As filed with the Securities and Exchange Commission 
on November 25, 1998 
------------------------------------------------------
----------------------- 
Registration No. 2-74288 
		811-3275 
 
U. S. SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C.  20549 
 
FORM N-1A 
 
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 
1933	 
 
[   ]  Pre-Effective Amendment No.

[X]    Post-Effective Amendment  No. 53

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940, 
Amendment No. 55

SMITH BARNEY INVESTMENT FUNDS INC. 
(Exact name of Registrant as Specified in Charter) 
388 Greenwich Street, New York, New York 10013 
(Address of Principal Executive Offices) (Zip Code) 
(800)-451-2010
(Registrant's Telephone Number, including Area Code:) 
Christina T. Sydor 
388 Greenwich Street, New York, New York 10013(22nd 
Floor)
(Name and Address of Agent For Service)
Continuous
(Approximate Date of Proposed Public Offering)

It is proposed that this filing will become effective: 
	immediately upon filing pursuant to Paragraph (b) of Rule 485
	On (date) pursuant to paragraph (b) of Rule 485
XXX	60 days after filing pursuant to paragraph (a)(1) of Rule 485
	On (date) pursuant to paragraph (a)(1) of Rule 485
	75 days after filing pursuant to paragraph (a)(2) of Rule 485
	On (date) pursuant to paragraph (a)(2) of rule 485

If appropriate, check the following box:

	This post-effective amendment designates a new 
effective date for a previously filed post-effective amendment.

Title of Securities Being Registered: Shares of Common 
Stock

SMITH BARNEY INVESTMENT FUNDS INC. 

CONTENTS OF REGISTRATION STATEMENT 

This Registration Statement contains the following 
pages and documents 

Front Cover 

Contents Page 
 
Cross-Reference Sheet 
 
Part A - Prospectus 
 
Part B - Statement of Additional Information 
 
Part C - Other Information 
 
Signature Page 
 
Exhibits 
 
SMITH BARNEY INVESTMENT FUNDS INC. 
 
FORM  N-1A CROSS REFERENCE SHEET 
 
PURSUANT TO RULE 485(a) Under the Securities Act of 
1933, as amended 
 
Part A 
Item No.					Prospectus Caption 
 
1. Cover Page 				Cover Page 
 
2. Synopsis 				Prospectus Summary  
 
3. Condensed Financial Highlights	Financial 
Highlights Information 
 
4. General Description
of Registrant 			Cover Page;  
						Prospectus Summary 
						Investment 
Objective and  
						Management 
Policies;
Additional 
Information 
 
5. Management of the Fund		Management of the 
Fund and the Company;
						Distributor;
Additional 
Information; 
						Annual Report 
 
6. Capital Stock and Other		Investment 
Objective and  
    Securities				Management 
Policies;
Dividends, 
Distributions and 
Taxes; Additional 
Information 

7. Purchase of Securities
Being Offered			Valuation of 
Shares;
Purchase of 
Shares;
						Exchange 
Privilege;
Redemption of 
Shares; 	
						Minimum Account 
Size;
Distributor;
Additional 
Information 
 
8. Redemption
or Purchase of Shares; 			Redemption of 
Shares;
Exchange Privilege 
 
9. Pending Legal Proceedings		Not Applicable 
 
Part B 
Item No. and Caption			Statement of 
Additional Information Caption 
 
10 Cover Page				Cover page 
 
11. Table of Contents			Contents 
 
12. General Information
 and History Distributor;		Additional 
Information 
 
13. Investment Objectives
and Policies 				Investment 
Objectives
Management and 
Policies 
 
14. Management of the Fund		Management of the 
Company; Distributor 
 
15. Control Persons and 		Principal 
Management of the Company  
Holders of Securities 
 
16. Investment Advisory
and Other Services			Management of the 
Company; 
						Distributor 
 
17. Brokerage Allocation and 		Investment 
Objective and 
Other Services				Management 
Policies; Distributor 
 
18. Capital Stock and Other 		Investment 
Objective and 
Securities 					Management 
Policies;
Purchase of 
Shares;
						Redemption of 
Shares;
Taxes 
 
19. Purchase, Redemption and		Purchase of 
Shares;
Pricing of  Securities Being		Redemption of 
Shares
Offered					Valuation of 
Shares;
Distributor;
Exchange Privilege 
 
20. Tax Status				Taxes 
 
21. Underwriters				see Prospectus 
"Purchase of Shares" 
22. Calculations of Performance 	Performance Data 
 
23. Financial Statements		Financial 
Statements 

SMITH BARNEY INVESTMENT FUNDS
PART A

<PAGE>
 
 
                                                                    SMITH BARNEY
                                                                     
                                                                       Small Cap
                                                                           Value
                                                                            Fund
                                                                                
                                                            
                                                         DECEMBER [ ], 1998     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
P R O S P E C T U S



[LOGO] SMITH BARNEY MUTUAL FUNDS
       Investing for your future.
       Every day.
<PAGE>
 
   
PROSPECTUS                                             DECEMBER [ }, 1998     
 
 
Smith Barney
   
Small Cap Value Fund     
388 Greenwich Street
New York, New York 10013
1-800-451-2010
   
  Smith Barney Small Cap Value Fund (the "Fund") is a mutual fund that seeks
long-term growth of capital by investing, under normal market conditions, at
least 65% of its total assets in the equity securities of smaller capitalized
companies (companies with market capitalizations of $1.4 billion or less at the
time of investment).     
   
  The Fund is one of a number of funds, each having distinct investment objec-
tives and policies making up the Smith Barney Investment Funds Inc. (the "Com-
pany"). The Company is an open-end management investment company commonly
referred to as a mutual fund.     
   
  The initial subscription period for shares is scheduled to end on February
22, 1999, (the "Subscription Period"). After the expiration of the Subscription
Period or a limited continuous offering period, the Fund will suspend the
offering of shares to the public. A continuous offering of shares is expected
to commence on or about April 1, 1999. See "Purchase of Shares."     
 
  This Prospectus sets forth concisely certain information about the Fund,
including sales charges, 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.
   
  Shares of the other Funds offered by the Company are described in separate
prospectuses that may be obtained by calling the Company at 1-800-451-2010.
       
  Additional information about the Fund is contained in a Statement of Addi-
tional Information, (the "SAI") dated December [ ], 1998, as amended or supple-
mented 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 Salomon Smith Barney Financial Consultant. The SAI has been
filed with the Securities and Exchange Commission (the "SEC") and is incorpo-
rated by reference into this Prospectus in its entirety.     
   
CFBDS, INC.     
Distributor
 
MUTUAL MANAGEMENT CORP.
Investment Manager
   
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   10
-------------------------------------------------
VALUATION OF SHARES                            12
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             12
-------------------------------------------------
PURCHASE OF SHARES                             14
-------------------------------------------------
EXCHANGE PRIVILEGE                             23
-------------------------------------------------
REDEMPTION OF SHARES                           26
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           29
-------------------------------------------------
PERFORMANCE                                    29
-------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND         30
-------------------------------------------------
DISTRIBUTION                                   31
-------------------------------------------------
ADDITIONAL INFORMATION                         32
-------------------------------------------------
APPENDIX A                                    A-1
</TABLE>    
--------------------------------------------------------------------------------
 
  No person has been authorized to give any information or to make any repre-
sentations in connection with this offering other than those contained in this
Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the distribu-
tor. This Prospectus does not constitute an offer by the Fund or the distribu-
tor 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 SAI. Cross references in this
summary are to headings in this Prospectus. See "Table of Contents."
   
INVESTMENT OBJECTIVE The Fund is an open-end, diversified, management invest-
ment company whose investment objective is to seek long-term growth of capital
by investing, under normal market conditions, at least 65% of its total assets
in the equity securities of smaller capitalized companies (companies with mar-
ket capitalizations of $1.4 billion or less at the time of investment). See
"Investment Objective and Management Policies."     
 
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund 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 L
shares, which differ principally in terms of sales charges and rates 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
$15,000,000. 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 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 L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00%. 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, and investors pay a CDSC of 1.00% if they redeem Class L shares within
12 months of purchase. The CDSC may be waived for certain redemptions. 
The Class L shares' distribution fee may cause that
Class to have higher expenses and pay lower dividends than Class A shares.
Purchases of Fund shares, which when combined with current holdings of Class L
shares of the Fund 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 $15,000,000. 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 Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
 
  Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration 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 shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Fund. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of this Class. Because the Fund's future return cannot
be predicted, however, there can be no assurance that this would be the case.
Finally, Class L shares which have a lower upfront sales charge but are sub-
ject to higher distribution fees than Class A shares, are suitable for invest-
ors who are not investing or intending to invest an amount which would receive
a substantive sales charge discount and who have a short-term or undetermined
time frame.
 
  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 L 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 L shares to investors with longer term investment outlooks.
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
  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 Fund. In addition, Class A share pur-
chases 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 pur-
chase to the net asset value of all Class A shares offered with a sales charge
held in Smith Barney Mutual Funds listed under "Exchange Privilege." Class A
share purchases may also 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 L shares, purchasers eligible to pur-
chase Class A shares at net asset value or at a reduced sales charge should
consider doing so.     
   
  Salomon Smith Barney Financial Consultants may receive different compensation
for selling different Classes of shares. Investors should understand that the
purpose of the CDSC on certain Class A shares, the Class B and Class L shares
is the same as that of an initial sales charge.     
 
  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
"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. Other investors may be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class L shares are available as investment
alternatives under both of these programs. See "Purchase of Shares--Smith Bar-
ney 401(k) and ExecChoice(TM) Programs."
   
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. ("CFBDS")
to distribute the Fund's shares.     
   
PURCHASE OF SHARES Shares may be purchased through a Salomon Smith Barney
Financial Consultant during the Initial Subscription Period. During the contin-
uous offering period, shares may also be purchased through a Salomon Smith Bar-
ney Financial Consultant, a broker that clears securities transactions through
Salomon Smith Barney Inc. ("Salomon Smith Barney") on a fully disclosed basis
or an investment dealer in the selling group. (An investment dealer in the
selling group and a broker that clear securities through Salomon Smith Barney
are collectively referred to as "Dealer Representatives.") In addition, certain
investors,     
 
                                                                               5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
including qualified retirement plans purchasing through certain Dealer
Representatives, may purchase shares directly from the Fund through the Fund's
transfer agent, First Data Investors Services Group, Inc. ("First Data" or
"Transfer Agent"). See "Purchase of Shares." The initial subscription period
for shares is scheduled to end on February 22, 1999, (the "Subscription Peri-
od"). After the expiration of the Subscription Period or a limited continuous
offering period, the Fund will suspend the offering of shares to the public. A
continuous offering of shares is expected to commence on or about April 1,
1999. See "Purchase of Shares."     
   
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L 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 $15,000,000. 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 L shares and the subse-
quent investment requirement for all Classes of shares is $25. The minimum
investment requirements for purchases of Fund shares through the Systematic
Investment Plan are described below. There is no minimum investment required
in Class A shares for unitholders who invest distributions from a unit invest-
ment trust ("UIT") sponsored by Salomon Smith Barney. See "Purchase of
Shares."     
 
SYSTEMATIC INVESTMENT PLAN During the continuous offering period, the Fund
offers shareholders a Systematic Investment Plan under which they may autho-
rize the automatic placement of a purchase order each month or quarter for
Fund shares. The minimum initial investment requirement for Class A, Class B
and Class L 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 FUND Mutual Management Corp. ("MMC" or the "Manager"),
formerly known as Smith Barney Mutual Funds Management Inc., serves as the
Fund's investment manager. The Manager is a wholly owned subsidiary of Salomon
Smith Barney Holdings Inc, ("Holdings") formerly known as Smith Barney
Holdings. Holdings is a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). Citigroup businesses produce a broad range of financial
services--asset management, banking and consumer finance, credit and charge
cards,     
 
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
insurance, investments, investment banking and trading--and use diverse
channels to make them available to consumer and corporate customers around the
world. Among these businesses are Citibank, Commercial Credit, Primerica
Financial Services, Salomon Smith Barney, SSBC Asset Management, Travelers
Life & Annuity, and Travelers Property Casualty.     
 
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 respec-
tive net asset values next determined. See "Exchange Privilege."
   
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Salomon Smith Barney Financial Consultants. See "Valuation of Shares."
    
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and distribu-
tions of net realized capital gains, if any, are declared and 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 dis-
tribution 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
Fund's investment objective will be achieved. The value of the Fund's invest-
ments, and thus the net asset value of the Fund's shares, will fluctuate in
response to changes in market and economic conditions, as well as the finan-
cial condition and prospects of issuers in which the Fund invests. The Fund
may invest in foreign securities, though management intends to limit such
investments to 10% of the Fund's assets. Foreign investments may include addi-
tional risks associated with currency exchange rates, less complete financial
information about individual companies, less market liquidity and political
instability. See "Investment Objective and Management Policies."     
 
                                                                              7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and the Fund's estimated operating expenses:
 
<TABLE>   
<CAPTION>
  SMITH BARNEY
  SMALL CAP VALUE FUND                          CLASS A CLASS B CLASS L 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    1.00%   None
    Maximum CDSC (as a percentage of original
     cost or redemption proceeds, whichever is
     lower)                                      None*   5.00%   1.00%   None
-------------------------------------------------------------------------------
  ANNUAL FUND OPERATING EXPENSES
    (as a percentage of average net assets)
    Management fees                              0.75%   0.75%   0.75%   0.75%
    12b-1 fees**                                 0.25    1.00    1.00    None
    Other expenses***                            0.25    0.25    0.25    0.25
-------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES                  1.25%   2.00%   2.00%   1.00%
-------------------------------------------------------------------------------
</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 L shares do not have a
     conversion feature and, therefore, are subject to an ongoing distribution
     fee. As a result, long-term shareholders of Class L shares may pay more
     than the economic equivalent of the maximum front-end sales charge
     permitted by the National Association of Securities Dealers ("NASD").
   
 *** "Other Expenses" have been estimated based on expenses the Fund expects to
     incur during its fiscal year ending September 30, 1999.     
   
  Class A shares of the Fund purchased through the Salomon Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable quarter-
ly, 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 a Salomon 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 Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class L 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." Salomon Smith Barney receives an annual 12b-1 service fee of 0.25% of
the value of average daily net assets of Class A shares. For Class B and Class
L shares, Salomon Smith Barney receives an annual 12b-1 fee of 1.00% of the
value of average daily net assets of each respective Class, consisting 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 account-
ing 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 Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
 
<TABLE>   
<CAPTION>
  SMITH BARNEY
  SMALL CAP VALUE FUND                                          1 YEAR 3 YEARS
------------------------------------------------------------------------------
  <S>                                                           <C>    <C>
  An investor would pay the following expenses on a $1,000
  investment, assuming (1) 5.00% annual return and (2) redemp-
  tion at the end of each time period:
    Class A....................................................  $62     $88
    Class B....................................................   70      93
    Class L....................................................   40      72
    Class Y....................................................   10      32
  An investor would pay the following expenses on the same
  investment, assuming the same annual return and no redemp-
  tion:
    Class A....................................................  $62     $88
    Class B....................................................   20      63
    Class L....................................................   30      72
    Class Y....................................................   10      32
------------------------------------------------------------------------------
</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 Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
 
 
                                                                               9
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
  The Fund's investment objective is long-term growth of capital. This invest-
ment objective may not be changed without the approval of the holders of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund's investment objective will be achieved.
   
  The Fund attempts to achieve its investment objective by investing, under
normal market conditions, substantially all of its assets in equity securities
and at least 65% of its total assets in equity securities of smaller capital-
ized companies (companies with market capitalizations of $1.4 billion or less
at the time of investment). Companies whose capitalization falls outside this
range after purchase continue to be considered smaller capitalized companies
for purposes of the 65% policy. Investments in smaller companies may offer
greater opportunities for growth of capital than larger, more established com-
panies, but may also involve certain risks because smaller capitalized compa-
nies often have limited market or financial resources and may be dependent on
one or two people for management. In addition, shares of small capitalized
companies have limited liquidity and more volatility which could result in
significant fluctuations in the price of their shares.     
   
  In selecting the Fund's equity investments, the Manager seeks to identify
companies that exhibit value attributes. When selecting stocks with value
characteristics, the Manager will typically be looking at companies that are
perhaps growing more slowly but whose valuation may be below average relative
to earnings and/or assets. In addition, the Manager may utilize an active
quantitative investment strategy for a portion of the Fund. This portion will
provide added diversification and, in addition, will select securities using a
proprietary technique that are believed to have a high probability of
outperforming their respective industry or sector. In identifying these secu-
rities, the Fund's portfolio manager is supported by a quantitatively oriented
investment team.     
   
  The Fund will normally invest in all types of equity securities, including
common stocks, preferred stocks, securities that are convertible into common
or preferred stocks, such as warrants and convertible bonds, and depository
receipts for those securities. It is the policy of the Fund to be as fully
invested in equity securities as practicable at all times. Under certain cir-
cumstances, the Fund may maintain a portion of its assets, which will usually
not exceed 10%, in U.S. Government securities, money market obligations, and
in cash to provide for payment of the Fund's expenses and to meet redemption
requests. The Fund reserves the right, as a defensive measure, to hold money
market securities, including repurchase agreements or cash, in such propor-
tions as, in the opinion of management, prevailing market or economic condi-
tions warrant.     
    
  Consistent with its investment objective and policies described above, the
Fund may invest up to 10% of its total assets in foreign securities, including
both
 
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
direct investments and investments made through depository receipts. The Fund
may also invest in real estate investment trusts; purchase or sell securities
on a when-issued or delayed-delivery basis; enter into forward commitments to
purchase securities; lend portfolio securities; purchase and sell put and call
options; invest in illiquid securities;
and enter into interest rate futures contracts, stock index futures
contracts and related options.    

  The different types of securities and investment techniques used by the Fund
all involve risks of varying degrees. For example, with respect to common
stock, there can be no assurance of capital appreciation, and there is a risk
of market decline. With respect to debt securities, including money market
instruments, there is the risk that the issuer of a security may not be able to
meet its obligation to make scheduled interest or principal payments. See
Appendix A for a more complete discussion of certain of these securities and
investment techniques and the associated risks.
 
 PORTFOLIO TRANSACTIONS AND TURNOVER
   
  Transactions on behalf of the Fund are allocated to various brokers and deal-
ers by the Manager in its best judgment. The primary consideration is prompt
and effective execution of orders at the most favorable price. Subject to that
primary consideration, brokers and dealers, including Salomon Smith Barney, may
be selected for research, statistical or other services to enable the Manager
to supplement its own research and analysis with the views and information of
other securities firms.     
   
  The Fund cannot accurately predict its portfolio turnover rate, but antici-
pates that its annual turnover normally will not exceed 150%. An annual turn-
over rate of 100% would occur if all of the securities held by the Fund were
replaced once during a period of one year. The Manager will not consider turn-
over rate a limiting factor in making investment decisions consistent with the
Fund's investment objective and policies.     
   
  Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders who hold their shares in bro-
kerage accounts maintained with Salomon Smith Barney depend on the smooth func-
tioning of their computer systems. Many computer software systems in use today
cannot recognize the year 2000, but revert to 1900 or some other date, due to
the manner in which dates were encoded and calculated. That failure could have
a negative impact on the Fund's operations, including the handling of securi-
ties     
 
                                                                              11
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
trades, pricing and account services. The Manager and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer sys-
tems and actively working on necessary changes to their systems to prepare for
the year 2000 and expect that their systems will be compliant before that
date. In addition, the Manager has been advised by the Fund's custodian,
transfer agent, distributor and accounting service agent that they are also in
the process of modifying their systems with the same goal. There can, however,
be no assurance that the Manager, Salomon Smith Barney or any other service
provider will be successful, or that interaction with other non-complying com-
puter systems will not impair Fund services at that time.     
   
  In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.     
 
VALUATION OF SHARES
 
 
  The Fund's net asset value per share is determined as of the close of regu-
lar trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number
of shares of the Class outstanding.
   
  Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Company's Board of Directors.
Short-term investments that mature in 60 days or less are valued at amortized
cost. Amortized cost involves valuing an investment at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Further information regarding the Fund's valuation
policies is contained in the SAI.     
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
   
  The Fund's policy is to distribute dividends from net investment income and
net realized capital gains, if any, annually. The Fund may also pay additional
dividends shortly before December 31 from certain amounts of undistributed
ordinary income and capital gains realized, in order to avoid a Federal excise
tax liability. If a shareholder does not otherwise instruct, dividends and
capital gain distributions will be     
 
12
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
   
reinvested automatically in additional shares of the same Class at net asset
value, with no additional sales charge or CDSC. Shareholders whose accounts are
held directly by First Data should notify First Data in writing, requesting a
change to this reinvest option.     
 
  The per share amounts of dividends from net investment income on Classes B
and L may be lower than that of Classes A and Y, mainly as a result of the dis-
tribution fees applicable to Class B and L shares. Similarly, the per share
amounts of dividends from net investment income on Class A shares may be lower
than that of Class Y, as a result of the service fee attributable to Class A
shares. Capital gain distributions, if any, will be the same amount across all
Classes of Fund shares (A, B, L and Y).
 
 TAXES
 
  The following is a summary of the material federal tax considerations affect-
ing the Fund and Fund shareholders. Please refer to the SAI for further discus-
sion. In addition to the considerations described below and in the SAI, there
may be other federal, state, local, and/or foreign tax implications to consid-
er. Because taxes are a complex matter, prospective shareholders are urged to
consult their tax advisors for more detailed information with respect to the
tax consequences of any investment.
   
  The Fund will be treated as a separate entity of the Company for Federal
Income Tax purposes. The Fund intends to qualify under Subchapter M of the
Internal Revenue Code (the "Code") for tax treatment as a regulated investment
company. In each taxable year that the Fund qualifies, the Fund will pay no
federal income tax on its net investment company taxable income and long-term
capital gain that is distributed to shareholders.     
 
