Smith Barney
INCOME FUNDS

388 Greenwich Street
New York, New York 10013
(800) 451-2010


Statement of Additional Information	
   
November 27, 1998, amended as of December 4, 1998 
    
   	This Statement of Additional Information expands upon and 
supplements the information contained in the current Prospectuses of 
Smith Barney Income Funds (the "Trust"), relating to seven investment 
funds offered by the Trust: Smith Barney Balanced Fund (the "Balanced 
Fund") (formerly Smith Barney Utilities Fund), Smith Barney Convertible 
Fund (the "Convertible Fund"), Smith Barney Diversified Strategic Income 
Fund (the "Diversified Strategic Income Fund"), Smith Barney Exchange 
Reserve Fund (the "Exchange Reserve Fund"), Smith Barney High Income 
Fund (the "High Income Fund"), Smith Barney Municipal High Income Fund 
(the "Municipal High Income Fund") and Smith Barney Total Return Bond 
Fund ("Total Return Bond Fund"), each a "Fund" and together the "Funds," 
each dated November 27, 1998, (except for Premium Total Return Fund 
which is dated April 29, 1998) as amended or supplemented from time to 
time (the "Prospectuses"), and should be read in conjunction with the 
Prospectuses. The Prospectuses may be obtained from any Salomon Smith 
Barney Financial Consultant or by writing or calling the Trust at the 
address or telephone number set forth above. This Statement of 
Additional Information, although not in itself a prospectus, is 
incorporated by reference into the Prospectuses in its entirety.
    

CONTENTS

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

Management of the Trust and the Funds	2
Investment Objectives and Management Policies. 	7
Purchase of Shares	27
Redemption of Shares	28
Distributor..	28
Valuation of Shares	31
Exchange Privilege	31
Performance Data (See in the Prospectuses "Performance" or "Yield 
Information")	32
Taxes (See in the Prospectuses "Dividends, Distributions and Taxes")	37
Additional Information	41
Voting Rights	42
Financial Statements	47
Appendix	A-1


 MANAGEMENT OF THE TRUST AND THE FUNDS

The executive officers of the Trust are employees of certain of the 
organizations that provide services to the Trust. These organizations 
are the following:
   
Name
Service
CFBDS, Inc. ("CFBDS")
Distributor
    
Mutual Management Corp. ("MMC"), 
(formerly known as Smith Barney 
Mutual Funds Management Inc.)  
Investment Adviser and Administrator 
to the Convertible Fund, Diversified  
Strategic Income Fund, Exchange 
Reserve Fund, High Income Fund, 
Municipal High Income Fund, Total 
Return Bond Fund and Balanced Fund. 
Smith Barney Global Capital 
Management Inc. ("Global Capital 
Management")
Sub-Investment Adviser to Diversified 
Strategic Income Fund
PNC Bank, National Association 
("PNC Bank")
Custodian to Convertible Fund, 
Exchange Reserve Fund, High Income 
Fund, Municipal High Income Fund, 
Total Return Bond Fund and Balanced 
Fund 
Chase Manhattan Bank ("Chase")
Custodian to Diversified Strategic 
Income Fund
First Data Investors Services 
Group, Inc. ("First Data")
Transfer Agent

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

Trustees and Executive Officers of the Trust

The Trustees and executive officers of the Trust, together with 
information as to their principal business occupations during the past 
five years, are shown below. The executive officers of the Trust are 
employees of organizations that provide services to the Funds. Each 
Trustee who is an "interested person" of the Trust, as defined in the 
Investment Company Act of 1940, as amended (the "1940 Act"), is 
indicated by an asterisk. 
   
Lee Abraham, Trustee (Age 71). Retired; formerly Chairman and Chief 
Executive Officer of Associated Merchandising Corporation, a major 
retail merchandising and sourcing organization. His address is 106 
Barnes Road, Stamford, Connecticut 06902.

Allan J. Bloostein, Trustee (Age 68). Consultant; formerly Vice Chairman 
of the Board of and Consultant to The May Department Stores Company; 
Director of Crystal Brands, Inc., Melville Corp. and R.G. Barry Corp. 
His address is 27 West 67th Street, New York, New York 10023.



Richard E. Hanson, Jr., Trustee (Age 57). Head of School, The New 
Atlanta Jewish Community High School, Atlanta Georgia; prior to July 1, 
1994, Headmaster, Lawrence Country Day School-Woodmere Academy, 
Woodmere, New York; prior to July 1, 1990, Headmaster of Woodmere 
Academy. His address is 58 Ivy Chase, Atlanta, GA  30342.

*Heath B. McLendon, Chairman of the Board and Investment Officer (Age 
65). Managing Director of Salomon Smith Barney Inc. ("Salomon Smith 
Barney") and Chairman of the Board of Smith Barney Strategy Advisers 
Inc.; and President of MMC and Travelers Investment Adviser, Inc. 
("TIA").  Mr. McLendon is Chairman or Co-Chairman of the Board and 
Director of 58 investment companies associated with Salomon Smith Barney 
Holdings Inc. His address is 388 Greenwich Street, New York, New York 
10013.
    
John C. Bianchi, Vice President and Investment Officer (Age 43). 
Managing Director of Salomon Smith Barney; Investment Officer of other 
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New 
York, New York 10013.

James E. Conroy, Vice President and Investment Officer (Age 47). 
Managing Director of Salomon Smith Barney. Investment Officer of other 
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New 
York, New York 10013.

Joseph P. Deane, Vice President and Investment Officer (Age 51).  
Managing Director of Salomon Smith Barney; Investment Officer of other 
Smith Barney Mutual Funds.  His address is 388 Greenwich Street, New 
York, New York 10013.
   
Simon R. Hildreth, Vice President and Investment Officer (Age 46). 
Managing Director of Salomon Smith Barney, member of the Investment 
Policy of Smith Barney Global Capital Management Inc.; Mr. Hildreth is 
Vice President and Investment Officer of other Smith Barney Mutual 
Funds. Prior to 1994, a Director of Mercury Asset Management Ltd., a 
fund manager located in the United Kingdom. His address is 10 
Piccadilly, London, WIV 9LA, UK.
    
       
Charles P. Graves, III, Vice President and Investment Officer (Age 36). 
Managing Director of Salomon Smith Barney. His address is 388 Greenwich 
Street, New York, New York 10013.

Lawrence T. McDermott, Vice President and Investment Officer (Age 50). 
Managing Director of Salomon Smith Barney. Investment Officer of other 
Smith Barney Mutual Funds. His address is 388 Greenwich Street, New 
York, New York 10013.

Robert E. Swab, Investment Officer (Age 43). Vice President of Salomon 
Smith Barney. His address is 388 Greenwich Street, New York, New York 
10013.
   
Phyllis M. Zahorodny, Vice President and Investment Officer (Age 40). 
Managing Director of Salomon Smith Barney. Investment Officer of other 
Smith Barney Mutual Funds.Her address is 388 Greenwich Street, New York, 
New York 10013.

Lewis E. Daidone, Senior Vice President and Treasurer (Age 41). 
Managing Director of Salomon Smith Barney; Director and Senior Vice 
President of MMC and TIA.  Mr. Daidone serves as Senior Vice President 
and Treasurer or Executive Vice President and Treasurer of other 
investment companies associated with Salomon Smith Barney.  His address 
is 388 Greenwich Street, New York, New York 10013.

Christina T. Sydor, Secretary (Age 47). Managing Director of Salomon 
Smith Barney; General Counsel and Secretary of MMC and TIA. Ms. Sydor 
serves as Secretary or Executive Vice President and General Counsel of 
other investment companies associated with Salomon Smith Barney. Her 
address is 388 Greenwich Street, New York, New York 10013.
    
	Each Trustee also serves as a director, trustee and/or general 
partner of certain other Smith Barney Mutual Funds. Global Capital 
Management and MMC are "affiliated persons" of the Trust as defined in 
the 1940 Act by virtue of their positions as investment advisers to the 
Funds. As of November 6, 1998, the Trustees and officers of the Funds, 
as a group, owned less than 1% of the outstanding shares of beneficial 
interest of each Fund.

	No officer, director or employee of Salomon Smith Barney or any 
Salomon Smith Barney parent or subsidiary receives any compensation from 
the Trust for serving as an officer or Trustee of the Trust. The Trust 
pays each Trustee who is not an officer, director or employee of Salomon 
Smith Barney or any of its affiliates a fee of $17,000 per year plus 
$3,250 per meeting attended, and reimburses them for travel and out-of-
pocket expenses. For the fiscal year ended July 31, 1998, such travel 
and out-of-pocket expenses totaled $5,368.

   
	For the fiscal year ended July 31, 1998 and the calendar year 
ended December 31, 1997, the Trustees of the Trust were paid the 
following compensation:





Trustee(*)

Aggregate 
Compensation 
from the Funds 
for the Fiscal 
Year ended
July 31, 1998

Total 
Pension or 
Retirement 
Benefits 
Accrued 
from the 
Funds
Aggregate 
Compensation 
from the Funds 
and the Fund 
Complex for the 
Year ended 
December 31, 
1997


Number of 
Funds for 
Which Person 
Served 
Within Fund 
Complex





Lee Abraham 
$37,810
$0
$38,650
2

Allan J. 
Bloostein 
38,070
0
85,850
8

Richard E. 
Hanson, Jr. 
38,170
0
47,350
2

Heath B. 
McLendon 
0
0
0
58
    

Investment Advisers, Sub-Investment Advisers and Administrator
   
MMC serves as investment adviser ("Investment Adviser") to one or more 
Funds pursuant to a separate written agreement with the relevant Fund 
(an "Advisory Agreement").  MMC is a wholly owned subsidiary of Salomon 
Salomon Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly 
owned subsidiary of Citigroup Inc. ("Citigroup") The Advisory 
Agreements were most recently approved by the Board of Trustees, 
including a majority of the Trustees who are not "interested persons" of 
the Trust or the Advisers ("Independent Trustees"), on August 5 1998. 
MMC also serves as administrator (the "Administrator") to each Fund 
pursuant to a separate written agreement dated May 4, 1994 (the 
"Administration Agreement") which was most recently approved by the 
Board on August 5, 1998. Global Capital Management serves as a sub-
investment adviser ("Sub-Investment Adviser") to Diversified Strategic 
Income Fund, pursuant to a written agreement dated March 21, 1994, 
respectively.  Both agreements were most recently approved by the Fund's 
Board of Trustees, including a majority of the Independent Trustees, on 
August 5, 1998. 
    
