors in Class A shares may open an account by making an initial invest-
ment of at least $1,000 for each account, or $250 for an IRA or a Self-Employed
Retirement Plan in the Portfolio. Investors in Class Y shares may open an
account by making an initial investment of $5,000,000. Subsequent investments
of at least $50 may be made for each Class. For participants in retirement
plans qualified under Section 403(b)(7) or Section 401(a) of the Code, the min-
imum initial investment requirement for Class A shares and the subsequent
investment requirement for both Classes in the Portfolio is $25. For sharehold-
ers purchasing shares of the Portfolio through the Systematic Investment Plan
on a monthly basis, the minimum initial investment requirement for Class A
Shares and the subsequent investment requirement for both Classes is $25. For
shareholders purchasing shares of the Portfolio through the Systematic Invest-
ment Plan on a quarterly basis, the minimum initial investment requirement for
Class A shares and the subsequent requirement for all classes is $50. There are
no minimum investment requirements in Class A shares for employees of Travelers
and its subsidiaries, including Smith Barney, Directors or Trustees of any of
the Smith Barney Mutual Funds, and their spouses and children. Share certifi-
cates are issued only upon a shareholder's written request to First Data. The
Fund reserves the right to waive or change minimums, to decline any order to
purchase its shares and to suspend the offering of shares from time to time.
Shares purchased will be held in the shareholder's account by the Fund's trans-
fer agent, First Data.     
 
  The Portfolio's shares are sold continuously at their net asset value next
determined after a purchase order is received and becomes effective. A purchase
order becomes effective when the Fund, Smith Barney or an Introducing Broker
receives, or converts the purchase amount into, Federal funds (i.e., monies of
member banks within the Federal Reserve System held on deposit at a Federal
Reserve Bank). When orders for the purchase of Portfolio shares are paid for in
Federal funds, or are placed by an investor with sufficient Federal funds or
cash balance in the investor's brokerage account with Smith Barney or the
Introducing Broker, the order becomes effective on the day of receipt prior to
the close of regular trading on the NYSE, on any day the Portfolio calculates
its net asset value. See "Valuation of Shares." Purchase orders received after
the close of regular trading on the NYSE are effective as of the time the net
asset value is next determined. When orders for the purchase of Portfolio
shares are paid for other than in Federal funds, Smith Barney or the Introduc-
ing Broker, acting on behalf of the investor, will complete the conversion
into, or itself advance, Federal funds, and the order will become effective on
the day following its receipt by the Fund, Smith Barney or the Introducing Bro-
ker. Shares purchased directly through First Data begin to accrue income divi-
dends on the day that the purchase order becomes effective. All other shares
 
                                                                              15
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
purchased begin to accrue dividends on the next business day following the day
the purchase order becomes effective.
 
 SYSTEMATIC INVESTMENT PLAN
   
  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial institu-
tion indicated by the shareholder to provide systematic additions to the share-
holder's Portfolio account. A shareholder who has insufficient funds to com-
plete the transfer will be charged a fee of up to $25 by Smith Barney or First
Data. The Systematic Investment Plan also authorizes Smith Barney to apply cash
held in the shareholder's Smith Barney brokerage account or redeem the share-
holder's shares of a Smith Barney money market fund to make additions to the
account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.     
 
 LETTER OF INTENT
 
  Class Y Shares. A Letter of Intent provides an opportunity for investors to
meet the minimum investment requirement for Class Y shares by aggregating
investments over a six-month period. Such investors must make an initial mini-
mum purchase of $1,000,000 in Class Y shares of the Portfolio and agree to pur-
chase a total of $5,000,000 of Class Y shares of the same Portfolio within six
months from the date of the Letter. If a total investment of $5,000,000 is not
made within the six-month period, all Class Y shares purchased to date will be
transferred to Class A shares, where they will be subject to all fees (includ-
ing a service fee of 0.25% and a distribution fee of 0.10%) and expenses appli-
cable to the Portfolio's Class A shares. Please contact a Smith Barney Finan-
cial Consultant or First Data for further information.
    
 SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS     
   
  Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions which are outlined below, are offered to all plans partic-
ipating ("Participating Plans") in these programs.     
          
  The Portfolio offers to Participating Plans Class A shares as an investment
choice under the Smith Barney 401(k) and ExecChoice(TM) Programs, provided the
Participating Plan makes an initial investment of $1,000,000 or more of Class A
shares of one or more funds of the Smith Barney Mutual Funds. Class A shares
acquired through the Participating Plans are subject to the same service and/or
dis-     
 
16
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
tribution fees as the Class A shares acquired by other investors; however, they
are not subject to any initial sales charge or contingent deferred sales charge
("CDSC").     
          
  Participating Plans wishing to acquire shares of the Portfolio through the
Smith Barney 401(k) Program or Smith Barney ExecChoice(TM) Program must pur-
chase such shares directly from First Data. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
    
                                                                              17
<PAGE>
 
EXCHANGE PRIVILEGE
   
  Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A shares are subject to minimum investment
requirements and all shares are subject to the other requirements of the fund
into which exchanges are made.     
 
 FUND NAME
 
 Growth Funds
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Growth Opportunity Fund
    Smith Barney Managed Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Special Equities Fund
         
 Growth and Income Funds
       
    Concert Social Awareness Fund     
    Smith Barney Convertible Fund
    Smith Barney Funds, Inc. -- Equity Income Portfolio
    Smith Barney Growth and Income Fund
    Smith Barney Premium Total Return Fund
         
    Smith Barney Utilities Fund
 
 Taxable Fixed-Income Funds
    Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
         
    Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
 
 Tax-Exempt Funds
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
    Smith Barney Intermediate Maturity California Municipals Fund
    Smith Barney Intermediate Maturity New York Municipals Fund
    Smith Barney Managed Municipals Fund Inc.
    Smith Barney Massachusetts Municipals Fund
         
    Smith Barney Muni Funds -- Florida Portfolio
    Smith Barney Muni Funds -- Georgia Portfolio
    Smith Barney Muni Funds -- Limited Term Portfolio
    Smith Barney Muni Funds -- National Portfolio
 
18
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
    Smith Barney Muni Funds -- New York Portfolio
    Smith Barney Muni Funds -- Ohio Portfolio
    Smith Barney Muni Funds -- Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund
    Smith Barney Tax-Exempt Income Fund
 
 International Funds
    Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
    Smith Barney World Funds, Inc. -- European Portfolio
    Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
    Smith Barney World Funds, Inc. -- International Balanced Portfolio
    Smith Barney World Funds, Inc. -- International Equity Portfolio
    Smith Barney World Funds, Inc. -- Pacific Portfolio
    
 Smith Barney Concert Allocation Series Inc.     
       
    Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio     
     
    Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
         
    Smith Barney Concert Allocation Series Inc. -- Growth Portfolio     
     
    Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
         
    Smith Barney Concert Allocation Series Inc. -- Income Portfolio     
 
 Money Market Funds
    Smith Barney Money Funds, Inc. -- Cash Portfolio
    Smith Barney Money Funds, Inc. -- Government Portfolio
    *Smith Barney Money Funds, Inc. -- Retirement Portfolio
    Smith Barney Municipal Money Market Fund, Inc.
    Smith Barney Muni Funds -- California Money Market Portfolio
    Smith Barney Muni Funds -- New York Money Market Portfolio
--------------------------------------------------------------------------------
* Available only for exchange with Class A shares of the Portfolio.
          
  Class A and Class Y Exchanges. Class A and Class Y shareholders of the Port-
folio who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without imposi-
tion of any charge.     
 
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Portfolio's performance and its shareholders. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Portfolio's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, the Fund will pro vide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege
 
                                                                              19
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
and during the 15 day period the shareholder will be required to (a) redeem his
or her shares in the Portfolio or (b) remain invested in the Portfolio or
exchange into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in deter-
mining what constitutes an abusive pattern of exchanges.
 
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined, plus any applicable sales
charge differential. Redemption procedures discussed below are also applicable
for exchanging shares, and exchanges will be made upon receipt of all support-
ing documents in proper form. If the account registration of the shares of the
fund being acquired is identical to the registration of the shares of the fund
exchanged, no signature guarantee is required. A capital gain or loss for tax
purposes will be realized upon the exchange, depending upon the cost or other
basis of shares redeemed. Before exchanging shares, investors should read the
current prospectus describing the shares to be acquired. The Portfolio reserves
the right to modify or discontinue exchange privileges upon 60 days' prior
notice to shareholders.
 
REDEMPTION OF SHARES
 
 
  The Fund is required to redeem the shares of the Portfolio tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
 
  If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will normally be remitted on the business day following receipt of
proper tender but, in any event, payment will be made within three business
days there-
after, except on any days on which the NYSE is closed or as permitted under the
1940 Act in extraordinary circumstances. Generally, if the redemption proceeds
are remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.
 
20
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
 
  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
 
  Smith Barney Funds, Inc./Short-Term U.S. Treasury Securities Portfolio
  Class A or Y (please specify)
  c/o First Data Investor Services Group, Inc.
     
  P.O. Box 5128     
     
  Westborough, Massachusetts 01581-5128     
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a written redemption request in excess of
$2,000 or share certificate stock power must be guaranteed by an eligible
guarantor institution, such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal Reserve System or member firm
of a national securities exchange. Written redemption requests of $2,000 or
less do not require a signature guarantee unless more than one such redemption
request is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting doc-
uments for redemptions made by corporations, executors, administrators, trust-
ees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
 
 AUTOMATIC CASH WITHDRAWAL PLAN
 
  The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the share-
holder is eligible to receive qualified distributions and has an account value
of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Portfolio. Any applicable CDSC will not be
waived on amounts withdrawn by a shareholder that exceed 1.00% per month of the
value of the shareholder's shares subject to the CDSC at the time the with-
drawal plan commences. (With respect to withdrawal plans in effect prior to
November 7, 1994, any applicable CDSC will be waived on amounts withdrawn that
do not exceed 2.00% per month of the value of the shareholder's shares subject
to the CDSC.) For further information regarding the automatic cash withdrawal
plan, shareholders should contact a Smith Barney Financial Consultant.
 
                                                                              21
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
 
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Portfolio shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a sig-
nature guarantee, that will be provided by First Data upon request. (Alterna-
tively, an invest or may authorize telephone redemptions on the new account
application with the applicant's signature guarantee when making his/her ini-
tial investment in the Portfolio.)
 
  Redemptions. Redemption requests of up $10,000 of any class or classes of the
Portfolio's shares, may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
 
  A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedure, the bank receiving the proceeds must be a mem-
ber of the Federal Reserve System or have a correspondent relationship with a
member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must com-
plete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day on which the NYSE is open.
 
  Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine. The
Fund and its agents will employ procedures designed to verify the identity of
the caller and legitimacy of instructions (for example, a shareholder's name
and account number will be required and phone calls may be recorded). The Fund
reserves the right
 
22
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
to suspend, modify or discontinue the telephone redemption and exchange program
or to impose a charge for this service at any time following at least (7) days
prior notice to shareholders.
 
 CONTINGENT DEFERRED SALES CHARGE
 
  Class A shares of the Portfolio acquired as part of an exchange privilege
transaction, which were originally acquired in one of the other Smith Barney
Mutual Funds at net asset value subject to a CDSC, continue to be subject to
any applicable CDSC of the original fund. Therefore, Class A shares that are
redeemed within 12 months of the date of purchase of the original fund may be
subject to a CDSC of 1.00%. The amount of any CDSC will be paid to and retained
by Smith Barney. The CDSC will be assessed based on an amount equal to the
lesser of the cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no CDSC will be imposed on increases in net
asset value above the initial purchase price in the original fund. In addition,
no charge will be assessed on shares derived from reinvestment of dividends or
capital gain distributions.
 
  In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestments of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that Class A shares acquired through an
exchange have been held will be calculated from the date that the Class A
shares were initially acquired in one of the other Smith Barney Mutual Funds,
and such shares being redeemed will be considered to represent, as applicable,
capital appreciation or dividend and capital gain distribution reinvestments in
such other funds. For Federal income tax purposes, the amount of the CDSC will
reduce the gain or increase the loss, as the case may be, on the amount real-
ized on redemption.
   
  The CDSC on Class A shares, if any, will be waived on (a) exchanges (see "Ex-
change Privilege" above); (b) automatic cash withdrawals in amounts equal to or
less than 1.00% per month of the value of the shareholder's shares at the time
the withdrawal plan commences (see "Automatic Cash Withdrawal Plan") (provided,
however, that automatic cash withdrawals in amounts equal to or less than 2.00%
per month of the value of the shareholder's shares will be permitted for with-
drawal plans that were established prior to November 7, 1994); (c) redemptions
of shares within twelve months following the death or disability of the share-
holder; (d) redemption of shares made in connection with qualified distribu-
tions from retirement plans or IRAs upon the attainment of age 59 1/2; (e)
involuntary redemptions; and (f) redemptions of shares to effect a combination
of a Portfolio with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other funds
of the Smith Barney Mutual     
 
                                                                              23
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
   
  For information concerning the CDSC applicable to Class A shares acquired
through the Smith Barney 401(k) Program or Smith Barney ExecChoice(TM) Program.
See "Purchase of Shares --Smith Barney 401(k) and Smith Barney ExecChoice(TM)
Programs."     
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Portfolio if the aggregate net asset value of the shares held in
the Portfolio account is less than $500. (If a shareholder has more than one
account in this Portfolio, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely upon market reductions
in net asset value. Before the Fund exercises such right, shareholders will
receive written notice and will be permitted 60 days to bring accounts up to
the minimum to avoid involuntary liquidation.
 
PERFORMANCE
 
 
  From time to time the Portfolio may include its total return, average annual
total return and yield in advertisements. In addition, in other types of sales
liter- ature the Portfolio may include its current dividend return. These fig-
ures are computed separately for Class A and Class Y shares of the Portfolio.
These figures are based on historical earnings and are not intended to indicate
future performance. Total return is computed for a specified period of time
assuming reinvestment of all income dividends and capital gain distributions on
the reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calculated by
the initial amount invested and subtracting 100%. The standard average annual
total return, as prescribed by the SEC is derived from this total return, which
provides the ending redeemable value. Such standard total return information
may also be accompanied with nonstandard total return information for differing
periods computed in the same manner but without annualizing the total return.
The yield of the Portfolio refers to the net investment income earned by
investments in the Portfolio over a thirty-day period. This net investment
income is then annualized, i.e., the amount of income earned
 
24
<PAGE>
 
PERFORMANCE (CONTINUED)
 
by the investment during that thirty-day period is assumed to be earned each
30-day period for twelve periods and is expressed as a percentage of the
investments. The yield quotation is calculated according to a formula pre-
scribed by the SEC to facilitate comparison with yields quoted by other invest-
ment companies. The Portfolio calculates current dividend return for each Class
by annualizing the most recent distribution and dividing by the net asset value
on the last day of the period for which current dividend return is presented.
The Portfolio's current dividend return for each Class may vary from time to
time depending on market conditions, the composition of its investment portfo-
lio and operating expenses. These factors and possible differences in the meth-
ods used in calculating current dividend return should be considered when com-
paring the Portfolio's current return to yields published for other investment
companies and other investment vehicles. The Portfolio may also include compar-
ative performance information in advertising or marketing its shares. Such per-
formance information may include data from Lipper Analytical Services, Inc. and
other financial publications.
 
MANAGEMENT OF THE FUND
 
 
  BOARD OF DIRECTORS
 
Overall responsibility for management and supervision of the Portfolio 
rests with the Fund's Board of Directors. The Directors approve all 
significant agreements between the Fund and the companies that 
furnish services to the Fund and the
Portfolio, including agreements with the Fund's distributor, investment manag-
er, custodian and transfer agent. The day-to-day operations of the Portfolio
are delegated to the Manager. The Statement of Additional Information contains
background information regarding each Director and executive officer of the
Fund.
 
  MANAGER
 
  Smith Barney Mutual Funds Management Inc. (the "Manager") manages the day-to-
day operations of the Portfolio pursuant to a management agreement entered into
by the Fund on behalf of the Portfolio under which the Manager offers the Port-
folio advice and assistance with respect to the acquisition, holding or dis-
posal of securities and recommendations with respect to other aspects and
affairs of the Portfolio and furnishes the Portfolio with bookkeeping, account-
ing and administrative services, office space and equipment, and the services
of the officers and employees of the Fund. By written agreement the research
and other departments of Smith Barney and staff furnish the Manager with infor-
mation, advice and assistance and are available for consultation on the Fund's
Portfolios, thus Smith Barney may also be considered an investment adviser to
the Fund. Smith Barney's services are paid for by the Manager on the basis of
direct and indirect costs to Smith Barney for performing such services; there
is no charge to the Fund for such services.
 
                                                                              25
<PAGE>
 
MANAGEMENT OF THE FUND (CONTINUED)
   
  For the Portfolio's last fiscal year, the management fee was 0.45% of the
Portfolio's average net assets and the Portfolio's total operating expenses
were 0.98% and 0.58% of the average net assets for Class A shares and Class Y
shares, respectively.     
   
  The Manager was incorporated on March 12, 1968 under the laws of Delaware. As
of January 31, 1997 the Manager had aggregate assets under management in excess
of $80 billion. The Manager, Smith Barney and Holdings are each located at 388
Greenwich Street, New York, New York 10013. The term "Smith Barney" in the
title of the Fund has been adopted by permission of Smith Barney and is subject
to the right of Smith Barney to elect that the Fund stop using the term in any
form or combination of its name.     
 
  PORTFOLIO MANAGEMENT
 
  James Conroy, Vice President of the Manager is Portfolio Manager of the Port-
folio and is responsible for managing the day-to-day operations of the Portfo-
lio, including the making of investment decisions since January 1996. Mr.
Conroy is also Portfolio Manager of the Fund's U.S. Government Securities Port-
folio. Mr. Conroy has also served as Vice President and Investment Officer of
Smith Barney Managed Governments Fund Inc. since February 1990 and as First
Vice President and Investment Officer of Smith Barney Government Securities
Fund since its inception in March 1984.
   
  Management's discussion and analysis, and additional performance information
regarding the Portfolio during the fiscal year ended December 31, 1996 is
included in the Annual Report dated December 31, 1996. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.     
 
DISTRIBUTOR
 
 
  Smith Barney distributes shares of the Portfolio as principal underwriter and
as such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Portfolio
under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a serv-
ice fee with respect to Class A shares of the Portfolio at the annual rate of
0.25% of the average daily net assets of that Class. Smith Barney is also paid
a distribution fee with respect to Class A shares at the annual rate of 0.10%
of the average daily net assets attributable to those shares. The fees are used
by Smith Barney to pay its Financial Consultants for servicing shareholder
accounts and to cover expenses primarily intended to result in the sale of
those shares. These expenses include: advertising expenses; the cost of print-
ing and mailing prospectuses to potential investors; payments to and
 
26
<PAGE>
 
DISTRIBUTOR (CONTINUED)
 
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Portfolio shares, including lease, utility, communications and
sales promotion expenses.
 
  Amounts expended by Smith Barney but not reimbursed by the Portfolio in any
year will not be a continuing liability of the Portfolio in subsequent years.
Because the Portfolio reimburses Smith Barney only for actual expenditures,
Smith Barney realizes no profit from the Plan.
 
ADDITIONAL INFORMATION
 
 
  The Fund, an open-end, diversified investment company, was incorporated in
Maryland on December 2, 1966. The Fund has an authorized capital of
2,000,000,000 shares with a par value of $.01 per share. The Board of Directors
has authorized the issuance of fifteen series of shares, each representing
shares in one of fifteen separate Portfolios and may authorize the issuance of
additional classes of shares in the future. The assets of each Portfolio are
segregated and separately managed and a shareholder's interest is in the assets
and earnings of the Portfolio in which he or she holds shares. Class A and
Class Y shares of the Portfolio represent interests in the assets of the Port-
folio and have identical voting, dividend, liquidation and other rights on the
same terms and conditions except that expenses related to the distribution of
each Class of shares are borne solely by each Class and each Class of shares
has exclusive voting rights with respect to provisions of the Fund's Rule 12b-1
distribution plan which pertains to a particular Class. Shareholders are enti-
tled to one vote for each share held and will vote in the aggregate and not by
Portfolio except as otherwise required by the 1940 Act or Maryland law. As
described under "Voting" in the Statement of Additional Information, the Fund
ordinarily will not hold meetings of shareholders annually; however, sharehold-
ers have the right to call a meeting upon a vote of 10% of the Fund's outstand-
ing shares for the purpose of voting to remove directors. Shareholders will
receive assistance in communicating with other shareholders in connection with
the removal of directors as required by the 1940 Act. Shares do not have cumu-
lative voting rights or preemptive rights and are fully paid, transferable and
nonassessable when issued for payment as described in this Prospectus.
 