  Dividends paid from net investment income and net realized short-term securi-
ties gain, are subject to federal income tax as ordinary income. Distributions,
if any, from net realized long-term securities gains, derived from the sale of
securities held by the Fund for more than one year, are taxable as long-term
capital gains, regardless of the length of time a shareholder has owned Fund
shares.
 
  Shareholders are required to pay tax on all taxable distributions, even if
those distributions are automatically reinvested in additional Fund shares. A
portion of the dividends paid by the Fund may qualify for the corporate divi-
dends received deduction. Dividends consisting of interest from U.S. government
securities may be exempt from state and local income taxes. The Fund will
inform shareholders of the source and tax status of all distributions promptly
after the close of each calendar year.
 
                                                                              13
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
 
  A shareholder's gain or loss on the disposition of Fund shares (whether by
redemption, sale or exchange), generally will be a long-term or short-term
gain or loss depending on the length of time the shares had been owned at dis-
position. Losses realized by a shareholder on the disposition of Fund shares
owned for six months or less will be treated as a long-term capital loss to
the extent a capital gain dividend had been distributed on such shares.
 
  The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for share-
holders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for share-
holders who otherwise are subject to backup withholding. Any tax withheld as a
result of backup withholding does not constitute an additional tax, and may be
claimed as a credit on the shareholder's federal income tax return.
 
PURCHASE OF SHARES
 
 
 GENERAL
   
  The Fund currently offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class L shares are sold to investors with an initial sales charge and
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 invest-
ors investing a minimum of $15,000,000 (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.     
 
 INITIAL SUBSCRIPTION PERIOD
   
  During the Initial Subscription Period, subscriptions for shares must be
made through a Salomon Smith Barney Financial Consultant. Shares of the Fund
subscribed for during the Subscription Period for which the Fund accepts pur-
chase orders will be issued and sold by the Fund on the third business day
after the end of the Subscription Period (the "Purchase Date"). Also on the
Purchase Date, shareholders of other funds of the Smith Barney Mutual Funds
will be able to exchange shares of such funds for shares of the Fund. On the
Purchase Date, the Fund will issue shares for which it has received and
accepted subscriptions and commence operations.     
   
  The Fund is offering its Class A shares to the public at a maximum purchase
price per share of $12.00, which equals the Class A share initial net asset
value     
 
14
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
per share of $11.40 plus the maximum sales charge set forth below under
"Continuous Offerings". The Fund is offering its Class B, Class L and Class Y
shares to the public at each Class' respective initial net asset value per
share of $11.40.     
   
  The Fund may in its discretion determine to withdraw the offering without
notice for any reason before the end of the Subscription Period. The Fund also
reserves the right to refuse any order in whole or in part.     
 
 CONTINUOUS OFFERINGS
   
  The Fund will suspend the offering of shares to the public immediately after
the expiration of the Subscription Period or within three weeks thereafter.
During the three-week period, the Fund will commence a limited continuous
offering of shares to the public. Once the Fund suspends the offering of
shares to the public (the "Closing Period"), it is expected to do so for 30
days. This period may be lengthened or shortened in the absolute discretion of
the Fund. During the Closing Period, the Fund will invest the proceeds from
its Subscription Period and its continuous offering, if any, and existing
shareholders of the Fund may request redemptions, purchase additional shares
and exchange shares of the Fund for shares of certain other funds of the Smith
Barney Mutual Funds. See "Exchange Privilege." Immediately after the expira-
tion of the Closing Period, the Fund expects to commence a continuous offering
of shares.     
   
  During the continuous offering, shares may be purchased through a Salomon
Smith Barney Financial Consultant. Shares may also be purchased through a
Dealer Representative. In addition, certain investors, including qualified
retirement plans purchasing through certain Dealer Representatives may pur-
chase shares directly from the Fund through First Data. When purchasing shares
of the Fund, investors must specify whether the purchase is for Class A, Class
B, Class L or Class Y shares. Salomon Smith Barney and Dealer Representatives
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 the Transfer Agent are not subject to a maintenance
fee.     
 
  Investors in Class A, Class B and Class L 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 Fund. Investors in Class Y
shares may open an account by making an initial investment of $15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For par-
ticipants 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 L shares and the subsequent investment requirement for all
Classes in the Fund is $25. For shareholders purchasing shares of the Fund
through the Systematic Investment Plan on a monthly basis, the minimum initial
investment requirement for Class A, Class B
 
                                                                             15
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
and Class L shares and the subsequent investment requirement for all Classes
is $25. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment require-
ment for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment require-
ments for Class A shares purchased by employees of Citigroup and its subsidi-
aries, including Salomon Smith Barney, unitholders who invest distributions
from a UIT sponsored by Salomon 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 pur-
chase 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. Share certificates are issued only upon a shareholder's writ-
ten request to the Transfer Agent.     
   
  Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant prior to the close of regular trading on the NYSE on any day the
Fund calculates its net asset value are priced according to the net asset
value determined on that day (the "trade date"). Orders received by Dealer
Representatives prior to the close of regular trading on the NYSE on any day
the Fund 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
the Fund's agent prior to its close of business. For shares purchased through
Salomon Smith Barney or Dealer Representatives purchasing through Salomon
Smith Barney, payment for Fund shares is due on the third business day (the
"settlement date") after the trade date. In all other cases, payments 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, Salomon Smith Barney or the Transfer Agent 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 to provide systematic
additions to the shareholder's Fund account. A shareholder who has insuffi-
cient funds to complete the transfer will be charged a fee of up to $25 by
Salomon Smith Barney or the Transfer Agent. The Systematic Investment Plan
also authorizes Salomon Smith Barney to apply cash held in the shareholder's
Salomon Smith Barney brokerage account or redeem the shareholder's shares of a
Salomon Smith Barney money market fund to make additions to the account. Addi-
tional information is available from the Fund or a Salomon Smith Barney Finan-
cial Consultant.     
 
16
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
    
 SALES CHARGE ALTERNATIVES     
   
  The following Classes of shares are available for purchase through this Pro-
spectus. See "Prospectus Summary--Alternative Purchase Arrangements" for a dis-
cussion of factors to consider in selecting which Class of shares to purchase.
       
  Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:
    
<TABLE>   
<CAPTION>
                                SALES CHARGE
                         ---------------------------      DEALER'S
                          AS A % OF     AS A % OF    REALLOWANCE AS % OF
  AMOUNT OF INVESTMENT   TRANSACTION 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 Salomon Smith Barney, which compensates Salomon 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 L shares is waived. See "Deferred
  Sales Charge Provisions" 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 "1933 Act"). The reduced sales charges shown above
apply to the aggregate of purchases of Class A shares of the Fund 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.     
   
  Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.     
   
  Class L Shares. Class L shares are sold with an initial sales charge of 1%
(which is equal to 1.01% of the amount invested) and are subject to a CDSC pay-
able upon certain redemptions. See "Deferred Sales Charge Provisions" below.
    
   
  Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except     
 
                                                                              17
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc.,
for which there is no minimum purchase amount).     
    
 SALES CHARGE WAIVERS AND REDUCTIONS     
    
 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 Citigroup and its subsidiaries and any Citigroup Affiliated Funds
including 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-shar-
ing 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 invest-
ment 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 the combination of such company with the Fund by merger,
acquisition of assets or otherwise; (c) purchases of Class A shares by any
client of a newly employed Salomon Smith Barney Financial Consultant (for a
period up to 90 days from the commencement of the Financial Consultant's
employment with Salomon 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 the Fund (or Class A shares of another Smith Barney Mutual Fund that
is offered with a sales charge) and who wish to reinvest their redemption pro-
ceeds in the Fund, provided the reinvestment is made within 60 calendar days
of the redemption; (e) purchases by accounts managed by registered investment
advisory subsidiaries of Citigroup; (f) direct rollovers by plan participants
of distributions from a 401(k) plan offered to employees of Citigroup and 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; (h) investments of distributions from a UIT sponsored by
Salomon Smith Barney; and (i) purchases by investors participating in a Salo-
mon Smith Barney fee-based arrangement. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to per-
mit verification that the purchase would qualify for the elimination of the
sales charge.     
    
 RIGHT OF ACCUMULATION     
   
  Class A shares of the Fund 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     
 
18
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
shares of the Fund and of funds sponsored by Salomon Smith Barney which are
offered with a sales charge as currently 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 infor-
mation at the time of purchase to permit verification that the purchase quali-
fies for the reduced sales charge. The right of accumulation is subject to mod-
ification or discontinuance at any time with respect to all shares purchased
thereafter.     
          
 LETTER OF INTENT     
   
  Class A Shares. A Letter of Intent for an amount 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 (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. Each investment made dur-
ing 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. The term of the Letter will commence upon the
date the Letter is signed, or at the option of the investor, up to 90 days
before such date. Please contact a Salomon Smith Barney Financial Consultant or
the Transfer Agent 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 (except purchases of
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Fund and agree to purchase a
total of $15,000,000 of Class Y shares of the Fund within 13 months from the
date of the Letter. If a total investment of $15,000,000 is not made within the
13 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 Fund's Class A shares, which may
include a CDSC of 1.00%. Please contact a Salomon Smith Barney Financial Con-
sultant or the Transfer Agent for further information.     
    
 DEFERRED SALES CHARGE PROVISIONS     
   
  "CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.     
 
                                                                              19
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
  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 Fund 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 L shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.     
   
  Class A shares and Class L 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
Salomon 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 Class B shares held under the Smith Barney 401(k) Program, as described
below. See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Pro-
grams."     
 
<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 and thereafter................................................ 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 shareholders as the total num-
ber of his or her Class B shares converting at the time bears to the total num-
ber 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."     
   
  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 Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation
or divi     -
 
20
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
dend and capital gain distribution reinvestments in such other funds. For Fed-
eral 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 Salomon 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 shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated 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 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
12 months following the death or disability of the shareholder; (d) redemp-
tions of shares made in connection with qualified distributions from retire-
ment plans or IRAs upon the attainment of age 59 1/2; (e) involuntary redemp-
tions; and (f) redemptions of shares to effect a combination of the Fund with
any investment company by merger, acquisition of assets or otherwise. In addi-
tion, a shareholder who has redeemed shares from other 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 Salomon Smith Bar-
ney in the case of shareholders who are also Salomon Smith Barney clients or
by the Transfer Agent in the case of all other shareholders) of the sharehold-
er's status or holdings, as the case may be.     
       
       
 SMITH BARNEY 401(K) PROGRAM 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 par-
ticipating ("Participating Plans") in these programs.
 
                                                                             21
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
  Each Fund offers to Participating Plans Class A and Class L shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class L shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class L 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 a
Fund, all of its subsequent investments in the Fund must be in the same Class
of shares, except as otherwise described below.
 
  Class A Shares. Class A shares of a Fund 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 L Shares. Class L shares of a Fund are offered without any sales charge
or CDSC to any Participating Plan that purchases less than $1,000,000 of Class
L 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 L 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 L shares for Class A shares of a Fund. (For Participating Plans that were
originally established through a Salomon 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 enroll-
ment 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 Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if its total Class
L 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 L shares for Class A shares of a
Fund. 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) Program that has not previ-
ously qualified for an exchange into Class A shares will be offered the oppor-
tunity
 
22
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
to exchange all of its Class L shares for Class A shares of a Fund, regardless
of asset size, at the end of the eighth year after the date the Participating
Plan enrolled in the Smith Barney 401(k) Program. 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 L shares of the Fund but instead may acquire Class A
shares of the Fund. Any Class L shares not converted will continue to be sub-
ject 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 the Transfer Agent. For further information
regarding these Programs, investors should contact a Salomon Smith Barney
Financial Consultant.     
   
EXCHANGE PRIVILEGE     
 
 
  Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
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 L
shares are subject to minimum investment requirements and all shares are sub-
ject to the other requirements of the fund into which exchanges are made.
 
 FUND NAME
 
  Growth Funds
    Concert Peachtree Growth Fund
    Concert Social Awareness Fund
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Balanced Fund
    Smith Barney Contrarian Fund
    Smith Barney Convertible Fund
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Funds, Inc.--Large Cap Value Fund
    Smith Barney Large Cap Blend Fund
    Smith Barney Large Capitalization Growth Fund
       
    Smith Barney Mid Cap Blend Fund     
           
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Premium Total Return Fund
       
    Smith Barney Small Cap Blend Fund, Inc.     
       
    Smith Barney Small Cap Growth Fund     
    Smith Barney Special Equities Fund
 
                                                                              23
<PAGE>
 
   
EXCHANGE PRIVILEGE (CONTINUED)     
 
 
  Taxable Fixed-Income Funds
    **Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
       
    +++Smith Barney Funds, Inc.--Short-Term High Grade Bond Fund     
    Smith Barney Funds, Inc.--U.S. Government Securities Fund
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
    Smith Barney Total Return Bond Fund
 
  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 Municipal High Income 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--Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund
 
  Global-International Funds
    Smith Barney Hansberger Global Small Cap Value Fund
    Smith Barney Hansberger Global Value Fund
    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.--Global 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
 
24
<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 L and Class Y shares of the
    Fund.
 ** Available for exchange with Class A and Class B shares of the Fund.
***Available for exchange with Class A shares of the Fund.
  + Available for exchange with Class B and Class L shares of the Fund.
 ++ Available for exchange with Class A and Class Y shares of the Fund. In
    addition, shareholders who own Class L shares of the Fund through the
    Smith Barney 401(k) and ExecChoice(TM) Programs may exchange those shares
    for Class L shares of this Fund.
+++Available for exchange with Class A and Class Y shares of the Fund.
 
  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 CDSC higher
than that imposed by the Fund, 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
fund that have been exchanged.
 
  Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Fund that
have been exchanged.
 
  Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
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 impo-
sition 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 Fund'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 Fund's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by a 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 Fund or (b) remain
invested in the Fund or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder
 
                                                                             25
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
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. 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 Fund 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 shares 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 trad-
ing 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 Transfer Agent
receives further instructions from Salomon Smith Barney, or if the sharehold-
er's account is not with Salomon 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 Salomon Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruc-
tion and Salomon 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 Salomon Smith Barney as custodian must be redeemed by submit-
ting a written request to a Salomon Smith Barney Financial Consultant. Shares
    
26
<PAGE>
 
   
REDEMPTION OF SHARES (CONTINUED)     
   
other than those held by Salomon Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, or Dealer Representative or by
submitting a written request for redemption to:     
     
  Smith Barney Small Cap Value Fund     
  Class A, B, L 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 the Transfer Agent together with the
redemption request. Any signature appearing on a share certificate, stock
power or written redemption request in excess of $10,000 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 $10,000 or less do not require a signature guarantee unless more than one
such redemption request is made in any 10-day period or the redemption pro-
ceeds are to be sent to an address other than the address of record. Unless
otherwise directed, redemption proceeds will be mailed to an investor's
address of record. The Transfer Agent may require additional supporting docu-
ments for redemptions made by corporations, executors, administrators, trust-
ees or guardians. A redemption request will not be deemed properly received
until the Transfer Agent receives all required documents in proper form.     
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
   
  Shareholders who do not have a Salomon Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should con-
tact First Data at 1-800-451-2010. Once eligibility is confirmed, the share-
holder must complete and return a Telephone/Wire Authorization Form, including
a signature guarantee, that will be provided by the Transfer Agent upon
request. (Alternatively, an investor may authorize telephone redemptions on
the new account application with a signature guarantee when making his/her
initial investment in the Fund.)     
   
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund'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 4:00 p.m.
(Eastern time) on any day the NYSE is open. Redemption requests received after
the     
 
                                                                             27
<PAGE>
 
   
REDEMPTION OF SHARES (CONTINUED)     
 
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 4:00
p.m. (Eastern time) on any day the NYSE is open. Exchange requests received
after the close of regular trading on the NYSE are priced 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.
 
 AUTOMATIC CASH WITHDRAWAL PLAN
 
  The Fund 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 Fund. Any applicable CDSC will not
be waived on amounts withdrawn by a share-
 
28
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
   
holder 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 share-
holder's shares subject to the CDSC.) For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Salomon Smith
Barney Financial Consultant or Dealer Representative.     
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size.) The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. 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 Fund may advertise its total return and average annual
total return in advertisements and/or other types of sales literature. These
figures are computed separately for Class A, Class B, Class L and Class Y
shares of the Fund. These figures are based on historical earnings and are not
intended to indicate future performance. Total return is computed for a speci-
fied 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
Fund 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.
 
 
                                                                              29
<PAGE>
 
MANAGEMENT OF THE COMPANY AND THE FUND
    
 BOARD OF DIRECTORS     
   
  Overall responsibility for the management and supervision of the Fund rests
with the Company's Board of Directors. The Directors approve all significant
agreements between the Company and the persons and companies that furnish serv-
ices to the Fund, including agreements with the Fund's distributor, investment
manager, custodian and transfer agent. The day-to-day operations of the Fund
are delegated to the Fund's investment manager. The SAI contains background
information regarding each Director and executive officer of the Company.     
 
 INVESTMENT MANAGER--MMC
   
  The Fund's investment manager, MMC, is a registered investment adviser whose
principal executive offices are located at 388 Greenwich Street, New York, New
York 10013. MMC was incorporated in March, 1968 under the laws of Delaware and
renders investment advice to a wide variety of individual, institutional and
investment company clients that had aggregate assets under management as of
September 30, 1998 in excess of $108 billion.     
   
  Subject to the supervision and direction of the Company's Board of Directors,
the Manager manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities, and employs professional portfo-
lio managers and securities analysts who provide research services to the Fund.
For investment management services rendered, the Fund pays the Manager a
monthly fee at the annual rate of 0.75% of the value of the Fund's average
daily net assets.     
   
  On October 8, 1998 Travelers Group Inc. and Citicorp consum-
mated their merger, thereby creating a new entity to be called Citigroup.
Citigroup is a bank holding company subject to regulation under the Bank Hold-
ing Company Act of 1956 (the "BHCA"), the requirements of the Glass-Stengall
Act and certain other laws and regulations. MMC does not believe that its com-
pliance with the applicable law will have a material adverse effect on its
ability to continue to provide the Fund with the same level of investment advi-
sory services that it currently receives.     
 
 PORTFOLIO MANAGEMENT
   
  Peter Hable[Vice President and Investment Officer] of the Company, President
of Davis Skaggs Investment Management, a division of the Manager and Managing
Director of Salomon Smith Barney, is the portfolio manager and manages the day-
to-day operations of the Fund, including making all investment decisions.     
 
30
<PAGE>
 
   
DISTRIBUTION     
   
  CFBDS located at 21 Milk Street, Boston, MA 02109-5408 distributes shares of
the Fund as principal underwriter and as such will conduct a continuous offer-
ing pursuant to a "best efforts" arrangement requiring CFBDS to take and pay
for only such securities as may be sold to the public.     
   
  The Fund has adopted a plan of distribution under Rule 12b-1 under the 1940
Act (the "Plan"), pursuant to which Salomon Smith Barney is paid an annual
service fee with respect to Class A, Class B and Class L shares of the Fund at
the annual rate of 0.25% of the average daily net assets of the respective
Class. Salomon Smith Barney is also paid an annual distribution fee with
respect to Class B and Class L shares at the annual rate of 0.75% of the aver-
age daily net assets attributable to those Classes. Class B shares which auto-
matically convert to Class A shares eight years after the date of original pur-
chase will no longer be subject to distribution fees. The fees are used by Sal-
omon Smith Barney to pay its Financial Consultants for servicing shareholder
accounts and, in the case of Class B and Class L shares, to cover expenses pri-
marily intended to result in the sale of those shares. These expenses include:
advertising; the cost of printing and mailing prospectuses to potential invest-
ors; payments to and expenses of Salomon 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
Salomon Smith Barney associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses.     
   
  The payments to Salomon Smith Barney Financial Consultants for selling shares
of a Class include a commission or fee paid by the investor or Salomon Smith
Barney at the time of sale and, with respect to Class A, Class B and Class L
shares, a continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. Salomon Smith Barney Financial Con-
sultants 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 service expenses actually incurred by Salomon 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 Salomon Smith Barney, amounts received under the
Plan and proceeds of the CDSC.     
 
                                                                              31
<PAGE>
 
   
ADDITIONAL INFORMATION     
       
          
  The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time. The Fund
offers shares of common stock currently classified into four Classes, A, B, L
and Y, with a par value of $.001 per share. Each Class represents an identical
interest in the Fund's investment portfolio. As a result, the Classes have the
same rights, privileges and preferences, except with respect to: (a) the desig-
nation of each Class; (b) the effect of the respective sales charges for each
Class; (c) the distribution and/or service fees borne by each Class pursuant to
the Plan; (d) the expenses allocable exclusively to each Class; (e) voting
rights on maters exclusively affecting a single Class; (f) the exchange privi-
lege of each Class; and (g) the conversion feature of the Class B shares. The
Board of Directors does not anticipate that there will be any conflicts among
the interests of the holders of the different Classes. The Directors, on an
ongoing basis, will consider whether any such conflict exists and, if so, take
appropriate action.     
   
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
       
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.     
   
  The Company does not hold annual shareholder meetings. There normally will be
no meeting 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. The Directors will call a meeting for any purpose
upon written request of shareholders holding at least 10% of the Company's out-
standing shares and the Company will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for sharehold-
ers vote, shareholders of each Class will have one vote for each full share
owned and a proportionate, fractional share held of that Class. Generally,
shares of the Company will be voted on a Company-wide basis on all matters
except matters affecting only the interests of one Fund or one Class of shares.
       
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include a list of the investment securities held by the Fund at
the end of the reporting period. In an effort to reduce the Fund's printing and
mailing costs, the Company plans to consolidate the mailing of its semi-annual
and annual reports by household. This consolidation means that a household hav-
ing multiple accounts with the identical address of record will receive a sin-
gle copy of each report. Shareholders who do not want this consolidation to
apply to their accounts should contact their Salomon Smith Barney Financial
Consultant or the Fund's Transfer Agent.     
 
