As filed with the Securities and Exchange Commission 
on July 16, 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. 49 

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940, 
Amendment No. 51 
 
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)
___	On (date) pursuant to paragraph (b)
_____	60 days after filing pursuant to paragraph (a) 
(1)
_____	On (date) pursuant to paragraph (a)(1)
_____	75 days after filing pursuant to paragraph (a) 
(2)
XXX	On September 30, 1998 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>

P R O S P E C T U S 
 
                                                                    SMITH BARNEY
                                                                       Small Cap
                                                                          Growth
                                                                            Fund
                                                              SEPTEMBER 30, 1998
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
LOGO Smith Barney Mutual Funds
     INVESTING FOR YOUR FUTURE.
     EVERY DAY.
<PAGE>
 
PROSPECTUS                                                  SEPTEMBER 30, 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 [   ]
1998, (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 [   ] 1998. 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 September 30, 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 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                              1
<PAGE>
 
TABLE OF CONTENTS
 
 
<TABLE>
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    9
-------------------------------------------------
VALUATION OF SHARES                            11
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             11
-------------------------------------------------
PURCHASE OF SHARES                             13
-------------------------------------------------
EXCHANGE PRIVILEGE                             23
-------------------------------------------------
REDEMPTION OF SHARES                           26
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           28
-------------------------------------------------
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 $[1.6] 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 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 purchase Class A shares
at net asset value or at a reduced sales charge should consider doing so.
  Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on 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."
 
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained by Smith Barney during the Initial Subscription Period. During the con-
tinuous offering period, shares may also be purchased through a brokerage
account maintained with Smith Barney, a broker that clears securities transac-
tions through Smith Barney on a fully disclosed basis (an "Introducing Broker")
or any other investment dealer in the selling group. In addition, certain
investors, including qualified retirement plans and certain institutional
investors, may purchase shares directly from the Fund through the Fund's trans-
fer 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 [    ], 1998, (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 offer-
ing of shares is expected to commence on or about [    ], 1998. 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. 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 Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services including Asset Management, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. 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 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."
 
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and 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 25% 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."
 
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                             [   %]  [   %]   [   %]  [   %]
    12b-1 fees**                                0.25    1.00     1.00    None
    Other expenses***                           [   ]   [   ]    [   ]   [   ]
-------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES                 [   %]  [    %]  [   %]  [   %]
-------------------------------------------------------------------------------
</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 August 31, 1999.
 
                                                                              7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
  The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of 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." 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, 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% dis-
tribution fee and a 0.25% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
 
 EXAMPLE
  The following example is intended to assist an investor in understanding the
various costs that an investor in the 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....................................................  $
    Class B....................................................
    Class L....................................................
    Class Y....................................................
  An investor would pay the following expenses on the same
  investment, assuming the same annual return and no redemp-
  tion:
    Class A....................................................  $
    Class B....................................................
    Class L....................................................
    Class Y....................................................
------------------------------------------------------------------------------
</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.
 
8
<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 compa-
nies for purposes of the 65% policy. Investments in smaller capitalized compa-
nies may offer greater opportunities for growth of capital than larger, more
established companies, but may also involve certain risks because smaller cap-
italized companies often have limited market or financial resources and may be
dependent on one or two people for management. In addition, small capitalized
companies may be subject to a 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 25% of its total assets in foreign securities, including
both direct
 
                                                                              9
<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;
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 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 Smith Barney Inc. ("Smith Barney"), depend on
the smooth functioning of their computer systems. Many computer software sys-
tems 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 securities trades, pricing and account services. The Manager and
Smith Barney have advised the Fund that they have been reviewing all of their
computer systems 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 cus-
todian, transfer agent and accounting
 
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
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,
Smith Barney or any other service provider will be successful, or that inter-
action with other non-complying computer systems will not impair Fund services
at that time.
 
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 reinvested automatically in additional
shares of the same Class at net asset value, with no additional sales charge
or CDSC. A shareholder may change the option at any time by notifying his or
her Smith Barney Financial Consultant or their financial consultant, Introduc-
ing Broker or dealer in the selling group. 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
distribution 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).
 
                                                                             11
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
 
 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.
 
  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 disposi-
tion. 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 num-
ber (social security or employer identification number). Withholding from tax-
able dividends and capital
 
12
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
gain distributions also is required for shareholders 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 share-
holder'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 brokerage account maintained with Smith Barney. Shares of the
Fund subscribed for during the Subscription Period for which the Fund accepts
purchase 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 $[   ], which equals the Class A share initial net asset
value per share of $[   ] 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 $[   ].
 
  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.
 
                                                                             13
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
 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 brokerage
account maintained with Smith Barney. Shares may also be purchased through an
Introducing Broker or any other investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
other institutional investors, may purchase shares directly from the Fund
through First Data. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class B, Class L or Class Y shares. Smith
Barney and other broker/dealers may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data 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 and Class L shares and the subse-
quent investment requirement for all Classes is $25. For shareholders purchas-
ing shares of the Fund through the Systematic Investment Plan on a quarterly
basis, the minimum initial investment 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 Travelers and its subsidiaries, including Smith Barney, Direc-
tors or Trustees of any of the Smith Barney Mutual Funds, and their
 
14
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
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 share-
holder's written request to the Transfer Agent.
 