  PNC Bank, National Association, located at 17th and Chestnuts Streets,
Philadelphia, Pennsylvania 19103, serves as custodian of the Portfolio's
investments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
 
                                                                              27
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
   
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply
to their account should contact their Smith Barney Financial Consultant or the
Fund's transfer agent.     
 
28
<PAGE>
 
 
                                                                    SMITH BARNEY
                                               ---------------------------------

                                               A Member of TravelersGroup [LOGO]

 
 
 
 
 
 
 
 
                                                                    SMITH BARNEY
                                                                     FUNDS, INC.
                                                                      SHORT-TERM
                                                                   U.S. TREASURY
                                                            SECURITIES PORTFOLIO
 
 
                                                            388 Greenwich Street
                                                        New York, New York 10013


                                                                  
                                                               FD 2319 4/97     
   
P R O S P E C T U S
SMITH BARNEY FUNDS, INC.

Income Return
Account Portfolio

APRIL 30, 1997

PROSPECTUS BEGINS ON PAGE ONE

[LOGO] Smith Barney Mutual Funds
Investing for your future.
Everyday.


PROSPECTUS
APRIL 30, 1997

Smith Barney Funds, Inc.
Income Return Account Portfolio
388 Greenwich Street
New York, New York 10013
(800) 451-2010

Smith Barney Funds, Inc. (the "Fund") is an investment company 
consisting of four different Portfolios.

The Income Return Account Portfolio (the "Portfolio") seeks 
high current income from a portfolio of high quality debt 
obligations and employs an immunization strategy to minimize 
the risk of loss of account value.

This Prospectus sets forth concisely certain information about 
the Fund and the Portfolio, including sales charges, 
distribution and service fees and expenses, that prospective 
investors will find helpful in making an investment decision. 
Investors are encouraged to read this Prospectus carefully and 
retain it for future reference.

Additional information about the Portfolio is contained in a 
Statement of Additional Information dated April 30, 1997, as 
amended or supplemented from time to time, that is available 
upon request and without charge by calling or writing the Fund 
at the telephone number or address set forth above or by 
contacting a Smith Barney Financial Consultant. The Statement 
of Additional Information has been filed with the Securities 
and Exchange Commission (the "SEC") and is incorporated by 
reference into this Prospectus in its entirety. 

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE 
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES 
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR 
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR 
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE 
CONTRARY IS A CRIMINAL OFFENSE.




TABLE OF CONTENTS



PROSPECTUS SUMMARY	3

FINANCIAL HIGHLIGHTS	12

INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES	17

VALUATION OF SHARES	19

DIVIDENDS, DISTRIBUTIONS AND TAXES	19

PURCHASE OF SHARES	21

EXCHANGE PRIVILEGE	32

REDEMPTION OF SHARES	36

MINIMUM ACCOUNT SIZE	39

PERFORMANCE	40

MANAGEMENT OF THE FUND	41

DISTRIBUTOR	43

ADDITIONAL INFORMATION	44

APPENDIX	A-1


No person has been authorized to give any information or to 
make any representations in connection with this offering 
other than those contained in this Prospectus and, if given or 
made, such other information and representations must not be 
relied upon as having been authorized by the Fund or the 
Distributor. This Prospectus does not constitute an offer by 
the Fund or the Distributor to sell or a solicitation of an 
offer to buy any of the securities offered hereby in any 
jurisdiction to any person to whom it is unlawful to make such 
offer or solicitation in such jurisdiction. 


PROSPECTUS SUMMARY

The following summary is qualified in its entirety by detailed 
information appearing elsewhere in this Prospectus and in the 
Statement of Additional Information. Cross references in this 
summary are to headings in the Prospectus. See "Table of 
Contents."

INVESTMENT OBJECTIVE The Fund is an open-end, management 
investment company.  The Portfolio seeks high current income 
from a portfolio of high quality debt obligations and employs 
an immunization strategy to minimize the risk of loss of 
account value. See "Investment Objective and Management 
Policies."

ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several 
classes of shares ("Classes") to current investors who have 
elected to reinvest their income and capital gain 
contributions:  Class A shares and Class C shares, which 
differ principally in terms of sales charges and rate of 
expenses to which they are subject; Class Y shares, which are 
offered only to investors meeting an initial investment 
minimum of $5,000,000. 

Class A Shares.  Class A shares of the Portfolio are sold at 
net asset value plus an initial sales charge of up to 2.00% 
and are not subject to an annual service fee.  The initial 
sales charges may be reduced or waived for certain purchases. 
Purchases of Class A shares of $500,000 or more, will be made 
at net asset value with no initial sales charge, but will be 
subject to a contingent deferred sales charge ("CDSC") of 
1.00% on redemptions made within 12 months of purchase.  See 
"Prospectus Summary - Reduced or No Initial Sales Charge" 

Class C Shares. Class C shares are sold at net asset value 
with no initial sales charge at the time of purchase.  Class C 
shares of the Portfolio are subject to an annual service fee 
of 0.15% and an annual distribution fee of 0.20% of the 
average daily net assets of the Class C shares.  All Class C 
investors pay a CDSC of 1.00% if they redeem Class C shares 
within 12 months of purchase. The CDSC may be waived for 
certain redemptions. The Class C shares' distribution fee may 
cause that Class to have higher expenses and pay lower 
dividends than Class A shares. Purchases of Portfolio shares, 
which when combined with current holdings of Class C shares of 
a Portfolio equal or exceed $500,000 in the aggregate, should 
be made in Class A shares at net asset value with no sales 
charge, and will be subject to a CDSC of 1.00% on redemptions 
made within 12
months of purchase. 

Class Y Shares. Class Y shares are available only to investors 
meeting an initial investment minimum of $5,000,000. Class Y 
shares are sold at net asset value with no initial sales 
charge or CDSC. They are not subject to any service or 
distribution fees.

In deciding which Class of Portfolio shares to purchase, 
investors should consider the following factors, as well as 
any other relevant facts and circumstances:

Intended Holding Period. The decision as to which Class of 
shares is more beneficial to an investor depends on the amount 
and intended length of his or her investment. Shareholders who 
are planning to establish a program of regular investment may 
wish to consider Class A shares; as the investment accumulates 
shareholders may qualify for reduced sales charges and the 
shares are subject to lower ongoing expenses over the term of 
the investment. As an alternative, Class C shares are sold 
without any initial sales charge so the entire purchase price 
is immediately invested in a Portfolio. Any investment return 
on these additional invested amounts may partially or wholly 
offset the higher annual expenses of these Classes. Because a 
Portfolio's future return cannot be predicted, however, there 
can be no assurance that this would be the case.

Finally, investors should consider the effect of the CDSC 
period and any conversion rights of the Classes in the context 
of their own investment time frame. 

Reduced or No Initial Sales Charge. The initial sales charge 
on Class A shares may be waived for certain eligible 
purchasers, and the entire purchase price will be immediately 
invested in the Portfolio.  In addition, Class A share 
purchases of $500,000 or more, will be made at net asset value 
with no initial sales charge, but will be subject to a CDSC of 
1.00% on redemptions made within 12 months of purchase. The 
$500,000 investment may be met by adding the purchase to the 
net asset value of all Class A shares offered with a sales 
charge held in funds sponsored by Smith Barney listed under 
"Exchange Privilege." Class A share purchases also may be 
eligible for a reduced initial sales charge. See "Purchase of 
Shares." Because the ongoing expenses of Class A shares may be 
lower than those for Class C shares, purchasers eligible to 
purchase Class A shares at net asset value or at a reduced 
sales charge should consider doing so.  

Smith Barney Financial Consultants may receive different 
compensation for selling different Classes of shares. 
Investors should understand that the purpose of the CDSC on 
the Class C shares is the same as that of the initial sales 
charge on the Class A shares.

See "Purchase of Shares" and "Management of the Fund" for a 
complete description of the sales charges and service and 
distribution fees for each Class of shares and "Valuation of 
Shares," "Dividends, Distributions and Taxes" and "Exchange 
Privilege" for other differences between the Classes of 
shares.  

PURCHASE OF SHARES Shares are offered to current investors who 
have elected to reinvest their income and capital gain 
distributions.

INVESTMENT MINIMUMS Investors in Class A, Class C shares may 
open an account by making an initial investment of at least 
$1,000 for each account, or $250 for an individual retirement 
account ("IRA") or a Self-Employed Retirement Plan. Investors 
in Class Y shares may open an account for an initial 
investment of $5,000,000. Subsequent investments of at least 
$50 may be made for all Classes. For participants in 
retirement plans qualified under Section 403(b)(7) or Section 
401(a) of the Code, the minimum initial investment requirement 
for purchases of Portfolio shares and the subsequent 
investment requirement for all Classes is $25. The minimum 
initial investment requirements for purchases of Portfolio 
shares through the Systematic Investment Plan are described 
below. See "Purchase of Shares."

SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a 
Systematic Investment Plan under which they may authorize the 
automatic placement of a purchase order each month or quarter 
for Portfolio shares.  The minimum initial investment 
requirement for Class A and Class C shares and the subsequent 
investment requirement for all Classes for shareholders 
purchasing shares through the Systematic Investment Plan on a 
monthly basis is $25 and on a quarterly basis is $50.   See 
"Purchase of Shares."

REDEMPTION OF SHARES Shares may be redeemed on each day the 
New York Stock Exchange, Inc. ("NYSE") is open for business. 
See "Purchase of Shares" and "Redemption of Shares."

MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds 
Management Inc. ("the "Manager") serves as the Portfolios' 
investment manager. The Manager is a wholly owned subsidiary 
of Smith Barney Holdings Inc. ("Holdings"). Holdings is a 
wholly owned subsidiary of Travelers Group Inc. ("Travelers"), 
a diversified financial services holding company engaged, 
through its subsidiaries, principally in four business 
segments: Investment Services, Consumer Finance Services, Life 
Insurance Services and Property & Casualty Insurance Services. 
See
"Management of the Fund."

EXCHANGE PRIVILEGE Shares of a Class may be exchanged for 
shares of the same Class of certain other funds of the Smith 
Barney Mutual Funds at the respective net asset values next 
determined.  See "Exchange Privilege."

VALUATION OF SHARES Net asset value of the Portfolio for the 
prior day generally is quoted daily in the financial section 
of most newspapers and is also available from a Smith Barney 
Financial Consultant.  See "Valuation of Shares."

DIVIDENDS AND DISTRIBUTIONS Dividends from net investment 
income are paid monthly on shares of the Portfolio. 
Distributions of net realized capital gains, if any, are paid 
annually. See "Dividends, Distributions and Taxes."

REINVESTMENT OF DIVIDENDS Dividends and distributions paid on 
shares of a Class will be reinvested automatically, unless 
otherwise specified by an investor, in additional shares of 
the same Class at current net asset value. Shares acquired by 
dividend and distribution reinvestments will not be subject to 
any sales charge or CDSC.  See "Dividends, Distributions and 
Taxes."

RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no 
assurance that the Portfolio's investment objective will be 
achieved. The value of the Portfolio's investments, and thus 
the net asset value of the Portfolio's shares, will fluctuate 
in response to changes in market and economic conditions, as 
well as the financial condition and prospects of issuers in 
which the Portfolio invests. See "Investment Objective and 
Management Policies."

THE PORTFOLIO'S EXPENSES The following expense table lists the 
costs and expenses an investor will incur either directly or 
indirectly as a shareholder of the Portfolios, based on the 
maximum sales charge or maximum CDSC that may be incurred at 
the time of purchase or redemption and the Portfolio's 
operating expenses for its most recent fiscal year:

INCOME RETURN ACCOUNT PORTFOLIO

CLASS A
CLASS C
CLASS Y






SHAREHOLDER TRANSACTION EXPENSES



Maximum sales charge imposed on 
purchases 
(as a percentage of offering 
price)


2.00 %


None


None

Maximum CDSC (as a percentage of 
original cost or redemption 
proceeds, whichever is lower)

None*

1.00%

None






INCOME RETURN ACCOUNT PORTFOLIO





Management fees
0.45%
0.45%
0.45%

12b-1 fees**
n/a
0.35
n/a

Other expenses
0.81
0.80
0.72

TOTAL PORTFOLIO OPERATING 
EXPENSES

1.26%

1.60%

1.17%






* Purchases of Class A shares of $500,000 or more, will be made 
at net asset value with no sales charge, but will be subject 
to a CDSC of 1.00% on redemptions made within 12 months of 
purchase.
** Upon conversion of Class B shares to Class A shares, such 
shares will no longer be subject to a distribution fee. Class 
C shares do not have a conversion feature and, therefore, are 
subject to an ongoing distribution fee. As a result, long-
term shareholders of Class C shares may pay more than the 
economic equivalent of the maximum front-end sales charge 
permitted by the National Association of Securities Dealers, 
Inc.

Class A shares of the Portfolio purchased through the Smith 
Barney AssetOne Program will be subject to an annual asset-
based fee, payable quarterly, in lieu of the initial sales 
charge.  The fee will vary to a maximum of 1.50%, depending on 
the amount of assets held through the Program.  For more 
information, please call your Smith Barney Financial 
Consultant.

The sales charge and CDSC set forth in the above table are the 
maximum charges imposed on purchases or redemptions of 
Portfolio shares and investors may actually pay lower or no 
charges, depending on the amount purchased and,  in the case 
of Class C and certain Class A shares, the length of time the 
shares are held. See "Purchase of Shares" and "Redemption of 
Shares."

Smith Barney Inc. ("Smith Barney") receives an annual 12b-1 
fee of 0.35% of the value of average daily net assets of Class 
C shares, consisting of a 0.20% distribution fee and a 0.15% 
service fee. "Other expenses" in the above table include fees 
for shareholder services, custodial fees, legal and accounting 
fees, printing costs and registration fees. 


EXAMPLE

The following example is intended to assist an investor in 
understanding the various costs that an investor in the 
Portfolio will bear directly or indirectly. The example 
assumes payment by the Portfolio of operating expenses at the 
levels set forth in the table above. See "Purchase of Shares," 
"Redemption of Shares" and "Management of the Fund."


1 YEAR
3 YEARS
5 YEARS
10 YEARS*







An investor would pay 
the following 
expenses on a $1,000 
investment, assuming 
(1) 5.00% annual 
return and (2) 
redemption at the end 
of each time period:











Income Return 
Account Portfolio





Class A
$ 33
$ 59
$ 88
$ 169

Class C
26
50
87
190

Class Y
12
37
64
142

An investor would pay 
the following 
expenses on the same 
investment, assuming 
the same annual 
return and no 
redemption:





Income Return Account 
Portfolio





Class A
$ 33
$ 59
$ 88
$ 169

Class C
16
50
87
190

Class Y
12
37
64
142







* Ten-year figures assume conversion of Class B shares to 
Class A shares at the end of the eighth year following the 
date of purchase.

The example also provides a means for the investor to compare 
expense levels of funds with different fee structures over 
varying investment periods. To facilitate such comparison, all 
funds are required to utilize a 5.00% annual return 
assumption. However, the Portfolio's actual return will vary 
and may be greater or less than 5.00%. THIS EXAMPLE SHOULD NOT 
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND 
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.



FINANCIAL HIGHLIGHTS

The following information has been audited by KPMG Peat 
Marwick LLP, independent auditors, whose report thereon 
appears in the Portfolio's Annual Report dated December 31, 
1996.  The information set out below should read in 
conjunction with the financial statements and related notes 
that also  appear in the Portfolio's Annual Report to 
Shareholders, which is incorporated by reference into the 
Statement of Additional Information.

FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING 
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
INCOME RETURN ACCOUNT PORTFOLIO
CLASS A SHARES
1996
1995
1994
1993
1992
1991

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

NET ASSET VALUE, 
BEGINNING OF YEAR

$9.60

$ 9.34

$ 9.59

$ 9.68

$ 9.65

$ 9.38

INCOME FROM OPERATIONS:







Net investment income
0.44
0.51
0.46
0.45
0.52
0.67

Net realized and 
unrealized gain (loss)

(0.06)

0.26

(0.26)

(0.07)

0.03

0.33

Total Income from 
Operations
0.38
0.77
0.20
0.38
0.55
1.00

LESS DISTRIBUTIONS 
FROM:







Net investment income
(0.47)
(0.51)
(0.45)
(0.47)
(0.52)
(0.73)

Capital
(0.03)
n/a
n/a
n/a
n/a
n/a
n/a

Total Distributions
(0.50)
(0.51)
(0.45)
(0.47)
(0.52)
(0.73)

NET ASSET VALUE, END OF 
YEAR

$ 9.48

$ 9.60

$ 9.34

$ 9.59

$ 9.68

$ 9.65

TOTAL RETURN (P)
4.08%
8.43%
2.14%
4.00%
5.85%
11.06%

NET ASSETS, END OF YEAR 
(000S)

$14,948

$16,324

$18,918

$50,874

$48,538

$33,682

RATIOS TO AVERAGE NET 
ASSETS:







Expenses
1.26%
0.69%
0.56%
0.53%
0.50%
0.49%

Net investment income
4.82
5.38
4.60
4.67
5.33
6.98

PORTFOLIO TURNOVER RATE

122%

107.30%

126.64%

152.04%

84.15%

30.44%

</TABLE>
<TABLE>
<CAPTION>
INCOME RETURN ACCOUNT PORTFOLIO
CLASS A SHARES (CONTINUED)

1990

1989

1988

1987

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

NET ASSET VALUE, BEGINNING 
OF YEAR
$ 9.31
$ 9.12
$ 9.26
$ 9.43

INCOME FROM OPERATIONS:





Net investment income
0.73
0.75
0.71
0.68

Net realized and 
unrealized gain (loss)
0.08
0.19
(0.13)
(0.19)

Total Income from 
Operations
0.81
0.94
0.58
0.49

LESS DISTRIBUTIONS FROM:





Net investment income
(0.74)
(0.75)
(0.72)
(0.60)

Capital
n/a
n/a
n/a
(0.06)

Total Distributions
(0.74)
(0.75)
(0.72)
(0.66)

NET ASSET VALUE, END OF 
YEAR

$ 9.38

$ 9.31

$ 9.12

$ 9.26

TOTAL RETURN (P)
9.10%
10.67%
6.48%
5.36%

NET ASSETS, END OF YEAR 
(000S)
$24,058
$27,604
$53,950
$55,494

RATIOS TO AVERAGE NET 
ASSETS:





Expenses
0.43%
0.43%
0.44%
0.35%

Net investment income
7.92
8.13
7.78
7.37

PORTFOLIO TURNOVER RATE
27.90%
33.17%
124.33%
68.21%

</TABLE>
++Total return is not annualized, as it may not be 
representative of the total return for the year. 
+ Annualized.

(PTotal)returns do not reflect any sales charges. 



<TABLE>
<CAPTION>
INCOME RETURN ACCOUNT PORTFOLIO

CLASS C SHARES

CLASS Y SHARES


1996
1995
1994(1
)
1993
1992(
2)

1996
1995
1994(3)
1993(4
)

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

<C>
<C>
<C>
<C>

NET ASSET 
VALUE, 
BEGINNING OF 
YEAR



$9.60




$ 
9.34



$ 9.58



$ 9.68



$ 
9.69




$ 
9.60



$ 
9.34



$ 9.59



$ 9.72

INCOME FROM 
OPERATIONS:











Net 
investment 
income

0.41

0.48

0.42

0.45

0.03


0.45

0.51

0.44

0.42

Net realized 
and 
unrealized 
gain (loss)


(0.06)


0.26


(0.24)


(0.12)


n/a



(0.06)


0.26


(0.25)


(0.13)

Total Income 
from 
Operations

0.35

0.74

0.18

0.33

0.03


0.39

0.77

0.19

0.29

LESS 
DISTRIBUTION S FROM:











Net 
investment 
income

(0.44)

(0.48)

(0.42)

(0.43)

(0.04)


(0.48)

(0.51)

(0.44)

(0.42)

Capital
(0.03)
n/a
n/a
n/a
n/a

(0.03)
n/a
n/a
n/a

Total 
Distributions
(0.47)
(0.48)
(0.42)
(0.43)
(0.04)

(0.51)
(0.51)
(0.44)
(0.42)

NET ASSET 
VALUE, END 
OF YEAR


$ 
9.48


$ 
9.60


$ 9.34


$ 9.58


$ 
9.68



$9.48


$ 
9.60


$ 9.34


$ 9.59

TOTAL RETURN 
(P)

3.72%

8.06%

1.86%

3.53%

0.31%
++


4.18%

8.43%

2.01%

3.01%+
+

NET ASSETS, 
END OF YEAR 
(000S)


$2,090


$2,520


$3,055


$3,993


$10



$ 
636


$ 952


$3,235


$5,412

RATIOS TO 
AVERAGE NET 
ASSETS:











Expenses
1.60%
1.02%
0.94%
0.90%
0.86%
+

1.17%
0.73%
0.69%
0.75%+

Net 
investment 
income

4.46

4.89

4.40

4.25

5.71+


5.12

5.43

4.65

4.78+

PORTFOLIO 
TURNOVER RATE


122%


107.3
%


126.64
%


152.04
%


84.15%



122%


107.3%


126.64%


152.04%

(1) On November 7, 1994 former Class B shares were renamed 
Class C shares.
(2) For the period from December 16, 1992 (inception date) to 
December 31, 1992.
(3) On November 7, 1994, former Class C shares were renamed 
Class Y shares.
(4) For the period from February 1, 1993 (inception date) to 
December 31, 1993.