32
<PAGE>
 
APPENDIX A
 
  Convertible Securities. Convertible securities are generally preferred secu-
rities or fixed-income securities that are convertible into common stock at
either a stated price or stated rate. The price of the convertible security
will normally vary in some proportion to changes in the price of the underlying
common stock because of this conversion feature. A convertible security will
normally also provide a fixed income stream. For this reason, the convertible
security may not decline in price as rapidly as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. The
Manager will select convertible securities to be purchased by the Fund based
primarily upon its evaluation of the fundamental investment characteristics and
growth prospects of the issuer of the security. As a fixed income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. While convertible secu-
rities generally offer lower interest or dividend yields than non-convertible
fixed income securities of similar quality, their value tends to increase as
the market value of the underlying stock increases and to decrease when the
value of the underlying stock decreases.
 
  Foreign Securities. In addition to direct investment in securities of foreign
issuers, the Fund may also invest in securities of foreign issuers in the form
of sponsored and unsponsored American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other similar
securities convertible into securities of foreign issuers. These securities may
not necessarily be denominated in the same currency as the securities into
which they may be converted. The Fund also may invest in securities denominated
in European Currency Units (ECUs). An ECU is a "basket" consisting of a speci-
fied amount of  currencies of certain of the twelve member states of the Euro-
pean Community. In addition, the Fund may invest in securities denominated in
other currency "baskets."
 
  There are certain risks involved in investing in securities of companies and
governments of foreign nations that are in addition to the usual risks inherent
in domestic investments. These risks include those resulting from revaluation
of currencies, future adverse political and economic developments and the pos-
sible imposition of currency exchange blockages or other foreign governmental
laws or restrictions, reduced availability of public information concerning
issuers and the lack of uniform accounting, auditing and financial reporting
standards or of other regulatory practices and requirements comparable to those
applicable to domestic companies. The yield of the Fund may be adversely
affected by fluctuations in value of one or more foreign currencies relative to
the U.S. dollar. Moreover, securities of many foreign companies and their mar-
kets may be less liquid and their prices more volatile than those of securities
of comparable domestic companies. In addition, with
 
                                                                             A-1
<PAGE>
 
APPENDIX A (CONTINUED)
 
respect to certain foreign countries, there is the possibility of expropria-
tion, nationalization, confiscatory taxation and limitations on the use or
removal of funds or other assets of the Fund, including the withholding of div-
idends. Foreign securities may be subject to foreign government taxes that
could reduce the yield on such securities. Because the Fund may invest in secu-
rities denominated or quoted in currencies other than the U.S. dollar, changes
in foreign currency exchange rates may adversely affect the value of portfolio
securities and the appreciation or depreciation of investments. Investment in
foreign securities also may result in higher expenses due to the cost of con-
verting foreign currency to U.S. dollars, the payment of fixed brokerage com-
missions on foreign exchanges, which generally are higher than commissions on
domestic exchanges, and the expense of maintaining securities with foreign cus-
todians, and the imposition of transfer taxes or transaction charges associated
with foreign exchanges.
   
  Real Estate Investment Trusts ("REITS"). The Fund may invest in REITS, which
are pooled investment vehicles that invest primarily in either real estate or
real estate related loans. The value of a REIT is affected by changes in the
value of the properties owned by the REIT or securing mortgage loans held by
the REIT. REITs are dependent upon cash flow from their investments to repay
financing costs and the management skill of the REIT's manager. REITs are also
subject to risks generally associated with investments in real estate. The Fund
will indirectly bear its proportionate share of any expenses, including manage-
ment fees, paid by a REIT in which it invests.     
 
  Debt Securities. Debt securities in which the Fund may invest include notes,
bills, commercial paper, obligations issued or guaranteed by the government or
any of its political subdivisions, agencies or instrumentalities, and
certificates of deposit. Debt securities represent money borrowed that
obligates the issuer (e.g., a corporation, municipality, government, government
agency) to repay the borrowed amount at maturity (when the obligation is due
and payable) and usually to pay the holder interest at specific times.
 
  All debt securities are subject to market risk and credit risk. Market risk
relates to market-induced changes in a security's value, usually as a result of
changes in interest rates. The value of the Fund's investments in debt securi-
ties will change as the general levels of interest rates fluctuate. During
periods of falling interest rates, the value of the Fund's debt securities will
generally rise. Conversely, during periods of rising interest rates, the value
of the Fund's debt securities will generally decline. Credit risk relates to
the ability of the issuer to make payments of principal and interest. The Fund
has no restrictions with respect to the maturities or duration of the debt
securities it holds. The Fund's investments in fixed income securities with
longer terms to maturity or greater duration are subject to greater volatility
than the Fund's shorter-term securities.
 
A-2
<PAGE>
 
APPENDIX A (CONTINUED)
   
  Money Market Instruments. Short-term instruments in which the Fund may invest
include obligations of banks having at least $1 billion in assets (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loan associations and similar institu-
tions); commercial paper rated no lower than A-2 by Standard & Poor's Ratings
Group or Prime-2 by Moody's Investors Service, Inc. or the equivalent from
another nationally recognized statistical rating organization or, if unrated,
of an issuer having an outstanding, unsecured debt issue then rated within the
two highest rating categories; and repurchase agreements with respect to any of
the foregoing entered into with banks and non-bank dealers approved by the
Company's Board of Directors.     
 
  U.S. Government Securities. The Fund may invest in U.S. Government securi-
ties. Generally, these securities include U.S. Treasury obligations and obliga-
tions issued or guaranteed by U.S. Government agencies, instrumentalities or
sponsored enterprises. U.S. Government securities also include Treasury
receipts and other stripped U.S. Government securities, where the interest and
principal components of stripped U.S. Government securities are traded indepen-
dently. The Fund may also invest in zero coupon U.S. Treasury securities and in
zero coupon securities issued by financial institutions, which represent a pro-
portionate interest in underlying U.S. Treasury securities. A zero coupon secu-
rity pays no interest to its holder during its life and its value consists of
the difference between its face value at maturity and its cost. The market val-
ues of zero coupon securities generally are more volatile than the market
prices of securities that pay interest periodically.
 
  Repurchase Agreements. The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to mini-
mize the risks of investing in repurchase agreements.
 
  Reverse Repurchase Agreements. In order to generate additional income, the
Fund may engage in reverse repurchase agreement transactions with banks, bro-
ker-dealers and other financial intermediaries. Reverse repurchase agreements
are the same as repurchase agreements except that, in this instance, the Fund
would assume the role of seller/borrower in the transaction. The Fund will
maintain a segregated account consisting of assets determined to be liquid by
the Manager that at all times have a value equal to its obligations under
reverse repurchase agreements. The Fund will invest the proceeds in other money
market instruments or repurchase agreements maturing not later than the expira-
tion of the reverse repur-
 
                                                                             A-3
<PAGE>
 
APPENDIX A (CONTINUED)
 
chase agreement. Reverse repurchase agreements involve the risk that the mar-
ket value of the securities sold by the Fund may decline below the repurchase
price of the securities.
 
  When-Issued, Delayed-Delivery and Forward Commitment Transactions. The Fund
may purchase securities on a when-issued basis, may purchase and sell securi-
ties for delayed delivery and may make contracts to purchase securities for a
fixed price at a future date beyond normal settlement time (forward commit-
ments). When-issued transactions, delayed delivery purchases and forward com-
mitments involve a risk of loss if the value of the securities declines prior
to the settlement date, which risk is in addition to the risk of decline in
the value of the Fund's other assets. Typically, no income accrues on securi-
ties the Fund has committed to purchase prior to the time delivery of the
securities is made, although the Fund may earn income on securities it has
deposited in a segregated account.
 
  Lending of Securities. Consistent with applicable regulatory requirements
and for cash management purposes, the 
Fund may seek to increase its income by lending portfolio securities to
entities deemed creditworthy by the Manager. Such loans will usually be made
to brokers, dealers and other financial organizations, and would be required
to be secured continuously by collateral in cash, letters of credit or U.S.
government securities, which are maintained at all times in an amount equal to
the current market value of the loaned securities. Any gain or loss in the
market price of the securities loaned that might occur during the term of the
loan would be for the account of the Fund. 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 finan-
cially. Loans will be made to firms deemed by the Manager to be of good stand-
ing and will not be made unless, in the judgment of Manager the consideration
to be earned from such loans would justify the risk.
 
  Options on Securities, Securities Indexes and Currencies. The Fund may write
(sell) covered put and call options on securities, securities indexes and cur-
rencies ("Options") and purchase put and call Options that are traded on for-
eign or U.S. securities exchanges and over the counter. The Fund will write
such Options for the purpose of increasing its return and/or protecting the
value of its portfolio. In particular, where the Fund writes an Option that
expires unexercised or is closed out by the Fund at a profit, it will retain
the premium paid for the Option, which will increase its gross income and will
offset in part the reduced value of a portfolio security in connection with
which the Option may have been written or the increased cost of portfolio
securities to be acquired. However, the writing of Options constitutes only a
partial hedge, up to the amount of the premium, less any transaction costs. In
contrast, if the price of the security underlying the Option
 
A-4
<PAGE>
 
APPENDIX A (CONTINUED)
 
moves adversely to the Fund's position, the Option may be exercised and the
Fund will be required to purchase or sell the security at a disadvantageous
price, resulting in losses that may only be partially offset by the amount of
the premium. The Fund may also write combinations of put and call Options on
the same security, known as "straddles." Such transactions generate additional
premium income but also present increased risk.
 
  The Fund may purchase put and call Options in anticipation of declines in the
value of portfolio securities or increases in the value of securities to be
acquired. In the event that the expected changes occur, the Fund may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the Options purchased. The risk assumed by the Fund in connection with
such transactions is limited to the amount of the premium and related transac-
tion costs associated with the Option, although the Fund may be required to
forfeit such amounts in the event that the prices of securities underlying the
Options do not move in the direction or to the extent anticipated.
 
  Over-the-counter options in which the Fund may invest differ from traded
options in that they are two-party contracts, with price and other terms nego-
tiated between buyer and seller, and generally do not have as much market
liquidity as exchange-traded options. The Fund may be required to treat as
illiquid over-the-counter options purchased and securities being used to cover
certain written over-the-counter options.
 
  Futures Contracts and Options on Futures Contracts. The Fund may enter into
transactions in futures contracts and options on futures only (i) for bona fide
hedging purposes (as defined in Commodities Futures Trading Commission regula-
tions), or (ii) for non-hedging purposes, provided that the aggregate initial
margin and premiums on such non-hedging positions do not exceed 5% of the liq-
uidation value of the Fund's assets.
 
  Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified
future time and at a specified price. The primary purpose of entering into a
futures contract by the Fund is to protect the Fund from fluctuations in the
value of securities without actually buying or selling the securities. The Fund
may enter into futures contracts and options on futures to seek higher invest-
ment returns when a futures contract is priced more attractively than stocks
comprising a benchmark index, to facilitate trading or to reduce transaction
costs. The Fund will only enter into futures contracts and options on futures
contracts that are traded on a domestic exchange and board of trade. Assets
committed to futures contracts will be segregated at the Fund's custodian to
the extent required by law.
 
 
                                                                             A-5
<PAGE>
 
APPENDIX A (CONTINUED)
 
  Among the several risks accompanying the utilization of futures contracts and
options on futures contracts are: First, the successful use of futures and
options is dependent upon the ability of the Manager to predict correctly move-
ments in the stock market or in the direction of interest rates. These predic-
tions involve skills and techniques that may be different from those involved
in the management of investments in securities. If the prices of the underlying
commodities move in an unanticipated manner, the Fund may lose the expected
benefit of these futures or options transactions and may incur losses. Second,
positions in futures contracts and options on futures contracts may only be
closed out by entering into offsetting transactions on the exchange where the
position was entered into (or through a linked exchange), and as a result of
daily price fluctuations limits there can be no assurance the offsetting trans-
action could be entered into at an advantageous price at a particular time.
Consequently, the Fund may realize a loss on a futures contract or option that
is not offset by an increase in the value of its portfolio securities that are
being hedged or the Fund may not be able to close a futures or options position
without incurring a loss in the event of adverse price movements.
 
A-6
<PAGE>
 
 
 
 
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<PAGE>
 
                      
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<PAGE>

                                               SALOMON SMITH BARNEY     
                                               ---------------------------------
                                                    A Member of citigroup [LOGO]

            Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.


 
                                                                      
                                                                   SMITH BARNEY
                                                                      SMALL CAP
                                                                          VALUE
                                                                           FUND
                                                                               
 
                                                           388 Greenwich Street
                                                       New York, New York 10013

                                                                
                                                             FD       12/98     

<PAGE>
 
 
                                                                    SMITH BARNEY
                                                                          
                                                                       Small Cap
                                                                          Growth
                                                                            Fund
                                                                                
                                                            
                                                         DECEMBER [ ], 1998     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
   
    
P R O S P E C T U S


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

<PAGE>
 
   
PROSPECTUS                                            DECEMBER [  ], 1998     
 
 
Smith Barney
   
Small Cap Growth Fund     
388 Greenwich Street
New York, New York 10013
1-800-451-2010
   
  Smith Barney Small Cap Growth Fund (the "Fund") is a mutual fund that seeks
long-term growth of capital by investing, under normal market conditions, at
least 65% of its total assets in the equity securities of smaller capitalized
companies (companies with market capitalizations of $1.4 billion or less at the
time of investment).     
   
  The Fund is one of a number of funds, each having distinct investment objec-
tives and policies making up the Smith Barney Investment Funds Inc. (the "Com-
pany"). The Company is an open-end management investment company commonly
referred to as a mutual fund.     
   
  The initial subscription period for shares is scheduled to end on February
22, 1999, (the "Subscription Period"). After the expiration of the Subscription
Period or a limited continuous offering period, the Fund will suspend the
offering of shares to the public. A continuous offering of shares is expected
to commence on or about April 1, 1999. See "Purchase of Shares."     
 
  This Prospectus sets forth concisely certain information about the Fund,
including sales charges, 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.
   
  Shares of the other Funds offered by the Company are described in separate
prospectuses that may be obtained by calling the Company at 1-800-451-2010.
       
  Additional information about the Fund is contained in a Statement of Addi-
tional Information, (the "SAI") dated December [  ], 1998, as amended or sup-
plemented 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 Salomon Smith Barney Financial Consultant. The SAI has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.     
   
CFBDS, INC.     
Distributor
 
MUTUAL MANAGEMENT CORP.
Investment Manager
   
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   10
-------------------------------------------------
VALUATION OF SHARES                            12
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             12
-------------------------------------------------
PURCHASE OF SHARES                             14
-------------------------------------------------
EXCHANGE PRIVILEGE                             23
-------------------------------------------------
REDEMPTION OF SHARES                           26
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           29
-------------------------------------------------
PERFORMANCE                                    29
-------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND         29
-------------------------------------------------
DISTRIBUTION                                   30
-------------------------------------------------
ADDITIONAL INFORMATION                         31
-------------------------------------------------
APPENDIX A                                    A-1
</TABLE>    
--------------------------------------------------------------------------------
 
  No person has been authorized to give any information or to make any repre-
sentations in connection with this offering other than those contained in this
Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the distribu-
tor. This Prospectus does not constitute an offer by the Fund or the distribu-
tor 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 SAI. Cross references in this
summary are to headings in this Prospectus. See "Table of Contents."
   
INVESTMENT OBJECTIVE The Fund is an open-end, diversified, management invest-
ment company whose investment objective is to seek long-term growth of capital
by investing, under normal market conditions, at least 65% of its total assets
in the equity securities of smaller capitalized companies (companies with mar-
ket capitalizations of $1.4 billion or less at the time of investment). See
"Investment Objective and Management Policies."     
 
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund 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 L
shares, which differ principally in terms of sales charges and rates 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
$15,000,000. 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 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 L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00%. 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, and investors pay a CDSC of 1.00% if they redeem Class L shares within
12 months of purchase. The CDSC may be waived for certain redemptions. The
Class L shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares. Purchases of Fund shares, which
when combined with current holdings of Class L shares of the Fund 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 $15,000,000. 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 Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
 
  Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration 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 shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Fund. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of this Class. Because the Fund's future return cannot
be predicted, however, there can be no assurance that this would be the case.
Finally, Class L shares which have a lower upfront sales charge but are sub-
ject to higher distribution fees than Class A shares, are suitable for invest-
ors who are not investing or intending to invest an amount which would receive
a substantive sales charge discount and who have a short-term or undetermined
time frame.
 
  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 L 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 L 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
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
immediately invested in the Fund. 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 other
Smith Barney Mutual Funds listed under "Exchange Privilege." Class A share pur-
chases may also 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 L shares, purchasers eligible to purchase Class A
shares at net asset value or at a reduced sales charge should consider doing
so.     
   
  Salomon Smith Barney Financial Consultants may receive different compensation
for selling different Classes of shares. Investors should understand that the
purpose of the CDSC on certain Class A shares, the Class B and Class L shares
is the same as that of an initial sales charge.     
  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
"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. Other investors may be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class L shares are available as investment
alternatives under both of these programs. See "Purchase of Shares--Smith Bar-
ney 401(k) and ExecChoice(TM) Programs."
   
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. ("CFBDS")
to distribute the Fund's shares.     
   
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker
that clears securities through Salomon Smith Barney Inc. ("Salomon Smith Bar-
ney"). (An investment dealer in the selling group and a broker that clears
securities through Salomon Smith Barney are collectively referred to as "Dealer
Representatives".) In addition, certain investors, including qualified retire-
ment plans and investors purchasing through certain Dealer Representatives, may
purchase shares directly from the Fund through the Fund's transfer agent. First
Data Investors Services Group, Inc. (the "Transfer Agent"). See "Purchase of
Shares." The initial subscription period for shares is scheduled to end on Feb-
ruary 22, 1999, (the "Subscription Period"). After the expiration of the Sub-
scription Period or a limited continuous offering period, the Fund will suspend
the offering of shares to the public. A continuous offering of shares is
expected to commence on or about April 1, 1999. See "Purchase of Shares."     
 
                                                                               5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L 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 $15,000,000. 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 L shares and the subse-
quent investment requirement for all Classes of shares is $25. The minimum
investment requirements for purchases of Fund shares through the Systematic
Investment Plan are described below. There is no minimum investment required
in Class A Shares for unitholders who invest distributions from a unit invest-
ment trust ("UIT") sponsored by Salomon Smith Barney. See "Purchase of
Shares."     
 
SYSTEMATIC INVESTMENT PLAN During the continuous offering period, the Fund
offers shareholders a Systematic Investment Plan under which they may autho-
rize the automatic placement of a purchase order each month or quarter for
Fund shares. The minimum initial investment requirement for Class A, Class B
and Class L 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 FUND Mutual Management Corp. ("MMC" or the "Manager"),
formerly known as Smith Barney Mutual Funds Management Inc., serves as the
Fund's investment manager. The Manager is a wholly owned subsidiary of Salomon
Smith Barney Holdings Inc, ("Holdings") formerly known as Smith Barney
Holdings. Holdings is a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). Citigroup businesses produce a broad range of financial
services--asset management, banking and consumer finance, credit and charge
cards, insurance, investments, investment banking and trading--and use diverse
channels to make them available to consumer and corporate customers around the
world. Among these businesses are Citibank, Commercial Credit, Primerica
Financial Services, Salomon Smith Barney, SSBC Asset Management, Travelers
Life & Annuity, and Travelers Property Casualty. See "Management of the
Company and 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 respec-
tive net asset values next determined. See "Exchange Privilege."
   
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Salomon Smith Barney Financial Consultants. See "Valuation of Shares."
    
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and distribu-
tions of net realized capital gains, if any, are declared and 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 dis-
tribution 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
Fund's investment objective will be achieved. The value of the Fund's invest-
ments, and thus the net asset value of the Fund's shares, will fluctuate in
response to changes in market and economic conditions, as well as the finan-
cial condition and prospects of issuers in which the Fund invests. The Fund
may invest in foreign securities, though management intends to limit such
investments to 10% of the Fund's assets. Foreign investments may include addi-
tional risks associated with currency exchange rates, less complete financial
information about individual companies, less market liquidity and political
instability. See "Investment Objective and Management Policies."     
 
                                                                              7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and the Fund's estimated operating expenses:
 
<TABLE>   
<CAPTION>
  SMITH BARNEY
  SMALL CAP GROWTH FUND                      CLASS A CLASS B  CLASS L  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      1.00%   None
    Maximum CDSC (as a percentage of
     original cost or redemption proceeds,
     whichever is lower)                     None*    5.00%    1.00%   None
------------------------------------------------------------------------------
  ANNUAL FUND OPERATING EXPENSES
    (as a percentage of average net assets)
    Management fees                          0.75% 0.75%  0.75%  0.75%
    12b-1 fees**                             0.25  1.00   1.00   None
    Other expenses***                        0.25  0.25   0.25   0.25
------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES              1.25% 2.00%  2.00%  1.00%
------------------------------------------------------------------------------
</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 L shares do not have a
     conversion feature and, therefore, are subject to an ongoing distribution
     fee. As a result, long-term shareholders of Class L shares may pay more
     than the economic equivalent of the maximum front-end sales charge
     permitted by the National Association of Securities Dealers ("NASD").
   
 *** "Other Expenses" have been estimated based on expenses the Fund expects to
     incur during its fiscal year ending September 30, 1999.     
   
  Class A shares of the Fund purchased through the Salomon Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable quarter-
ly, 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 a Salomon 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 Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class L 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." Salomon Smith Barney receives an annual 12b-1 service fee of 0.25% of
the value of average daily net assets of Class A shares. For Class B and Class
L shares, Salomon Smith Barney receives an annual 12b-1 fee of 1.00% of the
value of average daily net assets of each respective Class, consisting 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 account-
ing 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 Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Company and the Fund."     
 