  Purchase orders received by the Fund or Smith Barney 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 dealers or Introducing Brokers 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 Smith Barney prior to Smith Barney's close
of business. For shares purchased through Smith Barney or Introducing Brokers
purchasing through Smith Barney, payment for 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, 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 insufficient funds to com-
plete the transfer will be charged a fee of up to $25 by Smith Barney or the
Transfer Agent. The Systematic Investment Plan also authorizes Smith Barney to
apply cash held in the shareholder's Smith Barney brokerage account or redeem
the shareholder's shares of a Smith Barney money market fund to make additions
to the account. Additional information is available from the Fund or a Smith
Barney Financial Consultant.
 
                                                                              15
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
 INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
  The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
 
<TABLE>
<CAPTION>
                                  SALES CHARGE
                         ------------------------------      DEALERS'
                              % OF           % OF       REALLOWANCE AS % OF
  AMOUNT OF INVESTMENT   OFFERING PRICE AMOUNT INVESTED   OFFERING PRICE
---------------------------------------------------------------------------
  <S>                    <C>            <C>             <C>
  Less than $ 25,000          5.00%          5.26%             4.50%
  $ 25,000 -  49,999          4.00           4.17              3.60
    50,000 -  99,999          3.50           3.63              3.15
   100,000 - 249,999          3.00           3.09              2.70
   250,000 - 499,999          2.00           2.04              1.80
   500,000   and over          *               *                 *
---------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
  value without any initial sales charge but will be subject to a CDSC of 1.00%
  on redemptions made within 12 months of purchase. The CDSC on Class A Shares
  is payable to Smith Barney, which compensates Smith Barney Financial
  Consultants and other dealers whose clients make purchases of $500,000 or
  more. The CDSC is waived in the same circumstances in which the CDSC
  applicable to Class B and Class L shares is waived. See "Deferred Sales
  Charge Alternatives" and "Waivers of CDSC."
 
  Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
 
  The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the 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.
 
 INITIAL SALES CHARGE WAIVERS
  Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and of any of the Smith Barney
Mutual Funds or other Travelers affiliated funds (including retired Board mem-
bers and employees); the immediate families of such persons (including the sur-
viving spouse of a deceased Board Member or employee); and to a pension, prof-
it-sharing or other benefit plan for such persons and (ii) employees of members
of the NASD, 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 com-
pany with the Fund by merger, acquisition of assets or otherwise; (c) purchases
of Class A shares by any client of a newly employed Smith Barney Financial Con-
sultant (for a period up to 90 days from the commencement of the Financial Con-
sultant's employment with
 
16
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
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 spon-
sored by the Financial Consultant's prior employer, (ii) was sold to the cli-
ent 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 fund of the Smith Barney Mutual Funds that are
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 Travelers; (f) direct rollovers by plan participants
of distributions from a 401(k) plan offered to employees of Travelers or its
subsidiaries or a 401(k) plan enrolled in the Smith Barney 401(k) Program
(Note: subsequent investments will be subject to the applicable sales charge);
(g) purchases by separate accounts used to fund certain unregistered variable
annuity contracts; (h) purchases by investors participating in a Smith Barney
fee-based arrangement; and (i) purchases of Class A Shares by Section 403(b)
or 401(a) or (k) accounts associated with Copeland Retirement Programs. In
order to obtain such discounts, the purchaser must provide sufficient informa-
tion 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 other Smith Barney Mutual Funds which are
offered with a sales charge listed under "Exchange Privilege" then held by
such person and applying the sales charge applicable to such aggregate. In
order to obtain such discount, the purchaser must provide sufficient informa-
tion at the time of purchase to permit verification that the purchase quali-
fies for the reduced sales charge. The right of accumulation is subject to
modification or discontinuance at any time with respect to all shares pur-
chased thereafter.
 
 GROUP PURCHASES
  Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of the Smith Barney Mutual Funds
offered with a sales charge to, and share holdings of, all members of the
group. To be eligible for such reduced sales charges or to purchase at net
asset value, all purchases must be pursuant to an employer- or partnership-
sanctioned plan meeting certain require-
 
                                                                             17
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
ments. One such requirement is that the plan must be open to specified partners
or employees of the employer and its subsidiaries, if any. Such plan may, but
is not required to, provide for payroll deductions, IRAs or investments pursu-
ant to retirement plans under Sections 401 or 408 of the Code. Smith Barney may
also offer a reduced sales charge or net asset value purchase for aggregating
related fiduciary accounts under such conditions that Smith Barney will realize
economies of sales efforts and sales related expenses. An individual who is a
member of a qualified group may also purchase Class A shares at the reduced
sales charge applicable to the group as a whole. The sales charge is based upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the
amount of the current purchase. A "qualified group" is one which (a) has been
in existence for more than six months, (b) has a purpose other than acquiring
Fund shares at a discount and (c) satisfies uniform criteria which enable Smith
Barney to realize economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, must be available to arrange
for group meetings between representatives of the Fund and the members, and
must agree to include sales and other materials related to the Fund in its pub-
lications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the pur-
chaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
 
 LETTER OF INTENT
  Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge over the 13 month period based on the total amount
of intended purchases plus the value of all Class A shares previously purchased
and still owned. An alternative is to compute the 13 month period starting up
to 90 days before the date of execution of a Letter of Intent. Each investment
made during the period receives the reduced sales charge applicable to the
total amount of the investment goal. If the goal is not achieved within the
period, the investor must pay the difference between the sales charges applica-
ble to the purchases made and the charges previously paid, or an appropriate
number of escrowed shares will be redeemed. Please contact a Smith Barney
Financial Consultant or First Data to obtain a Letter of Intent application.
 
  Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
 
18
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
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 thirteen (13) months from the date of the Letter. If a total investment
of $15,000,000 is not made within the thirteen-month period, all Class Y shares
pur4 chased 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%. The Fund
expects that such transfer will not be subject to Federal income taxes. Please
contact a Smith Barney Financial Consultant or First Data for further informa-
tion.
 
 DEFERRED SALES CHARGE ALTERNATIVES
  "CDSC Shares" are sold at the net asset value next determined without an ini-
tial sales charge so that the full amount of an investor's purchase payment may
be immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. 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 subject to a CDSC.
 
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the time of
redemption. 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 L shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
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) Programs."
 
                                                                              19
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
<TABLE>
<CAPTION>
      YEAR SINCE PURCHASE
      PAYMENT WAS MADE      CDSC
---------------------------------
      <S>                   <C>
      First                 5.00%
      Second                4.00
      Third                 3.00
      Fourth                2.00
      Fifth                 1.00
      Sixth 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 also will be converted at that time
such proportion of Class B Dividend Shares owned by the shareholder as the
total number of his or her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than Class B Dividend
Shares) owned by the shareholder. See "Prospectus Summary--Alternative Pur-
chase Arrangements--Class B Shares Conversion Feature." The length of time
that CDSC Shares acquired through an exchange have been held will be calcu-
lated from the date that the shares exchanged were initially acquired in one
of the other applicable 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 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 redemp-
tion. The amount of any CDSC will be paid to Smith Barney.
 
  To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional 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
 
20
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
the death or disability of the shareholder; (d) redemptions of shares made in
connection with qualified distributions from retirement plans or IRAs upon the
attainment of age 59 1/2; (e) involuntary redemptions; and (f) redemptions of
shares to effect a combination of the Fund with any investment company by
merger, acquisition of assets or otherwise. In addition, a shareholder who has
redeemed shares from other Smith Barney Mutual Funds may, under certain cir-
cumstances, reinvest all or part of the redemption proceeds within 60 days and
receive pro rata credit for any CDSC imposed on the prior redemption.
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by the Transfer
Agent in the case of all other shareholders) of the shareholder'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.
 
  Each Fund offers to Participating Plans Class A and Class L shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Pro-
grams. 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 Smith Barney retail brokerage account,
the five year period will be
 
                                                                             21
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
calculated from the date the retail brokerage account was opened.) Such Partic-
ipating Plans will be notified of the pending exchange in writing within 30
days after the fifth anniversary of the enrollment date and, unless the
exchange offer has been rejected in writing, the exchange will occur on or
about the 90th day after the fifth anniversary date. If the Participating Plan
does not qualify for the five year exchange to Class A shares, a review of the
Participating Plan's holdings will be performed each quarter until either the
Participating Plan qualifies or the end of the eighth year.
 
  401(k) Plans Opened Prior to June 21, 1996. In any year after the date a 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 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 Par-
ticipating 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 Smith Barney Financial Consultant.
 
22
<PAGE>
 
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
 
  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
 
                                                                              23
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
 
    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
 
  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.
 
24
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
 
  Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a 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.
 
  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.
 
                                                                             25
<PAGE>
 
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 redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Transfer Agent receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the third business day following receipt of proper
tender, except on any days on which the NYSE is closed or as permitted under
the Investment Company Act of 1940, as amended (the "1940 Act"), in extraordi-
nary circumstances. Generally, if the redemption proceeds are remitted to a
Smith Barney brokerage account, these funds will not be invested for the share-
holder's benefit without specific instruction and Smith Barney will benefit
from the use of temporarily uninvested funds. Redemption proceeds for shares
purchased by check, other than a certified or official bank check, will be
remitted upon clearance of the check, which may take up to ten days or more.
 
  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting 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 First Data 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 guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Fed-
 
26
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
eral 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 proceeds 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. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly
received until First Data receives all required documents in proper form.
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
  Shareholders who do not have a Smith Barney brokerage account may be eligi-
ble to redeem and exchange Fund shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, including a sig-
nature guarantee, that will be provided by First Data upon request. (Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with 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.
(New York City time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value next determined. Redemptions of shares (i) by retirement plans or (ii)
for which certificates have been issued are not permitted under this program.
 
  A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal
fee for each wire redemption. Such charges, if any, will be assessed against
the shareholder's account from which shares were redeemed. In order to change
the bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee
and certain other documentation.
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the
 
                                                                             27
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
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. (New York City 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 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 shareholder's shares subject to the
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant or their
financial consultant, Introducing Broker or dealer in the selling group.
 
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, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
 
28
<PAGE>
 
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
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
[    ], 1998 in excess of $[   ] 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
 
                                                                              29
<PAGE>
 
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
 
and securities analysts who provide research services to the Fund. For invest-
ment management services rendered, the Fund pays the Manager a monthly fee at
the annual rate of 0.[  ]% of the value of the Fund's average daily net assets.
 