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

(P)Total returns do not reflect any sales charges. 
</TABLE>

INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES

The Portfolio invests in U.S. Government Obligations (see 
"Appendix"), bankers' acceptances, certificates of deposit, 
securities backed by letters of credit, commercial paper rated 
A-1 by Standard & Poor's Corporation ("S&P") or Prime-1 by 
Moody's Investors Service, Inc. ("Moody's") and notes and 
bonds, including floating rate issues, rated A or better by 
S&P or Moody's or, if not rated, of comparable quality as 
determined by the Manager. The Portfolio's investments in U.S. 
Government Obligations will be in obligations with remaining 
maturities of five years or less, and its investments in 
corporate debt obligations will be in obligations with 
remaining maturities of three years or less. Normally, 
approximately one-third of the Portfolio will consist of 
obligations that have remaining maturities of less than one 
year; however, it is expected there may be occasions when up 
to 100% of the Portfolio will be invested in securities 
maturing within one year. This portfolio composition is 
intended to achieve a higher level of income than would 
otherwise be available from an exclusively short-term 
portfolio with substantially less risk than that of a 
conventional bond or note portfolio. While minor day-to-day 
price fluctuations are unavoidable, it is believed that the 
Portfolio's immunization strategy will produce sufficient 
income accrual during adverse market conditions to offset any 
potential loss in the Portfolio security value measured over a 
three-month period.

The investment objective and policies of the Portfolio whose 
objective and policies may be changed only by the "vote of a 
majority of the outstanding voting securities," as defined in 
the Investment Company Act of 1940 (the "1940 Act"). 

PORTFOLIO TURNOVER

The Portfolio will not engage in the trading of securities for 
the purpose of realizing short-term profits; however, the 
Portfolio will adjust its portfolio as considered advisable in 
view of prevailing or anticipated market conditions and the 
Portfolio's investment objective. As the portfolio turnover 
rate increases, so will the Portfolio's dealer mark-ups and 
other transaction related expenses. Investors should realize 
that risk of loss is inherent in the ownership of any 
securities and that shares of a Portfolio will fluctuate with 
the market value of its securities. 

VALUATION OF SHARES

The Portfolio's net asset value per share is determined as of 
the close of regular trading on the NYSE, on each day that the 
NYSE is open, by dividing the value of the Portfolio's net 
assets attributable to each Class by the total number of 
shares of the Class outstanding.

Obligations are valued at the mean between the bid and asked 
quotations for such securities or if no quotations are 
available, then for securities of similar type, yield and 
maturity. Short-term investments that have a maturity of more 
than 60 days are valued at prices based on market quotations 
for securities of similar type, yield and maturity. Short-term 
investments that have a maturity of 60 days or less are valued 
at amortized cost when the Board of Directors has determined 
that amortized cost equals fair value, unless market 
conditions dictate otherwise. Other investments of a 
Portfolio, including restricted securities, if any, are valued 
at a fair value determined by the Board of Directors in good 
faith.

DIVIDENDS, DISTRIBUTIONS AND TAXES


DIVIDENDS AND DISTRIBUTIONS

The Fund declares monthly income dividends on shares of the 
Portfolio and makes annual distributions of capital gains, if 
any, on such shares. 

If a shareholder does not otherwise instruct, dividends and 
capital gain dis-
tributions will be reinvested automatically in additional 
shares of the same
Class at net asset value, subject to no sales charge or CDSC.

Income dividends and capital gain distributions that are 
invested are credited to shareholders' accounts in additional 
shares at the net asset value as of the close of business on 
the payment date. A shareholder may change the option at any 
time by notifying his or her Smith Barney Financial 
Consultant.  Accounts held directly by First Data should 
notify First Data in writing at least five business days prior 
to the payment date to permit the change to be entered in the 
shareholder's account. 

The per share dividends on  Class C shares of the Portfolio 
may be lower than the per share dividends on Class A and Class 
Y shares principally as a result of the distribution fee 
applicable with respect to Class C shares.  The per share 
dividends on Class A shares of the Portfolio may be lower than 
the per share dividends on Class Y shares principally as a 
result of the service fee applicable to Class A shares. 
Distributions of capital gains, if any, will be in the same 
amount for Class A, Class C and Class Y shares.

TAXES

The Portfolio intends to qualify as a regulated investment 
company under Subchapter M of the Code to be relieved of 
federal income tax on that part of its net investment income 
and realized capital gains which it pays out to its 
shareholders. To qualify, the Portfolio must meet certain 
tests, including distributing at least 90% of its investment 
company taxable income, and deriving less than 30% of its 
gross income from the sale or other disposition of certain 
investments held for less than three months.
 
Dividends from net investment income and distributions of 
realized short-term capital gains on the sale of securities, 
whether paid in cash or automatically invested in additional 
shares of a Portfolio, are taxable to shareholders as ordinary 
income. The Portfolio's dividends will not qualify for the 
dividends received deduction for corporations. Dividends and 
distributions declared by the Portfolio may also be subject to 
state and local taxes. Distributions out of net long-term 
capital gains (i.e., net long-term capital gains in excess of 
net short-term capital losses) are taxable to shareholders as 
long-term capital gains. Information as to the tax status of 
dividends paid or deemed paid in each calendar year will be 
mailed to shareholders as early in the succeeding year as 
practical but not later than January 31.
 
It is the policy of the Fund to comply with requirements of 
the Internal Revenue Code applicable to regulated investment 
companies and to distribute all of the taxable income and net 
taxable gains of the Portfolio to its shareholders.  Dividends 
derived from net investment income and capital gains on the 
sale of securities, whether paid in cash or automatically 
invested in additional shares of the same Portfolio, are 
taxable to shareholders of the Portfolio. Information as to 
the tax status of dividends deemed paid in each calendar year 
will be mailed to shareholders as early in the succeeding year 
as practical but no later than January 31. The foregoing 
relates to Federal income taxation. Dividends may also be 
subject to state and local taxes; investors should consult 
with their tax advisors regarding state and local taxes.

PURCHASE OF SHARES


GENERAL

The Portfolio offers several Classes of shares to current 
investors who have elected to reinvest their income and 
capital gain contributions. Class A shares are sold to 
investors with an initial sales charge and Class C shares are 
sold without an initial sales charge but are subject to a CDSC 
payable upon certain redemptions. Class Y shares are sold 
without an initial sales charge or CDSC and are available only 
to investors investing a minimum of $5,000,000 (except for 
purchases of Class Y shares by Smith Barney Concert  
Allocation Series Inc., for which there is no minimum purchase 
amount).  See "Prospectus Summary - Alternative Purchase 
Arrangements" for a discussion of factors to consider in 
selecting which Class of shares to purchase. 

Smith Barney and other broker/dealers may charge their 
customers an annual account maintenance fee in connection with 
a brokerage account through which an investor purchases or 
holds shares.  Accounts held directly at First Data Investor 
Services Group Inc. ("First Data"), the Fund's transfer agent, 
are not subject to a maintenance fee.

Investors in Class A and Class C shares may open an account by 
making an initial investment of at least $1,000 for each 
account, or $250 for an IRA or a Self-Employed Retirement Plan 
in the Portfolio. Investors in Class Y shares may open an 
account by making an initial investment of $5,000,000. 
Subsequent investments of at least $50 may be made for all 
Classes. For participants in retirement plans qualified under 
Section 403(b)(7) or Section 401(a) of the Code, the minimum 
initial investment requirement for Class A and Class C shares 
and the subsequent investment requirement for all Classes in 
the Portfolio is $25. For shareholders purchasing shares of 
the Portfolio through the Systematic Investment Plan, on a 
monthly basis the minimum initial investment requirement for 
Class A and  Class C shares and the subsequent investment 
requirement for all Classes is $50 on a quarterly basis. There 
are no minimum investment requirements in Class A shares for 
employees of Travelers and its subsidiaries, including Smith 
Barney, Directors or Trustees of any of the Smith Barney 
Mutual Funds and their spouses and children. The Fund reserves 
the right to waive or change minimums, to decline any order to 
purchase its shares and to suspend the offering of shares from 
time to time. Shares purchased will be held in the 
shareholder's account by the Fund's transfer agent, First 
Data. Share certificates are issued only upon a shareholder's 
written request to First Data. 

Purchase orders for a Portfolio that are received by the Fund 
or Smith Barney prior to the close of regular trading on the 
NYSE, on any day the Portfolio calculates its net asset value, 
are priced according to the net asset value determined on that 
day (the "trade date"). Orders received by dealers or 
Introducing Brokers prior to the close of regular trading on 
the NYSE on any day a Portfolio calculates its net asset 
value, are priced according to the net asset value determined 
on that day, provided the order is received by the Fund or 
Smith Barney prior to Smith Barney's close of business. For 
shares purchased through Smith Barney or Introducing Brokers 
purchasing through Smith Barney, payment for Portfolio shares 
is due on the third day after the trade date. In all other 
cases, payment must be made with the purchase order. 
 
SYSTEMATIC INVESTMENT PLAN

Shareholders may make additions to their accounts at any time 
by purchasing shares through a service known as the Systematic 
Investment Plan. Under the Systematic Investment Plan, Smith 
Barney or First Data is authorized through preauthorized 
transfers of at least $25 on a monthly basis or at least $50 
on a quarterly basis to charge the regular bank account or 
other financial institution indicated by the shareholder on a 
monthly or quarterly basis to provide systematic additions to 
the shareholder's Portfolio account. A shareholder who has 
insufficient funds to complete the transfer will be charged a 
fee of up to $25 by Smith Barney or First Data.  The 
Systematic Investment Plan also authorizes Smith Barney to 
apply cash held in the shareholder's Smith Barney brokerage 
account or redeem the shareholder's shares of a Smith Barney 
money market fund to make additions to the account. Additional 
information is available from the Fund or a Smith Barney 
Financial Consultant. 

INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES

The sales charge applicable to purchases of Class A shares of 
the Portfolio are as follows:
 

SALES CHARGE




AMOUNT OF 
TRANSACTION


% OF OFFERING 
PRICE


% OF AMOUNT 
INVESTED
DEALERS' 
REALLOWANCE AS % 
OF OFFERING PRICE






Less than $500,000
2.00%
2.04%
1.80%

$500,000 and over
*
*
*











* Purchases of Class A shares of $500,000 or more, will be 
made at net asset value without any initial sales charge, but 
will be subject to a CDSC of 1.00% on redemptions made within 
12 months of purchase. The CDSC on Class A shares is payable 
to Smith Barney, which compensates Smith Barney Financial 
Consultants and other dealers whose clients make purchases of 
$500,000 or more. The CDSC is waived in the same circumstances 
in which the CDSC applicable to Class B and Class C shares is 
waived. See "Deferred Sales Charge Alternatives" and "Waivers 
of CDSC."

Members of the selling group may receive up to 90% of the 
sales charge and may be deemed to be underwriters of the Fund 
as defined in the Securities Act of 1933, as amended.

The reduced sales charges shown above apply to the aggregate 
of purchases of Class A shares of the Portfolio made at one 
time by "any person," which includes an individual and his or 
her immediate family, or a trustee or other fiduciary of a 
single trust estate or single fiduciary account. 

INITIAL SALES CHARGE WAIVERS

Purchases of Class A shares may be made at net asset value 
without a sales charge in the following circumstances: (a) 
sales to (i) Board Members and employees of Travelers and its 
subsidiaries and any of the Smith Barney Mutual Funds 
(including retired Board Members and employees); the immediate 
familes of such persons (including the surviving spouse of a 
deceased Board Member or employee); and to a pension, profit-
sharing or other benefit plan for such persons and (ii) 
employees of members of the National Association of Securities 
Dealers, Inc., provided such sales are made upon the assurance 
of the purchaser that the purchase is made for investment 
purposes and that the securities will not be resold except 
through redemption or repurchase; (b) offers of Class A shares 
to any other investment company in connection with the 
combination of such company with a Portfolio by merger, 
acquisition of assets or otherwise; (c) purchases of Class A 
shares by any client of a newly employed Smith Barney 
Financial Consultant (for a period up to 90 days from the 
commencement of the Financial Consultant's employment with 
Smith Barney), on the condition the purchase of Class A shares 
is made with the proceeds of the redemption of shares of a 
mutual fund which (i) was sponsored by the Financial 
Consultant's prior employer, (ii) was sold to the client by 
the Financial Consultant and (iii) was subject to a sales 
charge; (d) shareholders who have redeemed Class A shares in a 
Portfolio (or Class A shares of another fund of the Smith 
Barney Mutual Funds that are offered with a sales charge equal 
to or greater than the maximum sales charge of a Portfolio) 
and who wish to reinvest their redemption proceeds in a 
Portfolio, provided the reinvestment is made within 60 
calendar days of the redemption; and (e) purchases of accounts 
managed by registered investment advisory subsidiaries of 
Travelers. In order to obtain such discounts, the purchaser 
must provide sufficient information at the time of purchase to 
permit verification that the purchase would qualify for the 
elimination of the sales charge.
 
RIGHT OF ACCUMULATION

Class A shares of a Portfolio may be purchased by "any person" 
(as defined above) at a reduced sales charge or at net asset 
value determined by aggregating the dollar amount of the new 
purchase and the total net asset value of all Class A shares 
of a Portfolio and of funds sponsored by Smith Barney which 
are offered with a sales charge listed under "Exchange 
Privilege" then held by such person and applying the sales 
charge applicable to such aggregate. In order to obtain such 
discount, the purchaser must provide sufficient information at 
the time of purchase to permit verification that the purchase 
qualifies for the reduced sales charge. The right of 
accumulation is subject to modification or discontinuance at 
any time with respect to all shares purchased thereafter. 
 
GROUP PURCHASES
 
Upon completion of certain automated systems, a reduced sales 
charge or purchase at net asset value will also be available 
to employees (and partners) of the same employer purchasing as 
a group, provided each participant makes the minimum initial 
investment required. The sales charge applicable to purchases 
by each member of such a group will be determined by the table 
set forth above under "Initial Sales Charge Alternative - 
Class A Shares" and will be based upon the aggregate sales of 
Class A shares of Smith Barney Mutual Funds offered with a 
sales charge to, and share holdings of, all members of the 
group. To be eligible for such reduced sales charges or to 
purchase at net asset value, all purchases must be pursuant to 
an employer- or partnership-sanctioned plan meeting certain 
requirements. One such requirement is that the plan must be 
open to specified partners or employees of the employer and 
its subsidiaries, if any. Such plan may, but is not required 
to, provide for pay-roll deductions, IRAs or investments 
pursuant to retirement plans under Sections 401 or 408 of the 
Code. Smith Barney may also offer a reduced sales charge or 
net asset value purchase for aggregating related fiduciary 
accounts under such conditions that Smith Barney will realize 
economies of sales efforts and sales related expenses. An 
individual who is a member of a qualified group may also 
purchase Class A shares at the reduced sales charge applicable 
to the group as a whole. The sales charge is based upon the 
aggregate dollar value of Class A shares offered with a sales 
charge that have been previously purchased and are still owned 
by the group, plus the amount of the current purchase. A 
"qualified group" is one which (a) has been in existence for 
more than six months, (b) has a purpose other than acquiring 
Portfolio shares at a discount and (c) satisfies uniform 
criteria which enables Smith Barney to realize economies of 
scale in its costs of distributing shares. A qualified group 
must have more than 10 members, must be available to arrange 
for group meetings between representatives of the Portfolio 
and the members, and must agree to include sales and other 
materials related to the Portfolio in its publications and 
mailings to members at no cost to Smith Barney. In order to 
obtain such reduced sales charge or to purchase at net asset 
value, the purchaser must provide sufficient information at 
the time of purchase to permit verification that the purchase 
qualifies for the reduced sales charge. Approval of group 
purchase reduced sales charge plans is subject to the 
discretion of Smith Barney.

LETTER OF INTENT

Class A Shares. A Letter of Intent for amounts of $50,000 or 
more provides an opportunity for an investor to obtain a 
reduced sales charge by aggregating investments over a 13-
month period, provided that the investor refers to such Letter 
when placing orders. For purposes of a Letter of Intent, the 
"Amount of Investment" as referred to in the preceding sales 
charge table includes purchases of all Class A shares of the 
Portfolio and other funds of the Smith Barney Mutual Funds 
offered with a sales charge over a 13 month period based on 
the total amount of intended purchases plus the value of all 
Class A shares previously purchased and still owned. An 
alternative is to compute the 13 month period starting up to 
90 days before the date of execution of a Letter of Intent. 
Each investment made during the period receives the reduced 
sales charge applicable to the total amount of the investment 
goal. If the goal is not achieved within the period, the 
investor must pay the difference between the sales charges 
applicable to the purchases made and the charges previously 
paid, or an appropriate number of escrowed shares will be 
redeemed. Please contact a Smith Barney Financial Consultant 
or First Data to obtain a Letter of Intent application. 

Class Y Shares. A Letter of Intent may also be used as a way 
for investors to meet the minimum investment requirement for 
Class Y shares. Such investors must make an initial minimum 
purchase of $1,000,000 in Class Y shares of a Portfolio and 
agree to purchase a total of $5,000,000 of Class Y shares of 
the same Portfolio within six months from the date of the 
Letter. If a total investment of $5,000,000 is not made within 
the six-month period, all Class Y shares purchased to date 
will be transferred to Class A shares, where they will be 
subject to all fees (including a service fee of 0.25%) (except 
the Income Return Account Portfolio's Class A shares will not 
be subject to a service fee) and expenses applicable to the 
Portfolio's Class A shares, which may include a CDSC of 1.00%. 
Please contact a Smith Barney Financial Consultant or First 
Data for further information. 

DEFERRED SALES CHARGE ALTERNATIVES

CDSC Shares are sold at net asset value next determined 
without an initial sales charge so that the full amount of an 
investor's purchase payment may be immediately invested in a 
Portfolio. A CDSC, however, may be imposed on certain 
redemptions of these shares. "CDSC Shares" are: (a) Class C 
shares; and (b) Class A shares that were purchased without an 
initial sales charge but subject to a CDSC.
 
Any applicable CDSC will be assessed on an amount equal to the 
lesser of the original cost of the shares being redeemed or 
their net asset value at the time of redemption. CDSC Shares 
that are redeemed will not be subject to a CDSC to the extent 
that the value of such shares represents: (a) capital 
appreciation of Portfolio assets; (b) reinvestment of 
dividends or capital gain distributions; or (c) with respect 
to Class C shares and Class A shares that are CDSC Shares, 
shares redeemed more than 12 months after their purchase.
 
Class C shares and Class A shares that are CDSC Shares are 
subject to a 1.00% CDSC if redeemed within 12 months of 
purchase.  Solely for purposes of determining the number of 
years since a purchase payment, all purchase payments made 
during a month will be aggregated and deemed to have been made 
on the last day of the preceding Smith Barney statement month. 
 
In determining the applicability of any CDSC, it will be 
assumed that a redemption is made first of shares representing 
capital appreciation, next of shares representing the 
reinvestment of dividends and capital gain distributions and 
finally of other shares held by the shareholder for the 
longest period of time. The length of time that CDSC Shares 
acquired through an exchange have been held will be calculated 
from the date that the shares exchanged were initially 
acquired in one of the other Smith Barney Mutual Funds, and 
Portfolio shares being redeemed will be considered to 
represent, as applicable, capital appreciation or dividend and 
capital gain distribution reinvestments in such other funds. 
For Federal income tax purposes, the amount of the CDSC will 
reduce the gain or increase the loss, as the case may be, on 
the amount realized on redemption. The amount of any CDSC will 
be paid to Smith Barney.
 
WAIVERS OF CDSC

The CDSC will be waived on: (a) exchanges (see "Exchange 
Privilege"); (b) automatic cash withdrawals in amounts equal 
to or less than 1.00% per month of the value of the 
shareholder's shares at the time the withdrawal plan commences 
(see "Automatic Cash Withdrawal Plan") (provided, however, 
that automatic cash withdrawals in amounts equal to or less 
than 2.00% per month of the value of the shareholder's shares 
will be permitted for withdrawal plans that were established 
prior to November 7, 1994); (c) redemptions of shares within 
twelve months following the death or disability of the 
shareholder; (d) redemption of shares made in connection with 
qualified distributions from retirement plans or IRAs upon the 
attainment of age 59 1/2; (e) involuntary redemptions; and (f) 
redemptions of shares in connection with a combination of a 
Portfolio with any investment company by merger, acquisition 
of assets or otherwise. In addition, a shareholder who has 
redeemed shares from other funds of the Smith Barney Mutual 
Funds may, under certain circumstances, reinvest all or part 
of the redemption proceeds within 60 days and receive pro rata 
credit for any CDSC imposed on the prior redemption.