	Certain of the services provided to the Trust by the Investment 
Advisers and the Sub-Investment Advisers are described in the 
Prospectuses under "Management of the Trust and the Fund." Each 
Investment Adviser, Sub-Investment Adviser, and the Administrator pays 
the salaries of all officers and employees who are employed by both it 
and the Trust, and maintains office facilities for the Trust. In 
addition to those services, MMC furnishes the Trust with statistical and 
research data, clerical help and accounting, data processing, 
bookkeeping, internal auditing and legal services and certain other 
services required by the Trust, prepares reports to the Funds' 
shareholders and prepares tax returns, reports to and filings with the 
Securities and Exchange Commission (the "SEC") and state Blue Sky 
authorities. The Investment Advisers and Sub-Investment Advisers bear 
all expenses in connection with the performance of their services.

	As compensation for investment advisory services, each Fund pays 
its Investment Adviser a fee computed daily and paid monthly at the 
following annual rates:



Fund

Investment Advisory 
Fee As a Percentage 
of Average Net 
Assets

Convertible Fund
0.50%

Diversified Strategic Income Fund
0.45%

Exchange Reserve Fund
0.30%

High Income Fund
0.50%

Municipal High Income Fund
0.40%

Total Return Bond Fund
0.65%

Balanced Fund 
0.45%

	For the periods below, the Funds paid investment advisory fees to 
their respective Investment Advisers as follows:



For the Fiscal Year Ended July 31:

Fund
   
1996
1997
1998

Convertible Fund

$417,942
$489,663
$665,663

Diversified Strategic 
Income Fund

11,818,108
12,546,980
13,233,258

Exchange Reserve Fund

448,925
442,557
326,309

High Income Fund

4,506,352
5,646,405
7,363,535

Municipal High Income 
Fund

3,771,279
3,395,338
3,103,442

Total Return Bond Fund(1)

N/A
N/A
378,792

Balanced Fund

8,094,511
6,431,624
5,097,517

____________________________
(1) 	Total Return Bond Fund waived $124,974 in management fees for the 
fiscal year ended July 31, 1998.  The administrative fees have 
been included in the total for management fees.
    

	As compensation for administrative services, each Fund pays the 
Administrator a fee computed daily and paid monthly at the annual rate 
of 0.20% of the Fund's average daily net assets.  For the periods shown 
below, the Funds paid administrative fees to MMC:




For the Fiscal Year Ended July 31:
Fund

1996
1997
1998
   
Convertible Fund

$167,177
$195,865
$266,265

Diversified Strategic 
Income Fund

5,252,493
5,576,436
5,881,448

Exchange Reserve Fund

299,283
295,038
217,539

High Income Fund

1,802,541
2,258,562
2,945,414

Municipal High Income 
Fund

1,885,640
1,697,669
1,551,721

Total Return Bond Fund*
N/A
N/A
N/A

Balanced Fund

3,597,560
2,858,500
2,265,563

___________________________
*	The administrative fees have been included in the total for 
management fees.
    

   
	For the fiscal years ended July 31, 1996, 1997 and 1998, 
Diversified Strategic Income Fund paid Global Capital Management sub-
investment advisory fees of $2,626,246, $2,788,218 and $2,940,724, 
respectively.
    
	Each Investment Adviser and MMC, as administrator, have agreed 
that if in any fiscal year the aggregate expenses of the Fund that it 
serves (including fees payable pursuant to its Advisory Agreement and 
Administration Agreement, but excluding interest, taxes, brokerage, 
distribution and service fees and, if permitted by the relevant state 
securities commission, extraordinary expenses) exceed the expense 
limitation of any state having jurisdiction over the Fund, the 
Investment Adviser and MMC will, to the extent required by state law, 
reduce their fees by the amount of such excess expenses, such amount to 
be allocated between them in the proportion that their respective fees 
bear to the aggregate of the fees paid by the Fund. Such fee reduction, 
if any, will be estimated and reconciled on a monthly basis. The most 
restrictive state expense limitation applicable to any Fund is 2.5% of 
the first $30 million of the Fund's average daily net assets, 2% of the 
next $70 million of the average daily net assets and 1.5% of the 
remaining average daily net assets of the Fund. No such fee reduction 
was required for the fiscal years ended July 31, 1996, 1997 and 1998.

	The Trust bears expenses incurred in its operations, including: 
taxes, interest, brokerage fees and commissions, if any; fees of 
Trustees who are not officers, directors, shareholders or employees of 
Salomon Smith Barney or MMC; SEC fees and state Blue Sky qualification 
fees; charges of custodians; transfer and dividend disbursing agent 
fees; certain insurance premiums; outside auditing and legal expenses; 
costs of maintaining corporate existence; costs of investor services 
(including allocated telephone and personnel expenses); costs of 
preparing and printing of prospectuses for regulatory purposes and for 
distribution to existing shareholders; costs of shareholders' reports 
and shareholder meetings; and meetings of the officers or Board of 
Trustees of the Trust.

Counsel and Auditors

	Willkie Farr & Gallagher serves as legal counsel to the Trust. The 
Trustees who are not "interested persons" of the Fund have selected 
Stroock & Stroock & Lavan, LLP as their legal counsel. 
   
	KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154 
has been selected as the Trust's independent auditor to examine and 
report on the Trust's financial statements and highlights for the fiscal 
year ending July 31, 1999.
    
	In the interest of economy and convenience, certificates 
representing shares in the Trust are not physically issued except upon 
specific request made by a shareholder to First Data. First Data 
maintains a record of each shareholder's ownership of Trust shares. 
Shares do not have cumulative voting rights, which means that holders of 
more than 50% of the shares voting for the election of Trustees can 
elect all of the Trustees. Shares are transferable but have no 
preemptive or subscription rights. Shareholders generally vote by Fund, 
except with respect to the election of Trustees and the selection of 
independent public accountants.

	Massachusetts law provides that, under certain circumstances, 
shareholders could be held personally liable for the obligations of the 
Trust. However, the Trust Agreement disclaims shareholder liability for 
acts or obligations of the Trust and requires that notice of such 
disclaimer be given in each agreement, obligation or instrument entered 
into or executed by the Trust or a Trustee. The Trust Agreement provides 
for indemnification from the Trust's property for all losses and 
expenses of any shareholder held personally liable for the obligations 
of the Trust. Thus, the risk of a shareholder's incurring financial loss 
on account of shareholder liability is limited to circumstances in which 
the Trust would be unable to meet its obligations, a possibility that 
the Trust's management believes is remote. Upon payment of any liability 
incurred by the Trust, the shareholder paying the liability will be 
entitled to reimbursement from the general assets of the Trust. The 
Trustees intend to conduct the operations of the Trust in such a way so 
as to avoid, as far as possible, ultimate liability of the shareholders 
for liabilities of the Trust. 


INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES

	The Prospectuses discuss the investment objectives of the Funds 
and the policies to be employed to achieve those objectives. This 
section contains supplemental information concerning the types of 
securities and other instruments in which the Funds may invest, the 
investment policies and portfolio strategies that the Funds may utilize 
and certain risks attendant to such investments, policies and 
strategies.

	U.S. Government Securities (All Funds). United States government 
securities include debt obligations of varying maturities issued or 
guaranteed by the United States government or its agencies or 
instrumentalities ("U.S. government securities"). U.S. government 
securities include not only direct obligations of the United States 
Treasury, but also securities issued or guaranteed by the Federal 
Housing Administration, Farmers Home Administration, Export-Import Bank 
of the United States, Small Business Administration, Government National 
Mortgage Association ("GNMA"), General Services Administration, Central 
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Land 
Banks, Federal National Mortgage Association ("FNMA"), Maritime 
Administration, Tennessee Valley Authority, District of Columbia Armory 
Board, Student Loan Marketing Association, International Bank for 
Reconstruction and Development, and Resolution Trust Corporation. 
Certain U.S. government securities, such as those issued or guaranteed 
by GNMA, FNMA and Federal Home Loan Mortgage Corporation ("FHLMC"), are 
mortgage-related securities. Because the United States government is not 
obligated by law to provide support to an instrumentality that it 
sponsors, a Fund will invest in obligations issued by such an 
instrumentality only if its Investment Adviser determines that the 
credit risk with respect to the instrumentality does not make its 
securities unsuitable for investment by the Fund.

	Bank Obligations (All Funds). 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 a 
Fund, depending upon the principal amount of certificates of deposit 
("CDs") of each held by the Fund) and are subject to Federal examination 
and to a substantial body of Federal law and regulation. As a result of 
Federal and state laws and regulations, domestic branches of domestic 
banks are, among other things, generally required to maintain specified 
levels of reserves, and are subject to other supervision and regulation 
designed to promote financial soundness.

	Obligations of foreign branches of U.S. banks, such as CDs and 
time deposits ("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 governmental regulation. Obligations of foreign 
branches of U.S. banks and foreign banks are subject to different risks 
than are those of U.S. banks or U.S. 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 U.S. 
banks are not necessarily subject to the same or similar regulatory 
requirements that apply to U.S. 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 U.S. bank than about a 
U.S. bank. CDs issued by wholly owned Canadian subsidiaries of U.S. 
banks are guaranteed as to repayment of principal and interest, but not 
as to sovereign risk, by the U.S. parent bank. 

	Obligations of U.S. 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 Federal and 
state regulation as well as governmental action in the country in which 
the foreign bank has its head office. A U.S. 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 U.S. branch of a foreign 
bank than about a U.S. bank.

	In view of the foregoing factors associated with the purchase of 
CDs and TDs issued by foreign banks and foreign branches of U.S. banks, 
a Fund's Investment Adviser will carefully evaluate such investments on 
a case-by-case basis.

	The Exchange Reserve Fund may purchase a CD issued by a bank, 
savings and loan association or other banking institution with less than 
$1 billion in assets (a "Small Issuer CD") so long as the issuer is a 
member of the FDIC or Office of Thrift Supervision and is insured by the 
Savings Association Insurance Fund ("SAIF"), and so long as the 
principal amount of the Small Issuer CD is fully insured and is no more 
than $100,000. The Exchange Reserve Fund will at any one time hold only 
one Small Issuer CD from any one issuer. Savings and loan associations 
whose CDs may be purchased by the Funds are members of the Federal Home 
Loan Bank and are insured by the SAIF. As a result, such savings and 
loan associations are subject to regulation and examination.