 PORTFOLIO MANAGEMENT
  [     ], Vice President and Investment Officer of the Fund, is the portfolio
manager and manages the day-to-day operations of the Fund, including making all
investment decisions.
 
DISTRIBUTION
 
 
  CFBDS, Inc. distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring CFBDS, Inc. 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 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. 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 average daily net assets
attributable to those Classes. Class B shares which automatically 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 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 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 Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and
sales promotion expenses.
 
  The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class L shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
 
  Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Fund's Board of Direc-
tors will
 
30
<PAGE>
 
DISTRIBUTION (CONTINUED)
 
evaluate the appropriateness of the Plan and its payment terms on a continuing
basis and in so doing will consider all relevant factors, including expenses
borne by Smith Barney, amounts received under the Plan and proceeds of the
CDSC.
 
  On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also sub-
ject to approval by the stockholders of each of Travelers and Citicorp. Trav-
elers has filed an application to become a bank holding company so that, upon
consummation of the merger, the surviving corporation would be 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 will then be applicable to Travelers and its subsidiaries. The
Glass-Steagall Act currently prohibits certain financial institutions from
underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund as retained the services of CFBDS, Inc. as Dis-
tributor.
 
  The Manager does not believe that its compliance with applicable law follow-
ing the merger of Travelers and Citicorp will have a material adverse effect
on its ability to continue to provide the Fund with the same level of invest-
ment advisory services that it currently receives. Smith Barney and the Man-
ager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not under-
writing and are consistent with the Glass-Steagall Act and other relevant fed-
eral and state laws. However, there is little controlling precedent regarding
the performance of the combination of investment advisory, shareholder servic-
ing and administrative activities by subsidiaries of bank holding companies.
If Smith Barney and the Manager, or their affiliates, were to be prevented
from acting as the manager or a shareholder service agent, the Fund would seek
alternative means for obtaining these services. The Fund does not expect that
shareholders would suffer any adverse financial consequences as a result of
any such occurrence.
 
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, privi-
 
                                                                             31
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
 
leges and preferences, except with respect to: (a) the designation 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 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 con-
sider 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 Company'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 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 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 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
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 ability 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 management
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,
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>
 
 
 
 
                      [THIS PAGE INTENTIONALLY LEFT BLANK]
 
 
 
<PAGE>
 
 
 
 
                      [THIS PAGE INTENTIONALLY LEFT BLANK]
 
 
 
<PAGE>
 
 
                                                 SMITH BARNEY
                                                 -------------------------------
                                                 A Member of TravelersGroup LOGO
 
 
 
 
 
                                              SMITH BARNEY SMALL CAP GROWTH FUND
 
                                                            388 Greenwich Street
                                                        New York, New York 10013
 
                                                                   FD       9/98


<PAGE>
 
P R O S P E C T U S

                                                                    SMITH BARNEY
                                                                       Small Cap
                                                                           Value
                                                                            Fund
                                                              SEPTEMBER 30, 1998
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
LOGO Smith Barney Mutual Funds
     INVESTING FOR YOUR FUTURE.
     EVERY DAY.

<PAGE>
 
PROSPECTUS                                                  SEPTEMBER 30, 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 [    ],
1998, (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 [    ], 1998. 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 September 30, 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 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
 
<TABLE>
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    9
-------------------------------------------------
VALUATION OF SHARES                            11
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             11
-------------------------------------------------
PURCHASE OF SHARES                             13
-------------------------------------------------
EXCHANGE PRIVILEGE                             23
-------------------------------------------------
REDEMPTION OF SHARES                           26
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           28
-------------------------------------------------
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 $[1.6] 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 immediately invested in the Fund. In addition, Class A share
purchases of $500,000
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
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 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 purchase Class A shares at
net asset value or at a reduced sales charge should consider doing so.
 
  Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on 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."
 
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained by Smith Barney during the Initial Subscription Period. During the con-
tinuous offering period, shares may also be purchased through a brokerage
account maintained with Smith Barney, a broker that clears securities transac-
tions through Smith Barney on a fully disclosed basis (an "Introducing Broker")
or any other investment dealer in the selling group. In addition, certain
investors, including qualified retirement plans and certain institutional
investors, may purchase shares directly from the Fund through the Fund's trans-
fer 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 [    ], 1998, (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 offer-
ing of shares is expected to commence on or about [    ], 1998. 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. 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 Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services including Asset Management, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. See "Management of the
Trust 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 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."
 
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and 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 25% 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."
 
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                              [   %]  [   %]  [   %]  [   %]
    12b-1 fees**                                 0.25    1.00    1.00    None
    Other expenses***                            [   ]   [   ]   [   ]   [   ]
-------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES                  [   %]  [   %]  [   %]  [   %]
-------------------------------------------------------------------------------
</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 August 31, 1999.
 
                                                                              7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
  The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of 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." 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, 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% dis-
tribution fee and a 0.25% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
 
 EXAMPLE
 
  The following example is intended to assist an investor in understanding the
various costs that an investor in the 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 $1,000
  investment, assuming (1) 5.00% annual return and (2) redemp-
  tion at the end of each time period:
    Class A....................................................  [$
    Class B....................................................
    Class L....................................................
    Class Y....................................................            ]
  An investor would pay the following expenses on the same
  investment, assuming the same annual return and no redemp-
  tion:
    Class A....................................................  [$
    Class B....................................................
    Class L....................................................
    Class Y....................................................            ]
------------------------------------------------------------------------------
</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.
 