<TABLE>   
<CAPTION>
  SMITH BARNEY
  SMALL CAP GROWTH FUND                                         1 YEAR 3 YEARS
------------------------------------------------------------------------------
  <S>                                                           <C>    <C>
  An investor would pay the following expenses on a $1,000
  investment, assuming (1) 5.00% annual return and (2) redemp-
  tion at the end of each time period:
    Class A....................................................  $62     $88
    Class B....................................................   70      93
    Class L....................................................   40      72
    Class Y....................................................   10      32
  An investor would pay the following expenses on the same
  investment, assuming the same annual return and no redemp-
  tion:
    Class A....................................................  $62     $88
    Class B....................................................   20      63
    Class L....................................................   30      72
    Class Y....................................................   10      32
------------------------------------------------------------------------------
</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 Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
 
                                                                               9
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
 
  The Fund's investment objective is long-term growth of capital. This invest-
ment objective may not be changed without the approval of the holders of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund's investment objective will be achieved.
   
  The Fund attempts to achieve its investment objective by investing, under
normal market conditions, substantially all of its assets in equity securities
and at least 65% of its total assets in equity securities of smaller capital-
ized companies (companies with market capitalizations of $1.4 billion or less
at the time of investment). Companies whose capitalization falls outside this
range after purchase continue to be considered smaller capitalized companies
for purposes of the 65% policy. Investments in smaller capitalized companies
may offer greater opportunities for growth of capital than larger, more estab-
lished companies, but may also involve certain risks because smaller capital-
ized companies often have limited market or financial resources and may be
dependent on one or two people for management. In addition, shares of small
capitalized companies have limited liquidity and more volatility which could
result in significant fluctuations in the price of their shares.     
   
  In selecting the Fund's equity investments, the Manager seeks to identify
companies that exhibit growth attributes. When selecting stocks with growth
potential, the Manager will evaluate the specific financial characteristics of
the issuer such as historical and forecasted earnings growth, sales growth,
profitability and return on equity. In addition, the Manager may utilize an
active quantitative investment strategy for a portion of the Fund. This por-
tion will provide added diversification and, in addition, will select securi-
ties using a proprietary technique that are believed to have a high probabil-
ity of outperforming their respective industry or sector. In identifying these
securities, the Fund's portfolio manager is supported by a quantitatively ori-
ented investment team.     
   
  The Fund will normally invest in all types of equity securities, including
common stocks, preferred stocks, securities that are convertible into common
or preferred stocks, such as warrants and convertible bonds, and depository
receipts for those securities. It is the policy of the Fund to be as fully
invested in equity securities as practicable at all times. Under certain cir-
cumstances, the Fund may maintain a portion of its assets, which will usually
not exceed 10%, in U.S. Government securities, money market obligations, and
in cash to provide for payment of the Fund's expenses and to meet redemption
requests. The Fund reserves the right, as a defensive measure, to hold money
market securities, including repurchase agreements or cash, in such propor-
tions as, in the opinion of management, prevailing market or economic condi-
tions warrant.     
 
  Consistent with its investment objective and policies described above, the
Fund may invest up to 10% of its total assets in foreign securities, including
both direct
 
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
investments and investments made through depository receipts. The Fund may also
invest in real estate investment trusts; purchase or sell securities on a when-
issued or delayed-delivery basis; enter into forward commitments to purchase
securities; lend portfolio securities; purchase and sell put and call options;
invest in illiquid securities; and enter into interest rate futures contracts,
stock index futures contracts and related options.

  The different types of securities and investment techniques used by the Fund
all involve risks of varying degrees. For example, with respect to common
stock, there can be no assurance of capital appreciation, and there is a risk
of market decline. With respect to debt securities, including money market
instruments, there is the risk that the issuer of a security may not be able to
meet its obligation to make scheduled interest or principal payments. See
Appendix A for a more complete discussion of certain of these securities and
investment techniques and the associated risks.
 
 PORTFOLIO TRANSACTIONS AND TURNOVER
   
  Transactions on behalf of the Fund are allocated to various brokers and deal-
ers by the Manager in its best judgment. The primary consideration is prompt
and effective execution of orders at the most favorable price. Subject to that
primary consideration, brokers and dealers, including Salomon Smith Barney, may
be selected for research, statistical or other services to enable the Manager
to supplement its own research and analysis with the views and information of
other securities firms.     
   
  The Fund cannot accurately predict its portfolio turnover rate, but antici-
pates that its annual turnover normally will not exceed 150%. An annual turn-
over rate of 100% would occur if all of the securities held by the Fund were
replaced once during a period of one year. The Manager will not consider turn-
over rate a limiting factor in making investment decisions consistent with the
Fund's investment objective and policies.     
   
  Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders who hold their shares in bro-
kerage accounts maintained with Salomon Smith Barney, depend on the smooth
functioning of their computer systems. Many computer software systems in use
today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure
could have a     
 
                                                                              11
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
negative impact on the Fund's operations, including the handling of securities
trades, pricing and account services. The Manager and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer sys-
tems and actively working on necessary changes to their systems to prepare for
the year 2000 and expect that their systems will be compliant before that
date. In addition, the Manager has been advised by the Fund's custodian,
transfer agent, distributor and accounting service agent that they are also in
the process of modifying their systems with the same goal. There can, however,
be no assurance that the Manager, Salomon Smith Barney or any other service
provider will be successful, or that interaction with other non-complying com-
puter systems will not impair Fund services at that time.     
   
  In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.     
 
VALUATION OF SHARES
 
 
  The Fund's net asset value per share is determined as of the close of regu-
lar trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number
of shares of the Class outstanding.
   
  Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Company's Board of Directors.
Short-term investments that mature in 60 days or less are valued at amortized
cost. Amortized cost involves valuing an investment at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Further information regarding the Fund's valuation
policies is contained in the SAI.     
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
   
  The Fund's policy is to distribute dividends from net investment income and
net realized capital gains, if any, annually. The Fund may also pay additional
dividends shortly before December 31 from certain amounts of undistributed
ordinary income and capital gains realized, in order to avoid a Federal excise
tax liability. If a share     -
 
12
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
   
holder does not otherwise instruct, dividends and capital gain distributions
will be reinvested automatically in additional shares of the same Class at net
asset value, with no additional sales charge or CDSC. Shareholders whose
accounts are held directly by First Data should notify First Data in writing,
requesting a change to this reinvest option.     
 
  The per share amounts of dividends from net investment income on Classes B
and L may be lower than that of Classes A and Y, mainly as a result of the dis-
tribution fees applicable to Class B and L shares. Similarly, the per share
amounts of dividends from net investment income on Class A shares may be lower
than that of Class Y, as a result of the service fee attributable to Class A
shares. Capital gain distributions, if any, will be the same amount across all
Classes of Fund shares (A, B, L and Y).
 
 TAXES
  The following is a summary of the material federal tax considerations affect-
ing the Fund and Fund shareholders. Please refer to the SAI for further discus-
sion. In addition to the considerations described below and in the SAI, there
may be other federal, state, local, and/or foreign tax implications to consid-
er. Because taxes are a complex matter, prospective shareholders are urged to
consult their tax advisors for more detailed information with respect to the
tax consequences of any investment.
   
  The Fund will be treated as a separate entity of the Company for Federal
Income Tax purposes. The Fund intends to qualify under Subchapter M of the
Internal Revenue Code (the "Code") for tax treatment as a regulated investment
company. In each taxable year that the Fund qualifies, the Fund will pay no
federal income tax on its net investment company taxable income and long-term
capital gain that is distributed to shareholders.     
   
  Dividends paid from net investment income and net realized short-term securi-
ties gain, are subject to federal income tax as ordinary income. Distributions,
if any, from net realized long-term securities gains derived from the sale of
securities held by the Fund for more than one year, are taxable as long-term
capital gains, regardless of the length of time a shareholder has owned Fund
shares.     
 
  Shareholders are required to pay tax on all taxable distributions, even if
those distributions are automatically reinvested in additional Fund shares. A
portion of the dividends paid by the Fund may qualify for the corporate divi-
dends received deduction. Dividends consisting of interest from U.S. government
securities may be exempt from state and local income taxes. The Fund will
inform shareholders of the source and tax status of all distributions promptly
after the close of each calendar year.
 
                                                                              13
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
 
  A shareholder's gain or loss on the disposition of Fund shares (whether by
redemption, sale or exchange), generally will be a long-term or short-term
gain or loss depending on the length of time the shares had been owned at dis-
position. Losses realized by a shareholder on the disposition of Fund shares
owned for six months or less will be treated as a long-term capital loss to
the extent a capital gain dividend had been distributed on such shares.
 
  The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for share-
holders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for share-
holders who otherwise are subject to backup withholding. Any tax withheld as a
result of backup withholding does not constitute an additional tax, and may be
claimed as a credit on the shareholder's federal income tax return.
 
PURCHASE OF SHARES
 
 
 GENERAL
   
  The Fund currently offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class L shares are sold to investors with an initial sales charge and
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 invest-
ors investing a minimum of $15,000,000 (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.     
 
 INITIAL SUBSCRIPTION PERIOD
   
  During the Initial Subscription Period, subscriptions for shares must be
made through a Salomon Smith Barney Financial Consultant. Shares of the Fund
subscribed for during the Subscription Period for which the Fund accepts pur-
chase orders will be issued and sold by the Fund on the third business day
after the end of the Subscription Period (the "Purchase Date"). Also on the
Purchase Date, shareholders of other funds of the Smith Barney Mutual Funds
will be able to exchange shares of such funds for shares of the Fund. On the
Purchase Date, the Fund will issue shares for which it has received and
accepted subscriptions and commence operations.     
 
14
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
  The Fund is offering its Class A shares to the public at a maximum purchase
price per share of $12.00, which equals the Class A share initial net asset
value per share of $11.40 plus the maximum sales charge set forth below
under "Continuous Offerings". The Fund is offering its Class B, Class L and
Class Y shares to the public at each Class' respective initial net asset value
per share of $11.40.     
   
  The Fund may in its discretion determine to withdraw the offering without
notice for any reason before the end of the Subscription Period. The Fund also
reserves the right to refuse any order in whole or in part.     
 
 CONTINUOUS OFFERINGS
   
  The Fund will suspend the offering of shares to the public immediately after
the expiration of the Subscription Period or within three weeks thereafter.
During the three-week period, the Fund will commence a limited continuous
offering of shares to the public. Once the Fund suspends the offering of
shares to the public (the "Closing Period"), it is expected to do so for 30
days. This period may be lengthened or shortened in the absolute discretion of
the Fund. During the Closing Period, the Fund will invest the proceeds from
its Subscription Period and its continuous offering, if any, and existing
shareholders of the Fund may request redemptions, purchase additional shares
and exchange shares of the Fund for shares of certain other funds of the Smith
Barney Mutual Funds. See "Exchange Privilege." Immediately after the expira-
tion of the Closing Period, the Fund expects to commence a continuous offering
of shares.     
   
  During the continuous offering, shares may be purchased through a Salomon
Smith Barney Financial Consultant. Shares may also be purchased through a
Dealer Representative. In addition, certain investors, including qualified
retirement plans purchasing through certain Dealer Representatives, may pur-
chase shares directly from the Fund through First Data. When purchasing shares
of the Fund, investors must specify whether the purchase is for Class A, Class
B, Class L or Class Y shares. Salomon 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 the Transfer Agent are not subject to a maintenance
fee.     
 
  Investors in Class A, Class B and Class L 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 Fund. Investors in Class Y
shares may open an account by making an initial investment of $15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For par-
ticipants 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 L shares and the subsequent investment requirement for all
Classes in the Fund is $25. For share-
 
                                                                             15
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
holders purchasing shares of the Fund through the Systematic Investment Plan
on a monthly basis, the minimum initial investment requirement for Class A,
Class B and Class L shares and the subsequent investment requirement for all
Classes is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a quarterly basis, the minimum initial invest-
ment requirement for Class A, Class B and Class L shares and the subsequent
investment requirement for all Classes is $50. There are no minimum investment
requirements for Class A shares purchased by employees of Citigroup and its
subsidiaries, including Salomon Smith Barney, unitholders who invest distribu-
tions from a unit investment trust sponsored by Salomon Smith Barney, Direc-
tors or Trustees of any of the Smith Barney Mutual Funds, and their spouses
and children, and their immediate family. 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. Share certificates are
issued only upon a shareholder's written request to the Transfer Agent.     
   
  Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant prior to the close of regular trading on the NYSE on any day the
Fund calculates its net asset value are priced according to the net asset
value determined on that day (the "trade date"). Orders received by Dealer
Representatives prior to the close of regular trading on the NYSE on any day
the Fund 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
the Fund's agent prior to its close of business. For shares purchased through
Salomon Smith Barney or Dealer Representatives purchasing through Salomon
Smith Barney, payment for Fund shares is due on the third business day (the
"settlement date") after the trade date. In all other cases, payments 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, Salomon Smith Barney or the Transfer Agent 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 to provide systematic
additions to the shareholder's Fund account. A shareholder who has insuffi-
cient funds to complete the transfer will be charged a fee of up to $25 by
Salomon Smith Barney or the Transfer Agent. The Systematic Investment Plan
also authorizes Salomon Smith Barney to apply cash held in the shareholder's
Salomon Smith Barney brokerage account or redeem the shareholder's shares of a
Salomon Smith Barney money market fund to make additions to the account. Addi-
tional information is available from the Fund or a Salomon Smith Barney Finan-
cial Consultant.     
 
16
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
    
 SALES CHARGE ALTERNATIVES     
   
  The following Classes of shares are available for purchase through this Pro-
spectus. See "Prospectus Summary--Alternative Purchase Arrangements" for a dis-
cussion of factors to consider in selecting which Class of shares to purchase.
       
  Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:
    
<TABLE>   
<CAPTION>
                                SALES CHARGE
                         ---------------------------      DEALER'S
                          AS A % OF     AS A % OF    REALLOWANCE AS % OF
  AMOUNT OF INVESTMENT   TRANSACTION 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 Salomon Smith Barney, which compensates Salomon 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 L shares is waived. See "Deferred
  Sales Charge Provisions" 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 "1933 Act"). The reduced sales charges shown above
apply to the aggregate of purchases of Class A shares of the Fund 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.     
   
  Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.     
   
  Class L Shares. Class L shares are sold with an initial sales charge of 1%
(which is equal to 1.01% of the amount invested) and are subject to a CDSC pay-
able upon certain redemptions. See "Deferred Sales Charge Provisions" below.
    
   
  Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).     
 
                                                                              17
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
    
 SALES CHARGE WAIVERS AND REDUCTIONS     
    
 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 Citigroup and its subsidiaries and any Citigroup affiliated funds
including 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-shar-
ing 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 the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
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 the Fund (or Class A shares
of another Smith Barney Mutual Fund that is offered with a sales charge) and
who wish to reinvest their redemption proceeds in the Fund, provided the rein-
vestment is made within 60 calendar days of the redemption; (e) purchases by
accounts managed by registered investment advisory subsidiaries of Citigroup;
(f) direct rollovers by plan participants of distributions from a 401(k) plan
offered to employees of Citigroup and its subsidiaries or a 401(k)
plan enrolled in the Smith Barney 401(k) Program 
(Note: subsequents investment will be
subject to the applicable sales charge); (g) purchases by separate accounts
used to fund certain unregistered variable annuity contracts; (h) investments
of distributions from a UIT sponsored by Salomon Smith Barney; and (i) pur-
chases by investors participating in a Salomon Smith Barney fee-based arrange-
ment. 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 the Fund 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 Fund and of funds sponsored by Salomon Smith Barney which
are offered with a sales charge as currently listed under "Exchange Privilege"
then     
 
18
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
held by such person and applying the sales charge applicable to such aggregate.
In order to obtain such discount, the purchaser must provide sufficient infor-
mation at the time of purchase to permit verification that the purchase quali-
fies for the reduced sales charge. The right of accumulation is subject to mod-
ification or discontinuance at any time with respect to all shares purchased
thereafter.     
          
 LETTER OF INTENT     
   
  Class A Shares. A Letter of Intent for an amount 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 (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. Each investment made dur-
ing 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. The term of the Letter will commence upon the
date the Letter is signed, or at the option of the investor, up to 90 days
before such date. Please contact a Salomon Smith Barney Financial Consultant or
the Transfer Agent 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 (except purchases of
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Fund and agree to purchase a
total of $15,000,000 of Class Y shares of the Fund within 13 months from the
date of the Letter. If a total investment of $15,000,000 is not made within the
13 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 Fund's Class A shares, which may
include a CDSC of 1.00%. Please contact a Salomon Smith Barney Financial Con-
sultant or the Transfer Agent for further information.     
    
 DEFERRED SALES CHARGE PROVISIONS     
   
  "CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.     
   
  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     
 
                                                                              19
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
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
Fund 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 L shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.     
   
  Class A shares and Class L 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
Salomon 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 Class B shares held under the Smith Barney 401(k) Program, as described
below. See "Purchase of Shares--Smith Barney 401(k) and ExecChoice TM Pro-
grams."     
 
<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 and thereafter  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 shareholders as the total num-
ber of his or her Class B shares converting at the time bears to the total num-
ber 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."     
   
  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 Fund 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     
 
20
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
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 Salomon 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 shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated 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 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
12 months following the death or disability of the shareholder; (d) redemp-
tions of shares made in connection with qualified distributions from retire-
ment plans or IRAs upon the attainment of age 59 1/2; (e) involuntary redemp-
tions; and (f) redemptions of shares to effect a combination of the Fund with
any investment company by merger, acquisition of assets or otherwise. In addi-
tion, a shareholder who has redeemed shares from other 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 Salomon Smith
Barney in the case of shareholders who are also Salomon Smith Barney clients
or by the Transfer Agent in the case of all other shareholders) of the share-
holder's status or holdings, as the case may be.     
 
 SMITH BARNEY 401(K) PROGRAM 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 par-
ticipating ("Participating Plans") in these programs.
 
                                                                             21
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
  Each Fund offers to Participating Plans Class A and Class L shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class L shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class L 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 a
Fund, all of its subsequent investments in the Fund must be in the same Class
of shares, except as otherwise described below.
 
  Class A Shares. Class A shares of a Fund 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 L Shares. Class L shares of a Fund are offered without any sales charge
or CDSC to any Participating Plan that purchases less than $1,000,000 of Class
L 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 L 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 L shares for Class A shares of a Fund. (For Participating Plans that were
originally established through a Salomon 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 enroll-
ment 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 Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if its total Class
L 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 L shares for Class A shares of a
Fund. 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) Program that has not previ-
ously qualified for an exchange into Class A shares will be offered the oppor-
tunity
 
22
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
to exchange all of its Class L shares for Class A shares of a Fund, regardless
of asset size, at the end of the eighth year after the date the Participating
Plan enrolled in the Smith Barney 401(k) Program. 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 L shares of the Fund but instead may acquire Class A
shares of the Fund. Any Class L shares not converted will continue to be sub-
ject 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 the Transfer Agent. For further information regarding
these Programs, investors should contact a Salomon Smith Barney Financial Con-
sultant.     
   
EXCHANGE PRIVILEGE     
 
 
  Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
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 L
shares are subject to minimum investment requirements and all shares are sub-
ject to the other requirements of the fund into which exchanges are made.
 
 FUND NAME
  Growth Funds
    Concert Peachtree Growth Fund
    Concert Social Awareness Fund
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Balanced Fund
    Smith Barney Contrarian Fund
    Smith Barney Convertible Fund
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Funds, Inc.--Large Cap Value Fund
    Smith Barney Large Cap Blend Fund
    Smith Barney Large Capitalization Growth Fund
       
    Smith Barney Mid Cap Blend Fund     
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Premium Total Return Fund
       
    Smith Barney Small Cap Blend Fund, Inc.     
       
    Smith Barney Small Cap Value Fund     
    Smith Barney Special Equities Fund
 
                                                                              23
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
 
  Taxable Fixed-Income Funds
    **Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
       
    +++Smith Barney Funds, Inc.--Short-Term High Grade Bond Fund     
    Smith Barney Funds, Inc.--U.S. Government Securities Fund
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
    Smith Barney Total Return Bond Fund
 
  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 Municipal High Income 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--Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund
 
  Global-International Funds
    Smith Barney Hansberger Global Small Cap Value Fund
    Smith Barney Hansberger Global Value Fund
    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.--Global 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
 
24
<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 L and Class Y shares of the
    Fund.
 ** Available for exchange with Class A and Class B shares of the Fund.
***Available for exchange with Class A shares of the Fund.
  + Available for exchange with Class B and Class L shares of the Fund.
 ++ Available for exchange with Class A and Class Y shares of the Fund. In
    addition, shareholders who own Class L shares of the Fund through the
    Smith Barney 401(k) and ExecChoice(TM) Programs may exchange those shares
    for Class L shares of this Fund.
+++Available for exchange with Class A and Class Y shares of the Fund.
 
  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 CDSC higher
than that imposed by the Fund, 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
fund that have been exchanged.
 
  Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Fund that
have been exchanged.
 
  Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
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 impo-
sition 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 Fund'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 Fund's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by a 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 Fund or (b) remain
invested in the Fund 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.
 
                                                                             25
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
 
  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. 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 Fund 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 shares 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 trad-
ing 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 Transfer Agent
receives further instructions from Salomon Smith Barney, or if the sharehold-
er's account is not with Salomon 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 Salomon Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruc-
tion and Salomon 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 Salomon Smith Barney as custodian must be redeemed by submit-
ting a written request to a Salomon Smith Barney Financial Consultant. Shares
other than those held by Salomon Smith Barney as custodian may be redeemed
    
26
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
   
through an investor's Financial Consultant, or Dealer Representative or by
submitting a written request for redemption to:     
     
  Smith Barney Small Cap Growth Fund     
  Class A, B, L 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 the Transfer Agent together with the
redemption request. Any signature appearing on a share certificate, stock
power or written redemption request in excess of $10,000 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 $10,000 or less do not require a signature guarantee unless more than one
such redemption request is made in any 10-day period or the redemption pro-
ceeds are to be sent to an address other than the address of record. Unless
otherwise directed, redemption proceeds will be mailed to an investor's
address of record. The Transfer Agent may require additional supporting docu-
ments for redemptions made by corporations, executors, administrators, trust-
ees or guardians. A redemption request will not be deemed properly received
until the Transfer Agent receives all required documents in proper form.     
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
   
  Shareholders who do not have a Salomon Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should con-
tact First Data at 1-800-451-2010. Once eligibility is confirmed, the share-
holder must complete and return a Telephone/Wire Authorization Form, including
a signature guarantee, that will be provided by the Transfer Agent upon
request. (Alternatively, an investor may authorize telephone redemptions on
the new account application with a signature guarantee when making his/her
initial investment in the Fund.)     
   