	Ratings as Investment Criteria (All Funds). In general, the 
ratings of nationally recognized statistical rating organizations 
("NRSROs") represent the opinions of these agencies as to the quality of 
securities that they rate. Such ratings, however, are relative and 
subjective, and are not absolute standards of quality and do not 
evaluate the market value risk of the securities. These ratings will be 
used by the Funds as initial criteria for the selection of portfolio 
securities, but the Funds also will rely upon the independent advice of 
their respective Investment Advisers and/or Sub-Investment Advisers to 
evaluate potential investments. Among the factors that will be 
considered are the long-term ability of the issuer to pay principal and 
interest, and general economic trends. The Appendix to this Statement of 
Additional Information contains further information concerning the 
rating categories of NRSROs and their significance.

	Subsequent to its purchase by a Fund, an issue of securities may 
cease to be rated or its rating may be reduced below the minimum 
required for purchase by the Fund. In addition, it is possible that an 
NRSRO might not change its rating of a particular issue to reflect 
subsequent events. None of these events will require sale of such 
securities by a Fund, but the Fund's Investment Adviser and/or Sub-
Investment Adviser will consider such events in its determination of 
whether the Fund should continue to hold the securities. In addition, to 
the extent that the ratings change as a result of changes in such 
organizations or their rating systems, or due to a corporate 
reorganization, a Fund will attempt to use comparable ratings as 
standards for its investments in accordance with its investment 
objective and policies.

	When-Issued Securities and Delayed-Delivery Transactions 
(Diversified Strategic Income, High Income, Total Return Bond and 
Municipal High Income Funds). To secure an advantageous price or yield, 
these Funds may purchase certain securities on a when-issued basis or 
purchase or sell securities for delayed delivery. A Fund will enter into 
such 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 a 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, a Fund will rely on the other party to 
consummate the transaction and may be disadvantaged if the other party 
fails to do so.

	U.S. government securities and Municipal Securities (as defined 
below) are normally subject to changes in value based upon changes, real 
or anticipated, in the level of interest rates and, although to a lesser 
extent in the case of U.S. government securities, the public's 
perception of the creditworthiness of the issuers. In general, U.S. 
government securities and Municipal Securities tend to appreciate when 
interest rates decline and depreciate when interest rates rise. 
Purchasing these securities on a when-issued 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.

	In the case of the purchase of securities on a when-issued or 
delayed-delivery basis by a Fund, the Fund will meet its obligations on 
the settlement date from then-available cash flow, the sale of 
securities held in the segregated account, the sale of other securities 
or, although it would not normally expect to do so, from the sale of the 
securities purchased on a when-issued or delayed-delivery basis (which 
may have a value greater or less than the Fund's payment obligations).

	Lending of Portfolio Securities (Convertible, Diversified 
Strategic Income, High Income, Total Return Bond and Balanced Funds). 
These Funds have the ability to lend portfolio securities to brokers, 
dealers and other financial organizations. Such loans, if and when made, 
may not exceed 20% of a Fund's total assets taken at value, except Total 
Return Bond Fund, which may lend its portfolio securities to the fullest 
extent allowed under the 1940 Act. A Fund will not lend portfolio 
securities to Salomon Smith Barney unless it has applied for and 
received specific authority to do so from the SEC. Loans of portfolio 
securities will be collateralized by cash, letters of credit or U.S. 
government securities which are maintained at all times in an amount at 
least equal to the current market value of the loaned securities. From 
time to time, a Fund may pay a part of the interest earned from the 
investment of collateral received for securities loaned to the borrower 
and/or a third party which is unaffiliated with the Fund and is acting 
as a "finder."

	By lending its securities, a Fund can increase its income by 
continuing to receive interest on the loaned securities as well as by 
either investing the cash collateral in short-term instruments or 
obtaining yield in the form of interest paid by the borrower when U.S. 
government securities are used as collateral. A Fund will comply with 
the following conditions whenever its portfolio securities are loaned: 
(a) the Fund must receive at least 100% cash collateral or equivalent 
securities from the borrower; (b) the borrower must increase such 
collateral whenever the market value of the securities loaned rises 
above the level of such collateral; (c) the Fund must be able to 
terminate the loan at any time; (d) the Fund must receive reasonable 
interest on the loan, as well as any dividends, interest or other 
distributions on the loaned securities, and any increase in market 
value; (e) the Fund may pay only reasonable custodian fees in connection 
with the loan; and (f) voting rights on the loaned securities may pass 
to the borrower; provided, however, that if a material event adversely 
affecting the investment in the loaned securities occurs, the Trust's 
Board of Trustees 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 a 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 each Fund's 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.

	Medium-, Low- and Unrated Securities (Convertible, Diversified 
Strategic Income, High Income, Total Return Bond and Municipal High 
Income Funds).  The Fund may invest in medium- or low- rated securities 
and unrated securities of comparable quality. Generally, these 
securities offer a higher current yield than the yield offered by 
higher-rated securities, but involve greater volatility of price and 
risk of loss of income and principal, including the probability of 
default by or bankruptcy of the issuers of such securities. Medium- and 
low-rated and comparable unrated securities: (a) will likely have some 
quality and protective characteristics that, in the judgment of the 
rating organization, are outweighed by large uncertainties or major 
risk exposures to adverse conditions and (b) are predominantly 
speculative with respect to the issuer's capacity to pay interest and 
repay principal in accordance with the terms of the obligation. Thus, 
it is possible that these types of factors could, in certain instances, 
reduce the value of securities held by the Fund with a commensurate 
effect on the value of the Fund's shares. Therefore, an investment in 
the Fund should not be considered as a complete investment program and 
may not be appropriate for all investors. 

	While the market values of medium- and low-rated and comparable 
unrated securities tend to react less to fluctuations in interest rate 
levels than do those of higher-rated securities, the market values of 
certain of these securities also tend to be more sensitive to 
individual corporate developments and changes in economic conditions 
than higher-rated securities. In addition, medium- and low-rated and 
comparable unrated securities generally present a higher degree of 
credit risk. Issuers of medium- and low-rated and comparable unrated 
securities are often highly leveraged and may not have more traditional 
methods of financing available to them so that their ability to service 
their debt obligations during an economic downturn or during sustained 
periods of rising interest rates may be impaired. The risk of loss due 
to default by such issuers is significantly greater because medium- and 
low-rated and comparable unrated securities generally are unsecured and 
frequently are subordinated to the prior payment of senior 
indebtedness. The Fund may incur additional expenses to the extent that 
it is required to seek recovery upon a default in the payment of 
principal or interest on its portfolio holdings. In addition, the 
markets in which medium- and low-rated or comparable unrated securities 
are traded generally are more limited than those in which higher- rated 
securities are traded. The existence of limited markets for these 
securities may restrict the availability of securities for the Fund to 
purchase and also may have the effect of limiting the ability of the 
Fund to: (a) obtain accurate market quotations for purposes of valuing 
securities and calculating net asset value and (b) sell securities at 
their fair value either to meet redemption requests or to respond to 
changes in the economy or the financial markets. The market for medium- 
and low-rated and comparable unrated securities is relatively new and 
has not fully weathered a major economic recession. Any such recession, 
however, could likely disrupt severely the market for such securities 
and adversely affect the value of such securities. Any such economic 
downturn also could adversely affect the ability of the issuers of such 
securities to repay principal and pay interest thereon. 

	Fixed-income securities, including medium- and low-rated and 
comparable unrated securities, frequently have call or buy-back 
features that permit their issuers to call or repurchase the securities 
from their holders, such as the Fund. If an issuer exercises these 
rights during periods of declining interest rates, the Fund may have to 
replace the security with a lower yielding security, resulting in a 
decreased return to the Fund. 

	Securities that are rated Ba by Moody's or BB by S&P have 
speculative characteristics with respect to capacity to pay interest 
and repay principal. Securities that are rated B generally lack 
characteristics of a desirable investment and assurance of interest and 
principal payments over any long period of time may be small. 
Securities that are rated Caa or CCC are of poor standing. These issues 
may be in default or present elements of danger may exist with respect 
to principal or interest. 

	In light of the risks described above, MMC, in evaluating the 
creditworthiness of an issue, whether rated or unrated, will take 
various factors into consideration, which may include, as applicable, 
the issuer's financial resources, its sensitivity to economic 
conditions and trends, the operating history of and the community 
support for the facility financed by the issue, the ability of the 
issuer's management and regulatory matters.

	Options on Securities (Convertible, Diversified Strategic Income, 
High Income, and Balanced Funds). These Funds may engage in transactions 
in options on securities, which, depending on the Fund, may include the 
writing of covered put options and covered call options, the purchase of 
put and call options and the entry 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. 
Diversified Strategic Income Fund, however, may engage in option 
transactions only to hedge against adverse price movements in the 
securities that it holds or may wish to purchase and the currencies in 
which certain portfolio securities may be denominated. 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 that a 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 a Fund normally will have expiration dates 
between one and nine months from the date written. The exercise price of 
the options may be below, equal to or above the 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. A Fund with 
option-writing authority may write (a) in-the-money call options when 
its Investment Adviser expects that the price of the underlying security 
will remain flat or decline moderately during the option period, (b) at-
the-money call options when its Investment Adviser expects that the 
price of the underlying security will remain flat or advance moderately 
during the option period and (c) out-of-the-money call options when its 
Investment Adviser expects that the price of the underlying 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 that such call options 
are used in equivalent transactions.

	So long as the obligation of a Fund as the writer of an option 
continues, the Fund may be assigned an exercise notice by the broker-
dealer through which the option was sold, requiring the Fund 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. A Fund 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, a Fund will be required to deposit 
in escrow the underlying security or other assets in accordance with the 
rules of the Options Clearing Corporation (the "Clearing Corporation") 
or similar foreign clearing corporation and of the securities exchange 
on which the option is written.

	The Diversified Strategic Income Fund may purchase and sell put, 
call and other types of option securities that are traded on domestic or 
foreign exchanges or the over-the-counter market including, but not 
limited to, "spread" options, "knock-out" options, "knock-in" options 
and "average rate" or "look-back" options.

	"Spread" options are dependent upon the difference between the 
price of two securities or futures contracts. "Knock-out" options are 
canceled if the price of the underlying asset reaches a trigger level 
prior to expiration. "Knock-in" options only have value if the price of 
the underlying asset reaches a trigger level. "Average rate" or "Look-
back" options are options where the option's strike price at expiration 
is set based on either the average, maximum or minimum price of the 
asset over the period of the option.