 
8
<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 compa-
nies for purposes of the 65% policy. Investments in smaller 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, small capitalized
companies may be subject to a 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 25% of its total assets in foreign securities, including
both
 
                                                                              9
<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; 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 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 Smith Barney Inc. ("Smith Barney") depend on
the smooth functioning of their computer systems. Many computer software sys-
tems 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 securities trades, pricing and account services. The Manager and
Smith Barney have advised the Fund that they have been reviewing all of their
computer systems 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 cus-
todian, transfer agent and accounting
 
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
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,
Smith Barney or any other service provider will be successful, or that inter-
action with other non-complying computer systems will not impair Fund services
at that time.
 
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 reinvested automatically in additional
shares of the same Class at net asset value, with no additional sales charge
or CDSC. A shareholder may change the option at any time by notifying his or
her Smith Barney Financial Consultant or their financial consultant, Introduc-
ing Broker or dealer in the selling group. 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
distribution 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).
 
                                                                             11
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
 
 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.
 
  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 disposi-
tion. 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 num-
ber (social security
 
12
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
or employer identification number). Withholding from taxable dividends and
capital gain distributions also is required for shareholders who otherwise are
subject to backup withholding. Any tax withheld as a result of backup with-
holding 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 brokerage account maintained with Smith Barney. Shares of the
Fund subscribed for during the Subscription Period for which the Fund accepts
purchase 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 $[   ], which equals the Class A share initial net asset
value per share of $[   ] 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 $[   ].
 
  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.
 
 
                                                                             13
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 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 brokerage
account maintained with Smith Barney. Shares may also be purchased through an
Introducing Broker or any other investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
other institutional investors, may purchase shares directly from the Fund
through First Data. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class B, Class L or Class Y shares. Smith
Barney and other broker/dealers may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data 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 and Class L shares and the subse-
quent investment requirement for all Classes is $25. For shareholders purchas-
ing shares of the Fund through the Systematic Investment Plan on a quarterly
basis, the minimum initial investment 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 Travelers and its subsidiaries, including Smith Barney, Direc-
tors or Trustees of any of the Smith Barney Mutual Funds, and their
 
14
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
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 share-
holder's written request to the Transfer Agent.
 
  Purchase orders received by the Fund or Smith Barney 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 dealers or Introducing Brokers 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 Smith Barney prior to Smith Barney's close
of business. For shares purchased through Smith Barney or Introducing Brokers
purchasing through Smith Barney, payment for 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, 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 insufficient funds to com-
plete the transfer will be charged a fee of up to $25 by Smith Barney or the
Transfer Agent. The Systematic Investment Plan also authorizes Smith Barney to
apply cash held in the shareholder's Smith Barney brokerage account or redeem
the shareholder's shares of a Smith Barney money market fund to make additions
to the account. Additional information is available from the Fund or a Smith
Barney Financial Consultant.
 
                                                                              15
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
 INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
  The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
 
<TABLE>
<CAPTION>
                                  SALES CHARGE
                         ------------------------------      DEALERS'
                              % OF           % OF       REALLOWANCE AS % OF
  AMOUNT OF INVESTMENT   OFFERING PRICE AMOUNT INVESTED   OFFERING PRICE
---------------------------------------------------------------------------
  <S>                    <C>            <C>             <C>
  Less than $ 25,000          5.00%          5.26%             4.50%
  $ 25,000 -  49,999          4.00           4.17              3.60
    50,000 -  99,999          3.50           3.63              3.15
   100,000 - 249,999          3.00           3.09              2.70
   250,000 - 499,999          2.00           2.04              1.80
   500,000   and over          *               *                 *
---------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
  value without any initial sales charge but will be subject to a CDSC of 1.00%
  on redemptions made within 12 months of purchase. The CDSC on Class A shares
  is payable to Smith Barney, which compensates Smith Barney Financial
  Consultants and other dealers whose clients make purchases of $500,000 or
  more. The CDSC is waived in the same circumstances in which the CDSC
  applicable to Class B and Class L shares is waived. See "Deferred Sales
  Charge Alternatives" and "Waivers of CDSC."
 
  Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
 
  The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the 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.
 
 INITIAL SALES CHARGE WAIVERS
  Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and of any of the Smith Barney
Mutual Funds or other Travelers affiliated funds (including retired Board mem-
bers and employees); the immediate families of such persons (including the sur-
viving spouse of a deceased Board Member or employee); and to a pension, prof-
it-sharing or other benefit plan for such persons and (ii) employees of members
of the NASD, 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 com-
pany with the Fund by merger, acquisition of assets or otherwise; (c) purchases
of Class A shares by any client of a newly employed Smith Barney Financial Con-
sultant (for a period up to 90 days from the commencement of the Financial Con-
sultant's employment with Smith Barney), on the condition the purchase of Class
A shares is made with the
 