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund'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 4:00
p.m.(Eastern 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     
 
                                                                             27
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
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 4:00
p.m. (Eastern time) on any day the NYSE is open. Exchange requests received
after the close of regular trading on the NYSE are priced 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.
 
 AUTOMATIC CASH WITHDRAWAL PLAN
  The Fund 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 Fund. 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
 
28
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
   
to the CDSC at the time the withdrawal plan commences. (With respect to with-
drawal 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 share-
holder's shares subject to the CDSC.) For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Salomon Smith
Barney Financial Consultant, or Dealer Representative.     
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size.) The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. 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 Fund may advertise its total return and average annual
total return in advertisements and/or other types of sales literature. These
figures are computed separately for Class A, Class B, Class L and Class Y
shares of the Fund. These figures are based on historical earnings and are not
intended to indicate future performance. Total return is computed for a speci-
fied 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
Fund 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 COMPANY AND THE FUND     
    
 BOARD OF DIRECTORS     
   
  Overall responsibility for the management and supervision of the Fund rests
with the Company's Board of Directors. The Directors approve all significant
    
                                                                              29
<PAGE>
 
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
   
agreements between the Company and the persons and companies that furnish serv-
ices to the Fund, including agreements with the Fund's distributor, investment
manager, custodian and transfer agent. The day-to-day operations of the Fund
are delegated to the Fund's investment manager. The SAI contains background
information regarding each Director and executive officer of the Company.     
 
 INVESTMENT MANAGER--MMC
   
  The Fund's investment manager, MMC, is a registered investment adviser whose
principal executive offices are located at 388 Greenwich Street, New York, New
York 10013. MMC was incorporated in March, 1968 under the laws of Delaware and
renders investment advice to a wide variety of individual, institutional and
investment company clients that had aggregate assets under management as of
September 30, 1998 in excess of $108 billion.     
   
  Subject to the supervision and direction of the Company's Board of Directors,
the Manager manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities, and employs professional portfo-
lio managers and securities analysts who provide research services to the Fund.
For investment management services rendered, the Fund pays the Manager a
monthly fee at the annual rate of 0.[75]% of the value of the Fund's average
daily net assets.     
   
  On October 8, 1998 Travelers Group Inc. and Citicorp consum-
mated their merger, thereby creating a new entity to be called Citigroup. 
Citigroup is a bank holding company subject to regulation under the
Bank Holding Company Act of 1956 (the "BHCA"), the requirements of the Glass-
Steagall Act and certain other laws and regulations. MMC does not believe that
its compliance with the applicable law will have a material adverse effect on
its ability to continue to provide the Fund with the same level of investment
advisory services that it currently receives.     
 
 PORTFOLIO MANAGEMENT
   
  [     ], Vice President and Investment Officer of the Company, is the 
portfolio manager and manages the day-to-day operations of the Fund, 
including making all investment decisions.     
          
DISTRIBUTION     
   
  CFBDS located at 21 Milk Street, Boston, MA 02109-5408 distributes shares of
the Fund as principal underwriter and as such will conduct a continuous offer-
ing pursuant to a "best efforts" arrangement requiring CFBDS Inc. to take and
pay for only such securities as may be sold to the public.     
 
30
<PAGE>
 
   
DISTRIBUTION (CONTINUED)     
   
  The Fund has adopted a plan of distribution under Rule 12b-1 under the 1940
Act (the "Plan"), pursuant to which Salomon Smith Barney is paid an annual
service fee with respect to Class A, Class B and Class L shares of the Fund at
the annual rate of 0.25% of the average daily net assets of the respective
Class. Salomon Smith Barney is also paid an annual distribution fee with
respect to Class B and Class L shares at the annual rate of 0.75% of the aver-
age daily net assets attributable to those Classes. Class B shares which auto-
matically convert to Class A shares eight years after the date of original
purchase will no longer be subject to distribution fees. The fees are used by
Salomon Smith Barney to pay its Financial Consultants for servicing share-
holder accounts and, in the case of Class B and Class L shares, to cover
expenses primarily intended to result in the sale of those shares. These
expenses include: advertising; the cost of printing and mailing prospectuses
to potential investors; payments to and expenses of Salomon Smith Barney
Financial Consultants and other persons who provide support services in con-
nection with the distribution of shares; interest and/or carrying charges; and
indirect and overhead costs of Salomon Smith Barney associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses.     
   
  The payments to Salomon Smith Barney Financial Consultants for selling
shares of a Class include a commission or fee paid by the investor or Salomon
Smith Barney at the time of sale and, with respect to Class A, Class B and
Class L shares, a continuing fee for servicing shareholder accounts for as
long as a shareholder remains a holder of that Class. Salomon 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 service expenses actually incurred by Salomon 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 fac-
tors, including expenses borne by Salomon Smith Barney, amounts received under
the Plan and proceeds of the CDSC.     
       
       
ADDITIONAL INFORMATION
          
  The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time. The Fund
offers shares of common stock currently classified into four Classes, A, B, L,
and Y with a par value of $.001 per share. Each Class represents an identical
interest in the Fund's investment portfolio. As a result, the Classes have the
same rights, privileges and preferences, except with respect to: (a) the des-
ignation of each Class; (b) the effect of the respective sales charges for
each Class; (c) the distribution and/or     
 
                                                                             31
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
   
service fees borne by each Class pursuant to the Plan; (d) the expenses allo-
cable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; (f) the exchange privilege of each Class; and (g)
the conversion feature of the Class B shares. The Board of Directors does not
anticipate that there will be any conflicts among the interests of the holders
of the different Classes. The Directors, on an ongoing basis, will consider
whether any such conflict exists and, if so, take appropriate action.     
   
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
       
  The Transfer Agent is located at Exchange Place, Boston, Massachusetts
02109.     
   
  The Company does not hold annual shareholder meetings. There normally will
be no meeting 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. The Directors will call a meeting for any pur-
pose upon written request of shareholders holding at least 10% of the
Company's outstanding shares and the Company will assist shareholders in call-
ing such a meeting as required by the 1940 Act. When matters are submitted for
shareholder vote, shareholders of each Class will have one vote for each full
share owned and a proportionate, fractional vote for any fractional share held
of that Class. Generally, shares of the Company will be voted on a Company-
wide basis on all matters except matters affecting only the interests of one
Fund or one Class of shares.     
   
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include a list of the investment securities held by the Fund at
the end of the reporting period. In an effort to reduce the Fund's printing
and mailing costs, the Company 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 accounts should contact their Salomon Smith Bar-
ney Financial Consultant or the Fund's Transfer Agent.     
 
32
<PAGE>
 
APPENDIX A
 
  Convertible Securities. Convertible securities are generally preferred secu-
rities or fixed-income securities that are convertible into common stock at
either a stated price or stated rate. The price of the convertible security
will normally vary in some proportion to changes in the price of the underlying
common stock because of this conversion feature. A convertible security will
normally also provide a fixed income stream. For this reason, the convertible
security may not decline in price as rapidly as the underlying common stock.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock. The
Manager will select convertible securities to be purchased by the Fund based
primarily upon its evaluation of the fundamental investment characteristics and
growth prospects of the issuer of the security. As a fixed income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. While convertible secu-
rities generally offer lower interest or dividend yields than non-convertible
fixed income securities of similar quality, their value tends to increase as
the market value of the underlying stock increases and to decrease when the
value of the underlying stock decreases.
 
  Foreign Securities. In addition to direct investment in securities of foreign
issuers, the Fund may also invest in securities of foreign issuers in the form
of sponsored and unsponsored American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other similar
securities convertible into securities of foreign issuers. These securities may
not necessarily be denominated in the same currency as the securities into
which they may be converted. The Fund also may invest in securities denominated
in European Currency Units (ECUs). An ECU is a "basket" consisting of a
specified amount of currencies of certain of the twelve member states of the
European Community. In addition, the Fund may invest in securities denominated
in other currency "baskets."
 
  There are certain risks involved in investing in securities of companies and
governments of foreign nations that are in addition to the usual risks inherent
in domestic investments. These risks include those resulting from revaluation
of currencies, future adverse political and economic developments and the pos-
sible imposition of currency exchange blockages or other foreign governmental
laws or restrictions, reduced availability of public information concerning
issuers and the lack of uniform accounting, auditing and financial reporting
standards or of other regulatory practices and requirements comparable to those
applicable to domestic companies. The yield of the Fund may be adversely
affected by fluctuations in value of one or more foreign currencies relative to
the U.S. dollar. Moreover, securities of many foreign companies and their mar-
kets may be less liquid and their prices more volatile than those of securities
of comparable domestic companies. In addition, with
 
                                                                             A-1
<PAGE>
 
APPENDIX A (CONTINUED)
 
respect to certain foreign countries, there is the possibility of expropria-
tion, nationalization, confiscatory taxation and limitations on the use or
removal of funds or other assets of the Fund, including the withholding of div-
idends. Foreign securities may be subject to foreign government taxes that
could reduce the yield on such securities. Because the Fund may invest in secu-
rities denominated or quoted in currencies other than the U.S. dollar, changes
in foreign currency exchange rates may adversely affect the value of portfolio
securities and the appreciation or depreciation of investments. Investment in
foreign securities also may result in higher expenses due to the cost of con-
verting foreign currency to U.S. dollars, the payment of fixed brokerage com-
missions on foreign exchanges, which generally are higher than commissions on
domestic exchanges, and the expense of maintaining securities with foreign cus-
todians, and the imposition of transfer taxes or transaction charges associated
with foreign exchanges.
   
  Real Estate Investment Trusts ("REITS"). The Fund may invest in REITS, which
are pooled investment vehicles that invest primarily in either real estate or
real estate related loans. The value of a REIT is affected by changes in the
value of the properties owned by the REIT or securing mortgage loans held by
the REIT. REITs are dependent upon cash flow from their investments to repay
financing costs and the management skills of the REIT's manager. REITs are also
subject to risks generally associated with investments in real estate. The Fund
will indirectly bear its proportionate share of any expenses, including manage-
ment fees, paid by a REIT in which it invests.     
 
  Debt Securities. Debt securities in which the Fund may invest include notes,
bills, commercial paper, obligations issued or guaranteed by the government or
any of its political subdivisions, agencies or instrumentalities, and
certificates of deposit. Debt securities represent money borrowed that
obligates the issuer (e.g., a corporation, municipality, government, government
agency) to repay the borrowed amount at maturity (when the obligation is due
and payable) and usually to pay the holder interest at specific times.
 
  All debt securities are subject to market risk and credit risk. Market risk
relates to market-induced changes in a security's value, usually as a result of
changes in interest rates. The value of the Fund's investments in debt securi-
ties will change as the general levels of interest rates fluctuate. During
periods of falling interest rates, the value of the Fund's debt securities will
generally rise. Conversely, during periods of rising interest rates, the value
of the Fund's debt securities will generally decline. Credit risk relates to
the ability of the issuer to make payments of principal and interest. The Fund
has no restrictions with respect to the maturities or duration of the debt
securities it holds. The Fund's investments in fixed income securities with
longer terms to maturity or greater duration are subject to greater volatility
than the Fund's shorter-term securities.
 
A-2
<PAGE>
 
APPENDIX A (CONTINUED)
   
  Money Market Instruments. Short-term instruments in which the Fund may invest
include obligations of banks having at least $1 billion in assets (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loan associations and similar institu-
tions); commercial paper rated no lower than A-2 by Standard & Poor's Ratings
Group or Prime-2 by Moody's Investors Service, Inc. or the equivalent from
another nationally recognized statistical rating organization or, if unrated,
of an issuer having an outstanding, unsecured debt issue then rated within the
two highest rating categories; and repurchase agreements with respect to any of
the foregoing entered into with banks and non-bank dealers approved by the
Company's Board of Directors.     
 
  U.S. Government Securities. The Fund may invest in U.S. Government securi-
ties. Generally, these securities include U.S. Treasury obligations and obliga-
tions issued or guaranteed by U.S. Government agencies, instrumentalities or
sponsored enterprises. U.S. Government securities also include Treasury
receipts and other stripped U.S. Government securities, where the interest and
principal components of stripped U.S. Government securities are traded indepen-
dently. The Fund may also invest in zero coupon U.S. Treasury securities and in
zero coupon securities issued by financial institutions, which represent a pro-
portionate interest in underlying U.S. Treasury securities. A zero coupon secu-
rity pays no interest to its holder during its life and its value consists of
the difference between its face value at maturity and its cost. The market val-
ues of zero coupon securities generally are more volatile than the market
prices of securities that pay interest periodically.
 
  Repurchase Agreements. The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to mini-
mize the risks of investing in repurchase agreements.
 
  Reverse Repurchase Agreements. In order to generate additional income, the
Fund may engage in reverse repurchase agreement transactions with banks, bro-
ker-dealers and other financial intermediaries. Reverse repurchase agreements
are the same as repurchase agreements except that, in this instance, the Fund
would assume the role of seller/borrower in the transaction. The Fund will
maintain a segregated account consisting of assets determined to be liquid by
the Manager that at all times have a value equal to its obligations under
reverse repurchase agreements. The Fund will invest the proceeds in other money
market instruments or repurchase agreements maturing not later than the expira-
tion of the reverse repur-
 
                                                                             A-3
<PAGE>
 
APPENDIX A (CONTINUED)
 
chase agreement. Reverse repurchase agreements involve the risk that the mar-
ket value of the securities sold by the Fund may decline below the repurchase
price of the securities.
 
  When-Issued, Delayed-Delivery and Forward Commitment Transactions. The Fund
may purchase securities on a when-issued basis, may purchase and sell securi-
ties for delayed delivery and may make contracts to purchase securities for a
fixed price at a future date beyond normal settlement time (forward commit-
ments). When-issued transactions, delayed delivery purchases and forward com-
mitments involve a risk of loss if the value of the securities declines prior
to the settlement date, which risk is in addition to the risk of decline in
the value of the Fund's other assets. Typically, no income accrues on securi-
ties the Fund has committed to purchase prior to the time delivery of the
securities is made, although the Fund may earn income on securities it has
deposited in a segregated account.
 
  Lending of Securities. Consistent with applicable regulatory requirements 
and for cash management purposes,
the Fund may seek to increase its income by lending portfolio securities to
entities deemed creditworthy by the Manager. Such loans will usually be made
to brokers, dealers and other financial organizations, and would be required
to be secured continuously by collateral in cash, letters of credit or U.S.
government securities, which are maintained at all times in an amount equal to
the current market value of the loaned securities. Any gain or loss in the
market price of the securities loaned that might occur during the term of the
loan would be for the account of the Fund. 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 finan-
cially. Loans will be made to firms deemed by the Manager to be of good stand-
ing and will not be made unless, in the judgment of Manager the consideration
to be earned from such loans would justify the risk.
 
  Options on Securities, Securities Indexes and Currencies. The Fund may write
(sell) covered put and call options on securities, securities indexes and cur-
rencies ("Options") and purchase put and call Options that are traded on for-
eign or U.S. securities exchanges and over the counter. The Fund will write
such Options for the purpose of increasing its return and/or protecting the
value of its portfolio. In particular, where the Fund writes an Option that
expires unexercised or is closed out by the Fund at a profit, it will retain
the premium paid for the Option, which will increase its gross income and will
offset in part the reduced value of a portfolio security in connection with
which the Option may have been written or the increased cost of portfolio
securities to be acquired. However, the writing of Options constitutes only a
partial hedge, up to the amount of the premium, less any transaction costs. In
contrast, if the price of the security underlying the Option
 
A-4
<PAGE>
 
APPENDIX A (CONTINUED)
 
moves adversely to the Fund's position, the Option may be exercised and the
Fund will be required to purchase or sell the security at a disadvantageous
price, resulting in losses that may only be partially offset by the amount of
the premium. The Fund may also write combinations of put and call Options on
the same security, known as "straddles." Such transactions generate additional
premium income but also present increased risk.
 
  The Fund may purchase put and call Options in anticipation of declines in the
value of portfolio securities or increases in the value of securities to be
acquired. In the event that the expected changes occur, the Fund may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the Options purchased. The risk assumed by the Fund in connection with
such transactions is limited to the amount of the premium and related transac-
tion costs associated with the Option, although the Fund may be required to
forfeit such amounts in the event that the prices of securities underlying the
Options do not move in the direction or to the extent anticipated.
 
  Over-the-counter options in which the Fund may invest differ from traded
options in that they are two-party contracts, with price and other terms nego-
tiated between buyer and seller, and generally do not have as much market
liquidity as exchange-traded options. The Fund may be required to treat as
illiquid over-the-counter options purchased and securities being used to cover
certain written over-the-counter options.
 
  Futures Contracts and Options on Futures Contracts. The Fund may enter into
transactions in futures contracts and options on futures only (i) for bona fide
hedging purposes (as defined in Commodities Futures Trading Commission regula-
tions), or (ii) for non-hedging purposes, provided that the aggregate initial
margin and premiums on such non-hedging positions do not exceed 5% of the liq-
uidation value of the Fund's assets.
 
  Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified
future time and at a specified price. The primary purpose of entering into a
futures contract by the Fund is to protect the Fund from fluctuations in the
value of securities without actually buying or selling the securities. The Fund
may enter into futures contracts and options on futures to seek higher invest-
ment returns when a futures contract is priced more attractively than stocks
comprising a benchmark index, to facilitate trading or to reduce transaction
costs. The Fund will only enter into futures contracts and options on futures
contracts that are traded on a domestic exchange and board of trade. Assets
committed to futures contracts will be segregated at the Fund's custodian to
the extent required by law.
 
 
                                                                             A-5
<PAGE>
 
APPENDIX A (CONTINUED)
 
  Among the several risks accompanying the utilization of futures contracts and
options on futures contracts are: First, the successful use of futures and
options is dependent upon the ability of the Manager to predict correctly move-
ments in the stock market or in the direction of interest rates. These predic-
tions involve skills and techniques that may be different from those involved
in the management of investments in securities. If the prices of the underlying
commodities move in an unanticipated manner, the Fund may lose the expected
benefit of these futures or options transactions and may incur losses. Second,
positions in futures contracts and options on futures contracts may only be
closed out by entering into offsetting transactions on the exchange where the
position was entered into (or through a linked exchange), and as a result of
daily price fluctuations limits there can be no assurance the offsetting trans-
action could be entered into at an advantageous price at a particular time.
Consequently, the Fund may realize a loss on a futures contract or option that
is not offset by an increase in the value of its portfolio securities that are
being hedged or the Fund may not be able to close a futures or options position
without incurring a loss in the event of adverse price movements.
 
A-6
<PAGE>
 
 
 
 
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<PAGE>
 
 
 
 
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<PAGE>
 
    
                                                 SALOMON SMITH BARNEY
                                                 -------------------------------
                                                    A member of citigroup [LOGO]

             Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
     


                                                                       
                                                                    SMITH BARNEY
                                                                       SMALL CAP
                                                                          GROWTH
                                                                            FUND
                                                                                
 
                                                            388 Greenwich Street
                                                        New York, New York 10013
                                                                
                                                             FD       12/98     



PART B


Smith Barney
Small Cap Growth Fund
Small Cap Value Fund
388 Greenwich Street
New York, New York 10013
1-800-451-2010

Statement of Additional 
Information
December [    ], 1998

This Statement of Additional Information ("SAI") expands upon and 
supplements the information contained in the current Prospectuses of 
Smith Barney Small Cap Growth Fund and Smith Barney Small Cap Value Fund 
(collectively referred to as "Funds" and each individually as a 
"Fund") dated December [  ], 1998, as amended or supplemented from 
time to time, and should be read in conjunction with each Fund's 
Prospectus. Each Fund is a series of Smith Barney Investment Funds Inc. 
(the "Company"). Each Fund's Prospectus may be obtained from a Salomon 
Smith Barney Financial Consultant or by writing or calling the Fund at 
the address or telephone number set forth above. This SAI, although not 
in itself a prospectus, is incorporated by reference into each 
Prospectus in its entirety.

CONTENTS

For ease of reference, the same section headings are used in both the 
Prospectus and this SAI, except where shown below:

Management of the Funds 	1
Investment Objective and Management Policies 	4
Purchase of Shares 	14
Redemption of Shares 	15
Distributor 	16
Valuation of Shares 	17
Exchange Privilege	17
Performance Data (See in the Prospectus "Performance") 	18
Taxes (See in the Prospectus "Dividends, Distributions and 
Taxes") 	19
Additional Information 	20

MANAGEMENT OF THE FUNDS

The executive officers of the Funds are employees of certain of the 
organizations that provide services to the Fund. These organizations are 
the following:

CFBDS, Inc. ("CFBDS" or the "Distributor") 	Distributor
Mutual Management Corp. ("MMC" or the "Manager") 	Investment 
Manager
PNC Bank, National Association ("PNC" or the "Custodian") 
	Custodian
First Data Investor Services Group, Inc.,
("First Data" or the "Transfer Agent") 	Transfer Agent

These organizations and the functions they perform for the Funds are 
discussed in the Prospectuses and in this
SAI.


Directors and Executive Officers of the Funds

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

	
Paul R. Ades, Director (Age 57). Partner in the law firm of  Murov & 
Ades.  His address is 272 South Wellwood Avenue, P.O. Box  504, 
Lindenhurst, New York 11757.

Herbert Barg, Director (Age 74). Private investor. His address is 273 
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.

Dwight B. Crane, Director (Age 60). Professor, Graduate School of 
Business Administration, Harvard University. His address is Graduate 
School of Business Administration, Harvard University, Boston, 
Massachusetts 02163.

Frank G. Hubbard, Director (Age 62).  Vice President, S&S Industries; 
Former Corporate Vice President, Materials Management and Marketing 
Services of Huls America, Inc.  His address is 80 Centennial Avenue P.O. 
Box 456, Piscataway, New Jersey 08855-0456.