	The Diversified Strategic Income Fund may utilize up to 15% of its 
assets to purchase options and may do so at or about the same time that 
it purchases the underlying security or at a later time. In purchasing 
options on securities, the Fund will trade only with counterparties of 
high status in terms of credit quality and commitment to the market. 

	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. In light of this 
fact and current trading conditions, the Fund expects to purchase only 
call or put options issued by the Clearing Corporation. The Funds with 
option-writing authority expect to write options only on U.S. securities 
exchanges, except that the Diversified Strategic Income Fund also may 
write options on foreign exchanges and 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 the Fund realizes a profit or loss will depend upon whether the 
amount received in the closing sale transaction is more or less than the 
premium that the Fund initially paid for the original option plus the 
related transaction costs.

	Although a Fund generally will purchase or write only those 
options for which its Investment Adviser believes there is an active 
secondary market, 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. At times in the 
past, for example, higher than anticipated trading activity or order 
flow or other unforeseen events have rendered inadequate certain of the 
facilities of the Clearing Corporation as well U.S. and foreign 
securities exchanges 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 a Fund as a covered call option 
writer 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 that may be 
held, written or exercised within certain time 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 Funds with authority to engage in 
options transactions, and other clients of their respective Investment 
Advisers 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 that are deemed covered by virtue of the 
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 the Fund must make 
delivery in accordance with an exercise notice. In these instances, a 
Fund may purchase or borrow temporarily the underlying securities for 
purposes of physical delivery. By so doing, the Fund will not bear any 
market risk because the 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.

	Additional risks exist with respect to certain of U.S. government 
securities for which a Fund may write covered call options. If a Fund 
writes covered call options on mortgage-backed securities, the 
securities that it holds as cover may, because of scheduled amortization 
or unscheduled prepayments, cease to be sufficient cover. The Fund will 
compensate for the decline in the value of the cover by purchasing an 
appropriate additional amount of those securities.

	Stock Index Options (Balanced Fund). These Funds may purchase and 
write put and call options on U.S. stock indexes listed on U.S. 
exchanges for the purpose of hedging their portfolios. 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 a narrower market 
index such as the Standard & Poor's 100. Indexes also are based on an 
industry or market segment such as the AMEX Oil and Gas Index or the 
Computer and Business Equipment Index.

	Options on stock indexes are similar to options on stock except 
that (a) the expiration cycles of stock index options are monthly, while 
those of stock options are currently quarterly and (b) 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 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 a securities portfolio being hedged correlate with 
price 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 Balanced 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 a Fund of options on stock indexes 
will be subject to its Investment Adviser'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 prices of individual stocks.

	The Balanced Fund will engage in stock index options transactions 
only when determined by their respective Investment Advisers to be 
consistent with the Funds' efforts to control risk. There can be no 
assurance that such judgment will be accurate or that the use of these 
portfolio strategies will be successful. When a Fund writes an option on 
a stock index, it will establish a segregated account in the name of the 
Fund consisting of cash, equity securities or debt securities of any 
grade in an amount equal to or greater than the market value of the 
option, provided such securities are liquid and unencumbered and are 
marked to market daily pursuant to guidelines established by the 
Trustees.

	Mortgage-Related Securities (Diversified Strategic Income, 
Exchange Reserve and Total Return Bond Funds). The average maturity of 
pass-through pools of mortgage-related securities varies with the 
maturities of the underlying mortgage instruments. In addition, a pool's 
stated maturity may be shortened by unscheduled payments on the 
underlying mortgages. Factors affecting mortgage prepayments include the 
level of interest rates, general economic and social conditions, the 
location of the mortgaged property and age of the mortgage. Because 
prepayment rates of individual pools vary widely, it is not possible to 
accurately predict the average life of a particular pool. Common 
practice is to assume that prepayments will result in an average life 
ranging from 2 to 10 years for pools of fixed-rate 30-year mortgages. 
Pools of mortgages with other maturities or different characteristics 
will have varying average life assumptions.

	Mortgage-related securities may be classified as private, 
governmental or government-related, depending on the issuer or 
guarantor. Private mortgage-related securities represent pass-through 
pools consisting principally of conventional residential mortgage loans 
created by non-governmental issuers, such as commercial banks, savings 
and loan associations and private mortgage insurance companies. 
Governmental mortgage-related securities are backed by the full faith 
and credit of the United States. GNMA, the principal guarantor of such 
securities, is a wholly owned United States government corporation 
within the Department of Housing and Urban Development. Government-
related mortgage-related securities are not backed by the full faith and 
credit of the United States government. Issuers of such securities 
include FNMA and FHLMC. FNMA is a government-sponsored corporation owned 
entirely by private stockholders, which is subject to general regulation 
by the Secretary of Housing and Urban Development. Pass-through 
securities issued by FNMA are guaranteed as to timely payment of 
principal and interest by FNMA. FHLMC is a corporate instrumentality of 
the United States, the stock of which is owned by the Federal Home Loan 
Banks. Participation certificates representing interests in mortgages 
from FHLMC's national portfolio are guaranteed as to the timely payment 
of interest and ultimate collection of principal by FHLMC.

	Private, U.S. governmental or government-related entities create 
mortgage loan pools offering pass-through investments in addition to 
those described above. The mortgages underlying these securities may be 
alternative mortgage instruments, that is, mortgage instruments whose 
principal or interest payments may vary or whose terms to maturity may 
be shorter than previously customary. As new types of mortgage-related 
securities are developed and offered to investors, Diversified Strategic 
Income Fund, consistent with its investment objective and policies, will 
consider making investments in such new types of securities.

	Currency Transactions (Diversified Strategic Income, Balanced
and High Income Funds). The Funds' dealings in forward currency exchange 
transactions will be limited to hedging involving either specific 
transactions or portfolio positions. Transaction hedging is the purchase 
or sale of forward currency contracts with respect to specific 
receivables or payables of the Fund generally arising in connection with 
the purchase or sale of its securities. Position hedging, generally, is 
the sale of forward currency contracts with respect to portfolio 
security positions denominated or quoted in the currency. A Fund may not 
position hedge with respect to a particular currency to an extent 
greater than the aggregate market value of the security at any time, or 
securities held in its portfolio denominated or quoted in, or currently 
convertible into (such as through exercise of an option or consummation 
of a forward currency contract) that particular currency. If a Fund 
enters into a transaction hedging or position hedging transaction, it 
will cover the transaction through one or more of the following methods: 
(a) ownership of the underlying currency or an option to purchase such 
currency; (b) ownership of an option to enter into an offsetting forward 
currency contract; (c) entering into a forward contract to purchase 
currency being sold, or to sell currency being purchased, provided that 
such covering contract is itself covered by any one of these methods 
unless the covering contract closes out the first contract; or (d) 
depositing into a segregated account with the custodian or a sub-
custodian of the Fund cash or readily marketable securities in an amount 
equal to the value of the Fund's total assets committed to the 
consummation of the forward currency contract and not otherwise covered. 
In the case of transaction hedging, any securities placed in the account 
must be liquid debt securities. In any case, if the value of the 
securities placed in the segregated account declines, additional cash or 
securities will be placed in the account so that the value of the 
account will equal the above amount. Hedging transactions may be made 
from any foreign currency into dollars or into other appropriate 
currencies.

	At or before the maturity of a forward contract, a Fund may either 
sell a portfolio security and make delivery of the currency or retain 
the security and offset its contractual obligation to deliver the 
currency by purchasing a second contract pursuant to which the relevant 
Fund will obtain, on the same maturity date, the same amount of the 
currency which it is obligated to deliver. If a Fund retains the 
portfolio security and engages in an offsetting transaction, the Fund, 
at the time of execution of the offsetting transaction, will incur a 
gain or loss to the extent movement has occurred in forward contract 
prices. Should forward prices decline during the period between a Fund's 
entering into a forward contract for the sale of a currency and the date 
that it enters into an offsetting contract for the purchase of the 
currency, the Fund will realize a gain to the extent that the price of 
the currency it has agreed to sell exceeds the price of the currency it 
has agreed to purchase. Should forward prices increase, the Fund will 
suffer a loss to the extent the price of the currency it has agreed to 
purchase exceeds the price of the currency it has agreed to sell.

	The cost to a Fund of engaging in currency transactions varies 
with factors such as the currency involved, the length of the contract 
period and the market conditions then prevailing. Because transactions 
in currency exchange are usually conducted on a principal basis, no fees 
or commissions are involved. The use of forward currency contracts does 
not eliminate fluctuations in the underlying prices of the securities, 
but it does establish a rate of exchange that can be achieved in the 
future. In addition, although forward currency contracts limit the risk 
of loss due to a decline in the value of the hedged currency, at the 
same time they limit any potential gain that might result should the 
value of the currency increase.

	If a devaluation is generally anticipated, the Diversified 
Strategic Income and High Income Funds may not be able to contract to 
sell the currency at a price above the devaluation level they 
anticipate.

	Foreign Currency Options (Diversified Strategic Income and High 
Income Funds) The High Income Fund may only purchase put and call 
options on foreign currencies, whereas the Diversified Strategic Income 
Fund may purchase or write put and call options on foreign currencies 
for the purpose of hedging against changes in future currency exchange 
rates. Foreign currency options generally have three, six and nine month 
expiration cycles. Put options convey the right to sell the underlying 
currency at a price which is anticipated to be higher than the spot 
price of the currency at the time the option expires. Call options 
convey the right to buy the underlying currency at a price which is 
expected to be lower than the spot price of the currency at the time 
that the option expires.

	The Fund may use foreign currency options under the same 
circumstances that it could use forward currency exchange transactions. 
A decline in the dollar value of a foreign currency in which a Fund's 
securities are denominated, for example, will reduce the dollar value of 
the securities even if their value in the foreign currency remains 
constant. In order to protect against such diminutions in the value of 
securities that it holds, the Fund may purchase put options on the 
foreign currency. If the value of the currency declines, the Fund will 
have the right to sell the currency for a fixed amount in dollars and 
will thereby offset, in whole or in part, the adverse effect on its 
securities that otherwise would have resulted. Conversely, if a rise in 
the dollar value of a currency in which securities to be acquired are 
denominated is projected, thereby potentially increasing the cost of the 
securities, the Fund may purchase call options on the particular 
currency. The purchase of these options could offset, at least 
partially, the effects of the adverse movements in exchange rates. The 
benefit to the Fund derived from purchases of foreign currency options, 
like the benefit derived from other types of options, will be reduced by 
the amount of the premium and related transaction costs. In addition, if 
currency exchange rates do not move in the direction or to the extent 
anticipated, the Fund could sustain losses on transactions in foreign 
currency options that would require it to forego a portion or all of the 
benefits of advantageous changes in the rates.