16
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
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) pur-
chases by shareholders who have redeemed Class A shares in the Fund or Class A
shares of another fund of the Smith Barney Mutual Funds that are offered with
a sales charge, and who wish to reinvest their redemption proceeds in the
Fund, provided the reinvestment is made within 60 calendar days of the redemp-
tion; (e) purchases by accounts managed by registered investment advisory sub-
sidiaries of Travelers; (f) direct rollovers by plan participants of distribu-
tions from a 401(k) plan offered to employees of Travelers or its subsidiaries
or a 401(k) plan enrolled in the Smith Barney 401(k) Program (Note: subsequent
investments will be subject to the applicable sales charge); (g) purchases by
separate accounts used to fund certain unregistered variable annuity con-
tracts; (h) purchases by investors participating in a Smith Barney fee-based
arrangement; and (i) purchases of Class A shares by Section 403(b) or 401(a)
or (k) accounts associated with Copeland Retirement Programs. 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 other Smith Barney Mutual Funds which are
offered with a sales charge listed under "Exchange Privilege" then held by
such person and applying the sales charge applicable to such aggregate. In
order to obtain such discount, the purchaser must provide sufficient informa-
tion at the time of purchase to permit verification that the purchase quali-
fies for the reduced sales charge. The right of accumulation is subject to
modification or discontinuance at any time with respect to all shares pur-
chased thereafter.
 
 GROUP PURCHASES
  Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of the Smith Barney Mutual Funds
offered with a sales charge to, and share holdings of, all members of the
group. To be eligible for such reduced sales charges or to purchase at net
asset value, all purchases must be pursuant to an employer- or partnership-
sanctioned plan meeting certain require-
 
                                                                             17
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
ments. One such requirement is that the plan must be open to specified partners
or employees of the employer and its subsidiaries, if any. Such plan may, but
is not required to, provide for payroll deductions, IRAs or investments pursu-
ant to retirement plans under Sections 401 or 408 of the Code. Smith Barney may
also offer a reduced sales charge or net asset value purchase for aggregating
related fiduciary accounts under such conditions that Smith Barney will realize
economies of sales efforts and sales related expenses. An individual who is a
member of a qualified group may also purchase Class A shares at the reduced
sales charge applicable to the group as a whole. The sales charge is based upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the
amount of the current purchase. A "qualified group" is one which (a) has been
in existence for more than six months, (b) has a purpose other than acquiring
Fund shares at a discount and (c) satisfies uniform criteria which enable Smith
Barney to realize economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, must be available to arrange
for group meetings between representatives of the Fund and the members, and
must agree to include sales and other materials related to the Fund in its pub-
lications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the pur-
chaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
 
 LETTER OF INTENT
 
  Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge over the 13 month period based on the total amount
of intended purchases plus the value of all Class A shares previously purchased
and still owned. An alternative is to compute the 13 month period starting up
to 90 days before the date of execution of a Letter of Intent. Each investment
made during the period receives the reduced sales charge applicable to the
total amount of the investment goal. If the goal is not achieved within the
period, the investor must pay the difference between the sales charges applica-
ble to the purchases made and the charges previously paid, or an appropriate
number of escrowed shares will be redeemed. Please contact a Smith Barney
Financial Consultant or First Data to obtain a Letter of Intent application.
 
  Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
 
18
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
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 thirteen (13) months from the date of the Letter. If a total investment
of $15,000,000 is not made within the thirteen-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%. The Fund
expects that such transfer will not be subject to Federal income taxes. Please
contact a Smith Barney Financial Consultant or First Data for further informa-
tion.
 
 DEFERRED SALES CHARGE ALTERNATIVES
 
  "CDSC Shares" are sold at the net asset value next determined without an ini-
tial sales charge so that the full amount of an investor's purchase payment may
be immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. 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 subject to a CDSC.
 
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the time of
redemption. 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 L shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
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) Programs."
 
                                                                              19
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
<TABLE>
<CAPTION>
      YEAR SINCE PURCHASE
      PAYMENT WAS MADE      CDSC
---------------------------------
      <S>                   <C>
      First                 5.00%
      Second                4.00
      Third                 3.00
      Fourth                2.00
      Fifth                 1.00
      Sixth 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 also will be converted at that time
such proportion of Class B Dividend Shares owned by the shareholder as the
total number of his or her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than Class B Dividend
Shares) owned by the shareholder. See "Prospectus Summary--Alternative Pur-
chase Arrangements--Class B Shares Conversion Feature." The length of time
that CDSC Shares acquired through an exchange have been held will be calcu-
lated from the date that the shares exchanged were initially acquired in one
of the other applicable 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 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 redemp-
tion. The amount of any CDSC will be paid to Smith Barney.
 
  To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional 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
 
20
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
shareholder's shares will be permitted for withdrawal plans that were estab-
lished prior to November 7, 1994); (c) redemptions of shares within 12 months
following the death or disability of the shareholder; (d) redemptions of
shares made in connection with qualified distributions from retirement plans
or IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and
(f) redemptions of shares to effect a combination of the Fund with any invest-
ment company by merger, acquisition of assets or otherwise. In addition, 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 Smith Barney in the
case of shareholders who are also Smith Barney clients or by the Transfer
Agent in the case of all other shareholders) of the shareholder'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.
 