*Heath B. McLendon, Chairman of the Board, President and Chief Executive 
Officer (Age 65). Managing Director of  Salomon Smith Barney Inc. 
("Salomon Smith Barney"), Director and President of MMC 
and Travelers Investment Advisers Inc. ("TIA") and formerly Chairman of the 
Board of Smith Barney Strategy Advisers Inc. Mr. McLendon is a director of 58 
investment companies associated with Salomon Smith Barney Holdings Inc.  
His address is 388 Greenwich Street, New York, New York 10013.

Jerome Miller, Director (Age 60).  Retired, Former President, Asset 
Management Group of Shearson Lehman Brothers.  His address is 27 Hemlock 
Road, Manhasset, New York, NY  11030.

Ken Miller, Director (Age 56). President of Young Stuff Apparel Group, 
Inc.  His address is 1411 Broadway, New York, New York 10018.

Lewis E. Daidone, Senior Vice President and Treasurer (Age 41). Managing 
Director of Salomon Smith Barney, Chief Financial Officer of the Smith 
Barney Mutual Funds; Director and Senior Vice President of MMC and TIA. 
His address is 388 Greenwich Street, New York, New York 10013.

Peter Hable, 

Christina T. Sydor, Secretary (Age 47). Managing Director of Salomon 
Smith Barney; General Counsel and Secretary of MMC and TIA. Her address 
is 388 Greenwich Street, New York, New York 10013.


No officer, director or employee of Salomon Smith Barney or any parent 
or  subsidiary receives any compensation from the Company for serving as 
an officer or Director of the Company.  The Company pays each Director 
who is not an officer, director or employee ofSalomon Smith Barney or 
any of its affiliates a fee of $22,500 per annum plus $2,900 per meeting 
attended and reimburses travel and out-of-pocket  expenses.  During the 
fiscal year ended December 31, 1997 such expenses totaled $10,097.  For 
the fiscal year ended December 31, 
1997, the Directors of the Company were paid the following compensation:





Name of Person

Aggregate 
Compensation 
from Fund

Total Pension 
or Retirement 
Benefits 
Accrued as 
part of Fund 
Expenses

Compensation 
from Fund and 
Fund Complex 
Paid to 
Directors

Number of 
Funds for 
Which 
Director 
Serves Within 
Fund Complex





Paul R. Ades
$0
$0
$49,000
5

Herbert Barg
0
0
101,600
16

Dwight B. Crane
0
0
133,850
22

Frank G. Hubbard
0
0
52,000
5

Heath B. McLendon
0
0
0
58

Jerome Miller
0
0
12,400
5

Ken Miller
0
0
52,000
5

Upon attainment of age 80 Directors are required to change to emeritus 
status.  Directors Emeritus are entitled to serve in emeritus status for 
a maximum of 10 years during which time they are paid 50% of the annual 
retainer fee and meeting fees otherwise applicable to the Fund Directors 
together with reasonable out-of-pocket expenses for each meeting 
attended. 


Investment Manager - MMC

MMC serves as investment manager to the Fund pursuant to an investment 
management agreement (the "Investment Management Agreement") with the 
Company which was approved by the Board of Directors, including a 
majority of Directors who are not "interested persons" of the Company 
or the Manager. The Manager is a wholly owned subsidiary of Salomon 
Smith Barney Holdings Inc. ("Holdings"), which in turn, is a wholly 
owned subsidiary of Citigroup Inc. ("Citigroup"). The services 
provided by the Manager under the Investment Management Agreement are 
described in the prospectus under "Management of the Company and the 
Fund." The Manager pays the salary of any officer and employee who is 
employed by both it and the Company. The Manager bears all expenses in 
connection with the performance of its services.

As compensation for investment management services, the Fund pays the 
Manager a fee computed daily and paid monthly at the annual rate of 
0.75% of each Fund's average daily net assets.

Counsel and Auditors

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

KPMG Peat Marwick LLP, independent accountants, 345 Park Avenue, New 
York, New York 10154, serve as auditors of the Company and will render 
an opinion on the Company's financial statements annually beginning with 
the fiscal period ending September 30, 1999.

INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES

Each Prospectus discusses each respective Fund's investment objective 
and the policies it employs to achieve its objective. This section 
contains supplemental information concerning the types of securities and 
other instruments in which the Fund may invest, the investment policies 
and portfolio strategies that the Fund may utilize and certain risks 
attendant to such investments, policies and strategies.

Foreign Securities and American Depository Receipts

Each Fund has the authority to invest up to 25% of its assets in foreign 
securities (including European Depository Receipts ("EDRs") and Global 
Depository Receipts ("GDRs")) and American Depository Receipts 
("ADRs") or other securities representing underlying shares of foreign 
companies. EDRs are receipts issued in Europe which evidence ownership 
of underlying securities issued by a foreign corporations. ADRs are 
receipts typically issued by an American bank or trust company which 
evidence a similar ownership arrangement. Generally, ADRs which are 
issued in registered form, are designed for use in the United States 
securities markets and EDRs, which are issued in bearer form, are 
designed for use in European securities markets. GDRs are tradeable both 
in the U.S. and Europe and are designed for use throughout the world.

Investing in the securities of foreign companies involves special risks 
and considerations not typically associated with investing in U.S. 
companies. These include differences in accounting, auditing and 
financial reporting standards, generally higher commission rates on 
foreign portfolio transactions, the possibility of expropriation or 
confiscatory taxation, adverse changes in investment or exchange control 
regulations, political instability which could affect U.S. investments 
in foreign countries, and potential restrictions on the flow of 
international capital. Additionally, foreign securities often trade with 
less frequency and volume than domestic securities and therefore may 
exhibit greater price volatility. Many of the foreign securities held by 
the Fund will not be registered with, nor will the issuers thereof be 
subject to the reporting requirements of, the SEC. Accordingly, there 
may be less publicly available information about the securities and 
about the foreign company issuing them than is available about a 
domestic company and its securities. Moreover, individual foreign 
economies may differ favorably or unfavorably from the U.S. economy in 
such respects as growth of gross domestic product, rate of inflation, 
capital reinvestment, resource self-sufficiency and balance of payment 
positions. Each Fund may invest in securities of foreign governments (or 
agencies or subdivisions thereof), and therefore many, if not all, of 
the foregoing considerations apply to such investments as well.

Lending of Portfolio Securities

Consistent with applicable regulatory requirements and for cash 
management purposes, each Fund may lend securities from its portfolio to 
brokers, dealers and other financial organizations. Each Fund may not 
lend its portfolio securities to the Investment Adviser or the 
Administrator or their affiliates unless they have applied for and 
received specific authority from the SEC. Loans of portfolio securities 
by the Fund will be collateralized by cash, letters of credit or U.S. 
government securities that are maintained at all times in an amount 
equal to at least 100% of the current market value of the loaned 
securities.

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

Reverse Repurchase Agreements

Each Fund may enter into reverse repurchase agreements. A reverse 
repurchase agreement involves the sale of a money market instrument by 
the Fund and its agreement to repurchase the instrument at a specified 
time and price. The Fund 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 and 
other financial institutions. The Funds will invest the proceeds in 
other money market instruments or repurchase agreements maturing not 
later than the expiration of the reverse repurchase agreement. Under the 
Investment Company Act of 1940, as amended, reverse repurchase 
agreements may be considered borrowing by the seller.

Reverse repurchase agreements create opportunities for increased returns 
to the shareholders of the Funds but, at the same time, create special 
risk considerations. Although the principal or stated value of such 
borrowings will be fixed, the Funds' assets may change in value during 
the time the borrowing is outstanding. To the extent the income or other 
gain derived from securities purchased with borrowed funds exceeds the 
interest or dividends the Fund will have to pay in respect thereof, the 
Fund's net income or other gain will be greater than if this type of 
leverage had not been used. Conversely, if the income or other gain from 
the incremental assets is not sufficient to cover this cost, the net 
income or other gain of the Fund will be less than if the reverse 
repurchase agreement had not been used.

Each Fund currently intends to invest not more than 33% of its net 
assets in reverse repurchase agreements.

When-Issued Securities and Delayed Delivery Transactions

In order to secure what the Manager considers to be an advantageous 
price or yield, each Fund may purchase U.S. government securities on a 
when-issued basis or purchase or sell U.S. government securities for 
delayed delivery. The Funds will enter into such purchase transactions 
for the purpose of acquiring portfolio securities and not for the 
purpose of leverage. Delivery of the securities in such cases occurs 
beyond the normal settlement periods, but no payment or delivery is made 
by the Fund prior to the reciprocal delivery or payment by the other 
party to the transaction. In entering into a when-issued or 
delayed-delivery transaction, the Fund relies on the other party to 
consummate the transaction and may be disadvantaged if the other party 
fails to do so.

U.S. government securities normally are subject to changes in value 
based upon changes, real or anticipated, in the level of interest rates 
and, to a lesser extent, the public's perception of the creditworthiness 
of the issuers. In general, U.S. government securities tend to 
appreciate when interest rates decline and depreciate when interest 
rates rise. Purchasing U.S. government securities on a when-issued basis 
or delayed-delivery basis, therefore, can involve the risk that the 
yields available in the market when the delivery takes place may

actually be higher than those obtained in the transaction itself.  
Similarly, the sale of U.S. government securities for delayed delivery 
can involve the risk that the prices available in the market when the 
delivery is made may actually be higher than those obtained in the 
transaction itself.

A Fund will at times maintain in a segregated account at PNC cash or 
liquid securities equal to the amount of the Fund's when-issued or 
delayed-delivery commitments. For the purpose of determining the 
adequacy of the securities in the account, the deposited securities will 
be valued at market or fair value. If the market or fair value of such 
securities declines, additional cash or securities will be placed in the 
account on a daily basis so that the value of the account will equal the 
amount of such commitments by the Fund. Placing securities rather than 
cash in the account may have a leveraging effect on the Fund's assets. 
That is, to the extent that the Fund remains substantially fully 
invested in securities at the time that it has committed to purchase 
securities on a when-issued basis, there will be greater fluctuation in 
its net asset value than if it had set aside cash to satisfy its 
purchase commitments. On the settlement date, the Fund will meet its 
obligations from then available cash flow, the sale of securities held 
in the separate account, the sale of other securities or, although it 
normally would not expect to do so, from the sale of the when-issued or 
delayed-delivery securities themselves (which may have a greater or 
lesser value than the Fund's payment obligations).

Money Market Instruments

As stated in the Prospectus, the Funds may invest for temporary 
defensive purposes in corporate and government bonds and notes and money 
market instruments. Money market instruments in which the Funds may 
invest include: U.S. government securities; certificates of deposit, 
time deposits and bankers' acceptances issued by domestic banks 
(including their branches located outside the United States and 
subsidiaries located in Canada), domestic branches of foreign banks, 
savings and loan associations and similar institutions; high grade 
commercial paper; and repurchase agreements with respect to the 
foregoing types of instruments. The following is a more detailed 
description of such money market instruments.

Certificates of deposit ("CDs") are short-term negotiable obligations 
of commercial banks. Time deposits ("TDs") are non-negotiable deposits 
maintained in banking institutions for specified periods of time at 
stated interest rates. Bankers' acceptances are time drafts drawn on 
commercial banks by borrowers usually in connection with international 
transactions.

Domestic commercial banks organized under Federal law are supervised and 
examined by the Comptroller of the Currency and are required to be 
members of the Federal Reserve System and to be insured by the Federal 
Deposit Insurance Corporation (the "FDIC"). Domestic banks organized 
under state law are supervised and examined by state banking authorities 
but are members of the Federal Reserve System only if they elect to 
join. Most state banks are insured by the FDIC (although such insurance 
may not be of material benefit to the Fund, depending upon the principal 
amounts of CDs of each bank held by the Fund) and are subject to Federal 
examination and to a substantial body of Federal law and regulation. As 
a result of governmental regulations, domestic branches of domestic 
banks are generally required to, among other things, maintain specified 
levels of reserves, and are subject to other supervision and regulation 
designed to promote financial soundness.

Obligations of foreign branches of domestic banks, such as CDs and TDs, 
may be general obligations of the parent bank in addition to the issuing 
branch, or may be limited by the terms of a specific obligation and 
government regulation. Such obligations are subject to different risks 
than are those of domestic banks or domestic branches of foreign banks. 
These risks include foreign economic and political developments, foreign 
governmental restrictions that may adversely affect payment of principal 
and interest on the obligations, foreign exchange controls and foreign 
withholding and other taxes on interest income. Foreign branches of 
domestic banks are not necessarily subject to the same or similar 
regulatory requirements that apply to domestic banks, such as mandatory 
reserve requirements, loan limitations, and accounting, auditing and 
financial recordkeeping requirements. In addition, less information may 
be publicly available about a foreign branch of a domestic bank than 
about a domestic bank. CDs issued by wholly owned Canadian subsidiaries 
of

domestic banks are guaranteed as to repayment of principal and interest 
(but not as to sovereign risk) by the domestic parent bank.

Obligations of domestic branches of foreign banks may be general 
obligations of the parent bank in addition to the issuing branch, or may 
be limited by the terms of a specific obligation and by governmental 
regulation as well as governmental action in the country in which the 
foreign bank has its head office. A domestic branch of a foreign bank 
with assets in excess of $1 billion may or may not be subject to reserve 
requirements imposed by the Federal Reserve System or by the state in 
which the branch is located if the branch is licensed in that state. In 
addition, branches licensed by the Comptroller of the Currency and 
branches licensed by certain states ("State Branches") may or may not 
be required to: (a) pledge to the regulator by depositing assets with a 
designated bank within the state, an amount of its assets equal to 5% of 
its total liabilities; and (b) maintain assets within the state in an 
amount equal to a specified percentage of the aggregate amount of 
liabilities of the foreign bank payable at or through all of its 
agencies or branches within the state. The deposits of State Branches 
may not necessarily be insured by the FDIC. In addition, there may be 
less publicly available information about a domestic branch of a foreign 
bank than about a domestic bank.

In view of the foregoing factors associated with the purchase of CDs and 
TDs issued by foreign branches of domestic banks or by domestic branches 
of foreign banks, MMC will carefully evaluate such investments on a 
case-by-case basis.

Savings and loan associations whose CDs may be purchased by the Fund are 
supervised by the Office of Thrift Supervision and are insured by the 
Savings Association Insurance Fund, which is administered by the FDIC 
and is backed by the full faith and credit of the U.S. government. As a 
result, such savings and loan associations are subject to regulation and 
examination.

Options, Futures and Currency Strategies

The Funds may use forward currency contracts and certain options and 
futures strategies to attempt to hedge its portfolio, i.e., reduce the 
overall level of investment risk normally associated with the Funds. 
There can be no assurance that such efforts will succeed.

In order to assure that the Funds will not be deemed to be a "commodity 
pool" for purposes of the Commodity Exchange Act, regulations of the 
Commodity Futures Trading Commission ("CFTC") require that the Funds 
enter into transactions in futures contracts and options on futures only 
(i) for bona fide hedging purposes (as defined in CFTC regulations), or 
(ii) for non-hedging purposes, provided that the aggregate initial 
margin and premiums on such non-hedging positions do not exceed 5% of 
the liquidation value of the Fund's assets. To attempt to hedge against 
adverse movements in exchange rates between currencies, the Fund may 
enter into forward currency contracts for the purchase or sale of a 
specified currency at a specified future date. Such contracts may 
involve the purchase or sale of a foreign currency against the U.S. 
dollar or may involve two foreign currencies. The Fund may enter into 
forward currency contracts either with respect to specific transactions 
or with respect to its portfolio positions. For example, when the 
investment adviser anticipates making a purchase or sale of a security, 
it may enter into a forward currency contract in order to set the rate 
(either relative to the U.S. dollar or another currency) at which the 
currency exchange transaction related to the purchase or sale will be 
made ("transaction hedging"). Further, when the investment adviser 
believes that a particular currency may decline compared to the U.S. 
dollar or another currency, the Fund may enter into a forward contract 
to sell the currency the investment adviser expects to decline in an 
amount approximating the value of some or all of the Fund's securities 
denominated in that currency, or when the investment adviser believes 
that one currency may decline against a currency in which some or all of 
the portfolio securities held by the Fund are denominated, it may enter 
into a forward contract to buy the currency expected to decline for a 
fixed amount ("position hedging"). In this situation, the Fund may, in 
the alternative, enter into a forward contract to sell a different 
currency for a fixed amount of the currency expected to decline where 
the investment manager believes that the value of the currency to be 
sold pursuant to the forward contract will fall whenever there is a 
decline in the value of the currency inwhich portfolio securities of the 
Fund are denominated ("cross hedging"). The Funds' custodian places 
(i) cash, (ii) U.S. Government securities or (iii) equity securities or 
debt securities (of any grade) in certain currencies provided such 
assets are liquid, unencumbered and marked to market daily, or other 
high-quality debt securities denominated in certain currencies in a 
separate account of the Fund having a value equal to the aggregate 
account of the Fund's commitments under forward contracts entered into 
with respect to position hedges and cross-hedges. If the value of the 
securities placed in a separate account declines, additional cash or 
securities are placed in the account on a daily basis so that the value 
of the amount will equal the amount of the Fund's commitments with 
respect to such contracts.

For hedging purposes, the Funds may write covered call options and 
purchase put and call options on currencies to hedge against movements 
in exchange rates and on debt securities to hedge against the risk of 
fluctuations in the prices of securities held by the Fund or which the 
investment adviser intends to include in its portfolio. The Fund also 
may use interest rates futures contracts and options thereon to hedge 
against changes in the general level in interest rates.

The Funds may write call options on securities and currencies only if 
they are covered, and such options must remain covered so long as the 
Fund is obligated as a writer. A call option written by the Fund is 
"covered" if the Fund owns the securities or currency underlying the 
option or has an absolute and immediate right to acquire that security 
or currency without additional cash consideration (or for additional 
cash consideration held in a segregated account by its custodian) upon 
conversion or exchange of other securities or currencies held in its 
portfolio. A call option is also covered if the Fund holds on a 
share-for-share basis a call on the same security or holds a call on the 
same currency as the call written where the exercise price of the call 
held is equal to less than the exercise price of the call written or 
greater than the exercise price of the call written if the difference is 
maintained by the Funds in cash, Treasury bills or other high-grade, 
short-term obligations in a segregated account with its custodian.

Although the portfolio might not employ the use of forward currency 
contracts, options and futures, the use of any of these strategies would 
involve certain investment risks and transaction costs to which it might 
not otherwise be subject. These risks include: dependence on the 
investment adviser's ability to predict movements in the prices of 
individual debt securities, fluctuations in the general fixed-income 
markets and movements in interest rates and currency markets, imperfect 
correlation between movements in the price of currency, options, futures 
contracts or options thereon and movements in the price of the currency 
or security hedged or used for cover; the fact that skills and 
techniques needed to trade options, futures contracts and options 
thereon or to use forward currency contracts are different from those 
needed to select the securities in which the Fund invests; lack of 
assurance that a liquid market will exist for any particular option, 
futures contract or options thereon at any particular time and possible 
need to defer or accelerate closing out certain options, futures 
contracts and options thereon in order to continue to qualify for the 
beneficial tax treatment afforded "regulated investment companies" 
under the Internal Revenue Code of 1986, as amended (the "Code"). See 
"Dividends, Distributions and Taxes."

Options on Securities

As discussed more generally above, the Funds may engage in the writing 
of covered call options. The Funds may also purchase put options and 
enter into closing transactions.

The principal reason for writing covered call options on securities is 
to attempt to realize, through the receipt of premiums, a greater return 
than would be realized on the securities alone. In return for a premium, 
the writer of a covered call option forfeits the right to any 
appreciation in the value of the underlying security above the strike 
price for the life of the option (or until a closing purchase 
transaction can be effected). Nevertheless, the call writer retains the 
risk of a decline in the price of the underlying security. Similarly, 
the principal reason for writing covered put options is to realize 
income in the form of premiums. The writer of a covered put option 
accepts the risk of a decline in the price of the underlying security. 
The size of the premiums the Fund may receive may be adversely affected 
as new or existing institutions, including other investment companies, 
engage in or increase their option-writing activities.

Options written by the Funds will normally have expiration dates between 
one and six months from the date written. The exercise price of the 
options may be below, equal to, or above the current market values of 
the underlying securities at the times the options are written. In the 
case of call options, these exercise prices are referred to as 
"in-the-money," "at-the-money" and "out-of-the-money," 
respectively.

The Funds may write (a) in-the-money call options when MMC expects the 
price of the underlying security to remain flat or decline moderately 
during the option period, (b) at-the-money call options when MMC expects 
the price of the underlying security to remain flat or advance 
moderately during the option period and (c) out-of-the-money call 
options when MMC expects that the price of the security may increase but 
not above a price equal to the sum of the exercise price plus the 
premiums received from writing the call option. In any of the preceding 
situations, if the market price of the underlying security declines and 
the security is sold at this lower price, the amount of any realized 
loss will be offset wholly or in part by the premium received. Out-of-
the-money, at-the-money and in-the-money put options (the reverse of 
call options as to the relation of exercise price to market price) may 
be utilized in the same market environments as such call options are 
used in equivalent transactions.

So long as the obligation of the Funds as the writer of an option 
continues, the Funds may be assigned an exercise notice by the 
broker-dealer through which the option was sold, requiring it to 
deliver, in the case of a call, or take delivery of, in the case of a 
put, the underlying security against payment of the exercise price. This 
obligation terminates when the option expires or the Fund effects a 
closing purchase transaction. The Funds can no longer effect a closing 
purchase transaction with respect to an option once it has been assigned 
an exercise notice. To secure its obligation to deliver the underlying 
security when it writes a call option, or to pay for the underlying 
security when it writes a put option, the Fund will be required to 
deposit in escrow the underlying security or other assets in accordance 
with the rules of the Options Clearing Corporation ("Clearing 
Corporation") or similar clearing corporation and the securities 
exchange on which the option is written.