	Foreign Government Securities (Diversified Strategic Income Fund 
and High Income Fund). Among the foreign government securities in which 
the Fund may invest are those issued by countries with developing 
economies, i.e., countries in the initial stages of their 
industrialization cycles. Investing in securities of countries with 
developing economies involves exposure to economic structures that are 
generally less diverse and less mature, and to political systems that 
can be expected to have less stability, than those of developed 
countries. The markets of countries with developing economies 
historically have been more volatile than markets of the more mature 
economies of developed countries, but often have provided higher rates 
of return to investors.

	Non-Taxable Municipal Securities (Municipal High Income Fund). 
Non-taxable Municipal securities include debt obligations issued to fund 
various public purposes, such as constructing public facilities, 
refunding outstanding obligations, paying general operating expenses and 
extending loans to public institutions and facilities. Private activity 
bonds that are issued by or on behalf of public authorities to finance 
privately operated facilities are considered to be Municipal Securities 
if the interest paid thereon may be excluded from gross income (but not 
necessarily from alternative minimum taxable income) for Federal income 
tax purposes in the opinion of bond counsel to the issuer.

	Municipal bonds may be issued to finance life care facilities. 
Life care facilities are an alternative form of long-term housing for 
the elderly which offer residents the independence of condominium life 
style and, if needed, the comprehensive care of nursing home services. 
Bonds to finance these facilities have been issued by various state 
industrial development authorities. Because the bonds are secured only 
by the revenues of each facility and not by state or local government 
tax payments, they are subject to a wide variety of risks, including a 
drop in occupancy levels, the difficulty of maintaining adequate 
financial reserves to secure estimated actuarial liabilities, the 
possibility of regulatory cost restrictions applied to health care 
delivery and competition from alternative health care or conventional 
housing facilities.

	Municipal leases are Municipal Securities that may take the form 
of a lease or an installment purchase contract issued by state and local 
governmental authorities to obtain funds to acquire a wide variety of 
equipment and facilities such as fire and sanitation vehicles, computer 
equipment and other capital assets. These obligations make it possible 
for state and local government authorities to acquire property and 
equipment without meeting constitutional and statutory requirements for 
the issuance of debt. Thus, municipal leases have special risks not 
normally associated with municipal bonds. These obligations frequently 
contain "non-appropriation" clauses providing that the governmental 
issuer of the obligation has no obligation to make future payments under 
the lease or contract unless money is appropriated for such purposes by 
the legislative body on a yearly or other periodic basis. In addition to 
the "non-appropriation" risk, municipal leases represent a type of 
financing that has not yet developed the depth of marketability 
associated with municipal bonds; moreover, although the obligations will 
be secured by the leased equipment, the disposition of the equipment in 
the event of foreclosure might prove to be difficult. In order to limit 
such risks, Municipal High Income Fund proposes to purchase either (a) 
municipal leases rated in the four highest categories by Moody's 
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group 
("S&P") or (b) unrated municipal leases purchased principally from 
domestic banks or other responsible third parties which enter into an 
agreement with the Fund, which provides that the seller will either 
remarket or repurchase the municipal lease within a short period after 
demand by the Fund.

	Taxable Municipal Securities. (Total Return Bond Fund). The Total 
Return Bond Fund will invest in a diversified portfolio of taxable 
long-term investment-grade securities issued by or on behalf of states 
and municipal governments, U.S. territories and possessions of the 
United States and their authorities, agencies, instrumentalities and 
political subdivisions ("Taxable Municipal Obligations").  The Taxable 
Municipal Obligations in which the Fund may invest are within the four 
highest ratings of Moody's (Aaa, Aa, A, Baa) or S&P (AAA, AA, A, BBB).  
Although securities rated in these categories are commonly referred to 
as investment grade, they may have speculative characteristics.  In 
addition, changes in economic conditions or other circumstances are 
more likely to lead to a weakened capacity to make principal and 
interest payments than is the case with higher-grade securities. 
Furthermore, the market for Taxable Municipal Obligations is relatively 
small, which may result in a lack of liquidity and in price volatility 
of those securities.  Interest on Taxable Municipal Obligations is 
includable in gross income for Federal income tax purposes and may be 
subject to personal income taxes imposed by any state of the United 
States or any political subdivision thereof, or by the District of 
Columbia.

	Temporary Investments (Municipal High Income Fund). When Municipal 
High Income Fund is maintaining a defensive position it may invest in 
short-term investments ("Temporary Investments") consisting of: (a) the 
following tax-exempt securities: (i) tax-exempt notes of municipal 
issuers having, at the time of purchase, a rating of MIG 1 through MIG 4 
by Moody's or rated SP-1 or SP-2 by S&P or, if not rated, of issuers 
having an issue of outstanding Municipal Securities rated within the 
four highest grades by Moody's or S&P; (ii) tax-exempt commercial paper 
having a rating not lower than A-2 by S&P or Prime-2 by Moody's at the 
time of purchase; and (iii) variable-rate demand notes rated within the 
two highest ratings by any major rating service, or determined to be of 
comparable quality to instruments with such rating, at the time of 
purchase; and (b) the following taxable securities: (i) U.S. government 
securities, including repurchase agreements with respect to such 
securities; (ii) other debt securities rated within the four highest 
grades by Moody's or S&P; (iii) commercial paper rated in the highest 
grade by either of these rating services; and (iv) CDs of domestic banks 
with assets of $1 billion or more. Among the tax-exempt notes in which 
the Fund may invest are Tax Anticipation Notes, Bond Anticipation Notes 
and Revenue Anticipation Notes, which are issued in anticipation of 
receipt of tax funds, proceeds of bond placements or other revenues, 
respectively. At no time will more than 20% of the Fund's total assets 
be invested in Temporary Investments unless the Fund has adopted a 
defensive investment policy in anticipation of a market decline. The 
Fund, however, intends to purchase tax-exempt Temporary Investments 
pending the investment of the proceeds of the sale of shares of the Fund 
and of its portfolio securities, or in order to have highly liquid 
securities available to meet anticipated redemptions.

	Futures Activities (Diversified Strategic Income, High Income, 
Municipal High Income, Total Return Bond and Balanced Funds). These 
Funds may enter into futures contracts and/or options on futures 
contracts that are traded on a U.S. exchange or board of trade. These 
investments may be made by a Fund for the purpose of hedging against the 
effects of changes in the value of its portfolio securities due to 
anticipated changes in interest rates, currency values and/or market 
conditions but not for purposes of speculation. In the case of Municipal 
High Income Fund, investments in futures contracts will be made only in 
unusual circumstances, such as when the Fund's Investment Adviser 
anticipates an extreme change in interest rates or market conditions. 
See "Taxes" below.

	Futures Contracts (Convertible, Diversified Strategic Income, 
Municipal High Income Total Return Bond Fund and Balanced Funds). The 
Funds may acquire or sell a futures contract to mitigate the effect of 
fluctuations in interest rates, currency values or market conditions 
(depending on the type of contract) on portfolio securities without 
actually buying or selling the securities. For example, if Municipal 
High Income Fund owns long-term bonds and tax-exempt rates are expected 
to increase, the Fund might enter into a short position in municipal 
bond index futures contracts. Such a sale would have much the same 
effect as the Fund's selling some of the long-term bonds in its 
portfolio. If tax-exempt rates increase as anticipated, the value of 
certain long-term Municipal Securities in the Fund would decline, but 
the value of the Fund's futures contracts would increase at 
approximately the same rate, thereby keeping the net asset value of the 
Fund from declining as much as it otherwise would have. Of course, 
because the value of portfolio securities will far exceed the value of 
the futures contracts sold by a Fund, an increase in the value of the 
futures contracts could only mitigate, not totally offset, the decline 
in the value of the Fund.

	The Diversified Strategic Income Fund may enter into futures 
contracts or related options on futures contracts that are traded on a 
domestic or foreign exchange or in the over-the-counter market. These 
investments may be made for the purpose of hedging against changes in 
the value of its portfolio securities but not for purposes of 
speculation. The ability of the Fund to trade in futures contracts may 
be limited by the requirements of the Internal Revenue Code of 1986 as 
amended (the "Code"), applicable to a regulated investment company. 

	When deemed advisable by MMC, the Total Return Bond Fund may 
enter into futures contracts or related options traded on a domestic 
exchange or board of trade.  Such investments, if any, by the Fund will 
be made solely for the purpose of hedging against the effects of 
changes in the value of the Fund's securities due to anticipated 
changes in interest rates and market conditions, and when the 
transactions are economically appropriate for the reduction of risks 
inherent in the management of the Fund.  The Fund may hedge up to 50% 
of its assets using futures contracts or related options transactions.

	No consideration is paid or received by a Fund upon entering into 
a futures contract. Initially, a Fund will be required to deposit with 
its custodian 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 board of trade on which the contract is traded and 
members of such board of trade may charge a higher amount). This amount, 
known as initial margin, is in the nature of a performance bond or good 
faith deposit on the contract and is returned to a Fund upon termination 
of the futures contract, assuming that all contractual obligations have 
been satisfied. Subsequent payments to and from the broker, known as 
variation margin, will be made daily as the price of the securities, 
currency or index 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." At any time prior to expiration 
of a futures contract, a Fund may elect to close the position by taking 
an opposite position, which will terminate the Fund's existing position 
in the contract.

	Several risks are associated with the use of futures contracts as 
a hedging device. Successful use of futures contracts by a Fund is 
subject to the ability of its Investment Adviser to predict correctly 
movements in interest rates, stock or bond indices or foreign currency 
values. These predictions involve skills and techniques that may be 
different from those involved in the management of the portfolio being 
hedged. In addition, there can be no assurance that there will be a 
correlation between movements in the price of the underlying securities, 
currency or index and movements in the price of the securities which 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 interest rates or currency values.

	Although the Funds with authority to engage in futures activity 
intend to enter into futures contracts only if there is an active market 
for such 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, a Fund would be 
required to make daily cash payments of variation margin and 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, there is no guarantee that the price of the 
securities being hedged will, in fact, correlate with the price 
movements in a futures contract and thus provide an offset to losses on 
the futures contract.