  Each Fund offers to Participating Plans Class A and Class L shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Pro-
grams. 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
 
                                                                             21
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
for Class A shares of a Fund. (For Participating Plans that were originally
established through a Smith Barney retail brokerage account, the five year
period will be calculated from the date the retail brokerage account was
opened.) Such Participating Plans will be notified of the pending exchange in
writing within 30 days after the fifth anniversary of the enrollment date and,
unless the exchange offer has been rejected in writing, the exchange will occur
on or about the 90th day after the fifth anniversary date. If the Participating
Plan does not qualify for the five year exchange to Class A shares, a review of
the Participating Plan's holdings will be performed each quarter until either
the Participating Plan qualifies or the end of the eighth year.
 
  401(k) Plans Opened Prior to June 21, 1996. In any year after the date a 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 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 Par-
ticipating 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 Smith Barney Financial
Consultant.
 
22
<PAGE>
 
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
 
  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.
 
                                                                              23
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
    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
 
  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.
 
24
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
 
  Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a 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.
 
  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.
 
                                                                             25
<PAGE>
 
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 redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Transfer Agent receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the third business day following receipt of proper
tender, except on any days on which the NYSE is closed or as permitted under
the Investment Company Act of 1940, as amended (the "1940 Act"), in extraordi-
nary circumstances. Generally, if the redemption proceeds are remitted to a
Smith Barney brokerage account, these funds will not be invested for the share-
holder's benefit without specific instruction and Smith Barney will benefit
from the use of temporarily uninvested funds. Redemption proceeds for shares
purchased by check, other than a certified or official bank check, will be
remitted upon clearance of the check, which may take up to ten days or more.
 
  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting 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 First Data 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 guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Fed-
 
26
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
eral 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 proceeds 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. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly
received until First Data receives all required documents in proper form.
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
 
  Shareholders who do not have a Smith Barney brokerage account may be eligi-
ble to redeem and exchange Fund shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, including a sig-
nature guarantee, that will be provided by First Data upon request. (Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with 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.
(New York City time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value next determined. Redemptions of shares (i) by retirement plans or (ii)
for which certificates have been issued are not permitted under this program.
 
  A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal
fee for each wire redemption. Such charges, if any, will be assessed against
the shareholder's account from which shares were redeemed. In order to change
the bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee
and certain other documentation.
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the
 
                                                                             27
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
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. (New York City 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 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 shareholder's shares subject to the
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant or their
financial consultant, Introducing Broker or dealer in the selling group.
 
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, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
 
28
<PAGE>
 
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
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
[    ], 1998 in excess of $[  ] 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
 
                                                                              29
<PAGE>
 
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
 
and securities analysts who provide research services to the Fund. For invest-
ment management services rendered, the Fund pays the Manager a monthly fee at
the annual rate of 0.[  ]% of the value of the Fund's average daily net assets.
 
 PORTFOLIO MANAGEMENT
 
  [     ], Vice President and Investment Officer of the Fund, is the portfolio
manager and manages the day-to-day operations of the Fund, including making all
investment decisions.
 
DISTRIBUTION
 
 
  CFBDS, Inc. distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring CFBDS, Inc. 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 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. 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 average daily net assets
attributable to those Classes. Class B shares which automatically 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 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 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 Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and
sales promotion expenses.
 
  The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class L shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
 
  Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Fund's Board of Direc-
tors will
 
30
<PAGE>
 
DISTRIBUTION (CONTINUED)
 
evaluate the appropriateness of the Plan and its payment terms on a continuing
basis and in so doing will consider all relevant factors, including expenses
borne by Smith Barney, amounts received under the Plan and proceeds of the
CDSC.
 
  On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also sub-
ject to approval by the stockholders of each of Travelers and Citicorp. Travel-
ers has filed an application to become a bank holding company so that, upon
consummation of the merger, the surviving corporation would be 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 will then be applicable to Travelers and its subsidiaries. The
Glass-Steagall Act currently prohibits certain financial institutions from
underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund has retained the services of CFBDS, Inc. as Dis-
tributor.
 
  The Manager does not believe that its compliance with applicable law follow-
ing the merger of Travelers and Citicorp 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. Smith Barney and the Manager
believe that the Manager's services under the Management Agreement and the
shareholder service activities performed by Smith Barney are not underwriting
and are consistent with the Glass-Steagall Act and other relevant federal and
state laws. However, their is little controlling precedent regarding the per-
formance of the combination of investment advisory, shareholder servicing and
administrative activities by subsidiaries of bank holding companies. If Smith
Barney and the Manager, or their affiliates, were to be prevented from acting
as the manager or a shareholder service agent, the Fund would seek alternative
means for obtaining these services. The Fund does not expect that shareholders
would suffer any adverse financial consequences as a result of any such occur-
rence.
 
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
 
                                                                              31
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
 
rights, privileges and preferences, except with respect to: (a) the designation
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 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 inter-
ests of the holders of the different Classes. The Directors, on an ongoing
basis, will consider whether any such conflicts exists and, if so, take appro-
priate 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 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 ability 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 management
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,
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>
 
 
 
 
                                              SMITH BARNEY
                                              -------------------------------
                                              A Member of TravelersGroup LOGO
 








 
                                                                 SMITH BARNEY 
                                                                    SMALL CAP 
                                                                        VALUE 
                                                                         FUND
 

                                                         388 Greenwich Street 
                                                     New York, New York 10013
 

                                                                FD       9/98




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
September 30, 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 September 30, 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 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 Smith Barney and Chairman of the Board of 
Smith Barney Strategy Advisers Inc.; prior 
to July 1993, Senior Executive Vice President of 
Shearson Lehman Brothers Inc.; Vice Chairman of 
Shearson Asset Management; a Director of PanAgora 
Asset Management, Inc. and PanAgora Asset Management 
Limited.  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 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.