An option position may be closed out only where there exists a secondary 
market for an option of the same series on a recognized securities 
exchange or in the over-the-counter market. The Fund expects to write 
options only on national securities exchanges or in the over-the-counter 
market. The Fund may purchase put options issued by the Clearing 
Corporation or in the over-the-counter market.

A Fund may realize a profit or loss upon entering into a closing 
transaction. In cases in which a Fund has written an option, it will 
realize a profit if the cost of the closing purchase transaction is less 
than the premium received upon writing the original option and will 
incur a loss if the cost of the closing purchase transaction exceeds the 
premium received upon writing the original option. Similarly, when a 
Fund has purchased an option and engages in a closing sale transaction, 
whether it recognizes a profit or loss will depend upon whether the 
amount received in the closing sale transaction is more or less than the 
premium the Fund initially paid for the original option plus the related 
transaction costs.

Although the Funds generally will purchase or write only those options 
for which MMC believes there is an active secondary market so as to 
facilitate closing transactions, there is no assurance that sufficient 
trading interest to create a liquid secondary market on a securities 
exchange will exist for any particular option or at any particular time, 
and for some options no such secondary market may exist. A liquid 
secondary market in an option may cease to exist for a variety of 
reasons. In the past, for example, higher than anticipated trading 
activity or order flow, or other unforeseen events, have at times 
rendered certain of the facilities of the Clearing Corporation and 
national securities exchanges inadequate and resulted in the institution 
of special procedures, such as trading rotations, restrictions on 
certain types of orders or trading halts or suspensions in one or more 
options. There can be no assurance that similar events, or events that 
may otherwise interfere with

the timely execution of customers' orders, will not recur. In such 
event, it might not be possible to effect closing transactions in 
particular options. If, as a covered call option writer, the Fund is 
unable to effect a closing purchase transaction in a secondary market, 
it will not be able to sell the underlying security until the option 
expires or it delivers the underlying security upon exercise.

Securities exchanges generally have established limitations governing 
the maximum number of calls and puts of each class which may be held or 
written, or exercised within certain periods, by an investor or group of 
investors acting in concert (regardless of whether the options are 
written on the same or different securities exchanges or are held, 
written or exercised in one or more accounts or through one or more 
brokers). It is possible that the Fund and other clients of MMC and 
certain of their affiliates may be considered to be such a group. A 
securities exchange may order the liquidation of positions found to be 
in violation of these limits, and it may impose certain other sanctions.

In the case of options written by a Fund that are deemed covered by 
virtue of a Fund's holding convertible or exchangeable preferred stock 
or debt securities, the time required to convert or exchange and obtain 
physical delivery of the underlying common stocks with respect to which 
the Fund has written options may exceed the time within which a Fund 
must make delivery in accordance with an exercise notice. In these 
instances, the Fund may purchase or temporarily borrow the underlying 
securities for purposes of physical delivery. By so doing, a Fund will 
not bear any market risk because a Fund will have the absolute right to 
receive from the issuer of the underlying security an equal number of 
shares to replace the borrowed stock, but the Fund may incur additional 
transaction costs or interest expenses in connection with any such 
purchase or borrowing.

Although MMC will attempt to take appropriate measures to minimize the 
risks relating to the Fund's writing of call options and purchasing of 
put and call options, there can be no assurance that the Fund will 
succeed in its option-writing program.

Stock Index Options

As described generally above, a Fund may purchase put and call options 
and write call options on domestic stock indexes listed on domestic 
exchanges in order to realize its investment objective of capital 
appreciation or for the purpose of hedging its portfolio. A stock index 
fluctuates with changes in the market values of the stocks included in 
the index. Some stock index options are based on a broad market index 
such as the New York Stock Exchange Composite Index or the Canadian 
Market Portfolio Index, or a narrower market index such as the Standard 
& Poor's 100. Indexes also are based on an industry or market segment 
such as the American Stock Exchange Oil and Gas Index or the Computer 
and Business Equipment Index.

Options on stock indexes are generally similar to options on stock 
except that the delivery requirements are different. Instead of giving 
the right to take or make delivery of stock at a specified price, an 
option on a stock index gives the holder the right to receive a cash 
"exercise settlement amount" equal to (a) the amount, if any, by which 
the fixed exercise price of the option exceeds (in the case of a put) or 
is less than (in the case of a call) the closing value of the underlying 
index on the date of exercise, multiplied by (b) a fixed "index 
multiplier." Receipt of this cash amount will depend upon the closing 
level of the stock index upon which the option is based being greater 
than, in the case of a call, or less than, in the case of a put, the 
exercise price of the option. The amount of cash received will be equal 
to such difference between the closing price of the index and the 
exercise price of the option expressed in dollars or a foreign currency, 
as the case may be, times a specified multiple. The writer of the option 
is obligated, in return for the premium received, to make delivery of 
this amount. The writer may offset its position in stock index options 
prior to expiration by entering into a closing transaction on an 
exchange or it may let the option expire unexercised.

The effectiveness of purchasing or writing stock index options as a 
hedging technique will depend upon the extent to which price movements 
in the portion of the securities portfolio of the Fund correlate with 
pric

movements of the stock index selected. Because the value of an index 
option depends upon movements in the level of the index rather than the 
price of a particular stock, whether the Fund will realize a gain or 
loss from the purchase or writing of options on an index depends upon 
movements in the level of stock prices in the stock market generally or, 
in the case of certain indexes, in an industry or market segment, rather 
than movements in the price of a particular stock. Accordingly, 
successful use by the Fund of options on stock indexes will be subject 
to MMC's ability to predict correctly movements in the direction of the 
stock market generally or of a particular industry. This requires 
different skills and techniques than predicting changes in the price of 
individual stocks.

Futures Contracts and Options on Futures Contracts

As described generally above, each Fund may invest in stock index 
futures contracts and options on futures contracts that are traded on a 
domestic exchange or board of trade.

The purpose of entering into a futures contract by a Fund is to protect 
the Fund from fluctuations in the value of securities without actually 
buying or selling the securities. For example, in the case of stock 
index futures contracts, if a Fund anticipates an increase in the price 
of stocks that it intends to purchase at a later time, the Fund could 
enter into contracts to purchase the stock index (known as taking a 
"long" position) as a temporary substitute for the purchase of stocks. 
If an increase in the market occurs that influences the stock index as 
anticipated, the value of the futures contracts increases and thereby 
serves as a hedge against a Fund's not participating in a market 
advance. A Fund then may close out the futures contracts by entering 
into offsetting futures contracts to sell the stock index (known as 
taking a "short" position) as it purchases individual stocks. The Fund 
can accomplish similar results by buying securities with long maturities 
and selling securities with short maturities. But by using futures 
contracts as an investment tool to reduce risk, given the greater 
liquidity in the futures market, it may be possible to accomplish the 
same result more easily and more quickly.

No consideration will be paid or received by the Fund upon the purchase 
or sale of a futures contract. Initially, a Fund will be required to 
deposit with the broker an amount of cash or cash equivalents equal to 
approximately 1% to 10% of the contract amount (this amount is subject 
to change by the exchange or board of trade on which the contract is 
traded and brokers or members of such board of trade may charge a higher 
amount). This amount is known as "initial margin" and is in the nature 
of a performance bond or good faith deposit on the contract which is 
returned to the Fund, upon termination of the futures contract, assuming 
all contractual obligations have been satisfied. Subsequent payments, 
known as "variation margin," to and from the broker, will be made 
daily as the price of the index or securities underlying the futures 
contract fluctuates, making the long and short positions in the futures 
contract more or less valuable, a process known as 
"marking-to-market." In addition, when a Fund enters into a long 
position in a futures contract or an option on a futures contract, it 
must deposit into a segregated account with a Fund's custodian an amount 
of cash or cash equivalents equal to the total market value of the 
underlying futures contract, less amounts held in the Fund's commodity 
brokerage account at its broker. At any time prior to the expiration of 
a futures contract, the Fund may elect to close the position by taking 
an opposite position, which will operate to terminate the Fund's 
existing position in the contract.

There are several risks in connection with the use of futures contracts 
as a hedging device. Successful use of futures contracts by the Fund is 
subject to the ability of MMC to predict correctly movements in the 
stock market or in the direction of interest rates. These predictions 
involve skills and techniques that may be different from those involved 
in the management of investments in securities. In addition, there can 
be no assurance that there will be a perfect correlation between 
movements in the price of the securities underlying the futures contract 
and movements in the price of the securities that are the subject of the 
hedge. A decision of whether, when and how to hedge involves the 
exercise of skill and judgment, and even a well-conceived hedge may be 
unsuccessful to some degree because of market behavior or unexpected 
trends in market behavior or interest rates.


Positions in futures contracts may be closed out only on the exchange on 
which they were entered into (or through a linked exchange) and no 
secondary market exists for those contracts. In addition, although the 
Fund intends to enter into futures contracts only if there is an active 
market for the contracts, there is no assurance that an active market 
will exist for the contracts at any particular time. Most futures 
exchanges and boards of trade limit the amount of fluctuation permitted 
in futures contract prices during a single trading day. Once the daily 
limit has been reached in a particular contract, no trades may be made 
that day at a price beyond that limit. It is possible that futures 
contract prices could move to the daily limit for several consecutive 
trading days with little or no trading, thereby preventing prompt 
liquidation of futures positions and subjecting some futures traders to 
substantial losses. In such event, and in the event of adverse price 
movements, the Fund would be required to make daily cash payments of 
variation margin; in such circumstances, an increase in the value of the 
portion of the portfolio being hedged, if any, may partially or 
completely offset losses on the futures contract. As described above, 
however, no assurance can be given that the price of the securities 
being hedged will correlate with the price movements in a futures 
contract and thus provide an offset to losses on the futures contract.

INVESTMENT RESTRICTIONS

Each Fund has adopted the following investment restrictions for the 
protection of shareholders. Restrictions I through 7 below cannot be 
changed without approval by the holders of a majority of the outstanding 
shares of a Fund, defined as the lesser of (a) 67% or more of a Fund's 
shares present at a meeting, if the holders of more than 50% of the 
outstanding shares are present in person or by proxy or (b) more than 
50% of a Fund's outstanding shares. The remaining restrictions may be 
changed by the Fund's Board of Directors at any time. In accordance with 
these restrictions, the Fund will not:

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

	2. Issue "senior securities" as defined in the 1940 Act, and the 
rules, regulations and orders thereunder, except as permitted under the 
1940 Act and the rules, regulations and orders thereunder.

	3. Invest more than 25% of its total assets in securities, the 
issuers of which conduct their principal business activities in the same 
industry. For purposes of this limitation, securities of the U.S. 
government (including its agencies and instumentalities) and securities 
of state or municipal governments and their political subdivisions are 
not considered to be issued by members of any industry.

	4. Borrow money, except that (a) the Fund may borrow from banks 
for temporary or emergency (not leveraging) purposes, including the 
meeting of redemption requests which might otherwise require the 
untimely disposition of securities, and (b) the Fund may, to the extent 
consistent with its investment policies, enter into reverse repurchase 
agreements, forward roll transactions and similar investment strategies 
and techniques. To the extent that it engages in transactions described 
in (a) and (b), the Fund will be limited so that no more than 33 1/3% of 
the value of its total assets (including the amount borrowed), valued at 
the lesser of cost or market, less liabilities (not including the amount 
borrowed) valued at the time the borrowing is made, is derived from such 
transactions.

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

	6. Engage in the business of underwriting securities issued by 
other persons, except to the extent that the Fund may technically be 
deemed to be an underwriter under the Securities Act of 1933, as 
amended, in disposing of portfolio securities.


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

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

	9. Invest in oil, gas or other mineral exploration or development 
programs.

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

	11. Invest for the purpose of exercising control over or 
management of the issuer.

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

If any percentage restriction described above is complied with at the 
time of an investment, a later increase or decrease in percentage 
resulting from a change in values or assets will not constitute a 
violation of such restriction.

Portfolio Turnover

While the Fund's portfolio turnover rate (the lesser of purchases or 
sales of portfolio securities during the year, excluding purchases or 
sales of short-term securities, divided by the monthly average value of 
portfolio securities) is generally not expected to exceed 150%. The rate 
of turnover will not be a limiting factor, however, when the Fund deems 
it desirable to sell or purchase securities. This policy should not 
result in higher brokerage commissions to the Fund, as purchases and 
sales of portfolio securities are usually effected as principal 
transactions. Securities may be sold in anticipation of a rise in 
interest rates (market decline) or purchased in anticipation of a 
decline in interest rates (market rise) and later sold. In addition, a 
security may be sold and another security of comparable quality 
purchased at approximately the same time to take advantage of what the 
Fund believes to be a temporary disparity in the normal yield 
relationship between the two securities. These yield disparities may 
occur for reasons not directly related to the investment quality of 
particular issues or the general movement of interest rates, such as 
changes in the overall demand for, or supply of, various types of 
tax-exempt securities.

Portfolio Transactions

Decisions to buy and sell securities for the Fund are made by the 
Manager, subject to the overall review of the Company's Board of 
Directors. Although investment decisions for the Fund are made 
independently from those of the other accounts managed by the Manager, 
investments of the type that the Fund may make also may be made by those 
other accounts. When the Fund and one or more other accounts managed by 
the Manager are prepared to invest in, or desire to dispose of, the same 
security, available investments or opportunities for sales will be 
allocated in a manner believed by the Manager to be equitable to each. 
In some cases, this procedure may adversely affect the price paid or 
received by the Fund or the size of the position obtained or disposed of 
by the Fund. 

Allocation of transactions on behalf of the Funds, including their 
frequency, to various dealers is determined by the Manager in its best 
judgment and in a manner deemed fair and reasonable to the Fund's 
shareholders. The primary considerations of the Manager in allocating 
transactions are availability of the desired security and the prompt 
execution of orders in an effective manner at the most favorable prices. 
Subject to these considerations, dealers that provide supplemental 
investment research and statistical or other services to the Manager may 
receive orders for portfolio transactions by a Fund. Information so 
received is in addition to, and not in lieu of, services required to be 
performed by the Manager, and the fees of the Manager are not reduced as 
a consequence of their receipt of the supplemental information. The 
information may be useful to the Manager in serving both the Fund and 
other clients, and conversely, supplemental information obtained by the 
placement of business of other clients may be useful to the Manager in 
carrying out its obligations to the Fund.

The Funds will not purchase securities during the existence of any 
underwriting or selling group relating to the securities, of which the 
Manager is a member, except to the extent permitted by the SEC. Under 
certain circumstances, the Funds may be at a disadvantage because of 
this limitation in comparison with other funds that have similar 
investment objectives but that are not subject to a similar limitation.

Even though investment decisions for the Fund are made independently 
from those of the other accounts managed by the Investment Adviser, 
investments of the kind made by the Fund also may be made by those other 
accounts. When the Funds and one or more accounts managed by the 
Investment Adviser are prepared to invest in, or desire to dispose of, 
the same security, available investments or opportunities for sales will 
be allocated in a manner believed by the Investment Adviser to be 
equitable. In some cases, this procedure may adversely affect the price 
paid or received by the Fund or the size of the position obtained for or 
disposed of by the Fund.

PURCHASE OF SHARES

Volume Discounts

The schedules of sales charges described in the Prospectus apply to 
purchases of shares of a Fund made by any "purchaser," which term is 
defined to include the following: (a) an individual; (b) an individual's 
spouse and his or her children purchasing shares for his or her own 
account; (c) a trustee or other fiduciary purchasing shares for a single 
trust estate or single fiduciary account; (d) a pension, profit-sharing 
or other employee benefit plan qualified under Section 401(a) of the 
Code and qualified employee benefit plans of employers who are 
"affiliated persons" of each other within the meaning of the 1940 Act; 
(e) tax-exempt organizations enumerated in Section 501(c)(3) or (13) of 
the Code; or (f) any other organized group of persons, provided that the 
organization has been in existence for at least six months and was 
organized for a purpose other than the purchase of investment company 
securities at a discount. Purchasers who wish to combine purchase orders 
to take advantage of volume discounts should contact aSalomon Smith 
Barney Financial Consultant.

Combined Right of Accumulation

Reduced sales charges, in accordance with the schedules in the 
Prospectus, apply to any purchase of shares of a Fund by any 
"purchaser" (as defined above). The reduced sales charge is subject to 
confirmation of the shareholder's holdings through a check of 
appropriate records. The Company reserves the right to terminate or 
amend the combined right of accumulation at any time after written 
notice to shareholders. For further information regarding the right of 
accumulation, shareholders should contact aSalomon Smith Barney 
Financial Consultant.

Determination of Public Offering Price

Each Fund offers its shares to the public on a continuous basis. The 
public offering price for a Class A and Class Y share of a Fund is equal 
to the net asset value per share at the time of purchase, plus for Class 
A shares an initial sales charge based on the aggregate amount of the 
investment. The public offering price for a Class L share includes a 
1.00 % initial sales charge. Class A share purchases, including 
applicable rights of accumulation, equaling or exceeding $500,000 is 
equal to the net asset value per share at the time of purchase and no 
sales charge is imposed at the time of purchase. A contingent deferred 
sales charge ("CDSC") is imposed on certain redemptions of Class L 
shares, and Class A shares when purchased in amounts exceeding $500,000. 
The method of computation of the public offering price is shown in each 
Fund's financial statements, incorporated by reference in their entirety 
into this SAI.

REDEMPTION OF SHARES

Detailed information on how to redeem shares of a Fund is included in 
the Prospectus. The right of redemption of shares of the Fund may be 
suspended or the date of payment postponed (a) for any periods during 
which the New York Stock Exchange, Inc. (the "NYSE") is closed (other 
than for customary weekend and holiday closings), (b) when trading in 
the markets the Fund normally utilizes is restricted, or an emergency 
exists, as determined by the SEC, so that disposal of the Fund's 
investments or determination of its net asset value is not reasonably 
practicable or (c) for any other periods as the SEC by order may permit 
for the protection of the Fund's shareholders.

Distributions in Kind

If the Board of Directors of the Company determines that it would be 
detrimental to the best interests of the remaining shareholders to make 
a redemption payment wholly in cash, the Fund may pay, in accordance 
with SEC rules, any portion of a redemption in excess of the lesser of 
$250,000 or 1.00% of the Fund's net assets by a distribution in kind of 
portfolio securities in lieu of cash. Securities issued as a 
distribution in kind may incur brokerage commissions when shareholders 
subsequently sell those securities.

Automatic Cash Withdrawal Plan

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

Shareholders who wish to participate in the Withdrawal Plan and who hold 
their shares in certificate form must deposit their share certificates 
with First Data as agent for Withdrawal Plan members. All dividends and 
distributions on shares in the Withdrawal Plan are reinvested 
automatically at net asset value in additional shares of the Fund. 
Withdrawal Plans should be set up with aSalomon Smith Barney Financial 
Consultant. Applications for participation in the Withdrawal Plan must 
be received by First Data no later than the eighth day of the month to 
be eligible for participation beginning with that month's withdrawal. 
For additional information, shareholders should contact a Financial 
Consultant.


DISTRIBUTOR

CFBDS serves as the Company's distributor on a best efforts basis 
pursuant to a written agreement (the Distribution Agreement"), which 
was approved by the Company's Board of Directors.


Distribution Arrangements

To compensateSalomon Smith Barney for the services it provides and for 
the expense it bears under the Distribution Agreement, the Fund has 
adopted a services and distribution plan (the "Plan") pursuant to Rule 
l2b-1 under the 1940 Act. Under the Plan, the Fund pays Salomon Smith 
Barney a service fee, accrued daily and paid monthly, calculated at the 
annual rate of 0.25% of the value of the Fund's average daily net assets 
attributable to the Class A, Class B and Class L shares. In addition, 
the Fund pays Salomon Smith Barney a distribution fee with respect to 
the Class B and Class L shares primarily intended to compensateSalomon 
Smith Barney for its initial expense of paying Financial Consultants a 
commission upon sales of those shares. The Class B and Class L 
distribution fee is calculated at the annual rate of 0.75% of the value 
of the Fund's average daily net assets attributable to the shares of the 
respective Class.

VALUATION OF SHARES

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

Securities listed on a national securities exchange will be valued on 
the basis of the last sale on the date on which the valuation is made 
or, in the absence of sales, at the mean between the closing bid and 
asked prices. Over-the-counter securities will be valued at the mean 
between the closing bid and asked prices on each day, or, if market 
quotations for those securities are not readily available, at fair 
value, as determined in good faith by the Fund's Board of Directors. 
Short-term obligations with maturities of 60 days or less are valued at 
amortized cost, which constitutes fair value as determined by the Fund's 
Board of Directors. Amortized cost involves valuing an instrument at its 
original cost to the Fund and thereafter assuming a constant 
amortization to maturity of any discount or premium, regardless of the 
effect of fluctuating interest rates on the market value of the 
instrument. All other securities and other assets of the Fund will be 
valued at fair value as determined in good faith by the Fund's Board of 
Directors.

EXCHANGE PRIVILEGE

Except as noted below and in the Prospectus, shareholders of any of the 
Smith Barney Mutual Funds may exchange all or part of their shares for 
shares of the same class of other Smith Barney Mutual Funds, to the 
extent such shares are offered for sale in the shareholder's state of 
residence, on the basis of relative net asset value per share at the 
time of exchange as follows:

A. Class A and Class Y shares of the Fund may be exchanged without 
a sales charge for the respective shares of any of the Smith 
Barney Mutual Funds.

B. Class B shares of any fund may be exchanged without a sales 
charge. Class B shares of the Fund exchanged for Class B shares of 
another Smith Barney Mutual Fund will be subject to the higher 
applicable CDSC of the two funds and, for purposes of calculating 
CDSC rates and conversion periods, will be deemed to have been 
held since the date the shares being exchanged were deemed to be 
purchased.

C. Class L shares of any fund may be exchanged without a sales 
charge. For purposes of CDSC applicability, Class L shares of the 
Fund exchanged for Class L shares of another Smith Barney Mutual 
Fund will be deemed to have been owned since the date the shares 
being exchanged were deemed to be purchased.