	If a Fund has hedged against the possibility of a change in 
interest rates or currency or market values adversely affecting the 
value of securities held in its portfolio and rates or currency or 
market values move in a direction opposite to that which the Fund has 
anticipated, the Fund will lose part or all of the benefit of the 
increased value of securities which it has hedged because it will have 
offsetting losses in its futures positions. In addition, in such 
situations, if the Fund had insufficient cash, it may have to sell 
securities to meet daily variation margin requirements at a time when it 
may be disadvantageous to do so. These sales of securities may, but will 
not necessarily, be at increased prices which reflect the change in 
interest rates or currency values, as the case may be.

	Options on Futures Contracts. An option on an interest rate 
futures contract, as contrasted with the direct investment in such a 
contract, gives the purchaser the right, in return for the premium paid, 
to assume a position in the underlying interest rate futures contract at 
a specified exercise price at any time prior to the expiration date of 
the option. An option on a foreign currency futures contract, as 
contrasted with the direct investment in such a contract, gives the 
purchaser the right, but not the obligation, to assume a long or short 
position in the relevant underlying future currency at a predetermined 
exercise price at a time in the future. Upon exercise of an option, the 
delivery of the futures position by the writer of the option to the 
holder of the option will be accompanied by delivery of the accumulated 
balance in the writer's futures margin account, which represents the 
amount by which the market price of the futures contract exceeds, in the 
case of a call, or is less than, in the case of a put, the exercise 
price of the option on the futures contract. The potential for loss 
related to the purchase of an option on futures contracts is limited to 
the premium paid for the option (plus transaction costs). Because the 
value of the option is fixed at the point of sale, there are no daily 
cash payments to reflect changes in the value of the underlying 
contract; however, the value of the option does change daily and that 
change would be reflected in the net asset value of a Fund investing in 
the option.

	Several risks are associated with options on futures contracts. 
The ability to establish and close out positions on such options will be 
subject to the existence of a liquid market. In addition, the purchase 
of put or call options on interest rate and foreign currency futures 
will be based upon predictions by a Fund's Investment Adviser as to 
anticipated trends in interest rates and currency values, as the case 
may be, which could prove to be incorrect. Even if the expectations of 
an Investment Adviser are correct, there may be an imperfect correlation 
between the change in the value of the options and of the portfolio 
securities or the currencies being hedged.

	Foreign Investments (Convertible, Diversified Strategic Income, 
High Income and Balanced Funds). Investors should recognize that 
investing in foreign companies involves certain considerations which are 
not typically associated with investing in U.S. issuers. Since the Fund 
will be investing in securities denominated in currencies other than the 
U.S. dollar, and since the Fund may temporarily hold funds in bank 
deposits or other money-market investments denominated in foreign 
currencies, the Fund may be affected favorably or unfavorably by 
exchange control regulations or changes in the exchange rate between 
such currencies and the dollar. A change in the value of a foreign 
currency relative to the U.S. dollar will result in a corresponding 
change in the dollar value of the Fund's assets denominated in that 
foreign currency. Changes in foreign currency exchange rates may also 
affect the value of dividends and interest earned, gains and losses 
realized on the sale of securities and net investment income and gain, 
if any, to be distributed to shareholders by the Fund.

	The rate of exchange between the U.S. dollar and other currencies 
is determined by the forces of supply and demand in the foreign exchange 
markets. Changes in the exchange rate may result over time from the 
interaction of many factors directly or indirectly affecting economic 
conditions and political developments in other countries. Of particular 
importance are rates of inflation, interest rate levels, the balance of 
payments and the extent of government surpluses or deficits in the 
Unites States and the particular foreign country.  All these factors are 
in turn sensitive to the monetary, fiscal and trade policies pursued by 
the governments of the United States and other foreign countries 
important to international trade and finance. Government intervention 
may also play a significant role. National governments rarely 
voluntarily allow their currencies to float freely in response to 
economic forces. Sovereign governments use a variety of techniques, such 
as intervention by a country's central bank or imposition of regulatory 
controls or taxes, to affect the exchange rates of their currencies.

	Many of the securities held by the Fund will not be registered 
with, nor the issuers thereof be subject to reporting requirements of, 
the SEC. Accordingly, there may be less publicly available information 
about the securities and about the foreign company or government issuing 
them than is available about a domestic company or government entity. 
Foreign issuers are generally not subject to uniform financial reporting 
standards, practices and requirements comparable to those applicable to 
U.S. issuers. In addition, with respect to some foreign countries, there 
is the possibility of expropriation or confiscatory taxation, 
limitations on the removal of funds or other assets of the Fund, 
political or social instability, or domestic developments which could 
affect U.S. investments in those countries. Moreover, individual foreign 
economies may differ favorably or unfavorably from the U.S. economy in 
such respects as growth of gross national product, rate of inflation, 
capital reinvestment, resource self-sufficiency and balance of payment 
positions. The Fund may invest in securities of foreign governments (or 
agencies or instrumentalities thereof), and many, if not all, of the 
foregoing considerations apply to such investments as well.

	Securities of some foreign companies are less liquid, and their 
prices are more volatile, than securities of comparable domestic 
companies. Certain foreign countries are known to experience long delays 
between the trade and settlement dates of securities purchased or sold. 
Due to the increased exposure of the Fund to market and foreign exchange 
fluctuations brought about by such delays, and to the corresponding 
negative impact on Fund liquidity, the Fund will avoid investing in 
countries which are known to experience settlement delays which may 
expose the Fund to unreasonable risk of loss.

	The interest payable on the Fund's foreign securities may be 
subject to foreign withholding taxes, and while investors may be able to 
claim some credit or deductions for such taxes with respect to their 
allocated shares of such foreign tax payments, the general effect of 
these taxes will be to reduce the Fund's income. Additionally, the 
operating expenses of the Fund can be expected to be higher than those 
of an investment company investing exclusively in U.S. securities, since 
the expenses of the Fund, such as custodial costs, valuation costs and 
communication costs, as well as the rate of the investment advisory 
fees, though similar to such expenses of some other international funds, 
are higher than those costs incurred by other investment companies.

	The Fund may also purchase American Depository Receipts ("ADRs"), 
European Depository Receipts ("EDRs") and Global Depository Receipts 
("GDRs"), or other securities representing underlying shares of foreign 
companies.  ADRs are publicly traded on exchanges or over-the-counter in 
the United States and are issued through "sponsored" or "unsponsored" 
arrangements.  In a sponsored ADR arrangement, the foreign issuer 
assumes the obligation to pay some or all of the depository's 
transaction fees, whereas under an unsponsored arrangement, the foreign 
issuer assumes no obligation and the depository's transaction fees are 
paid by the ADR holders.  In addition, less information is available in 
the United States about an unsponsored ADR than about a sponsored ADR, 
and the financial information about a company may not be as reliable for 
an unsponsored ADR as it is for a sponsored ADR.  The Fund may invest in 
ADRs through both sponsored and unsponsored arrangements.

	Short Sales (Balanced Fund). Balanced Fund may, from time to time, 
sell securities short but the value of securities sold short will not 
exceed 5% of the value of the Fund's assets. In addition, the Fund may 
not (a) sell short the securities of a single issuer to the extent of 
more than 2% of the value of the Fund's net assets or (b) sell short the 
securities of any class of an issuer to the extent of more than 2% of 
the outstanding securities of the class at the time of the transaction. 
A short sale is a transaction in which the Fund sells securities that it 
does not own (but has borrowed) in anticipation of a decline in the 
market price of the securities.

	When the Fund makes a short sale, the proceeds it receives from 
the sale are retained by a broker until the Fund replaces the borrowed 
securities. To deliver the securities to the buyer, the Fund must 
arrange through a broker to borrow the securities and, in so doing, the 
Fund becomes obligated to replace the securities borrowed at their 
market price at the time of replacement, whatever that price may be. The 
Fund may have to pay a premium to borrow the securities and must pay any 
dividends or interest payable on the securities until they are replaced.

	The Fund's obligation to replace the securities borrowed in 
connection with a short sale will be secured by collateral deposited 
with the broker that consists of cash, U.S. government securities, 
equity securities or debt securities of any grade, providing such 
securities have been determined by the Investment Adviser to be liquid 
and unencumbered and are marked to market daily pursuant to guidelines 
established by the Trustees. In addition, the Fund will place in a 
segregated account with its custodian an amount of cash or U.S. 
government securities equal to the difference, if any, between the 
market value of the securities at the time they were sold short and the 
value of any assets deposited as collateral with the broker in 
connection with the short sale (not including the proceeds of the short 
sale). Until it replaces the borrowed securities, the Fund will maintain 
the segregated account daily such that the amount deposited in the 
account plus the amount deposited with the broker, not including the 
proceeds from the short sale, will  equal the current market value of 
the securities sold short and will not be less than the market value of 
the securities at the time they were sold short. 

	Short Sales Against the Box (Convertible and Balanced Funds). 
These Funds may enter into a short sale of common stock such that, when 
the short position is open, the Fund involved owns an equal amount of 
preferred stocks or debt securities convertible or exchangeable without 
payment of further consideration into an equal number of shares of the 
common stock sold short. A Fund will enter into this kind of short 
sale,, described as "against the box," for the purpose of receiving a 
portion of the interest earned by the executing broker from the proceeds 
of the sale. The proceeds of the sale will be held by the broker until 
the settlement date, when the Fund delivers the convertible securities 
to close out its short position. Although a Fund will have to pay an 
amount equal to any dividends paid on the common stock sold short prior 
to delivery, it will receive the dividends from the preferred stock or 
interest from the debt securities convertible into the stock sold short, 
plus a portion of the interest earned from the proceeds of the short 
sale. The Funds will deposit, in a segregated account with their 
custodian, convertible preferred stock or convertible debt securities in 
connection with short sales against the box.

Investment Restrictions

The Trust has adopted investment restrictions 1 through 8 below as 
fundamental policies with respect to the Funds, which, under the terms 
of the 1940 Act, may not be changed without the vote of a majority of 
the outstanding voting securities of a Fund. A "majority" is defined in 
the 1940 Act as the lesser of (a) 67% or more of the shares present at a 
shareholder meeting, if the holders of more than 50% of the outstanding 
shares of the Trust are present or represented by proxy, or (b) more 
than 50% of the outstanding shares. Investment restrictions 9 through 16 
may be changed by vote of a majority of the Board of Trustees at any 
time.