CDSC waivers will be granted subject to confirmation (by Smith 
Barney in the case of shareholders who are also Smith Barney 
clients or by First Data in the case of all other 
shareholders) of the shareholder's status or holdings, as the 
case may be. 


EXCHANGE PRIVILEGE

Except as otherwise noted below, shares of each Class may be 
exchanged for shares of the same Class in the following funds 
of the Smith Barney Mutual Funds, to the extent shares are 
offered for sale in the shareholder's state of residence. 
Exchanges of Class A and Class C shares are subject to minimum 
investment requirements and all shares are subject to the 
other requirements of the fund into which exchanges are made.

FUND NAME

Growth Funds

Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc. 
Smith Barney Special Equities Fund

Growth and Income Funds

Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc. - Equity Income Portfolio 
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund

Taxable Fixed-Income Funds

**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund

+++Smith Barney Funds, Inc. - Short-Term U.S. Treasury 
Securities Portfolio
Smith Barney Funds, Inc. - U.S. Government Securities 
Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.

Tax-Exempt Funds

Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.

*Smith Barney Intermediate Maturity California Municipals 
Fund
*Smith Barney Intermediate Maturity New York Municipals 
Fund

Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund

Smith Barney Muni Funds - Florida Portfolio
Smith Barney Muni Funds - Georgia Portfolio
*Smith Barney Muni Funds - Limited Term Portfolio
Smith Barney Muni Funds - National Portfolio

Smith Barney Muni Funds - New York Portfolio
Smith Barney Muni Funds - Ohio Portfolio
Smith Barney Muni Funds - Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.

Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund

International Funds

Smith Barney World Funds, Inc. - Emerging Markets Portfolio
Smith Barney World Funds, Inc. - European Portfolio
Smith Barney World Funds, Inc. - Global Government Bond 
Portfolio
Smith Barney World Funds, Inc. - International Balanced 
Portfolio
Smith Barney World Funds, Inc. - International Equity 
Portfolio
Smith Barney World Funds, Inc. - Pacific Portfolio

Smith Barney Concert Allocation Series Inc. 

Smith Barney Concert  Allocation Series Inc. - High Growth 
Portfolio

Smith Barney Concert  Allocation Series Inc. - Growth 
Portfolio 

Smith Barney Concert Allocation Series Inc. - Balanced 
Portfolio 

Smith Barney Concert Allocation Series Inc. - Conservative 
Portfolio 

Smith Barney Concert Allocation Series Inc. - Income 
Portfolio 

Money Market Funds

+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc. - Cash Portfolio
++Smith Barney Money Funds, Inc. - Government Portfolio
***Smith Barney Money Funds, Inc. - Retirement Portfolio
+++Smith Barney Municipal Money Market Fund, Inc.
+++Smith Barney Muni Funds - California Money Market 
Portfolio
+++Smith Barney Muni Funds - New York Money Market 
Portfolio

* Available for exchange with Class A, Class C and Class Y 
shares of each
   Portfolio.
** Available for exchange with Class A shares of each 
Portfolio. In addition, shareholders who own Class C 
shares of a Portfolio through the Smith Barney 401(k) 
Program may exchange those shares for Class C shares of 
this fund.
*** Available for exchange with Class A shares of each 
Portfolio.
+ Available for exchange with Class B and Class C shares of 
each Portfolio.
++ Available for exchange with Class A and Class Y shares 
of each Portfolio. In addition, shareholders who own 
Class C shares of a Portfolio through the Smith Barney 
401(k) Program may exchange those shares for Class C 
shares of this fund.
+++Available for exchange with Class A and Class Y shares 
of each Portfolio.

Class C Exchanges. Upon an exchange, the new Class C shares 
will be deemed to have been purchased on the same date as the 
Class C shares of a Portfolio that have been exchanged. 

Class A and Class Y Exchanges. Class A and Class Y 
shareholders of the Portfolio who wish to exchange all or a 
portion of their shares for shares in any of the funds 
identified above may do so without imposition of any charge. 

Additional Information Regarding the Exchange Privilege. 
Although the exchange privilege is an important benefit, 
excessive exchange transactions can be detrimental to the 
Portfolio's performance and its shareholders. The Manager may 
determine that a pattern of frequent exchanges is excessive 
and contrary to the best interests of the Portfolio's other 
shareholders. In this event, the Fund may, at its discretion, 
decide to limit additional purchases and/or exchanges by the 
shareholder. Upon such a determination, the Fund will provide 
notice in writing or by telephone to the shareholder at least 
15 days prior to suspending the exchange privilege and during 
the 15 day period the shareholder will be required to (a) 
redeem his or her shares in the Portfolio or (b) remain 
invested in the Portfolio or exchange into any of the funds of 
the Smith Barney Mutual Funds ordinarily available, which 
position the shareholder would be expected to maintain for a 
significant period of time. All relevant factors will be 
considered in determining what constitutes an abusive pattern 
of exchanges. 

Certain shareholders may be able to exchange shares by 
telephone. See "Redemption of Shares - Telephone Redemption 
and Exchange Program." Exchanges will be processed at the net 
asset value next determined, plus any applicable sales charge 
differential. Redemption procedures discussed below are also 
applicable for exchanging shares, and exchanges will be made 
upon receipt of all supporting documents in proper form. If 
the account registration of the shares of the fund being 
acquired is identical to the registration of the shares of the 
fund exchanged, no signature guarantee is required. A capital 
gain or loss for tax purposes will be realized upon the 
exchange, depending upon the cost or other basis of shares 
redeemed. Before exchanging shares, investors should read the 
current prospectus describing the shares to be acquired. The 
Portfolio reserves the right to modify or discontinue exchange 
privileges upon 60 days' prior notice to shareholders. 

REDEMPTION OF SHARES

The Fund is required to redeem the shares of the Portfolio 
tendered to it, as described below, at a redemption price 
equal to their net asset value per share next determined after 
receipt of a written request in proper form at no charge other 
than any applicable CDSC. Redemption requests received after 
the close of regular trading on the NYSE are priced at the net 
asset value next determined. If a shareholder holds shares in 
more than one Class, any request for redemption must specify 
the Class being redeemed. In the event of a failure to specify 
which Class, or if the investor owns fewer shares of the Class 
than specified, the redemption request will be delayed until 
the Fund's transfer agent receives further instructions from 
Smith Barney, or if the shareholder's account is not with 
Smith Barney, from the shareholder directly. The redemption 
proceeds will be remitted on or before the third day following 
receipt of proper tender, except on any days on which the NYSE 
is closed or as permitted under the 1940 Act in extraordinary 
circumstances. Generally, if the redemption proceeds are 
remitted to a Smith Barney brokerage account, these funds will 
not be invested for the shareholder's benefit without specific 
instruction and Smith Barney will benefit from the use of 
temporarily uninvested funds. Redemption proceeds for shares 
purchased by check, other than a certified or official bank 
check, will be remitted upon clearance of the check, which may 
take up to ten days or more. 

Shares held by Smith Barney as custodian must be redeemed by 
submitting a written request to a Smith Barney Financial 
Consultant. Shares other than those held by Smith Barney as 
custodian may be redeemed through an investor's Financial 
Consultant, Introducing Broker or dealer in the selling group 
or by submitting a written request for redemption to:


Smith Barney Funds, Inc./Income Return Account Portfolio 
Class A,B,C or Y (please specify)

c/o First Data Investor Services Group, Inc. 
P.O. Box 5128
Westborough, Massachusetts 01581-5128


A written redemption request must (a) state the Class and 
number or dollar amount of shares to be redeemed, (b) identify 
the shareholder's account number and (c) be signed by each 
registered owner exactly as the shares are registered. If the 
shares to be redeemed were issued in certificate form, the 
certificates must be endorsed for transfer (or be accompanied 
by an endorsed stock power) and must be submitted to First 
Data together with the redemption request. Any signature 
appearing on a written redemption request in excess of $2,000, 
share certificate or stock power must be guaranteed by an 
eligible guarantor institution, such as a domestic bank, 
savings and loan institution, domestic credit union, member 
bank of the Federal Reserve System or member firm of a 
national securities exchange. Written redemption requests of 
$2,000 or less do not require a signature guarantee unless 
more than one such redemption request is made in any 10-day 
period. Redemption proceeds will be mailed to an investor's 
address of record. First Data may require additional 
supporting documents for redemptions made by corporations, 
executors, administrators, trustees or guardians. A redemption 
request will not be deemed properly received until First Data 
receives all required documents in proper form. 

AUTOMATIC CASH WITHDRAWAL PLAN

The Portfolio offers shareholders an automatic cash withdrawal 
plan, under which shareholders who own shares with a value of 
at least $10,000 may elect to receive cash payments of at 
least $50 monthly or quarterly. Retirement plan accounts are 
eligible for automatic cash withdrawal plans only where the 
shareholder is eligible to receive qualified distributions and 
has an account value of at least $5,000. The withdrawal plan 
will be carried over on exchanges between funds or Classes of 
a Portfolio. Any applicable CDSC will not be waived on amounts 
withdrawn by a shareholder that exceed 1.00% per month of the 
value of the shareholder's shares subject to the CDSC at the 
time the withdrawal plan commences. (With respect to 
withdrawal plans in effect prior to November 7, 1994, any 
applicable CDSC will be waived on amounts withdrawn that do 
not exceed 2.00% per month of the value of the shareholder's 
shares subject to the CDSC.) For further information regarding 
the automatic cash withdrawal plan, shareholders should 
contact a Smith Barney Financial Consultant.   

TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

Shareholders who do not have a Smith Barney brokerage account 
may be eligible to redeem and exchange Portfolio shares by 
telephone. To determine if a shareholder is entitled to 
participate in this program, he or she should contact First 
Data at 1-800-451-2010. Once eligibility is confirmed, the 
shareholder must complete and return a Telephone/Wire 
Authorization Form, along with a signature guarantee, that 
will be provided by First Data upon request. (Alternatively, 
an investor may authorize telephone redemptions on the new 
account application with the applicant's signature guarantee 
when making his/her initial investment in the Portfolio.)

Redemptions. Redemption requests of up to $10,000 of any class 
or classes of the Portfolio's shares, may be made by eligible 
shareholders by calling First Data at 1-800-451-2010. Such 
requests may be made between 9:00 a.m. and 5:00 p.m. (New York 
City time) on any day the NYSE is open. Redemption requests 
received after the close of regular trading on the NYSE are 
priced at the net asset value next determined. Redemptions of 
shares (i) by retirement plans or (ii) for which certificates 
have been issued are not permitted under this program.

A shareholder will have the option of having the redemption 
proceeds mailed to his/her address of record or wired to a 
bank account predesignated by the shareholder. Generally, 
redemption proceeds will be mailed or wired, as the case may 
be, on the next business day following the redemption request. 
In order to use the wire procedures, the bank receiving the 
proceeds must be a member of the Federal Reserve System or 
have a correspondent relationship with a member bank. The Fund 
reserves the right to charge shareholders a nominal fee for 
each wire redemption. Such charges, if any, will be assessed 
against the shareholder's account from which shares were 
redeemed. In order to change the bank account designated to 
receive redemption proceeds, a shareholder must complete a new 
Telephone/Wire Authorization Form and, for the protection of 
the shareholder's assets, will be required to provide a 
signature guarantee and certain other documentation.  

Exchanges. Eligible shareholders may make exchanges by 
telephone if the account registration of the shares of the 
fund being acquired is identical to the registration of the 
shares of the fund exchanged. Such exchange requests may be 
made by calling First Data at 1-800-451-2010 between 9:00 a.m. 
and 5:00 p.m. (New York City time) on any day on which the 
NYSE is open. Exchange requests received after the close of 
regular trading on the NYSE are processed at the net asset 
value next determined.  

Additional Information regarding Telephone Redemption and 
Exchange Program. Neither the Fund nor its agents will be 
liable for following instructions communicated by telephone 
that are reasonably believed to be genuine. The Fund and its 
agents will employ procedures designed to verify the identity 
of the caller and legitimacy of instructions (for example, a 
shareholder's name and account number will be required and 
phone calls may be recorded). The Fund reserves the right to 
suspend, modify or discontinue the telephone redemption and 
exchange program or to impose a charge for this service at any 
time following at least seven (7) days prior notice to 
shareholders.  

MINIMUM ACCOUNT SIZE

The Fund reserves the right to redeem involuntarily any 
shareholder's account in a Portfolio if the aggregate net 
asset value of the shares held in that Portfolio account is 
less than $500. (If a shareholder has more than one account in 
any Portfolio, each account must satisfy the minimum account 
size.) The Fund, however, will not redeem shares based solely 
on market reductions in net asset value. Before the Fund 
exercises such right, shareholders will receive written notice 
and will be permitted 60 days to bring accounts up to the 
minimum to avoid involuntary liquidation.

PERFORMANCE

From time to time the Portfolio may include its total return, 
average annual total return, yield and current dividend return 
in advertisements and/or other types of sales literature. 
These figures are computed separately for Class A,  Class C 
and Class Y shares of the Portfolio. These figures are based 
on historical earnings and are not intended to indicate future 
performance. Total return is computed for a specified period 
of time assuming deduction of the maximum sales charge, if 
any, from the initial amount invested and reinvestment of all 
income dividends and capital gain distributions on the 
reinvestment dates at prices calculated as stated in this 
Prospectus, then dividing the value of the investment at the 
end of the period so calculated by the initial amount invested 
and subtracting 100%. The standard average annual total 
return, as prescribed by the SEC is derived from this total 
return, which provides the ending redeemable value. Such 
standard total return information also may be accompanied with 
nonstandard total return information for differing periods 
computed in the same manner but without annualizing the total 
return or taking sales charges into account. The yield of a 
Portfolio Class refers to the net investment income earned by 
investments in the class over a thirty-day period. This net 
investment income is then annualized, i.e., the amount of 
income earned by the investment during that thirty-day period 
is assumed to be earned each 30-day period for twelve periods 
and is expressed as a percentage of the investments. The yield 
quotation is calculated according to a formula prescribed by 
the SEC to facilitate comparison with yields quoted by other 
investment companies. The Portfolio calculates current 
dividend return for each Class by annualizing the most recent 
monthly distribution, including net equalization credits or 
debits, and dividing by the net asset value or the maximum 
public offering price (including sales charge) on the last day 
of the period for which current dividend return is presented. 
The current dividend return for each Class may vary from time 
to time depending on market conditions, the composition of its 
investment portfolio and operating expenses. These factors and 
possible differences in the methods used in calculating 
current dividend return should be considered when comparing a 
Class's current return to yields published for other 
investment companies and other investment vehicles. The 
Portfolio may also include comparative performance information 
in advertising or marketing its shares. Such performance 
information may include data from Lipper Analytical Services, 
Inc. and other financial publications.

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS

Overall responsibility for management and supervision of the 
Fund rests with the Fund's Board of Directors. The Directors 
approve all significant agreements between the Fund and the 
companies that furnish services to the Fund, including 
agreements with the Fund's distributor, investment manager, 
custodian and transfer agent. The day-to-day operations of the 
Portfolio are delegated to the Manager. The Statement of 
Additional Information contains background information 
regarding each Director and executive officer of the Fund.

MANAGER

Smith Barney Mutual Funds Management, Inc. (the "Manager") 
manages the day- to-day operations of the Portfolio pursuant 
to a management agreement entered into by the Fund on behalf 
of the Portfolio under which the Manager offers the Portfolio 
advice and assistance with respect to the acquisition, holding 
or disposal of securities and recommendations with respect to 
other aspects and affairs of the Portfolio and furnishes the 
Portfolio with bookkeeping, accounting and administrative 
services, office space and equipment, and the services of the 
officers and employees of the Fund. By written agreement the 
research and other departments and staff of Smith Barney will 
furnish the Manager with information, advice and assistance 
and will be available for consultation on the Fund's 
Portfolios, thus Smith Barney may also be considered an 
investment adviser to the Fund. Smith Barney's services are 
paid for by the Manager on the basis of direct and indirect 
costs to Smith Barney of performing such services; there is no 
charge to the Fund for such services.
For the Portfolio's last fiscal year the management fee was 
0.45% of  the Portfolio's average net assets. Payment under 
the Portfolio's management agreement is made as promptly as 
possible after the last day of each month and is computed on 
the aggregate net assets of the Portfolio during the month. 
Total operating expenses for the Portfolio's average net 
assets for the last fiscal year were: 1.26%, 1.60% and 1.17% 
for Class A, Class C and Class Y shares, respectively.

The Manager was incorporated on March 12, 1968 under the laws 
of Delaware. As of January  31, 1997 the Manager had aggregate 
assets under management in excess of $80 billion. The Manager, 
Smith Barney and Holdings are each located at 388 Greenwich 
Street, New York, New York 10013. The term "Smith Barney" in 
the title of the Fund has been adopted by permission of Smith 
Barney and is subject to the right of Smith Barney to elect 
that the Fund stop using the term in any form or combination 
of its name.

PORTFOLIO MANAGEMENT

Patrick Sheehan is a Managing Director of Smith Barney, a Vice 
President of Smith Barney Funds, Inc. and Portfolio Manager of  
the Portfolio. Mr. Sheehan manages the day to day operations 
of this Portfolio, including making all investment decisions. 
Prior to January 1992, Mr. Sheehan was a Portfolio Manager at 
Value Line Inc., Senior Vice President of Seaman's Bank for 
Savings, Assistant Vice President of Capital Markets of 
Federal Home Loan Board of New York and Vice President and 
Treasurer of Poughkeepsie Savings Bank.

Management's discussion and analysis and additional 
performance information regarding the Portfolio during the 
fiscal year ended December 31, 1996 is included in the Annual 
Report dated December 31, 1996. A copy of the Annual Report 
may be obtained upon request and without charge from a Smith 
Barney Financial Consultant or by writing or calling the Fund 
at the address or phone number listed on page one of this 
Prospectus.

DISTRIBUTOR

Smith Barney distributes shares of the Portfolio as principal 
underwriter and as such conducts a continuous offering 
pursuant to a "best efforts" arrangement requiring Smith 
Barney to take and pay for only such securities as may be sold 
to the public. Pursuant to a plan of distribution under Rule 
12b-1 under the 1940 Act (the "Plan") adopted by the 
Portfolio,  Smith Barney is paid a service fee with respect to 
such Portfolio's Class C shares at the annual rate of 0.15% of 
the average daily net assets attributable that Class. Smith 
Barney is also paid a distribution fee with respect to Class C 
shares of the Portfolio at the annual rate of 0.20% of the 
average daily net assets attributable to that Class.

The fees are used by Smith Barney to pay its Financial 
Consultants for servicing shareholder accounts and, in the 
case of  Class C shares, to cover expenses primarily intended 
to result in the sale of those shares. These expenses include: 
advertising expenses; the cost of printing and mailing 
prospectuses to potential investors; payments to and expenses 
of Smith Barney Financial Consultants and other persons who 
provide support services in connection with the distribution 
of shares; interest and/or carrying charges; and indirect and 
overhead costs of Smith Barney associated with the sale of 
Portfolio shares, including lease, utility, communications and 
sales promotion expenses.

The payments to Smith Barney Financial Consultants for selling 
shares of a Class include a commission or fee paid by the 
investor or Smith Barney at the time of sale and, with respect 
to the Class C shares of the Portfolio, a continuing fee for 
servicing shareholder accounts for as long as a shareholder 
remains a holder of that Class. Smith Barney Financial 
Consultants may receive different levels of compensation for 
selling different Classes of shares.  

Payments under the Plan are not tied exclusively to the 
distribution and shareholder services expenses actually 
incurred by Smith Barney and the payments may exceed 
distribution expenses actually incurred. The Fund's Board of 
Directors will evaluate the appropriateness of the Plan and 
its payment terms on a continuing basis and in so doing will 
consider all relevant factors, including expenses borne by 
Smith Barney, amounts received under the Plan and proceeds of 
the CDSC.

ADDITIONAL INFORMATION

The Fund, an open-end, diversified investment company, was 
incorporated in Maryland on December 2, 1966. The Fund has an 
authorized capital of 2,000,000,000 shares with a par value of 
$.01 per share. The Board of Directors has authorized the 
issuance of fifteen series of shares, each representing shares 
in one of fifteen separate Portfolios and may authorize the 
issuance of additional series of shares in the future. The 
assets of each Portfolio are segregated and separately managed 
and a shareholder's interest is in the assets of the Portfolio 
in which he or she holds shares. Class A, Class B, Class C, 
Class Y and Class Z (where available) shares of each Portfolio 
represent interests in the assets of that Portfolio and have 
identical voting, dividend, liquidation and other rights on 
the same terms and conditions except that expenses related to 
the distribution of each Class of shares are borne solely by 
each Class and each Class of shares has exclusive voting 
rights with respect to provisions of the Fund's Rule 12b-1 
distribution plan which pertain to a particular Class. As 
described under "Voting" in the Statement of Additional 
Information, the Fund ordinarily will not hold shareholder 
meetings; however, shareholders have the right to call a 
meeting upon a vote of 10% of the Fund's outstanding shares 
for the purpose of voting to remove directors and, as required 
by the 1940 Act, the Fund will assist shareholders in calling 
such a meeting. Shares do not have cumulative voting rights or 
preemptive rights and are fully paid, transferable and 
nonassessable when issued for payment as described in this 
Prospectus.