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

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

PERFORMANCE DATA

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

Average Annual Total Return

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

	P (1 + T)n = ERV

	Where:	P	=	a hypothetical initial payment of $ 1,000.
			T	=	average annual total return.
			n	=	number of years.
			ERV	=	Ending Redeemable Value of a hypothetical 
$1,000 investment made
					at the beginning of a 1-, 5- or 10-year 
period at the end of the 1-, 5- or
					10-year period (or fractional portion 
thereof), assuming reinvestment
					of all dividends and distributions.


Performance will vary from time to time depending on market conditions, 
the composition of the Fund's portfolio and operating expenses. 
Consequently, any given performance quotation should not be considered 
representative of the Fund's performance for any specified period in the 
future. Because performance will vary, it may not provide a basis for 
comparing an investment in the Fund with certain bank deposits or other 
investments that pay a fixed yield for a stated period of time.

TAXES

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

The Company intends to qualify each year as a regulated investment 
company under the Code. If the Fund (a) qualifies as a regulated 
investment company and (b) distributes to its shareholders at least 90% 
of its net investment income (including, for this purpose, its net 
realized short-term capital gains), the Fund will not be liable for 
Federal income taxes to the extent that its net investment income and 
its net realized long- and short term capital gains, if any, are 
distributed to its shareholders.

As described above, the Fund may invest in futures contracts and options 
on futures contracts that are traded on a U.S. exchange or board of 
trade. As a general rule, these investment activities will increase or 
decrease the amount of long-term and short-term capital gains or losses 
realized by the Fund and, thus, will affect the amount of capital gains 
distributed to the Fund's shareholder.

For federal income tax purposes, gain or loss on the futures and options 
described above (collectively referred to as "Section 1256 Contracts") 
would, as a general rule, be taxed pursuant to a special 
"mark-to-market system." Under the mark-to-market system, the Fund may 
be treated as realizing a greater or lesser amount of gains or losses 
than actually realized. As a general rule, gain or loss on Section 1256 
Contracts is treated as 60% long-term capital gain or loss and 40% 
short-term capital gain or loss, and as a result, the mark-to market 
will generally affect the amount of capital gains or losses taxable to 
the Fund and the amount of distributions taxable to a shareholder. 
Moreover, if the Fund invests in both Section 1256 and offsetting 
positions in those contracts, then the Fund may not be able to receive 
the benefit of certain realized losses for an indeterminate period of 
time. The Fund expects that its activities with respect to Section 1256 
Contracts and offsetting position in those Contracts (1) will not cause 
it or its shareholders to be treated as receiving a materially greater 
amount of capital gains or distributions than actually realized or 
received and (2) will permit it to use substantially all of its losses 
for the fiscal years in which the losses actually occur.

Gains or losses on the sales of stock or securities by the Fund 
generally will be long-term capital gains or losses if a Fund has held 
the stock or securities for more than one year. Gains or losses on sales 
of stock or securities held for not more than one year generally will be 
short-term capital gains or losses.

Foreign countries may impose withholding and other taxes on dividends 
and interest paid to the Fund with respect to investments in foreign 
securities. However, certain foreign countries have entered into tax 
conventions with the United States to reduce or eliminate such taxes. 
Distributions of long-term capital gains will be taxable to shareholders 
as such, whether paid in cash or reinvested in additional shares and 
regardless of the length of time that the shareholder has held his or 
her interest in the Fund. If a shareholder receives a distribution 
taxable as long-term capital gain with respect to his or her investment 
in the Fund and redeems or exchanges the shares before he or she has 
held them for more than six months, any loss on the redemption or 
exchange that is less than or equal to the amount of the distribution 
will be treated as a long-term capital loss.

Any net long-term capital gains realized by the Fund will be distributed 
annually as described in the Prospectus. Such distributions ("capital 
gain dividends") will be taxable to shareholders as long-term capital 
gains, regardless of how long a shareholder has held Fund shares, and 
will be designated as capital gain dividends in a written notice mailed 
by the Fund to shareholders after the close of the Fund's prior taxable 
year. If a shareholder receives a capital gain dividend with respect to 
any share and if the share has been held by the shareholder for six 
months or less, then any loss on the sale or exchange of such share will 
be treated as a long-term capital loss to the extent of the capital gain 
dividend.

Investors considering buying shares of the Fund on or just prior to a 
record date for a taxable dividend or capital gain distribution should 
be aware that, regardless of whether the price of the Fund shares to be 
purchased reflects the amount of the forthcoming dividend or 
distribution payment, any such payment will be a taxable dividend or 
distribution payment.

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

The foregoing is only a summary of certain tax considerations generally 
affecting the Fund and its shareholders and is not intended as a 
substitute for careful tax planning. Shareholders are urged to consult 
their tax advisors with specific reference to their own tax situations, 
including their state and local tax liabilities.

ADDITIONAL INFORMATION

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

PNC Bank, located at 17th and Chestnut Streets, Philadelphia, 
Pennsylvania 19103, serves as the custodian of the Funds. Under its 
agreement with the Company on behalf of the Funds, PNC Bank holds each 
Fund's portfolio securities and keeps all necessary accounts and 
records. For its services, PNC Bank receives a monthly fee based upon 
the month-end market value of securities held in custody and also 
receives securities transaction charges. The assets of the Funds are 
held under bank custodianship in compliance with the 1940 Act.

First Data, located at Exchange Place, Boston, Massachusetts 02109, 
serves as the Company's transfer agent. Under the transfer agency 
agreement, First Data maintains the shareholder account records for the 
Company, handles certain communications between shareholders and the 
Company and distributes dividends and distributions payable by the 
Company. For these services, First Data receives a monthly fee computed 
on the basis of the number of shareholder accounts it maintains for the 
Company during the month and is reimbursed for out-of-pocket expenses.


Smith Barney
Small Cap Growth Fund
Small Cap Value Fund





Statement of





Additional Information



December  [  ], 1998

Smith Barney
Small Cap Growth Fund
Small Cap Value Fund
388 Greenwich Street
New York, New York 100 13

SALOMON SMITH BARNEY
A Member of Citigroup 

SMCAPSAIa
1




PART C
 
Item 24. Financial Statements and Exhibits 
 
a)	Financial Statements:

		Included in Part A:

		       

		Included in Part B:


The Registrant's Semi-Annual Reports for series whose fiscal period ended 
June 30, 1998 are incorporated by reference to the Definitive 30b2-1 
filed on September 25, 1998 as Accession #0000091155-98-573. 

The Registrant's Annual Reports for series whose fiscal year ended 
December 31, 1997 and the Report of Independent Auditors dated February 
10, 1998 are incorporated by reference to the Definitive 30b2-1 filed on 
March 10, 1998 as Accession #0000091155-98-157. 
 
The Registrant's Annual Reports for series whose fiscal year ended April 
30, 1998 and the Report of Independent Auditors dated June 12,1998 are 
incorporated by reference to the Definitive 30b2-1 filed on July 9,1998 
as Accession #0000091155-98-444. 

(b) Exhibits 
 
All references are to the Registrant's registration 
statement on Form N-1A (the "Registration Statement") 
as filed with the SEC on October 2, 1981(File Nos. 2-
74288 and 811-3275).

(1)  Articles of Restatement dated September 17, 1993 
to Registrant's  Articles of  Incorporation dated 
September 28, 1981, Articles of Amendment dated 
October 14, 1994, Articles Supplementary, Articles  of 
Amendment dated October 14, 1994, Articles 
Supplementary, Articles of Amendments and Certificates 
of Correction dated November 7, 1994, are incorporated 
by reference to Post-Effective Amendment No. 37 to the 
Registration Statement filed on November 7, 1994. 
Articles of Amendment dated October 23, 1997 are 
incorporated by reference to Post-Effective Amendment 
No. 46 dated October 23, 1997("Post-Effective 
Amendment No.46").  Articles of Amendment dated 
February 27, 1998 are incorporated by reference 
to Post-Effective Amendment No. 48 dated April 29, 1998.
Articles of Amendment dated June 1, 1998 are incorporated
by reference to Post-Effective Amendment No. 49.

(2) Registrant's By-Laws, as amended on September 30, 
1992 are incorporated by reference to Post-Effective 
Amendment No. 30 to the Registration Statement filed 
on April 30, 1993. 
 
(3) Not Applicable. 
 
(4) Registrant's form of stock certificate for Smith 
Barney Hansberger Global Value Fund ("Global Value 
Fund") and Smith Barney Hansberger Global Value Small 
Cap Fund ("Small Cap Fund") is incorporated by 
reference to Post Effective Amendment 46.
 
(5) (a) Investment Advisory Agreement dated July 30, 
1993, between the Registrant on behalf of Smith Barney 
Investment Grade Bond Fund, Smith Barney Government 
Securities Fund and Smith Barney Special Equities 
Fund and Greenwich Street Advisors is incorporated by 
reference to the Registration Statement filed on Form 
N-14 on September 2, 1993, File No. 33-50153. 
 
    (b) Investment Advisory Agreements on behalf of 
Smith Barney Growth Opportunity Fund and Smith Barney 
Managed Growth Fund is incorporated by reference to 
Post-Effective Amendment No. 40 filed on June 27, 
1995.
 
    (c) Investment Management Agreements on behalf of 
Global Value Fund and Global Small Cap Fund between 
Registrant and Smith Barney Mutual Funds Management 
Inc. is incorporated by reference to Post-Effective 
Amendment No. 46.
 
    (d) Sub-Advisory Agreement on behalf of Global 
Value Fund and Global Small Cap Fund between MMC and 
Hansberger Global Investors Inc. is 
incorporated by reference to Post-Effective 
Amendment No. 46. 
 
    (e)Investment Management Agreements on behalf of 
Smith Barney Small Cap Growth Fund and Smith Barney 
Small Cap Value Fund between Registrant and 
Mutual Management Corp. is incorporated by reference
To Post-Effective Amendment No. 49.

(6) (a) Distribution Agreement dated July 30, 1993, 
between the Registrant and Smith Barney Shearson Inc. 
is incorporated by reference to the registration 
statement filed on Form N-14 on September 2, 1993.  
File 33-50153. 
 
     (b) Form of Distribution Agreement between the 
Registrant and PFS Distributors on behalf of Smith 
Barney Investment Funds Inc. is incorporated by 
reference to Post-Effective Amendment No. 40 filed on 
June 27, 1995. 
 
     (c) Form of Distribution Agreement between the 
Registrant and CFBDS, Inc. is incorporated by reference
To Post-Effective Amendment No. 49.

(7) Not Applicable. 
 
8 (a) Custodian Agreement with PNC Bank, National 
Association is incorporated by reference to Post -
Effective Amendment No. 44 filed on April 29, 1997. 
 
   (b) Custodian Agreement with Chase Manhattan Bank 
is incorporated by reference to Post-Effective 
Amendment No. 46.
 
9 (a)  Transfer Agency and Registrar Agreement dated 
August 5, 1993 with First Data Investor Services 
Group, Inc. (formerly The Shareholder Services Group, 
Inc.) is incorporated by reference to Post-Effective 
Amendment No. 31 as filed on December 22, 1993 (Post-
Effective Amendment No. 31"). 
 
   (b)Sub-Transfer Agency Agreement between the 
Registrant and PFS Shareholders Services on behalf of  
Smith Barney Investment Funds Inc. is incorporated by 
reference to Post-Effective Amendment No. 40 filed on 
June 27, 1995. 
 
(10)  Opinion of Robert A. Vegliante, Deputy General 
Counsel of Smith Barney Mutual Funds Management Inc. 
filed with the Registrant's rule 24-f2 Notice 
(Accession No. 000091155-97-000104) is incorporated by 
reference. 
 
(11)  To be filed by amendment.
  
(12) Not Applicable 
 
(13)  Not Applicable 
 
(14)  Not Applicable 
 
(15) (a) Amended Services and Distribution Plans 
pursuant to Rule 12b-1 between the Registrant on behalf 
of Smith Barney Investment Grade Bond Fund, Smith 
Barney Government Securities Fund, Smith Barney Special 
Equities Fund and Smith Barney European Fund and Smith 
Barney, Inc. ("Smith Barney") are incorporated by 
reference to Post-Effective Amendment No. 37' 
 
    (b) Form of Services and Distribution Plans 
pursuant to Rule 12b-1 between the Registrant on 
behalf  of Smith Barney Growth Opportunity Fund and 
Smith Barney Managed Growth Fund is incorporated by 
reference to Post-Effective Amendment No. 40 filed on 
June 27, 1995. 
 
    (c) Form of Services and Distribution Plans 
pursuant to Rule 12b-1 between the Registrant on 
behalf of  the Global Value Fund and Small Cap Fund is
incorporated by reference to Post-Effective Amendment 
No. 46.
 
    (d) Form of Amended and Restated Shareholder Services and 
Distribution Plan pursuant to Rule 12b-1 between 
the Registrant on behalf of each of its series 
is incorporated by reference to Post-Effective Amendment
No. 49.

(16) Performance Data is incorporated by reference to 
Post-Effective Amendment No. 22 as filed on May 1, 
1989. 
 
(17) Filed herein.
 
(18)  Form of Plan pursuant to Rule 18f-3 is incorporated by 
reference to Post-Effective Amendment No.50 to 
Registration Statement. 

 Item 25  Persons Controlled by or Under Common Control 
with Registrant 
 
None. 
 


Item 26.	Title of Class	Number of Record Holders
					As of November 9, 1998
Smith Barney
Investment Grade Bond Fund
 		Class A			12,778
		Class B			12,583
		Class C			844
		Class Y			3

Smith Barney
Government Securities Fund
		Class A			20,254
		Class B			5,584
		Class C			228
		Class Y			10

Smith Barney
Contrarian Fund
		Class A			11,433
		Class B			29,109
		Class C			3,094
		Class Y			5
		Class Z			1

Smith Barney
Special Equities Fund
		Class A			17,530
		Class B			24,063
		Class C			1,657
		Class Y			5
		Class Z			1

Concert
Peachtree Growth Fund
		Class A			118
		Class B			241
		Class C			33
		Class Y			6

Smith Barney Hansberger Global Small Cap
Value Fund
		Class A			632
		Class B			1,489
		Class C			412
		Class Y			2

Smith Barney Hansberger Global Value Fund
		Class A			1,996
		Class B			4,621
		Class C			1,244
		Class Y			8

Item  27.  Indemnification 
 
	The response to this item is incorporated by 
reference to Pre-Effective Amendment No. 1 to the 
registration statement filed on Form N-14 on October 
8, 1993 (File No. 33-50153). 
 
Item 28(a).  Business and Other Connections of 
Investment Adviser 
 
Investment Adviser -Mutual Management Corp.("MMC") 
formerly Smith Barney Mutual Funds Management Inc. 
 
MMC was incorporated in December 1968 under the laws 
of the State of Delaware.  MMC is a wholly owned 
subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings")(formerly known as Smith Barney Holdings 
Inc.), which in turn is a wholly owned subsidiary of 
Citigroup Inc. MMC is registered as an 
investment adviser under the Investment Advisers Act 
of 1940 (the "Advisers Act").The list required by this 
Item 28 of officers and directors of MMC together with 
information as to any other business, profession, 
vocation or employment of a substantial nature engaged 
in by such officers and directors during the past two 
years, is incorporated by reference to Schedules A and 
D of FORM ADV filed by MMC pursuant to the Advisers 
Act (SEC File No. 801-8314). 
 
Item 29.	Principal Underwriters 
(a) CFBDS, Inc. the Registrant's Distributor, is also
the distributor for
CitiFundsSM International Growth & Income Portfolio, 
CitiFundsSM International Equity Portfolio, CitiFundsSM Large Cap 
Growth 
Portfolio, CitiFundsSM Intermediate Income Portfolio, 
CitiFundsSM Short-Term U.S. Government Income Portfolio, 
CitiFundsSM Emerging Asian Markets Equity Portfolio, 
CitiFundsSM U.S. Treasury Reserves, CitiFundsSM Cash Reserves, 
CitiFundsSM Premium U.S. Treasury Reserves, 
CitiFundsSM Premium Liquid Reserves, CitiFundsSM Institutional U.S. 
Treasury Reserves, CitiFundsSM Institutional Liquid Reserves,
SM Institutional Cash Reserves, CitiFundsSM Tax Free Reserves, 
CitiFundsSM Institutional Tax Free Reserves, 
CitiFundsSM California Tax Free Reserves, 
CitiFundsSM Connecticut Tax Free Reserves, 
CitiFundsSM New York Tax Free Reserves, CitiFundsSM Balanced Portfolio, 
CitiFundsSM Small Cap Value Portfolio, CitiFundsSM Growth & Income 
Portfolio,
CitiFundsSM Small Cap Growth Portfolio, CitiFundsSM National 
Tax Free Income Portfolio, CitiFundsSM New York Tax Free Income 
Portfolio, 
CitiSelect VIP Folio 200, Citiselect VIP Folio 300,
CitiSelect (VIP Folio 400, CitiSelect (VIP Folio 500, 
CitiFundsSM Small Cap Growth VIP Portfolio, CitiSelect (Folio 200, 
CitiSelect (Folio 300, CitiSelect (Folio 400, and CitiSelect (Folio 
500.  
CFBDS is also the placement agent for Large Cap Value Portfolio, 
International Portfolio, Foreign Bond Portfolio, 
Intermediate Income Portfolio, Short-Term Portfolio, 
Growth & Income Portfolio, Large Cap Growth Portfolio, 
Small Cap Growth Portfolio, International Equity Portfolio, 
Balanced Portfolio, Government Income Portfolio, Emerging
Asian Markets Equity Portfolio, Tax Free Reserves Portfolio, 
Cash Reserves Portfolio and U.S. Treasury Reserves Portfolio. 

     CFBDS, Inc. is also the distributor for the following
Smith Barney Mutual Fund registrants: 
Concert Investment Series
Consulting Group Capital Markets Funds
Greenwich Street Series Fund
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Concert Allocation Series Inc.
Smith Barney Equity Funds
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.
Smith Barney Income Funds
Smith Barney Institutional Cash Management Fund, Inc.
Smith Barney Investment Trust
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc.
Smith Barney Muni Funds
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund Inc.
Smith Barney Principal Return Fund 
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust
Smith Barney Variable Account Funds
Smith Barney World Funds, Inc.
Travelers Series Fund Inc.
And various series of unit investment trusts.

CFBDS, Inc. is also the distributor for the following
Salomon Brothers funds;
Salomon Brothers Opportunity Fund Inc 
Salomon Brothers Investors Fund Inc
Salomon Brothers Capital Fund Inc
Salomon Brothers Series Funds Inc
Salomon Brothers Institutional Series Funds Inc
Salomon Brothers Variable Series Funds Inc

The information required by this Item 29 with respect 
to each director, officer and partner of CFBDS, Inc.
is incorporated by reference to Schedule A of Form BD 
filed by CFBDS, Inc. pursuant to the Securities 
Exchange Act of 1934 (SEC File No. 8-32417).

Item 30.  Location of Accounts and Records 
 
(1) 	Smith Barney Investment Funds Inc. 
	388 Greenwich Street 
	New York, New York 10013 
 
(2)	Mutual Management Corp.
	388 Greenwich Street 
	New York, New York  10013 
 
(3)	PNC Bank, National Association 
	17th and Chestnut Streets 
	Philadelphia, PA 
 
(4)	The Chase Manhattan Bank 
	Chase Metrotech Center 
	Brooklyn, New York 11245 
 
(5)	First Data Investor Services Group, Inc. 
	One Exchange Place 
	Boston, Massachusetts 02109 

(6) CFBDS Inc.
21 Milk Street, 5th floor
Boston, Massachusetts 02109

Item 31. Management Services 
 
	Not Applicable.
 
Item 32. Undertakings 

(a) Not applicable
 
(b) Not applicable
 
(c) The Registrant hereby undertakes to furnish to 
each person to whom a prospectus of any series of the 
Registrant is delivered a copy of the Registrant's 
latest annual report, upon request and without charge. 

SIGNATURES 
 
Pursuant to the requirements of the Securities Act of 
1933, as amended, and the Investment Company Act of 
1940, as amended, the Registrant, SMITH BARNEY 
INVESTMENT FUNDS INC., has duly caused this Amendment 
to the Registration Statement to be signed on its 
behalf by the undersigned, thereunto duly authorized, 
all in the City of New York, State of New York on the 
24th day of November, 1998. 

SMITH BARNEY INVESTMENT FUNDS INC. 

 
By: /s/ Heath B. McLendon* 
      Heath B. McLendon 
      Chief Executive Officer 
 
 
	WITNESS our hands on the date set forth below. 
 
	Pursuant to the requirements of the Securities 
Act of 1933, as amended, this Post-Effective Amendment 
to the Registration Statement has been signed below by
the following persons in the capacities and on the 
dates indicated. 
 
Signature			Title					Date	 
 
/s/ Heath B. McLendon	Chairman of the Board		11/24/98 
Heath B. McLendon		(Chief Executive Officer) 
 
/s/ Lewis E. Daidone	 Senior Vice President 
Lewis E. Daidone		 and Treasurer			11/24/98 
				(Chief Financial 
				and Accounting Officer) 
 
/s/ Paul R. Ades	*		Director			11/24/98
Paul R. Ades 
 
/s/ Herbert Barg*	 		Director			11/24/98
Herbert Barg 
 
/s/ Dwight B. Crane*		Director			11/24/98
Dwight B. Crane 
 
/s/ Frank Hubbard*		Director			11/24/98
Frank Hubbard 

 /s/ Jerome Miller**		Director			11/24/98
Jerome Miller 

/s/ Ken Miller*			Director			11/24/98
Ken Miller 
 

*Signed by Heath B. McLendon, their duly authorized 
attorney-in-fact, pursuant
to power of attorney dated November 3, 1994. 
 
**Signed by Heath B. McLendon, their duly authorized 
attorney-in-fact, pursuant
to power of attorney dated April 15, 1998. 


/s/ Heath B. McLendon 
Heath B. McLendon 

EXHIBITS


Exhibit No.			Description of Exhibit