Christina T. Sydor, Secretary (Age 47). Managing 
Director of 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 Smith Barney or 
any parent or  subsidiary receives any compensation 
from the Company for serving as an officer or Director 
of the Company.  The Company pays each Director who is 
not an officer, director or employee of Smith Barney 
or any of its affiliates a fee of $16,000 per annum 
plus $2,500 per meeting attended and reimburses travel 
and out-of-pocket  expenses.  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 Travelers Group 
Inc. ("Travelers"). 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 _______% of the 
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 August 31, 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, 
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 
of management.

	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 100%. 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. The Company has 
paid no brokerage commissions since its commencement 
of operations.

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 a 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 a 
Smith Barney Financial Consultant.

Determination of Public Offering Price

Each Fund offers its shares to the public on a 
continuous basis. The public offering price for a 
Class A and Class Y share of 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 (and 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"), however, 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 a 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, Inc. 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 compensate 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 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 Smith Barney a 
distribution fee with respect to the Class B and Class 
L shares primarily intended to compensate 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 C 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 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. 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.

Aggregate Total Return

"Aggregate total return" figures represent the 
cumulative change in the value of an investment in the 
Fund for the specified period and are computed by the 
following formula:

	ERV-P
	P

	Where:	P	=	a hypothetical initial 
payment of $10,000.
			ERV	=	Ending Redeemable Value 
of a hypothetical $ 10,000 investment made
					at the beginning of a 
l-, 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















































September 30, 1998

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

SMITH BARNEY
A Member of Travelers Group
SMCPSAIe
1


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

		Included in Part A:

		       

		Included in Part B:

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 filed herewith.

(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)Form of 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. are filed herewith.

(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 filed herewith.

(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 Invest 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 filed herewith.

(16) Performance Data is incorporated by reference to 
Post-Effective Amendment No. 22 as filed on May 1, 
1989. 
 
(17) Not Applicable 
 
(18)  Plan pursuant to Rule 18f-3 is incorporated by 
reference to Post-Effective Amendment No.42 to 
Registration Statement dated January 10, 1996. 
 
Item 25  Persons Controlled by or Under Common Control 
with Registrant 
 
None. 
 


Item 26.	Title of Class	Number of Record Holders

Smith Barney
Investment Grade Fund
 		Class A			12,970
		Class B			12,631
		Class C			508
		Class Y			4

Smith Barney
Government Securities Fund
		Class A			21,658
		Class B			6,124
		Class C			151
		Class Y			11

Smith Barney
Contrarian Fund
		Class A			15,981
		Class B			40,226
		Class C			4,967
		Class Y			8
		Class Z			1

Smith Barney
Special Equities Fund
		Class A			21,000
		Class B			30,564
		Class C			2,138
		Class Y			6
		Class Z			1

Concert
Peachtree Growth Fund
		Class A			123
		Class B			224
		Class C			31
		Class Y			7

Smith Barney Hansberger Global Small Cap
Value Fund
		Class A			625
		Class B			1,540
		Class C			428
		Class Y			3

Smith Barney Hansberger Global Value Fund
		Class A			2,130
		Class B			4,910
		Class C			1,260
		Class Y			9





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 
Travelers Group 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 effective on
or about ______, 1998, 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. will become the distributor effective
_______, 1998 for the following Smith Barney Mutual Fund
registrants: 
Consulting Group Capital Markets Funds
Global Horizons Investment Series (Cayman Islands)
Greenwich Street Series Fund
Puerto Rico Daily Liquidity Fund Inc.
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.
Smith Barney Worldwide Special Fund N.V. (Netherlands 
Antilles)
Travelers Series Fund Inc.
The USA High Yield Fund N.V.(Netherlands Antilles)
Worldwide Securities Limited  (Bermuda). 

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 
 
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 
16th day of July, 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		7/16/98 
Heath B. McLendon		(Chief Executive Officer) 
 
/s/ Lewis E. Daidone	 Senior Vice President 
Lewis E. Daidone		 and Treasurer			7/16/98 
				(Chief Financial 
				and Accounting Officer) 
 
/s/ Paul R. Ades	*		Director			7/16/98 
Paul R. Ades 
 
/s/ Herbert Barg*	 		Director			7/16/98 
Herbert Barg 
 
/s/ Dwight B. Crane*		Director			7/16/98 
Dwight B. Crane 
 
/s/ Frank Hubbard*		Director			7/16/98 
Frank Hubbard 

 /s/ Jerome Miller*		Director			7/16/98 
Jerome Miller 

/s/ Ken Miller*			Director			7/16/98 
Ken Miller 
 

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

EXHIBITS


Exhibit No.			Description of Exhibit


1                       Articles of Amendment

5(e)                    Form of Investment Management Agreements

6(c)                    Form of Distribution Agreement

15(d)				Form of  Amended and Restated Shareholder Services 
                        and Distribution Plan pursuant to Rule 12b-1