PNC Bank, National Association, located at 17th and Chestnut 
Streets, Philadelphia, Pennsylvania 19103, serves as custodian 
of the Portfolio's investments.

First Data, located at Exchange Place, Boston, Massachusetts 
02109, serves as the Fund's transfer agent.

The Fund sends its shareholders a semi-annual report and an 
audited annual report, which include listings of the 
investment securities held by the Fund at the end of the 
period covered. In an effort to reduce the Fund's printing and 
mailing costs, the Fund plans to consolidate the mailing of 
its semi-annual and annual reports by household. This 
consolidation means that a household having multiple accounts 
with the identical address of record will receive a single 
copy of each report.  Shareholders who do not want this 
consolidation to apply to their account should contact their 
Smith Barney Financial Consultant or the Fund's transfer 
agent.

APPENDIX

GNMA Securities. Government National Mortgage Association 
("GNMA"), an agency of the United States Government, 
guarantees the timely payment of monthly installments of 
principal and interest on modified pass-through Certificates, 
whether or not such amounts are collected by the issuer of 
these Certificates on the underlying mortgages. Scheduled 
payments of principal and interest are made each month to 
holders of GNMA Certificates (such as the U.S. Government 
Securities Portfolio). Unscheduled prepayments of mortgages 
are passed through to holders of GNMA Certificates at par with 
the regular monthly payments of principal and interest, which 
have the effect of reducing future payments on such 
Certificates. The income portions of monthly payments received 
by these Portfolios will be included in their net investment 
income. See "Dividends, Distributions and Taxes."  

GNMA Certificates have historically involved no credit risk; 
however, due to fluctuations in interest rates, the market 
value of such securities will vary during the period of a 
shareholder's investment in the U.S. Government Securities 
Portfolio. Prepayments and scheduled payments of principal 
will be reinvested by the U.S. Government Securities Portfolio 
in then available GNMA Certificates which may bear interest at 
a rate lower or higher than the Certificate from which the 
payment was received. As with other debt securities, the price 
of GNMA Certificates is likely to decrease in times of rising 
interest rates; however, in periods of falling interest rates 
the potential for prepayment may reduce the general upward 
price increase of GNMA Certificates that might otherwise 
occur. If the U.S. Government Securities Portfolio buys GNMA 
Certificates at a premium, mortgage foreclosures or 
prepayments may result in a loss to the Portfolio of up to the 
amount of the premium paid since only timely payment of 
principal and interest is guaranteed.  

Other U.S. Government Obligations. In addition to GNMA 
Securities and direct obligations of the U.S. Treasury (such 
as Treasury Bills, Notes and Bonds), U.S. Government 
Obligations in which the Fund may invest include: (1) 
obligations of, or issued by, Banks for Cooperatives, Federal 
Land Banks, Federal Intermediate Credit Banks, Federal Home 
Loan Banks, the Federal Home Loan Bank Board, or the Student 
Loan Marketing Association; (2) other securities fully 
guaranteed as to principal and interest by the United States 
of America; (3) other obligations of, or issued by, or fully 
guaranteed as to principal and interest by the Federal 
National Mortgage Association or any agency of the United 
States; and (4) obligations currently or previously sold by 
the Federal Home Loan Mortgage Corporation.

Repurchase Agreements. A repurchase agreement arises when the 
Fund purchases a security for a Portfolio and simultaneously 
agrees to resell it to the vendor at an agreed-upon future 
date, normally the next business day. The resale price is 
greater than the purchase price, which reflects an agreed-upon 
rate of return for the period the Portfolio holds the security 
and which is not related to the coupon rate on the purchased 
security. The Fund requires continual maintenance of the 
market value of the collateral in amounts at least equal to 
the resale price, thus risk is limited to the ability of the 
seller to pay the agreed-upon amount on the delivery date; 
however, if the seller defaults, realization upon the 
collateral by the Fund may be delayed or limited or the 
Portfolio might incur a loss if the value of the collateral 
securing the repurchase agreement declines and might incur 
disposition costs in connection with liquidating the 
collateral. A Portfolio will only enter into repurchase 
agreements with broker/dealers or other financial institutions 
that are deemed creditworthy by the Manager under guidelines 
approved by the Board of Directors. It is the policy of the 
Fund not to invest in repurchase agreements that do not mature 
within seven days if any such investment together with any 
other illiquid assets held by the Portfolio amount to more 
than 15% of that Portfolio's total assets.
 
  Delayed Delivery. A delayed delivery transaction involves 
the purchase of securities at an agreed-upon price on a 
specified future date. At the time the Fund enters into a 
binding obligation to purchase securities on a delayed 
delivery basis the Portfolio has all the rights and risks 
attendant to the ownership of the security and therefore must 
maintain with the Custodian a segregated account with assets 
of a dollar amount sufficient to make payment for the 
securities to be purchased. The value of the securities on the 
delivery date may be more or less than their purchase price. 
Securities purchased on a delayed delivery basis do not 
generally earn interest until their scheduled delivery date.


Smith Barney

A Member of TravelersGroup [LOGO]




SMITH BARNEY
FUNDS, INC.



INCOME RETURN
ACCOUNT PORTFOLIO

388 Greenwich Street
New York, New York 10013

FD 4/97  
    



	Part B
   
	April 30, 1997
    
	SMITH BARNEY FUNDS, INC.
	388 Greenwich Street
	New York, New York  10013

	STATEMENT OF ADDITIONAL INFORMATION


Smith Barney Funds, Inc. (the "Fund") currently consists of 
four Portfolios:  the Equity Income Portfolio, the U.S. 
Government Securities Portfolio, the Income Return Account 
Portfolio and the Short-Term U.S. Treasury Securities 
Portfolio.  (collectively referred to as "Portfolios" and 
individually as "Portfolio").

This Statement of Additional Information is not a prospectus. 
 It is intended to provide more detailed information about 
Smith Barney Funds, Inc. as well as matters already discussed 
in the Prospectus of the applicable Portfolio and therefore 
should be read in conjunction with such  Portfolio's 
Prospectus which may be obtained from the Fund or a Smith 
Barney Financial Consultant.



	TABLE OF CONTENTS




Directors and Officers		2
Investment Policies		4
Investment Restrictions		7
Additional Tax Information		11
IRA and Other Prototype Retirement Plans		12
Performance Information		13	
Valuation of Shares		16
Purchase and Redemption of Shares		17
Investment Management Agreement
  and Other Services		17	
Custodian		20
Independent Auditors		20
Voting		20
Financial Statements		26
Appendix - Ratings of Debt Obligations		27


	DIRECTORS AND OFFICERS

   
*JESSICA M. BIBLIOWICZ, Director and President
Executive Vice President of Smith Barney Inc. ("Smith 
Barney"); Director of twelve investment companies associated 
with Smith Barney, President of thirty-nine investment 
companies associated with Smith Barney; President and Chief 
Executive Officer of Smith Barney Mutual Funds Management, 
Inc. (the "Manager"). Prior to January 1994, Director of Sales 
and Marketing for Prudential Mutual Funds; 37.

JOSEPH H. FLEISS, Director
Retired, 3849 Torrey Pines Blvd., Sarasota, Florida 34238.  
Director of ten investment companies associated with Smith 
Barney.  Formerly Senior Vice President of Citibank, Manager 
of Citibank's Bond Investment Portfolio and Money Management 
Desk and a Director of Citicorp Securities Co., Inc; 79.

DONALD R. FOLEY, Director
Retired, 3668 Freshwater Drive, Jupiter, Florida 33477.  
Director of ten investment companies associated with Smith 
Barney.  Formerly Vice President of Edwin Bird Wilson, 
Incorporated (advertising); 74.

PAUL HARDIN, Director
Interim President of University of Alabama at Birmingham; 
Professor of Law at University of North Carolina at Chapel 
Hill, 103 S. Building, Chapel Hill, North Carolina 27599; 
Director of twelve investment companies associated with Smith 
Barney; and a Director of The Summit Bancorporation; Formerly, 
Chancellor of the University of North Carolina at Chapel Hill, 
University of North Carolina; 65.
 
FRANCIS P. MARTIN, Director
Practicing physician, 2000 North Village Avenue, Rockville 
Centre, New York 11570.  Director of ten investment companies 
associated with Smith Barney.  Formerly President of the 
Nassau Physicians' Fund, Inc.; 72.

*HEATH B. McLENDON, Chairman of the Board and Chief Executive 
Officer
Managing Director of Smith Barney ; Director of forty-one 
investment companies associated with Smith Barney; Chairman of 
 the Manager; Chairman of the Board of Smith Barney Strategy 
Advisors Inc.; prior to July 1993, Senior Executive Vice 
President of Shearson Lehman Brothers; Vice Chairman of the 
Board of Asset Management; 63. 

RODERICK C. RASMUSSEN, Director
Investment Counselor, 81 Mountain Road, Verona, New Jersey 
07044.  Director of ten investment companies associated with 
Smith Barney.  Formerly Vice President of Dresdner and Company 
Inc. (investment counselors); 70.
    	
* Designates an "interested person" as defined in the 
Investment Company Act of 1940 whose business address is 388 
Greenwich Street, New York, New York 10013. 


   
*BRUCE D. SARGENT, Director and Vice President
Managing Director of Smith Barney  and Vice President and 
Director of the Manager and of three investment companies 
associated with Smith Barney; 53.

JOHN P. TOOLAN, Director
Retired, 13 Chadwell Place, Morristown, New Jersey 07960.  
Director of ten investment companies associated with Smith 
Barney.  Formerly, Director and Chairman of Smith Barney Trust 
Company, Director of Smith Barney  Holdings Inc. and the 
Manager and Senior Executive Vice President, Director and 
Member of the Executive Committee of Smith Barney; 66.

*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney, Senior Vice President and 
Treasurer of forty-one investment companies associated with 
Smith Barney, and Director and Senior Vice President the 
Manager; 38.

*PATRICK SHEEHAN, Vice President
Managing Director of Smith Barney and Vice President of two 
investment companies associated with Smith Barney.  Prior to 
January 1992, Portfolio Manager of Value Line Inc., Senior 
Vice President of Seaman's Bank for Savings, Assistant Vice 
President of Capital Markets of Federal Home Loan Board of New 
York and Vice President and Treasurer of Poughkeepsie Savings 
Bank; 49. 

*JAMES E. CONROY, Vice President
Managing Director of Smith Barney and Vice President of four 
investment companies associated with Smith Barney; prior to 
July 1993, Managing Director of Shearson Lehman Advisors; 45.

* AYAKO WEISSMAN, Vice President
Managing Director of Smith Barney and Vice President of  one 
investment company associated with Smith Barney; 39.

*THOMAS M. REYNOLDS, Controller and Assistant Secretary
Director of Smith Barney and Controller and Assistant 
Secretary of thirty-seven investment companies associated with 
Smith Barney; 37.

*CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney,  Secretary of forty-one 
investment companies associated with Smith Barney; Secretary 
and General Counsel of the Manager; 46.  

On April 11, 1997, directors and officers owned in the 
aggregate less than 1% of the outstanding shares of each 
Portfolio.
                                        
* Designates an "interested person" as defined in the 
Investment Company Act of 1940 whose business address is 388 
Greenwich Street, New York, New York 10013. 


The following table shows the compensation paid by the Fund to 
each incumbent director during the Fund's last fiscal year. 
None of the oficers of the Fund received any compensation from 
the Fund for such period. Officers and interested directors of 
the Fund are compensated by Smith Barney.
   	
COMPENSATION 
TABLE                                   
				                                         		 Total
				Pension or		Compensation	Number of
				Retirement		from Fund	Funds for
		Aggregate	Benefits Accrued		and Fund	Which 	director
		Compensation 	as part of 		Complex	Serves Within
Name of Person	  from Fund 	  Fund Expenses  	Paid to Directors	 Fund Complex 
Jessica M. Bibliowicz*	$0	$0			$0	12
Joseph H. Fleiss+	 	4,213	 0	 		58,500	10
Donald R. Foley+	 4,113	 0	 		58,300	10
Paul Hardin	  	4,413	 0	 		76,850	12
Heath B. McLendon*	 0	 0			0 	41
Francis P. Martin+	 4,113	 0	  		58,300	10
Roderick C. Rasmussen	 4,213	 0	  		58,500	10
Bruce D. Sargent*	0	0			0	3
John P. Toolan+	 	4,213	0			58,500	10
C. Richard Youngdahl**	4,213	0			58,500	10

*  Designates an "interested director".
** Effective January 1, 1997, Mr. Youngdahl elected to become 
Director Emeritus.
+ Pursuant to the Fund's deferred compensation plan, the 
indicated Directors have elected to defer the following 
payment of some or all of their compensation: Joseph H. Fleiss 
- $658; Donald R. Foley - $658; Francis P. Martin $4,113; and 
John P. Toolan - $4,213.

Upon attainment of age 72 the Fund's current Directors may 
elect to change to emeritus status.  Any directors elected or 
appointed to the Board in the future will be required to 
change to emeritus status upon attainment of age 80.  
Directors Emeritus are entilted to serve in emeritus status 
for a maximum of 10 years during which time they are paid 50% 
of the annual retainer fee and meeting fees otherwise 
applicable to the Fund's Directors, together with reasonable 
out-of-pocket expenses for each meeting attended.
    
	INVESTMENT POLICIES


The Articles of Incorporation of the Fund permit the Board of 
Directors to establish additional Portfolios of the Fund from 
time to time.  The investment objectives, policies and 
restrictions applicable to additional Portfolios would be 
established by the Board of Directors at the time such 
Portfolios were established and may differ from those set 
forth in the Prospectus and this Statement of Additional 
Information.

	The Fund effects portfolio transactions with a view 
towards attaining the investment objectives of the Portfolios 
and is not limited to a predetermined rate of portfolio 
turnover.  A high portfolio turnover results in 
correspondingly greater transaction costs in the form of 
dealer spreads or brokerage commissions and other transaction 
costs that a Portfolio will bear directly, and may result in 
the realization of net capital gains which are taxable when 
distributed to shareholders.  See " Financial Highlights" in 
the Prospectus and "Investment Management Agreement and Other 
Services - Brokerage" in this Statement of Additional 
Information.

	Each Portfolio, other than the Short-Term U.S. Treasury 
Securities Portfolio, may invest in investment grade bonds, 
i.e. U.S. Government Obligations or bonds rated Aaa, Aa, A and 
Baa by Moody's Investors Service, Inc. ("Moody's") or AAA, AA, 
A and BBB by Standard & Poor's ("S&P").
   
Repurchase and Reverse Repurchase Agreements.  Each Portfolio 
may on occasion enter into repurchase agreements, wherein the 
seller agrees to repurchase a security from the Portfolio at 
an agreed-upon future date, normally the next business day.  
The resale price is greater than the purchase price, which 
reflects the agreed-upon rate of return for the period the 
Portfolio holds the security and which is not related to the 
coupon rate on the purchased security.  The Fund requires 
continual maintenance of the market value of the collateral in 
amounts at least equal to the resale price, thus risk is 
limited to the ability of the seller to pay the agreed-upon 
amount on the delivery date; however, if the seller defaults, 
realization upon the collateral by the Portfolio may be 
delayed or limited or the Portfolio might incur a loss if the 
value of the collateral securing the repurchase agreement 
declines and might incur disposition costs in connection with 
liquidating the collateral.  A Portfolio will only enter into 
repurchase agreements with broker/dealers or other financial 
institutions that are deemed creditworthy by the Manager under 
guidelines approved by the Board of Directors.  It is the 
policy of the Fund not to invest in repurchase agreements that 
do not mature within seven days if any such investment 
together with any other illiquid assets held by a Portfolio 
amount to more than 15% of that Portfolio's total assets.

The Fund has never entered into reverse repurchase agreements 
even though it is permitted to do so on behalf of the Income 
Return Account Portfolio.  The Fund does not currently intend 
to commit to such agreements more than 5% of the net assets of 
any of the Income Return Account Portfolio, although the 
fundamental policies of the Income Return Account Portfolio 
permits the Income Return Account Portfolio to invest up to 
1/3 of its total assets in reverse repurchase agreements, and 
this right is reserved. The U.S. Government Securities and the 
Short-Term U.S. Treasury Securities Portfolios may enter into 
and may invest up to 1/3 of its total assets in reverse 
repurchase agreements with broker/dealers and other financial 
institutions.  Such agreements involve the sale of Portfolio 
securities with an agreement to repurchase the securities at 
an agreed-upon price, date and interest payment and have the 
characteristics of borrowing.  Since the proceeds of 
borrowings under reverse repurchase agreements are invested, 
this would introduce the speculative factor known as 
"leverage."  The securities purchased with the funds obtained 
from the agreement and securities collateralizing the 
agreement will have maturity dates no later than the repayment 
date.  Generally the effect of such a transaction is that the 
Fund can recover all or most of the cash invested in the 
portfolio securities involved during the term of the reverse 
repurchase agreement, while in many cases it will be able to 
keep some of the interest income associated with those 
securities.  Such transactions are only advantageous if the 
Portfolio has an opportunity to earn a greater rate of 
interest on the cash derived from the transaction than the 
interest cost of obtaining that cash.  Opportunities to 
realize earnings from the use of the proceeds equal to or 
greater than the interest required to be paid may not always 
be available, and the Fund intends to use the reverse 
repurchase technique only when the Manager believes it will be 
advantageous to the Portfolio.  The use of reverse repurchase 
agreements may exaggerate any interim increase or decrease in 
the value of the participating Portfolio's assets.  The Fund's 
custodian bank will maintain a separate amount for the 
Portfolio with securities having a value equal to or greater 
than such commitments.
    
	Securities Lending.  Each Portfolio, other than the 
Income Return Account Portfolio and the Short-Term U.S. 
Treasury Securities Portfolio, may seek to increase its net 
investment income by lending its securities provided such 
loans are callable at any time and are continuously secured by 
cash or U.S. Government Obligations equal to no less than the 
market value, determined daily, of the securities loaned.  The 
Portfolio will receive amounts equal to dividends or interest 
on the securities loaned.  It will also earn income for having 
made the loan because cash collateral pursuant to these loans 
will be invested in short-term money market instruments.  In 
connection with lending of securities the Fund may pay 
reasonable finders, administrative and custodial fees.  
Management will limit such lending to not more than one-third 
of the value of the total assets of  the U.S. Government 
Securities Portfolio, and the investment restriction of the 
Equity Income  Portfolio limits it to less than 20% of such 
Portfolio's net assets.  Where voting or consent rights with 
respect to loaned securities pass to the borrower, management 
will follow the policy of calling the loan, in whole or in 
part as may be appropriate, to permit the exercise of such 
voting or consent rights if the issues involved have a 
material effect on the Portfolio's investment in the 
securities loaned.  Apart from lending its securities and 
acquiring debt securities of a type customarily purchased by 
financial institutions, none of the foregoing Portfolios will 
make loans to other persons.  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 only be made to borrowers whom the Manager deems 
to be of good standing and will not be made unless, in the 
judgment of the Manager, the interest to be earned from such 
loans would justify the risk.

	Foreign Investments.  The Equity Income Portfolio may 
invest its assets in the securities of foreign issuers. 
Investments in foreign securities involve certain risks not 
ordinarily associated with investments in securities of 
domestic issuers.  Such risks include currency exchange 
control regulations and costs, the possibility of 
expropriation, seizure, or nationalization of foreign 
deposits, less liquidity and volume and more volatility in 
foreign securities markets and the impact of political, 
social, economic or diplomatic developments or the adoption of 
other foreign government restrictions that might adversely 
affect the payment of principal and interest on securities in 
a Portfolio.  If it should become necessary, the Fund might 
encounter greater difficulties in invoking legal processes 
abroad than would be the case in the United States.  In 
addition, there may be less publicly available information 
about a non-U.S. company, and non-U.S. companies are not 
generally subject to uniform accounting and financial 
reporting standards, practices and requirements comparable to 
those applicable to U.S. companies.  Furthermore, some of 
these securities may be subject to foreign brokerage and 
withholding taxes.