	The investment policies adopted by the Trust prohibit a Fund from:

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

4. Borrowing 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 transaction.

5. Purchasing 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" and for the Balanced Fund which may 
make short sales or maintain a short position to the extent of 
5% of its net assets).   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. 

6. Making 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.

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

8.	Purchasing or selling 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 Fund's 
investment objective and policies); (d) investing in real 
estate investment trust securities; or (e) investing in gold 
bullion and coins or receipts for gold.

9.	Investing in oil, gas or other mineral exploration or 
development programs, except that the  Convertible, Diversified 
Strategic Income, Balanced and High Income Funds may invest in 
the securities of companies that invest in or sponsor those 
programs.

10.	Writing or selling puts, calls, straddles, spreads or 
combinations thereof, except, with respect to Funds other than 
Exchange Reserve Fund, as permitted under the Fund's investment 
objective and policies.

11.	With respect to all Funds except the Exchange Reserve Fund, 
purchasing restricted securities, illiquid securities (such as 
repurchase agreements with maturities in excess of seven days 
and, in the case of Exchange Reserve Fund, TDs maturing from 
two business days through six months) or other securities that 
are not readily marketable if more than 10% or, in the case of 
the High Income and Diversified Strategic Income Funds, 15% of 
the total assets of the Fund would be invested in such 
securities.  With respect to the Exchange Reserve Fund, 
securities subject to Rule 144A of the 1933 Act (provided at 
least two dealers make a market in such securities) and certain 
privately issued commercial paper eligible for resale without 
registration pursuant to Section 4(2) of the 1933 Act will not 
be subject to this restriction

12	Purchasing any security if as a result the Fund would then have 
more than 5% of its total assets invested in securities of 
companies (including predecessors) that have been in continuous 
operation for fewer than three years; provided that, in the 
case of private activity bonds purchased for Municipal High 
Income Fund, this restriction shall apply to the entity 
supplying the revenues from which the issue is to be paid.

13.	Making investments for the purpose of exercising control or 
management.

14.	Purchasing or retaining securities of any company if, to the 
knowledge of the Trust, any of the Trust's officers or Trustees 
or any officer or director of an Investment Adviser 
individually owns more than 1/2 of 1% of the outstanding 
securities of such company and together they own beneficially 
more than 5% of the securities.

15.	Investing in warrants other than those acquired by the Fund as 
part of a unit or attached to securities at the time of 
purchase (except as permitted under a Fund's investment 
objective and policies) if, as a result, the investments 
(valued at the lower of cost or market) would exceed 5% of the 
value of the Fund's net assets.  At no time may more than 2% of 
the Fund's net assets be invested in warrants not listed on a 
recognized U.S. or foreign stock exchange, to the extent 
permitted by applicable state securities laws.

16.	With respect to Balanced Fund, purchasing in excess of 5% of 
the voting securities of a public utility or public utility 
holding company, so as to become a public utility holding 
company as defined in the Public Utility Holding Company Act of 
1935, as amended. 

	The Trust has adopted two additional investment restrictions 
applicable to Exchange Reserve Fund, the first of which is a fundamental 
policy, which prohibit the Fund from:

1.	Investing in common stocks, preferred stocks, warrants, other 
equity securities, corporate bonds or debentures, state bonds, 
municipal bonds or industrial revenue bonds.

2.	Investing more than 10% of its assets in variable rate master 
demand notes providing for settlement upon more than seven 
days' notice by the Fund.

Portfolio Turnover

	The Funds do not intend to seek profits through short-term 
trading. Nevertheless, the Funds will not consider portfolio turnover 
rate a limiting factor in making investment decisions.

	Under certain market conditions, a Fund authorized to engage in 
transactions in options may experience increased portfolio turnover as a 
result of its investment strategies. For instance, the exercise of a 
substantial number of options written by a Fund (due to appreciation of 
the underlying security in the case of call options on securities or 
depreciation of the underlying security in the case of put options on 
securities) could result in a turnover rate in excess of 100%. A 
portfolio turnover rate of 100% also would occur if all of a Fund's 
securities that are included in the computation of turnover were 
replaced once during a one-year period. A Fund's turnover rate is 
calculated by dividing the lesser of purchases or sales of its portfolio 
securities for the year by the monthly average value of the portfolio 
securities. Securities or options with remaining maturities of one year 
or less on the date of acquisition are excluded from the calculation.

	Certain other practices which may be employed by a Fund also could 
result in high portfolio turnover. For example, portfolio 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 of 
comparable quality purchased at approximately the same time to take 
advantage of what a Fund's Investment Adviser 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 securities. 


	For the fiscal years ended July 31, 1996, 1997 and 1998, the 
portfolio turnover rates were as follows:


   
For the Fiscal Year Ended 
July 31:

Fund
1996
1997
1998




Convertible Fund

59%
57%
49%

Diversified Strategic 
Income Fund

90
85
128

High Income Fund

72
78
102

Municipal High Income 
Fund

44
51
84

Total Return Bond Fund

N/A
N/A
0

Balanced Fund

58
45
110

<R/>
For regulatory purposes, the turnover rate of Exchange Reserve Fund is 
zero.

Portfolio Transactions

Most of the purchases and sales of securities by a Fund, whether 
transacted on a securities exchange or over the counter, will be made in 
the primary trading market for the securities, except for Eurobonds 
which are principally traded over the counter. The primary trading 
market for a given security is generally located in the country in which 
the issuer has its principal office. Decisions to buy and sell 
securities for a Fund are made by its Investment Adviser, who is also 
responsible for placing these transactions subject to the overall review 
of the Board of Trustees. With respect to Diversified Strategic Income 
Fund, decisions to buy and sell domestic securities for the Fund are 
made by MMC, which is also responsible for placing these transactions; 
the responsibility to make investment decisions with respect to foreign 
securities and to place these transactions rests with Global Capital 
Management. Although investment decisions for each Fund are made 
independently from those of the other accounts managed by its Investment 
Adviser, investments of the type that the Fund may make also may be made 
by those other accounts. When a Fund and one or more other accounts 
managed by its 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 to each. In some cases this procedure may 
adversely affect the price paid or received by a Fund, or the size of 
the position obtained or disposed of by the Fund.

	Transactions on domestic stock exchanges and some foreign stock 
exchanges involve the payment of negotiated brokerage commissions. On 
exchanges on which commissions are negotiated, the cost of transactions 
may vary among different brokers. Commissions generally are fixed on 
most foreign exchanges. There is generally no stated commission in the 
case of securities traded in U.S. or foreign over-the-counter markets, 
but the prices of those securities include undisclosed commissions or 
mark-ups. The cost of securities purchased from underwriters includes an 
underwriting commission or concession, and the prices at which 
securities are purchased from and sold to dealers include a dealer's 
mark-up or mark-down. U.S. government securities generally are purchased 
from underwriters or dealers, although certain newly issued U.S. 
government securities may be purchased directly from the United States 
Treasury or from the issuing agency or instrumentality. The following 
table sets forth certain information regarding each Fund's payment of 
brokerage commissions:


Total Brokerage Commissions Paid



Fiscal 
Year

Convertible Fund

High 
Income 
Fund

Balanced 
Fund

Diversified 
Strategic 
Income Fund

Total 
Return 
Bond 
Fund

1996

$16,920
$32,621
$2,446,072
$50,196
N/A

1996*
--
--
--
--
N/A

1997
--
--
138,150
--
N/A

    
   
1998
23,753
34,725
2,187,80
5
20,200
--
    
Brokerage Commissions Paid to Salomon Smith Barney


Fiscal 
Year

Convertible Fund

High 
Income 
Fund

Balanced 
Fund

Diversified 
Strategic 
Income Fund

Total 
Return 
Bond 
Fund

1996
--
--
91,818
--
N/A

1996* 
--
--
--
--
N/A

1997
--
--
138,150
--
N/A
   
1998
--
--
139,236
--
--
    

% of Total Brokerage Commissions Paid to Salomon Smith Barney


Fiscal 
Year

Convertible Fund

High 
Income 
Fund

Balanced 
Fund

Diversified 
Strategic 
Income Fund

Total 
Return 
Bond 
Fund

1996
--
--
 3.75%
--
N/A

1996*
--
--
--
--
N/A

1997
--
--
6.60
--
N/A

   
1998
--
--
6.36
--
--
    

% of Total Dollar Amount of Transactions Involving Commissions Paid to 
Salomon Smith Barney


Fiscal 
Year

Convertible Fund

High 
Income 
Fund

Balanced 
Fund

Diversified 
Strategic 
Income Fund

Total 
Return 
Bond 
Fund

1996
--
--
2.72%
--
N/A

1996*
--
--
--
--
N/A

1997
--
--
5.85
--
N/A
   
1998
--
--
6.54
--
--
    
*  For the period from August 1, 1996 through December 31, 1996.

	In selecting brokers or dealers to execute securities transactions 
on behalf of a Fund, the Fund's Investment Adviser seeks the best 
overall terms available. In assessing the best overall terms available 
for any transaction, each Investment Adviser will consider the factors 
that it deems relevant, including the breadth of the market in the 
security, the price of the security, the financial condition and 
execution capability of the broker or dealer and the reasonableness of 
the commission, if any, for the specific transaction and on a continuing 
basis. In addition, each Advisory Agreement between the Trust and an 
Investment Adviser authorizes the Investment Adviser, in selecting 
brokers or dealers to execute a particular transaction and in evaluating 
the best overall terms available, to consider the brokerage and research 
services (as those terms are defined in Section 28(e) of the Securities 
Exchange Act of 1934, as amended) provided to the Trust, the other Funds 
and/or other accounts over which the Investment Adviser or its 
affiliates exercise investment discretion. The fees under the Advisory 
Agreements and the Sub-Advisory and/or Administration Agreements are not 
reduced by reason of their receiving such brokerage and research 
services. Further, Salomon Smith Barney will not participate in 
commissions brokerage given by the Fund to other brokers or dealers and 
will not receive any reciprocal brokerage business resulting therefrom. 
The Trust's Board of Trustees periodically will review the commissions 
paid by the Funds to determine if the commissions paid over 
representative periods of time were reasonable in relation to the 
benefits inuring to the Trust.