	For many foreign securities, there are U.S. dollar-
denominated American Depositary Receipts ("ADRs"), which are 
traded in the United States on exchanges or over the counter 
and are sponsored and issued by domestic banks.  ADRs 
represent the right to receive securities of foreign issuers 
deposited in a domestic bank or a correspondent bank.  ADRs do 
not eliminate all the risk inherent in investing in the 
securities of foreign issuers.  However, by investing in ADRs 
rather than directly in foreign issuers' stock, the Portfolio 
can avoid currency risks during the settlement period for 
either purchases or sales.  In general, there is a large, 
liquid market in the United States for many ADRs.  The 
information available for ADRs is subject to the accounting, 
auditing and financial reporting standards of the domestic 
market or exchange on which they are traded, which standards 
are more uniform and more exacting that those to which many 
foreign issuers may be subject.  


Additional Policies - Equity Income Portfolio 
   
	Although the Equity Income Portfolio may, as described 
below, sell short "against the box,"  
and borrow money, the Equity Income Portfolio has not done so 
during the last fiscal year. 

	Although the Equity Income Portfolio may lend money or 
assets, as described in
"Investment Restrictions", the Portfolio has not engaged in 
this practice within the last year.  
    
	While the Equity Income Portfolio is permitted to invest 
in warrants (including 2% or less of the Portfolio's total net 
assets in warrants that are not listed on the New York Stock 
Exchange or American Stock Exchange), the Portfolio has not 
purchased any warrants during its last fiscal year.
For purposes 
of computing the foregoing percentage, warrants acquired by 
the Portfolio in units or attached to securities will be 
deemed to be without value.
   
	In addition, although the Equity Income Portfolio may 
buy or sell put and call options (including swaps, caps, 
collars and floors) up to 15% of its net assets, provided such 
options are listed on a national securities exchange, neither 
Portfolio has done so in the last year, and the Portfolio does 
not currently intend to commit more than 5% of its assets to 
be invested in or subject to put and call options.  A "call 
option" gives a holder the right to purchase a specific stock 
at a specified price referred to as the "exercise price," 
within a specific period of time (usually 3, 6, or 9 months). 
 A "put option" gives a holder the right to sell a specific 
stock at a specified price within a specified time period.  
The initial purchaser of a call option pays the "writer" a 
premium, which is paid at the time of purchase and is retained 
by the writer whether or not such option is exercised.  Put 
and call options are currently traded on The Chicago Board 
Options Exchange and several other national exchanges.  
Institutions, such as the Fund, that sell (or "write") call 
options against securities held in their investment portfolios 
retain the premium.  If the writer determines not to deliver 
the stock prior to the option's being exercised, the writer 
may purchase in the secondary market an identical option for 
the same stock with the same price and expiration date in 
fulfillment of the obligation.  In the event the option is 
exercised the writer must deliver the underlying stock to 
fulfill the option obligation.  The brokerage commissions 
associated with the buying and selling of call options are 
normally proportionately higher than those associated with 
general securities transactions.

    

	INVESTMENT RESTRICTIONS

	The Fund has adopted the following restrictions and 
fundamental policies that cannot be changed without approval 
by a "vote of a majority of the outstanding voting securities" 
of each Portfolio affected by the change as defined in the 
Investment Company Act of 1940, as amended (the "Act") and 
Rule 18f-2 thereunder (see "Voting").

	Without the approval of a majority of its outstanding 
voting securities the Equity Income  Portfolio may not:

	1.  Invest more than 5% of the value of its total assets 
in any one issuer (except securities of the U.S. Government 
and its instrumentalities); 2.  Invest more than 25% of the 
value of its total assets in any one industry; 3.  Invest more 
than 5% of its total assets in issuers with less than three 
years of continuous operation (including that of predecessors) 
or so-called "unseasoned" equity securities that are not 
either admitted for trading on a national stock exchange or 
regularly quoted in the over-the-counter market; 4.  Purchase 
more than 10% of any class of outstanding securities, or any 
class of voting securities, of any one issuer; 5.  Purchase 
any securities on margin; 6.  Make short sales of securities 
or maintain a short position unless at all times when a short 
position is open, the Portfolio owns or has the right to 
obtain, at no added cost, securities identical to those sold 
short; 7.  Borrow money, except as a temporary measure for 
extraordinary or emergency purposes, and then not in excess of 
the lesser of 10% of its total assets taken at cost or 5% of 
the value of its total assets; 8.  Mortgage or pledge any of 
its assets; 9.  Act as a securities underwriter or invest in 
real estate or commodities (the purchase by the Portfolio of 
securities for which there is an established market of 
companies engaged in real estate activities or investments 
shall not be deemed to be prohibited by this fundamental 
investment limitation); 10.  Invest in securities of another 
investment company except as permitted by Section 12(d)(1) of 
the Investment Company Act of 1940 or as part of a merger, 
consolidation, or acquisition; 11.  Invest in or hold 
securities of an issuer if those officers and directors of the 
Fund, its Adviser, or Smith Barney owning beneficially more 
than 1/2 of 1% of the securities of such issuer together own 
more than 5% of the securities of such issuer; 12.  Invest in 
"restricted securities", that is, securities which at the time 
of purchase by the Portfolio would have to be registered under 
the Securities Act of 1933 before they could be sold; 13.  
Invest in any company for the purpose of exercising control of 
management; 14.  Have more than 15% of its net assets at any 
time invested in or subject to puts, calls or combinations 
thereof and may not purchase or sell options that are not 
listed on a national securities exchange; 15.  Invest in 
interests in oil or gas or other mineral exploration or 
development programs; 16.  Purchase or sell any securities 
other than shares of the Fund from or to the Adviser or any 
officer or director of the Adviser or the Fund; and 17.  Lend 
money or assets, except that the Portfolio may purchase a 
portion of issues of publicly distributed bonds, debentures or 
notes and may invest in certificates of deposit or commercial 
paper, and may lend a portion of its portfolio securities to 
broker-dealers and financial institutions, provided that any 
such loan must be secured at all times by cash or U.S. 
Government Obligations equal at all times to at least 100% of 
the market value of the portfolio securities loaned.  The 
Portfolio will not make a portfolio securities loan if 
immediately thereafter as a result thereof, portfolio 
securities with a market value of 20% or more of the 
Portfolio's total net assets would be subject to such loans.

	Without the approval of a majority of its outstanding 
voting securities the U.S. Government Securities Portfolio may 
not:

	1.  Purchase any securities other than obligations 
issued or guaranteed by the U.S. Government or its agencies or 
instrumentalities, some of which may be subject to repurchase 
agreements.  There is no limit on the amount of its assets 
which may be invested in the securities of any one issuer of 
such obligations; 2.  Purchase securities on margin, sell 
securities short (provided however each Portfolio may sell 
short if it maintains a segregated account of cash or U.S. 
Government Obligations with the Custodian, so that the amount 
deposited in it plus the collateral deposited with the broker 
equals the current market value of the securities sold short 
and is not less than the market value of the securities at the 
time they were sold short) or purchase mortgage-related 
securities issued or guaranteed by the U.S. Government or its 
agencies or instrumentalities); 3.  Borrow money, except from 
banks for temporary purposes and then in amounts not in excess 
of 5% of the value of each Portfolio's assets at the time of 
such borrowing; or mortgage, pledge or hypothecate any assets 
except in connection with any such borrowing and in amounts 
not in excess of 7 1/2% of the value of the Fund's assets at 
the time of such borrowing.  (This borrowing provisions is not 
for investment leverage, but solely to facilitate management 
of each Portfolio by enabling each Portfolio to meet 
redemption requests where the liquidation of portfolio 
securities is deemed to be disadvantageous or inconvenient.)  
Borrowings may take the form of a sale of portfolio securities 
accompanied by a simultaneous agreement as to their 
repurchase; 4.  Make loans, except through the purchase of 
debt obligations (described in restriction 1 above), 
repurchase agreements and loans of each Portfolio's 
securities; and 5.  Act as an underwriter of securities except 
to the extent the Fund may be deemed to be an underwriter in 
connection with the sale of portfolio holdings.



	Without the approval of a majority of its outstanding 
voting securities the Income Return Account Portfolio may not:

	1.  Purchase common stocks, preferred stocks, warrants, 
other equity securities or municipal obligations; 2.  Borrow 
money except from banks for temporary purposes in an amount up 
to 10% of the value of its total assets and may pledge its 
assets in an amount up to 10% of the value of its total assets 
only to secure such borrowings.  The Portfolio will borrow 
money only to accommodate requests for the redemption of 
shares while effecting an orderly liquidation of portfolio 
securities or to clear securities transactions and not for 
leveraging purposes.  This restriction shall not be deemed to 
prohibit the Portfolio from entering into reverse repurchase 
agreements so long as not more than 33 1/3% of the Portfolio's 
total assets are subject to such agreements; 3.  With respect 
to 75% of its assets, invest more than 5% of its assets in the 
securities of any one issuer, except securities issued or 
guaranteed as to principal and interest by the U.S. 
Government, its agencies or instrumentalities; 4.  Purchase 
securities on margin or sell securities short; 5.  Write or 
purchase put or call options; 6.  Underwrite the securities of 
other issuers or knowingly purchase securities subject to 
restrictions on disposition under the Securities Act of 1933 
(i.e. "restricted securities"); 7.  Purchase or sell 
commodities or commodity futures contracts, oil and gas 
interests or real estate (however, the Portfolio may purchase 
mortgage-related securities issued or guaranteed by the U.S. 
Government or its agencies or instrumentalities); 8.  Make 
loans to others (except through the purchase of debt 
obligations as described in the Fund's then current 
Prospectus), except that the Fund may purchase and 
simultaneously resell for later delivery, obligations issued 
or guaranteed as to principal and interest by the U.S. 
Government or its agencies or instrumentalities; provided, 
however, that the Portfolio will not enter into such a 
repurchase agreement if, as a result thereof, more than 10% of 
its total assets (taken at current value) at that time would 
be subject to repurchase agreements maturing in more than 
seven days; 9.  Invest in companies for the purpose of 
exercising control; 
10.  Invest in securities of other investment companies, 
except as they may be acquired as part of a merger, 
consolidation or acquisition of assets; 11.  Purchase any 
securities, other than obligations of the U.S. Government, its 
agencies or its instrumentalities, if immediately after such 
purchase more than 25% of the Portfolio's total assets would 
be invested in the securities of issuers in the same industry; 
 12.  Issue senior securities as defined in the Act except 
insofar as the Fund may be deemed to have issued a senior 
security by reason of (a) entering into any repurchase 
agreement or reverse repurchase agreement; or (b) permitted 
borrowings of money; and 13. Purchase any security if as a 
result the Portfolio would then have more than 5% of its total 
assets (taken at current value) invested in securities of 
companies (including predecessors) that have been operation 
for less than three years or in equity securities for which 
market quotations are not readily available.


	Without the approval of a majority of its outstanding 
voting securities, the Short-Term U.S. Treasury Securities 
Portfolio may not:

	1.  Invest more than 5% of the value of its total assets 
in the securities of any one issuer (other than obligations 
issued or guaranteed by the United States Government, its 
agencies or instrumentalities); 2.  Purchase common stocks, 
preferred stocks, warrants, other equity securities, corporate 
bonds, municipal bonds or industrial revenue bonds; 3.  Borrow 
money except from banks for temporary purposes in an amount up 
to 10% of the value of its total assets.  The Portfolio will 
borrow money only to accommodate requests for the redemption 
of shares while effecting an orderly liquidation of portfolio 
securities or to clear securities transactions and may not for 
leveraging purposes.  Whenever borrowings exceed 5% of the 
value of the Portfolio's total assets, the Portfolio will not 
make any additional investments.  This restriction will not be 
deemed to prohibit the Fund from obtaining letters of credit 
solely for purpose of participating in a captive insurance 
company sponsored by the Investment Company Institute to 
provide fidelity and directors and officers liability 
insurance; 4.  Pledge, hypothecate, mortgage or otherwise 
encumber its assets, except in an amount up to 10% of the 
value of its total assets, but only to secure borrowings for 
temporary purposes; 5.  Sell securities short or purchase 
securities on margin; 6.  Write or purchase put or call 
options; 7.  Underwrite the securities of other issuers or 
purchase restricted securities; 8. Purchase or sell real 
estate, real estate investment trust securities, commodities 
or commodity contracts or oil and gas interests; 9.  Make 
loans to others except through the purchase of qualified debt 
obligations in accordance with the Portfolio's investment 
objective and policies; 10.  Issue senior securities as 
defined in the Act except insofar as the Portfolio may be 
deemed to have issued a senior security by reason of:  (a) 
borrowing money in accordance with restrictions described 
above or (b) by purchasing securities on a when-issued or 
delayed delivery basis or purchasing or selling securities on 
a forward commitment basis; and 11. Invest in securities of 
other investment companies, except as they may be acquired as 
part of a merger, consolidation, acquisition of assets or plan 
of reorganization.

	The foregoing percentage restrictions apply at the time 
an investment is made; a subsequent increase or decrease in 
percentage may result from changes in values or net assets.


	ADDITIONAL TAX INFORMATION

	The following summary addresses the principal United 
States income tax considerations regarding the purchase, 
ownership and disposition of shares in a Portfolio of the 
Fund.

General.

	Each Portfolio within the Fund is generally treated as a 
separate corporation for federal income tax purposes, and thus 
the provisions of the Internal Revenue Code of 1986, as 
amended (the "Code") generally will be applied to each 
Portfolio separately, rather than to the Fund as a whole.  For 
tax purposes therefor, net long-term and short-term capital 
gains, net income and operating expenses will be determined 
separately for each Portfolio.

	Each Portfolio within the Fund intends to qualify and 
elect to be treated for each taxable year as a "regulated 
investment company" under Sections 851-855 of the Code.  To so 
qualify, each Portfolio must, among other things, (i) derive 
at least 90% of its gross income in each taxable year from 
dividends, interest, proceeds from loans of stock and 
securities, gains from the sale or other disposition of stock, 
securities or foreign currency, of certain other income 
(including but not limited to gains from options, futures and 
forward contracts) derived from its business of investing 
stock, securities or currency; (ii) derive less than 30% of 
its gross income in each taxable year from the sale or other 
disposition of any of the following which was held for less 
than three months: (a) stocks or securities, (b) options, 
futures or forward contracts (other than options, futures or 
forward contracts on foreign currency), but only if such 
currency (or options futures of forward contracts) is not 
directly related to each Portfolio's principal business of 
investing in stock or securities (or options or futures with 
respect to stock or securities); and (iii) diversify its 
holding so that , at the end of each quarter of its taxable 
years, the following two conditions are met:  (a) at least 50% 
of the market value of the Portfolio's total assets is 
represented by cash, U.S. Government securities, securities of 
other regulated investment companies and other securities, 
with such other securities limited, in respect of any one 
issuer, to an amount not greater than 5% of the Portfolio's 
assets and not more than 10% of the outstanding voting 
securities of such issuer; and (b) not more than 25% of the 
value of the Portfolio's assets is invested in securities of 
any one issuer (other than U.S. Government securities or 
securities of other regulated investment companies).  The 
diversification requirements described above may limit a 
Portfolio's ability to engage in hedging transactions by 
writing or buying options or by entering into futures or 
forward contracts.
   
	At December 31, 1996 the unused capital loss carryovers 
of the Fund by Portfolio were approximately as follows:  U.S. 
Government Securities Portfolio, $3,627,000; Income Return 
Account Portfolio, $765,000; and Short-Term U.S. Treasury 
Securities Portfolio, $9,043,000.  For federal income tax 
purposes, these amounts are available to be applied against 
future securities gains, if any, realized.  The carryovers 
expire as follows:

		
 December 31,
(in thousands)
	                                           1997     2001	 2002 	2003	2004
U.S. Government Securities Portfolio$  333	$430	$2,864	0 	0
---		
Income Return Account Portfolio	218	0	0	$547	0	
Short-Term U.S. Treasury
Securities Portfolio		0	1,477	5,471	1,124	$971
    
Distributions

	If the net asset value of shares of a Portfolio is reduced 
below a shareholder's costs as a result of a distribution by 
the Portfolio, such distribution will be taxable even though 
it represents a return of invested capital.

Redemption of Shares.

	Any gain or loss realized on the redemption or exchange of 
Portfolio shares by a shareholder who is not a dealer in 
securities will be treated as long-term capital loan or loss 
if the shares have been held for more than one year, and 
otherwise as short-term capital gain or loss.

	However, any loss realized by a shareholder upon the 
redemption or exchange of Portfolio shares held six months or 
less will be treated as a long-term capital loss to the extent 
of any long-term capital gain distributors received by the 
shareholder with respect to such shares.  Additionally, any 
loss realized on a redemption or exchange of Portfolio shares 
will be disallowed to the extent the shares disposed of are 
replaced within a period of 61 days beginning 30 days before 
and ending 30 days after such disposition, such as pursuant to 
reinvestment of dividends in Portfolio shares.


	IRA AND OTHER PROTOTYPE RETIREMENT PLANS
   
	Copies of the following plans with custody or trust 
agreements have been approved by the Internal Revenue Service 
and are available from the Fund or Smith Barney; investors 
should consult with their own tax or retirement planning 
advisors prior to the establishment of a plan.


IRA, Rollover IRA and Simplified Employee Pension - IRA


	The Small Business Job Protection Act of 1996 changed 
the eligibility requirements for participants in Individual 
Retirement Accounts ("IRAs").  Under these new provisions, if 
you or your spouse have earned income, each of you may 
establish an IRA and make maximum annual contributions equal 
to the lesser of earned income or $2,000.  As a result of this 
legislation, married couples where one spouse is non-working 
may now contribute a total of $4,000 annually to their IRAs.

	If you or your spouse is an active participant in an 
employer-sponsored retirement plan, a deduction for 
contributions to an IRA might still be allowed in full or in 
part, depending on your combined adjusted gross income.  For 
married couples filing jointly, a full deduction of 
contributions to an IRA will be allowed where the couples' 
adjusted gross income is below $40,001 ($25,001 for an 
unmarried individual); a partial deduction will be allowed 
when adjusted gross income is between $40,001 - $50,000 
($25,001 - $35,000 for an unmarried individual); and no 
deduction when adjusted income is $50,000 ($35,000 for an 
unmarried individual).  Shareholders should consult  their tax 
advisors concerning the effects of the Tax Reform Act on the 
deductibility of their IRA contributions.

	A Rollover IRA is available to defer taxes on lump sum 
payments and other qualifying rollover amounts (no maximum) 
received from another retirement plan.

	An employer who has established a Simplified Employee 
Pension - IRA ("SEP-IRA") on behalf of eligible employees may 
make a maximum annual contribution to each participant's 
account of 15% (up to $24,000) of each participant's 
compensation.  Compensation is capped at $160,000 for 1997.

    
Paired Defined Contribution Prototype

	Corporations (including Subchapter S corporations) and 
non-corporate entities may purchase shares of the Fund through 
the Smith Barney Prototype Paired Defined Contribution Plan.  
The prototype permits adoption of profit-sharing provisions, 
money purchase pension provisions, or both, to provide 
benefits for eligible employees and their beneficiaries.  The 
prototype provides for a maximum annual tax deductible 
contribution on behalf of each Participant of up to 25% of 
compensation, but not to exceed $30,000 (provided that a money 
purchase pension plan or both a profit-sharing plan and a 
money purchase pension plan are adopted thereunder).


	PERFORMANCE INFORMATION

	From time to time the Fund may advertise a Portfolio's 
total return, average annual total return and yield in 
advertisements.  In addition, in other types of sales 
literature the Fund may also advertise a Portfolio's current 
dividend return.  These figures are based on historical 
earnings and are not intended to indicate future performance. 
 The total return shows what an investment in the Portfolio 
would have earned over a specified period of time (one, five 
or ten years) assuming the payment of the maximum sales load 
when the investment was first made, that all distributions and 
dividends by the Portfolio were reinvested on the reinvestment 
dates during the period less the maximum sales load charged 
upon reinvestment and less all recurring fees.  The average 
annual total return is derived from this total return, which 
provides the ending redeemable value.  The Fund may also quote 
a Portfolio's total return for present shareholders that 
eliminates the sales charge on the initial investment.
   
	Each Portfolio's average annual total return with respect 
to its Class A Shares for the one-year period, five-year 
period, if any, and for the life of the Portfolio (except for 
the Equity Income  Portfolio, Income Return Account Portfolio 
and U.S. Government Securities Portfolio which displays 
performance data for ten years) ended December 31, 1996 is as 
follows:


	One Year	Five Years	Life	Inception Date

Equity Income 	10.25%	11.86%	11.13%*	1/1/72

Income Return	1.95	4.48	6.61*	3/4/85	

U.S. Government	(0.71)	5.33	7.85*	10/9/84

Short-Term U.S.	2.15	5.04	5.47	11/11/91



                     
* Representative of ten years, not life of the Equity Income 
Portfolio, the Income Return Portfolio and the U.S. Government 
Securities Portfolio.

Each Portfolio's average annual total return with respect to 
its Class B Shares (where applicable) for the one-year period 
and the life of such Portfolio's Class B shares through 
December 31, 1996 is as follows: 

Portfolio 	One Year	Life	Inception Date

Equity Income	10.22%	      19.70%	11/7/94
			
U.S. Government	(1.06)	       8.62	11/7/94


Each Portfolio's average annual total return with respect to 
its Class C Shares (where applicable) for the one-year period 
and for the life of such Portfolio's Class C shares through 
December 31, 1996 is as follows: 

Portfolio	One Year	Life	Inception Date	

Equity Income 	14.15%	13.52%	12/2/92

Income Return	2.72	4.48	12/16/92

U.S. Government	2.49	5.73	12/2/92	



Each Portfolio's average annual total return with respect to 
its Class Y Shares (where applicable) for the one-year period 
and for the life of such Portfolio's Class Y shares through 
December 31, 1996 is as follows: 

Portfolio	One Year	Life	Inception Date	

Income Return	1.95%	6.99%	2/1/93		

U.S. Government	6.28	6.14	1/12/93		

Equity Income	N/A	12.26	2/7/96



Each Portfolio's average annual total return with respect to 
its Class Z Shares (where applicable) for the life of such 
Portfolio's Class Z shares through December 31, 1996 is as 
follows: 

Portfolio	One Year	Life	Inception Date	

Income Return	2.15%	6.06%	11/7/94		

U.S. Government	4.31	10.75 	11/7/94		

Equity Income 	16.47	22.32	11/7/94		

    

	  Note that effective October 10, 1994 Class C shares were 
reclassified as additional Class A shares with respect to the 
Equity Income Portfolio and that effective November 7, 1994 
Class C shares were redesignated Class Y shares with respect 
to the U.S. Government Securities Portfolio and the Income 
Return Account Portfolio. Note further that effective November 
7, 1994 then existing Class B shares of each Portfolio were 
designated as Class C shares. Each Portfolio (except the 
Short-Term U.S. Treasury Securities Portfolio) began to offer 
new Class B shares on November 7, 1994.

	Each Portfolio's yield is computed by dividing the net 
investment income per share earned during a specified thirty 
day period by the maximum offering price per share on the last 
day of such period and annualyzing the result.  For purposes 
of the yield calculation, interest income is determined based 
on a yield to maturity percentage for each long-term debt 
obligation in the Portfolio; income on short-term obligations 
is based on current payment rate.

	The Fund calculates current dividend return for the U.S. 
Government Securities Portfolio by analyzing the most recent 
quarterly distribution from investment income, including net 
equalization credits or debits, and dividing by the net asset 
value or the maximum public offering price (including sales 
charge) on the last day of the period for which current 
dividend return is presented.  The Fund calculates current 
dividend return for the Equity Income Portfolio by dividing 
the dividends from investment income declared during the most 
recent twelve months by the net asset value or the maximum 
public offering price (including sales charge) on the last day 
of the period for which current dividend return is presented. 
The Fund calculates current dividend return for the Income 
Return Account Portfolio and the Short-Term U.S. Treasury 
Securities Portfolio by analyzing the most recent monthly 
distribution, including net equalization credits and debits, 
and dividing by the net asset value or the maximum public 
offering price (including sales charge) on the last day of the 
period for which current dividend return is presented.  From 
time to time, the Fund may include a Portfolio's current 
dividend return in information furnished to present or 
prospective shareholders and in advertisements.

	A Portfolio's current dividend return may vary from time to 
time depending on market conditions, the composition of its 
investment portfolio and operating expenses.  These factors 
and possible differences in the methods used in calculating 
current dividend return should be considered when comparing 
the Portfolio's current dividend return to yields published 
for other investment companies in other investment vehicles.  
Current dividends return should also be considered relative to 
changes in the value of the Portfolio's shares and to the 
risks associated with the Portfolio's investment objective and 
policies.  For example, in comparing current dividend returns 
with those offered by Certificates of Deposit ("CDs"), it 
should be noted that CDs are insured (up to $100,000) and 
offer a fixed rate of return.  Returns of the Income Return 
Account Portfolio and the Short-Term U.S. Treasury Securities 
Portfolio may from time to time be compared with returns of 
money market funds measured by Donoghue's Money Fund Report, a 
widely-distributed publication on money market funds.

	Performance information may be useful in evaluating a 
Portfolio and for providing a basis for comparison with other 
financial alternatives.  Since the performance of each 
Portfolio changes in response to fluctuations in market 
conditions, interest rates and Portfolio expenses, no 
performance quotation should be considered a representation as 
to the Portfolio's performance for any future period.



	VALUATION OF SHARES

	The net asset value of each Portfolio's Classes of shares 
will be determined on any day that the New York Stock Exchange 
is open.  The New York Stock Exchange is closed on the 
following holidays:  New Year's Day, President's Day, Good 
Friday, Memorial Day, Independence Day, Labor Day, 
Thanksgiving Day and Christmas Day.


	PURCHASE AND REDEMPTION OF SHARES

	The Fund has committed itself to pay in cash all requests 
for redemption by any shareholder of record limited in amount 
during any 90-day period to the lesser of $250,000 or 1% of 
the net asset value of the Fund at the beginning of such 
period.  Such commitment is irrevocable without the prior 
approval of the Securities and Exchange Commission.  
Redemptions in excess of the above limit may be paid in 
portfolio securities, in cash or any combination or both, as 
the Board of Directors may deem advisable; however, payments 
shall be made wholly in cash unless the Board of Directors 
believes that economic conditions exist that would make such a 
practice detrimental to the best interests of the Fund and its 
remaining shareholders.  If a redemption is paid in portfolio 
securities, such securities will be valued in accordance with 
the procedures described under "Valuation of Shares" in the 
Prospectus and a shareholder would incur brokerage expenses if 
these securities were then converted to cash.




	INVESTMENT MANAGEMENT AGREEMENT AND OTHER SERVICES

Manager
   
For the fiscal years ended December 31, 1994, 1995 and 1996, 
the management fees for each Portfolio were as follows:  

Portfolio		1994	1995	1996

U.S. Gov't	$1,987,629	$1,869,768	$1,770,235
Income Return	208,151	                  125,055	   107,484 
Equity Income	 4,079,437	4,093,396	4,622,817
Short-Term U.S.	  735,555	  403,161	      479,559

    
	Pursuant to the Management Agreement, the management fee 
for the Equity Income Portfolio is calculated at a rate in 
accordance with the following schedule: 0.60% of the first 
$500 million of average daily net assets; 0.55% of the next 
$500 million; and 0.50% of average daily net assets over $1 
billion.  The management fee for the U.S. Government 
Securities Portfolio and the Income Return Account Portfolio 
is calculated at a rate in accordance with the following 
schedule: 0.50% of the first $200 million of aggregate average 
daily net assets of the two Portfolios, and 0.40% of the 
aggregate average daily net assets of the three Portfolios in 
excess of $200 million.  The management fee for the Short-Term 
U.S. Treasury Securities Portfolio is calculated at the annual 
rate of 0.45% of such Portfolios average daily net assets.  

	The Management Agreement for each of the Fund's Portfolios 
further provides that all other expenses not specifically 
assumed by the Manager under the Management Agreement on 
behalf of the Portfolio are borne by the Fund.  Expenses 
payable by the Fund include, but are not limited to, all 
charges of custodians (including sums as custodian and sums 
for keeping books and for rendering other services to the 
Fund) and shareholder servicing agents, expenses of preparing, 
printing and distributing all prospectuses, proxy material, 
reports and notices to shareholders, all expenses of 
shareholders' and directors' meetings. filing fees and 
expenses relating to the registration and qualification of the 
Fund's shares and the Fund under Federal or state securities 
laws and maintaining such registrations and qualifications 
(including the printing of the Fund's registration 
statements), fees of auditors and legal counsel, costs of 
performing portfolio valuations, out-of-pocket expenses of 
directors and fees of directors who are not "interested 
persons" as defined in the Act, interest, taxes and 
governmental fees, fees and commissions of every kind, 
expenses of issue, repurchase or redemption of shares, 
insurance expense, association membership dues, all other 
costs incident to the Fund's existence and extraordinary 
expenses such as litigation and indemnification expenses.  
Direct expenses are charged to each Portfolio; general 
corporate expenses are allocated on the basis of relative net 
assets.


Plan of Distribution

	Pursuant to a Plan of Distribution adopted by the Fund on 
behalf of each Portfolio under Rule 12b-1 under the Investment 
Company Act of 1940 (the "Plan"), Smith Barney incurs the 
expenses of distributing each Portfolio's Class A, Class B, 
Class C and Class Y shares.  See  "Distributor" in each 
Portfolio's applicable Prospectus. 
	
	For the year ended December 31, 1996, the table below 
represents the fees which have been accrued and/or paid to 
Smith Barney  under the Plans of Distribution pursuant to Rule 
12b-1 for the Fund's Portfolios. The distribution expenses for 
1996 included compensation of Financial Consultants and 
printing costs of prospectuses and marketing materials.  
   
Portfolio	  Class A	Class B	Class C	Class Y		Total

U.S. Gov't	$851,122	$87,112	$131,238    N/A       $1,069,472
Income Return	N/A		N/A	7,740	   N/A	             7,740
Equity Income	1,580,633	107,017	316,307	   N/A	      2,003,951
Short-Term Treas.324,545	N/A	N/A	  N/A	         324,545

	During the fiscal year 1994 aggregate sales commissions of 
$1,992,000 were paid to Smith Barney  by the purchasers of 
Fund shares.  For the fiscal years 1995 and 1996, aggregate 
sales commissions of approximately $364,000 and $689,000, 
respectively, were paid to Smith Barney  by the purchasers of 
Fund shares.  A contingent deferred sales charge ("CDSC") may 
be imposed on certain redemptions of Class A, Class B shares 
and Class C shares. The amount of the CDSC will depend on the 
number of years since the shareholder made the purchase 
payment from which the amount is being redeemed. For Class B 
shares, for the Equity Income Portfolio the maximum CDSC is 
5.00% of redemption proceeds, declining by 1.00% each year 
after the date of purchase to zero. For Class B shares of each 
of the U.S. Government Securities Portfolio the maximum CDSC 
is 4.50% of redemption proceeds, declining by 0.50% the first 
year after purchase and by 1.00% each year thereafter to zero. 
A CDSC of 1.00% is imposed on redemptions of Class A which 
when combined with Class A shares offered with a sales charge 
currently held by an investor equal or exceed $500,000 in the 
aggregate and Class C shares  if such redemptions occur within 
12 months from the date such investment was made.  Any sales 
charge imposed on redemptions is paid to the distributor of 
the Fund shares.  

	  Note that effective October 10, 1994 Class C shares were 
reclassified as additional Class A shares with respect to the 
Equity Income Portfolio and that effective November 7, 1994 
Class C shares were redesignated Class Y shares with respect 
to the U.S. Government Securities Portfolio and the Income 
Return Account Portfolio. Note further that effective November 
7, 1994 Class B shares of each Portfolio were designated as 
Class C shares.

Each Portfolio (except the Short-Term U.S. Treasury Securities 
Portfolio) began to offer new Class B shares on November 7, 
1994.



    
Brokerage

	The Manager is responsible for allocating the Fund's 
brokerage.  Orders may be directed to any broker including, to 
the extent and in the manner permitted by applicable law, 
Smith Barney.  Smith Barney has acted as the Fund's principal 
broker on behalf of the Equity Income Portfolio  (no 
commissionable transactions have been paid to date on behalf 
of the U.S. Government Securities Portfolio or the Income 
Return Account Portfolio, or the Short-Term U.S. Treasury 
Securities Portfolio) and has received a substantial portion 
of brokerage fees paid by such Portfolios.  No Portfolio will 
deal with Smith Barney in any transaction in which Smith 
Barney acts as principal.

	The Fund attempts to obtain the most favorable execution of 
each portfolio transaction, that is, the best combination of 
net price and price and prompt reliable execution.  In the 
opinion of the Manager or the Subadviser, as the case may be, 
however, it is not possible to determine in advance that any 
particular broker will actually be able to effect the most 
favorable execution because, in the context of a constantly 
changing market, order execution involves judgments as to 
price, commission rates, volume, the direction of the market 
and the likelihood of future change.  In making its decision 
as to which broker or brokers are most likely to provide the 
most favorable execution, the management of the Fund takes 
into account the relevant circumstances.  These include, in 
varying degrees, the size of the order, the importance of 
prompt execution, the breadth and trends of the market in the 
particular security, anticipated commission rates, the 
broker's familiarity with such security including its contacts 
with possible buyers and sellers and its level of activity in 
the security, the possibility of a block transaction and the 
general record of the broker for prompt, competent and 
reliable service in all aspects of order processing, execution 
and settlement.


	Commissions are negotiated and take into account the 
difficulty involved in execution of a transaction, the time it 
took to conclude, the extent of the broker's commitment of its 
own capital, if any, and the price received.  Anticipated 
commission rates are an important consideration in all trades 
and are weighed along with the other relevant factors 
affecting order execution set forth above.  In allocating 
brokerage among those brokers who are believed to be capable 
of providing equally favorable execution, the Fund takes into 
consideration the fact that a particular broker may, in 
addition to execution capability, provide other services to 
the Fund such as research and statistical information.  It is 
not possible to place a dollar value on such services nor does 
their availability reduce the expenses of the Manager, the 
Subadviser or Smith Barney in connection with services 
rendered to other advisory clients and not all such services 
may be used in connection with the Fund.
   
	Shown below are the total brokerage fees paid by the Fund 
on behalf of the Equity Income  Portfolio during 1994, 1995 
and 1996 (the fees for 1994 include fees on behalf of the 
Utility Portfolio which has been merged into the Smith Barney 
Utilities Fund). Also shown is the portion paid to Smith 
Barney and the portion paid to other brokers for the execution 
of orders allocated in consideration of research and 
statistical services or solely for their ability to execute 
the order.  During fiscal year 1996, the total amount of 
commissionable transactions was $733,741,210; $339,035,608 
(46.0%) of which was directed to Smith Barney and executed by 
unaffiliated brokers and $394,705,602 (54.0%) of which was 
directed to other brokers.
    

<TABLE>   
<CAPTION> 
                                                Commissions  
                                                    
<S>                <C>                 <C>                 <C>       <C>                  <C>            <C>             <C>				
	    								To Others For
		           	For Execution Only				Execution,	 	
			
									Research and
									Statistical
	 	Total	To Smith Barney	    	To Others	              Services    

1994	  $1,063,007	$177,691*	16.7	$271,982	25.6	$613,334	57.7	
1995	       896,018 	312,572*	34.9 	496,622		55.4	86,824		9.7   
1996	       956,742	441,702*	46.2	493,445		51.6	21,595		2.2
                        
</TABLE>    
*Directed to Smith Barney and executed by unaffiliated 
brokers.
	The Board of Directors of the Fund has adopted certain 
policies and procedures incorporating the standards of Rule 
17e-1 issued by the Securities and Exchange Commission under 
the Act which requires that the commissions paid to Smith 
Barney must be "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 during a comparable 
period of time."  The Rule and the policy and procedures also 
contain review requirements and require the Manager to furnish 
reports to the Board of Directors and to maintain records in 
connection with such reviews.


	CUSTODIAN

	Portfolio securities and cash owned by the Fund are held 
in the custody of PNC Bank, National Association, 17th and 
Chestnut Streets, Philadelphia, Pennsylvania  19103 (foreign 
securities, if any, will be held in the custody of the 
Barclays Bank, PLC)

	In the event of the liquidation or dissolution of the 
Fund, shares of a Portfolio are entitled to receive the assets 
belonging to that Portfolio that are available for 
distribution and a proportionate distribution, based upon the 
relative net assets of the respective Portfolios, of any 
general assets not belonging to any particular Portfolio that 
are available for distribution.



	INDEPENDENT  AUDITORS
   
	KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 
10154, has been selected as the Fund's independent auditors 
for its fiscal year ending December 31, 1997 to exammine and 
report on the Fund's financial statements and highlights.
    

	VOTING

	As permitted by Maryland law, there will normally be no 
meetings of shareholders for the purpose of electing directors 
unless and until such time as less than a majority of the 
directors holding office have been elected by shareholders.  
At that time, the directors then in office will call a 
shareholders' meeting for the election of directors.  The 
directors must call a meeting of shareholders for the purpose 
of voting upon the question or removal of any director when 
requested in writing to do so by the record holders of not 
less than 10% of the outstanding shares of the Fund.  At such 
a meeting, a director may be removed after the holders of 
record of not less than a majority of the outstanding shares 
of the Fund have declared that the director be removed either 
by declaration in writing or by votes cast in person or by 
proxy.  Except as set forth above, the directors shall 
continue to hold office and may appoint successor directors.

   	As used in the Prospectus and this Statement of Additional 
Information, a "vote of a majority of the outstanding voting 
securities" means the affirmative vote of the lesser of (a) 
more than 50% of the outstanding shares of the Fund (or the 
affected Portfolio or class) or (b) 67% or more of such shares 
present at a meeting if more than 50% of the outstanding 
shares of the Fund (or the affected Portfolio or class) are 
represented at the meeting in person or by proxy.  A Portfolio 
or class shall be deemed to be affected by a matter unless it 
is clear that the interests of each Portfolio or class in the 
matter are identical or that the matter does not affect any 
interest of the Portfolio or class.  Under the Rule the 
approval of a management agreement or any change in a 
fundamental investment policy would be effectively acted upon 
with respect to a Portfolio only if approved by a "vote of a 
majority of the outstanding voting securities" of the 
Portfolio affected by the matter; however, the ratification of 
independent accountants, the election of directors, and the 
approval of a distribution agreement that is submitted to 
shareholders are not subject to the separate voting 
requirements and may be effectively acted upon by a vote of 
the holders of a majority of all Fund shares voting without 
regard to Portfolio.  As of April 11, 1997, the Smith Barney 
401(k) Employee Savings Plan, 388 Greenwich Street, New York, 
New York, 10013, owned of record, but not beneficially, 
7,838,781.626 (100%) of the outstanding Class Z shares of the 
Equity Income Portfolio and the Smith Barney 401(k) Employee 
Savings Plan, 388 Greenwich Street, New York, New York, 10013, 
owned of record, but not beneficially, 1,495,418.655 (100%) of 
the outstanding Class Z shares of the U.S. Government 
Securities Portfolio The following table contains a list of 
shareholders who of record or beneficially own at least 5% of 
the outstanding shares of a particular class of shares of a 
Portfolio of the Fund:

Equity Income Portfolio 

Class Y

Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 1,578,676.494 (69.46%) shares

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 434,734.179 (19.13%) shares

Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 256,156.410 (11.27%) shares

U.S. Government Securities Portfolio

Class Y

Arthur Smith Corporation
c/o Phyllis Smith
4888 Loop Central Drive
Suite 500
Houston, TX  77081-2214
owned 106,167.844 (26.25%) shares


Baxter P. Freeze & Anne Freeze TRS
U/A/D 4/24/92
Baxter P. Freeze Charitable Trust
1515 Wickliff Avenue
High Point, NC  27262-4551
owned 77,532.849 (19.07%) shares

Virginia P. Swindal Tr.
UAD 4-9-92
Virginia P. Swindal Rev Trust
5111 South Nichols Street
Tampa, FL  33611-4132
owned 60,757.000  (15.02%) shares

Avron Wahl
Smith Barney Inc. Sep Custodian
5 Evergreen Drive
Ocean, NJ 07712
owned 33,513.962 (8.29%) shares

Frederick L. Swindal Tr.
UAD 4-9-92
Frederick L. Swindal Trust
5111 South Nichols Street
Tampa, FL  33611-4132
owned 28,591.000  (7.07%) shares




Luby Enterprises Inc.
c/o Joe Luby
1900 E. Girard Place
Englewood, CO 80110
owned 28, 515.435 (7.05%) shares

Raul Cuadrado
3250 Riveria Drive
Coral Gables, FL 33134-6477
owned 25,253.801 (6.24%) shares

Short-Term U.S. Treasury Securities Portfolio

Class Y shares

Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 6,023,259.544 (62.12%) shares

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 1,654.449.119 (17.06%) shares

Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive
Suite 440
Lester, PA 19113
owned 2,000,361,.438 (20.63%) shares





Income Return Account Portfolio

Class A

Carver Pump Co.
Employee Savings Plan
Bond & Equity Acct.
Attn. Sandy Rock PO Box 389
Muscataine, IA 52761
owned 68,933.243 (8.76%) shares

James D. Adams TR
UW Oscar Levine
FBO Betty Blackford Levine
3950 N.W. 27th Avenue
Boca Raton FL 33434-4435
owned 55,747.576 (7.09%) shares

Carver Pump
Collective Bargaining Unit
Retirement Savings PL Equity
& Balanced Acct U/A/D 1//11/93
PO Box 389
Muscataine IA 52761-0389
owned 40,582.925 (5.16%) shares

Class C

Marshall E. Redding / IRA
Smith Barney  IRA Cust.
2530 Atlantic Avenue, Suite - A
Long Beach, CA  90806-2741
owned 21,996.538 (15.57%) shares

Brendan T. Cremen
Susan Delany Cremen
c/o Delany
20 Belgrave Road
Monkstown
County Dublin, Ireland
owned 20,940.181 (14.82%) shares

Process Supplies And
Accessories Incorporated
Profit Sharing Plan
Attn. Larry E. Wright
P.O. 11025
Knoxville, TN 37939
owned 12,116.522 (8.58%) shares



Maura Ciesielski
Smith Barney Inc. IRA Custodian
115 Lafayette Drive
Wash Crossing PA 18977-1414
owned 8,861.882 (6.27%) shares

Mountain State Art & Craft
Fair Inc.
Attn: Ron Twohig
305 Beechwood Estates
Scott Depot, WV 25560
owned 7,243.9911 (5.13%) shares


Class Y

Beatrice S. Wind
Smith Barney  IRA Cust.
8101 S.W. 72nd Avenue
Miami, FL  33143-7609
owned 43,182.410 (63.83%) shares

Elizabeth Lynn Schneider &
Theodre J. Vittoria
Beatrice S. Wind Charitable
630 Fifth Avenue
New York, NY 10111
owned 24,474.150 (36.17%) shares

    




	FINANCIAL STATEMENTS

   	The following financial information is hereby incorporated 
by reference to the indicated pages of the Fund's 1996 Annual 
Reports to Shareholders, copies of which are furnished with 
this Statement of Additional Information.
	Page(s) in
	Annual Report:

			Equity Income      U.S.Gov't                                       

Average Annual Total Return	5	3-5
Line Graph Showing Growth of $10,000 Investment		7	6
Schedules of Investments		8-10	7
Statements of Assets and Liabilities
	dated December 31, 1996	11	8
Statements of Operations
	for the year ended December 31, 1996		12	9
Statements of Changes in Net Assets
	for the years ended December 31, 1996 and 1995	13	10	
Notes to Financial Statements	14-17	11-17	
Financial Highlights		18-21	18-20
Independent Auditors' Report		22	21

	Page(s) in
	Annual Report:

	                       Income Return & Short-Term                         
	

Average Annual Total Return		                      4-5, 7
Line Graph Showing Growth of $10,000 Investment		6,8
Schedule of Investments					9
Statement of Assets and Liabilities
	dated December 31, 1996				10
Statement of Operations
	for the year ended December 31, 1996		11
Statement of Changes in Net Assets
	for the years ended December 31, 1996 and 1995	12-13	
Notes to Financial Statements				14-19	
Financial Highlights					20-22
Independent Auditors' Report				23
		
    
	APPENDIX - RATINGS OR DEBT OBLIGATIONS






BOND (AND NOTES) RATINGS

Moody's Investors Service, Inc.

	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 edged."  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 by 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 which 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 which are rated B generally lack characteristics 
of the desirable investment.  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 which are rated Caa are of poor standing.  
Such issues may be in default or there may be present elements 
of danger with respect to principal or interest.

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

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

	Con (..) - Bonds for which the security depends upon the 
completion of some act or the fulfillment of some condition 
are rated conditionally.  These are bonds secured by (a) 
earnings of projects under construction, (b) earnings of 
projects unseasoned in operating experience, (c) rentals which 
begin when facilities are completed, or (d) payments to which 
some other limiting condition attaches.  Parenthetical rating 
denotes probable credit stature upon completion of 
construction or elimination of basis of condition.

	Note: 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 & Poor's Corporation

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

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

	Provisional Ratings:  The letter "p" indicates that the 
rating is provisional.  A provisional rating assumes the 
successful completion of the project being financed by the 
debt being rated and indicates that payment of debt service 
requirements is largely or entirely dependent upon the 
successful and timely completion of the project.  This rating, 
however, while addressing credit quality subsequent to 
completion of the project, makes no comment on the likelihood 
of, or the risk of default upon failure of, such completion.  
The investor should exercise judgment with respect to such 
likelihood and risk.

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

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

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

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



COMMERCIAL PAPER RATINGS

Moody's 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 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 changes 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 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 & Poor's Corporation

	A-1 - This designation indicates that the degree of safety 
regarding timely payment is either overwhelming or very 
strong.  Those issuers 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.


	PART C  Other Information

Item 24.  Financial Statements and Exhibits

(a) Financial Statements	  Location In:     
	                                       Part A 	 Part B 
	                                                  Annual Report		
					

Statement of Assets and Liabilities	 N/A	     *	

Statements of Changes in Net Assets  N/A	      *	

Statement of Operations             N/A	*	

Notes to Financial Statements	N/A	*	

Supplementary Information	N/A	*	

_______________
* The  Registrant's Annual Report for the  year
 ended  December 31, 1996 and  the  Report  of
 Independent  Accountants are incorporated  by
 reference  to the Definitive 30b-1  filed  on
 March 10, 1997 
 as  Accession  #   91155-97-132.


All other statements and schedules are omitted because 
they are not applicable or the required information will 
be shown in the financial statements or notes thereto.

	(b)	Exhibits

	(1)	(a)	Articles Supplementary dated November 16, 
1992 are incorporated by reference to 
Exhibit 1(a) to Post-Effective Amendment 
No. 49.  

		(b)	Articles Supplementary dated October 29, 
1992 are incorporated by reference to 
Exhibit 1(b) to Post-Effective Amendment 
No. 49.
		
		(c)	Articles of Amendment dated October 29, 
1992 are incorporated by reference to 
Exhibit 1(c) to Post-Effective Amendment 
No. 49.
	
		(d)	Articles Supplementary dated September 6, 
1991 are incorporated by reference  to 
Exhibit 1(a) to Post-Effective Amendment 
No. 46.

		(e)	Articles Supplementary dated October 31, 
1990 are incorporated by reference to 
Exhibit 1(a) to Post-Effective Amendment 
No. 43.

		(f)	Articles Supplementary dated march 27, 
1986, May 15, 1985, December 28, 1984, 
August 2, 1984, June 8, 1984, February 
26, 1972 and April 25, 1967 are 
incorporated by reference to Exhibits 
1(a) through (g) to Post-Effective 
Amendment No. 39.

		(g)	Articles of Incorporation dated December 
1, 1966 are incorporated by reference to 
Exhibit 1(h) to Post-Effective Amendment 
No. 39.

		(h)	Articles Supplementary dated December 14, 
1993  are incorporated by reference to 
Exhibit 1(h) to Post-Effective Amendment 
No. 54.                 

	(2)	Bylaws of the Fund are incorporated by 
reference to Exhibit 2 to Post-Effective 
Amendment No. 39.

	(3)	Not applicable.


	(4)	(a)	Specimen Stock Certificates for the 
Income and Growth Portfolio, the U.S. 
Government Securities Portfolio, the 
Monthly Payment Government Portfolio, and 
the Income Return Account Portfolio are 
incorporated by reference to Exhibit 4 to 
Post-Effective Amendment No. 39.

		(b)	Specimen Stock Certificate for the 
Utility Portfolio is incorporated by  
reference to Exhibit 4(b) to Post-
Effective Amendment No. 43.
		
		(c)	Specimen Stock Certificate for the Short-
Term U.S. Treasury Securities Portfolio 
is incorporated by reference to Exhibit 
4(c) to Post-Effective Amendment No.53.

		(d)	Specimen Stock Certificate for the 
Capital Appreciation Portfolio is 
incorporated by reference to Exhibit 4(d) 
to Post-Effective Amendment No.53.

		(e)	Specimen Stock Certificate for the 
Socially Responsible Investment Portfolio 
is incorporated by reference to Exhibit 
4(e) to Post-Effective Amendment No.53.
 
	(5)	(a)	Management Agreement between Short-Term 
U.S. Treasury Securities Portfolio and 
Smith, Barney Advisers, Inc. *

		(b)	Management Agreement between the Income 
and Growth Portfolio and Smith, Barney 
Advisers, Inc.**

		(c)	Management Agreement between U.S. 
Government Securities Portfolio and 
Smith, Barney Advisers, Inc.**

		(d)	Management Agreement between Monthly 
Payment Government Portfolio and Smith, 
Barney Advisers, Inc.**

		(e)	Management Agreement between Income 
Return Account Portfolio and Smith, 
Barney Advisers, Inc.**

		(f)	Management Agreement between the Utility 
Portfolio and Smith, Barney Advisers, 
Inc.**

		(g)	Management Agreement between the Capital 
Appreciation Portfolio and Smith, Barney 
Advisers, Inc. is incorporated herein by 
reference to Exhibit 5(g) to Post-
Effective Amendment No. 48.  

		(h)	Subadvisory Agreement between Smith, 
Barney Advisers, Inc. and Janus Capital 
Corporation on behalf of Capital 
Appreciation Portfolio is incorporated 
herein by reference to Exhibit 5(h) to 
Post-Effective Amendment No. 48.

*Exhibit 5(a) is incorporated by reference to 
Exhibit 5(a) to Post-Effective 
Amendment No. 46.

**Exhibits 5(b) through (f) are incorporated by 
reference to Exhibits 5(a) 
through (e) to Post-Effective Amendment No.43

	(6)	(a)	Distribution Agreement between Smith 
Barney Funds and Smith Barney, Harris 
Upham & Co. Incorporated is incorporated 
by reference to Exhibit 6(a)  to Post-
Effective Amendment No. 39.

		(b)	Distribution Agreement between Smith 
Barney Funds, Inc. and Smith Barney 		
	Shearson Inc. 

	(7)		Not applicable.

	(8)		Custodian Agreement between Registrant 
and Provident National Bank is 
incorporated by reference to Exhibit 8 to 
Post-Effective Amendment No. 39.

	(9)	(a)	Transfer Agency Agreement between 
Registrant and Provident Financial 
Processing Corp. is incorporated herein 
by reference to Exhibit 9 to Post-
Effective Amendment No. 39.

		(b)	Rule 18f-3 Plan  is incorporated herein 
by reference to Exhibit 9(b) to Post-
Effective Amendment No. 58.

	(10)		Not applicable.

	(11)		(a) Auditors' Report (See the Annual 
Report to Shareholders which is 
incorporated by reference in the 
Statement of Additional Information)    
			
			(b) Auditors' Consent 

	(12)		Previously filed.

	(13)		Not applicable

	(14)		Previously filed.

	(15)	(a)	Plan of Distribution Pursuant to Rule 
12b-1 on behalf of the Short-Term U.S. 
Treasury Securities Portfolio is 
incorporated by reference to Exhibit 
15(a) to Post-Effective Amendment No. 46.

		(b)	Plan of Distribution Pursuant to Rule 
12b-1 on behalf of the Utility Portfolio 
is incorporated by reference to Exhibit 
15(b) to Post-Effective Amendment No. 48.

		(c)	Plan of Distribution Pursuant to Rule 
12b-1 on behalf of the Income and Growth 
Portfolio is incorporated by reference to 
Exhibit 15(c) to Post-Effective Amendment 
No.48.

		(d)	Plan of Distribution Pursuant to Rule 
12b-1 on behalf of the U.S. Government 
Securities Portfolio is incorporated by 
reference to Exhibit 15(d) to Post-
Effective Amendment No. 48.

		(e)	Plan of Distribution Pursuant to Rule 
12b-1 on behalf of the Monthly Payment 
Government Portfolio is incorporated by 
reference to Exhibit 15(e) to Post-
Effective Amendment No. 48.

		(f)	Plan of Distribution Pursuant to Rule 
12b-1 on behalf of the Income Return 
Account Portfolio is incorporated by 
reference to Exhibit 15(f) to Post-
Effective Amendment No. 48.

		(g)	Plan of Distribution Pursuant to Rule 
12b-1 on behalf of the Capital 
Appreciation Portfolio is incorporated by 
reference to Exhibit 15(g) to Post-
Effective Amendment No. 48.
		
		(h)	Amended Plan of Distribution Pursuant to 
Rule 12b-1 on behalf of the Short-Term 
U.S. Treasury Securities Portfolio is 
incorporated by reference to Exhibit 
15(h) to Post-Effective Amendment No. 56.

		(i)	Amended Plan of Distribution Pursuant to 
Rule 12b-1 on behalf of the Utility 
Portfolio is incorporated by reference to 
Exhibit 15(i) to Post-Effective Amendment 
No. 56.


		(j)	Amended Plan of Distribution Pursuant to 
Rule 12b-1 on behalf of the Income and 
Growth Portfolio is incorporated by 
reference to Exhibit 15(j) to Post-
Effective Amendment No. 56.


		(k)	Amended Plan of Distribution Pursuant to 
Rule 12b-1 on behalf of the U.S. 
Government Securities Portfolio is 
incorporated by reference to Exhibit 
15(k) to Post-Effective Amendment No. 56.


		(l)	Amended Plan of Distribution Pursuant to 
Rule 12b-1 on behalf of the Monthly 
Payment Government Portfolio is 
incorporated by reference to Exhibit 
15(l) to Post-Effective Amendment No. 56.


		(m)	Amended Plan of Distribution Pursuant to 
Rule 12b-1 on behalf of the Income Return 
Account Portfolio is incorporated by 
reference to Exhibit 15(m) to Post-
Effective Amendment No. 56.


		(n)	Amended Plan of Distribution Pursuant to 
Rule 12b-1 on behalf of the Capital 
Appreciation Portfolio is incorporated by 
reference to Exhibit 15(n) to Post-
Effective Amendment No. 56.


	(16)		Schedule of Computation of Performance 
Quotation for the Income and Growth 
Portfolio, the U.S. Government Securities 
Portfolio, the Monthly Payment Government 
Portfolio, and the Income Return Account 
Portfolio are incorporated herein by 
reference to Exhibit 16 to Post-Effective 
Amendment No. 37.


Item 25.	Persons Controlled by or under Common Control 
with Registrant

		(None)

Item 26.	Number of Holders of Securities
		Number of Recordholders on
	Title of Class	April 11, 1997

	Income and Growth Portfolio	36,943
	U.S. Government Securities Portfolio	11,772
	Income Return Account Portfolio	 427
	Monthly Payment Government Portfolio	0
	Short-Term U.S. Treasury Securities Portfolio	4,450
	Utility Portfolio	0
	Capital Appreciation Portfolio	0
	Appreciation Portfolio	0
	European Portfolio	0
	Fundamental Value Portfolio	0
	Special Equities Portfolio	0
	Diversified Strategic Income Portfolio	0
	Investment Grade Bond Portfolio	0
	High Income Portfolio	0
	Socially Responsible Investment Portfolio	0	


Item 27.	Indemnification

		Reference is made to Article SEVENTH, 
paragraph 7(e) of Registrant's Articles of 
Incorporation for a complete statement of its 
terms.
		
		Registrant is a named assured on a joint 
insured bond pursuant to Rule 17g-1 of the 
Investment Company Act of 1940.  Other 
assureds include Smith Barney Mutual Funds 
Management Inc.and (Registrant's Adviser) and 
affiliated investment companies.


Item 28.	Business and other Connections of Investment 
Adviser

	See the material under the caption "Management of the 
Fund" included in Part A (Prospectus) of this 
Registration Statement and the material appearing 
under the caption "Management Agreement" included in 
Part B (Statement of Additional Information) of this 
Registration Statement.

	Information as to the Directors and Officers of Smith 
Barney Mutual Funds Management Inc. is included in its 
Form ADV (File No. 801-8314), filed with the 
Commission, which is incorporated herein by reference 
thereto.

Item 29.	Principal Underwriters

		(a) Smith Barney Inc. ("Smith Barney ") 
also acts as principal underwriter for the 
Smith Barney Money Funds, Inc.; Smith 
Barney Municipal Money Market Fund, Inc.; 
Smith Barney Muni Funds; Smith Barney 
Funds, Inc.; Smith Barney World Funds, 
Inc.; Smith Barney Variable Account Funds; 
Travelers Series Fund Inc.; Smith Barney 
Intermediate Municipal Fund, Inc.; Smith 
Barney Municipal Fund, Inc.; High Income 
Opportunity Fund Inc.; Greenwich Street 
California Municipal Fund Inc.; Greenwich 
Street Municipal fund Inc.; The 
Inefficient-Market Fund Inc.; Smith Barney 
Investment Funds, Inc.; Smith Barney 
Adjustable Rate Government Income Fund; 
Smith Barney Income Funds; Smith Barney 
Massachusetts Municipals Fund; Zenix Income 
Fund Inc; Smith Barney Arizona Municipals 
Fund Inc.; Smith Barney Principal Return 
Fund; Municipal High Income Fund 
Inc.;Consulting Group Capital Markets Fund; 
Smith Barney Series Fund; Smith Barney 
Investment Trust; Smith Barney Aggressive 
Growth Fund Inc.; Smith Barney Appreciation 
Fund Inc.; Smith Barney California 
Municipals Fund Inc.; Smith Barney 
Fundamental Value Fund Inc.; Smith Barney 
Managed Governments Fund Inc.; Smith Barney 
Managed Municipals Fund Inc.; Smith Barney 
New Jersey Municipals Fund Inc.; Smith 
Barney Natural Resources Fund Inc.; Smith 
Barney Investment Funds Inc.; The Italy 
Fund Inc.; Smith Barney Telecommunications 
Trust; Managed Municipals Portfolio Inc.; 
Managed Municipals Portfolio II Inc.; 
Managed High Income Portfolio Inc. Smith 
Barney Institutional Cash Management Fund 
Inc.;Smith Barney Concert Allocation Series 
Inc.


		(b) The information required by 
this Item 29 with respect to each 
director and officer of Smith 
Barney is incorporated by 
reference to Schedule A of Form BD 
filed by Smith Barney pursuant to 
the Securities Exchange Act of 
1934 (SEC File No. 8-8177).
		
		(c) Not applicable



Item 30.	Location of Accounts and Records

		PNC Bank, National Association, 17th and 
Chestnut Streets, Philadelphia, 
Pennsylvania 19103, and First Data 
Investor Services Group Inc., Exchange 
Place, Boston, Massachusetts 02109, will 
maintain the custodian and the 
shareholder servicing agent records, 
respectively, required by Section 31 (a).

		All other records required by Section 31 
(a) are maintained at the offices of the 
Registrant at 388 Greenwich Street, New 
York, New York 10013 (and preserved for 
the periods specified by Rule 31a-2).

Item 31.	Management Services

		Not applicable

Item 32.	Undertakings

		(a) Not applicable
	
		(b) Registrant undertakes, if 
requested to do so by the holders 
of at least 10% of Registrant's 
outstanding shares, to call a 
meeting of shareholders for the 
purpose of voting upon the 
questions of removal of a director 
or directors and to assist in 
communications with other 
shareholders as required by 
Section 16(c).
	
		(c) Registrant undertakes to 
furnish each person to whom a 
prospectus is delivered with a 
copy of Registrant's latest report 
to shareholders, upon request and 
without charge.

	SIGNATURES

     Pursuant to the requirements of the Securities Act of 
1933 and the Investment Company Act of 1940, the 
Registrant certifies that it meets all of the requirements 
for effectiveness of this Post-Effective Amendment to the 
Registration Statement pursuant to Rule 485(b) under the 
Securities Act of 1933 and has duly caused this Post-
Effective Amendment to its Registration Statement to be 
signed on its behalf by the undersigned, and where 
applicable, the true and lawful attorney-in-fact, thereto 
duly authorized, in the City of New York and State of New 
York on the  30th day of  April 1997.

SMITH BARNEY 
FUNDS, INC.

BY /s/ Heath B. McLendon        							    
(Heath B. McLendon, Chief Executive Officer) 

     Pursuant to the requirements of the Securities Act of 
1933, this Post-Effective Amendment to the Registration 
Statement has been signed below by the following persons 
in the capacities and on the date indicated.

Signatures	Title		Date


 /s/ Heath B. McLendon    Director, Chairman and   April 30, 1997
(Heath B. McLendon)	Chief Executive Officer


 /s/ Jessica M. Bibliowicz          	President	April 30, 1997
(Jessica M. BIbliowicz)	




Joseph  H. Fleiss*          	Director					
(Joseph H. Fleiss)


Donald R. Foley*          	Director				
(Donald R. Foley)

Paul Hardin*                 	Director				
(Paul Hardin III)

Francis P. Martin*         	Director				
(Francis P. Martin)


Roderick C. Rasmussen *	Director				
(Roderick C. Rasmussen)


 /s/ Bruce D. Sargent               	Director	April 30, 1997			 				
(Bruce D. Sargent)


Signatures	Title				Date


John P. Toolan*                        	Director
(John P. Toolan)


 /s/ Lewis E. Daidone        Treasurer and Principal  April 30 , 1997
(Lewis E. Daidone)	Financial Officer



*By:  /s/ Christina T. Sydor  		 April  30,1997					
      Christina T. Sydor
      Pursuant to Power of Attorney                      



	EXHIBIT INDEX

Exhibit No.	Exhibit		   Page No.                            
11(b)	Auditor's Consent

17	Financial Data Schedule