	To the extent consistent with applicable provisions of the 1940 
Act and the rules and exemptions adopted by the SEC thereunder, the 
Board of Trustees has determined that transactions for a Fund may be 
executed through Salomon Smith Barney and other affiliated broker-
dealers if, in the judgment of the Fund's Investment Adviser, the use of 
such broker-dealer is likely to result in price and execution at least 
as favorable as those of other qualified broker-dealers, and if, in the 
transaction, such broker-dealer charges the Fund a rate consistent with 
that charged to comparable unaffiliated customers in similar 
transactions. In addition, under rules recently adopted by the SEC, 
Salomon Smith Barney may directly execute such transactions for the 
Funds on the floor of any national securities exchange, provided (a) the 
Trust's Board of Trustees has expressly authorized Salomon Smith Barney 
to effect such transactions, and (b) Salomon Smith Barney annually 
advises the Trust of the aggregate compensation it earned on such 
transactions. Over-the-counter purchases and sales are transacted 
directly with principal market makers except in those cases in which 
better prices and executions may be obtained elsewhere. The Funds will 
not purchase any security, including U.S. government securities or 
Municipal Securities, during the existence of any underwriting or 
selling group relating thereto of which Salomon Smith Barney is a 
member, except to the extent permitted by the SEC.

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


PURCHASE OF SHARES

Volume Discounts

The schedule of sales charges on Class A shares described in the 
Prospectuses applies to purchases made by any "purchaser", which 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; (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; or (g) a trustee or other professional 
fiduciary (including a bank, or an Investment Adviser registered with 
the SEC under the Investment Advisers Act of 1940) purchasing shares of 
the Fund for one or more trust estates or fiduciary accounts. Purchasers 
who wish to combine purchase orders to take advantage of volume 
discounts on Class A shares should contact a Salomon Smith Barney 
Financial Consultant. 



Combined Right of Accumulation

Reduced sales charges, in accordance with the schedules in the 
Prospectuses, apply to any purchase of Class A shares if the aggregate 
investment in Class A shares of the relevant Fund and in Class A shares 
of other funds of the Smith Barney Mutual Funds that are offered with a 
sales charge, including the purchase being made, of any "purchaser" (as 
defined above) is $25,000 or more. The reduced sales charge is subject 
to confirmation of the shareholder's holdings through a check of 
appropriate records. The Trust 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 rights of 
accumulation, shareholders should contact a Salomon Smith Barney 
Financial Consultant.

Determination of Public Offering Prices

The Trust offers shares of the Funds to the public on a continuous 
basis. The public offering price for a Class A, Class Y and Class Z 
share of a Fund is equal to the net asset value per share at the time of 
purchase, plus for Class A and Class L shares an initial sales charge. 
The public offering price for a Class B  (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 B, Class L and Class O shares and of Class 
A shares when purchased in amounts exceeding $500,000. The method of 
computation of the public offering price is shown in the Funds' 
financial statements incorporated by reference in their entirety into 
this Statement of Additional Information.

REDEMPTION OF SHARES

Detailed information on how to redeem shares of a Fund is included in 
its Prospectus. The right of redemption of shares of a 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 such other periods as the SEC by order may permit 
for the protection of the Fund's shareholders.

	Distributions in Kind. If the Board of Trustees of the Trust 
determines that it would be detrimental to the best interests of the 
remaining shareholders of a Fund to make a redemption payment wholly in 
cash, the Trust may pay, in accordance with SEC rules, any portion of a 
redemption in excess of the lesser of $250,000 or 1% of the Fund's net 
assets by 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 of a 
Fund 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. Any applicable CDSC will not be 
waived on amounts withdrawn by shareholders that exceed 1.00% per month 
of the value of a shareholder's shares at the time the Withdrawal Plan 
commences. (With respect to Withdrawal Plans in effect prior to November 
7, 1994, any applicable CDSC will be waived on amounts withdrawn that do 
not exceed 2.00% per month of the value of a shareholder's shares at the 
time the Withdrawal Plan commences). To the extent that 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 may reduce 
the shareholder's investment and ultimately exhaust it. Withdrawal 
payments should not be considered as income from investment in a Fund. 
Furthermore, as it generally would not be advantageous to a shareholder 
to make additional investments in a Fund at the same time he or she is 
participating in the Withdrawal Plan with respect to that Fund, 
purchases by such shareholders of additional shares in the Fund in 
amounts less than $5,000 will not ordinarily be permitted.

	Shareholders who wish to participate in the Withdrawal Plan and 
who hold their shares in certificate form must deposit their share 
certificates of the Fund from which withdrawals will be made 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 
involved. All applications for participation in the Withdrawal Plan must 
be received by First Data as Plan Agent no later than the eighth day of 
each month to be eligible for participation beginning with that month's 
withdrawal. For additional information regarding the Withdrawal Plan, 
contact your Salomon Smith Barney Financial Consultant.

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

   	For the fiscal year ended July 31, 1998, Salomon Smith Barney 
and/or PFS incurred distribution expenses for advertising, printing and 
mailing prospectuses, support services and overhead expenses, to Salomon 
Smith Barney or PFS Financial Consultants and for accruals for interest 
on the excess of Salomon Smith Barney and/or PFS expenses incurred in 
the distribution of the Fund's shares over the sum of the distribution 
fees and CDSC received by Salomon Smith Barney and/or PFS are expressed 
in the following table:




Fund Name

Financial 
Consultant
Compensation


Branch 
Expenses


Advertising
Expenses


Printing
Expenses


Interest
Expenses


Other 
Expenses

Div. 
Strat.

$12,436,072
$8,959,209
$966,299
$168,014
$412,185
$10,505,708

Balanced
         
90,235
  
3,559,360
  195,177
  
66,243
  
(61,163)
    
3,759,617

High 
Income
    
6,034,688
  
3,573,384
  430,209
    
47,639
  
211,863
    
4,263,094

Muni High
       
603,894
  
1,333,426
  133,180
    
38,047
         
825
    
1,505,478

Convertible
       
164,695
     
239,557
 17,098
      
2,858
      
3,038
       
262,550
Ex. 
Reserve 
--
     
146,365
 --
      
9,149
  
(26,919)
       
128,594
Total 
Return
     
6,229,612
  
1,010,375
  138,608
    
612
  
117,941
    
1,267,536
    
Distribution Arrangements

   	Shares of the Trust are sold on a best efforts basis by CFBDS as 
sales agent of the Trust pursuant to the Distribution Agreement. To 
compensate Salomon Smith Barney for the services it provides and for 
the expense it bears under the Distribution Agreement, the Trust has 
adopted a services and distribution plan (the "Plan") pursuant to Rule 
12b-1 under the 1940 Act. Under the Plan, each Fund, except Exchange 
Reserve Fund, pays Salomon Smith Barney a service fee, accrued daily 
and paid monthly, calculated at the annual rate of 0.25% (0.15% in the 
case of Municipal High Income Fund) of the value of the Fund's average 
daily net assets attributable to its Class A, Class B, Class L and 
Class O shares. In addition, each Fund except the Exchange Reserve 
Fund, pays Salomon Smith Barney, with respect to its Class B, Class L 
and Class O shares, a distribution fee.  The Exchange Reserve Fund pays 
PFS a distribution fee with respect to its Class B shares.  The 
distribution fee is primarily intended to compensate Salomon Salomon 
Smith Barney and/or PFS for its initial expense of paying Financial 
Consultants a commission upon sales of those shares. The Class B and 
Class L shares' distribution fees, accrued daily and paid monthly, are 
calculated at the annual rate of 0.50% for Class B shares of each Fund 
and 0.45% for Class L shares, except the Smith Barney Balanced Fund and 
the Smith Barney Convertible Fund (0.50% for Class L shares in the case 
of Exchange Reserve Fund and 0.55% for Class L shares in the case of 
Municipal High Fund) of the value of a Fund's average daily net assets 
attributable to the shares of the respective Class.  For the Smith 
Barney Convertible Fund and the Smith Barney Balanced Fund, Class L and 
Class O shares' distribution fees, accrued daily and paid monthly, are 
calculated at the annual rate of 0.75% for Class L shares and 0.45% for 
Class O shares.


	For the fiscal years ended July 31, 1998, Salomon Smith Barney 
received $57,460,253, in the aggregate from the Trust under the Plan.
    
	The following expenses were incurred during the periods indicated:

Initial Sales Charges  (paid to Salomon Smith Barney).


Class A


For the Fiscal Year Ended July 31:
   
Fund
1996
1997
1998

Convertible Fund
 $49,000
 $19,000
 $19,000

Diversified Strategic 
Income Fund
  
792,000
  983,000
1,344,000

High Income Fund
  
593,000
  726,000
1,571,000

Municipal High Income 
Fund
    
47,000
46,000
70,000

Total Return Bond Fund
     
N/A
N/A
1,146,000

Balanced Fund
   
228,000
 55,000
 68,000
    
   


Class L


For the Fiscal Year Ended July 31:

Fund
1996
1997
1998

Convertible Fund

N/A
N/A
   
$2,000

Diversified Strategic 
Income Fund

N/A
N/A
         
78,000

High Income Fund

N/A
N/A
       
112,000

Municipal High Income 
Fund

N/A
N/A
           
3,000

Total Return Bond Fund
N/A
N/A
       
21,000

Balanced Fund

N/A
N/A
           
4,000
    

CDSC (paid to Salomon Smith Barney)


Class A

For the Fiscal Year Ended July 31:


   
Fund

1998

Convertible Fund
N/A

Diversified Strategic Income Fund

23,000

Exchange Reserve Fund

N/A

High Income Fund

12,000

Municipal High Income Fund

N/A

Total Return Bond Fund

1,000

Balanced Fund

N/A

    
Class B

   
For the Fiscal Year Ended July 31:

Fund
1996
1997
1998

Convertible Fund

$95,000 
$59,000
$50,000

Diversified Strategic Income Fund

4,015,000
2,858,000
2,494,000

Exchange Reserve Fund

765,000
618,000
349,000

High Income Fund

915,000
831,000
936,000

Municipal High Income Fund

929,000
525,000
231,000

Total Return Bond Fund

N/A
N/A
34,000

Balanced Fund

3,393,000
2,514,000
829,000


    
   
Class L

For the Fiscal Year Ended July 31:



Fund
1998

Convertible Fund
$0

Diversified Strategic Income Fund
35,000

Exchange Reserve Fund
N/A

High Income Fund
20,000

Municipal High Income Fund
0

Total Return Bond Fund
20,000

Balanced Fund
0

    
   
Class O

For the Fiscal Year Ended July 31:



Fund

1998

Balanced Fund
$1,000
    

Service Fees and Distribution Fees

   

For the Fiscal Year Ended July 31:

Fund
1996
1997
1998

Convertible Fund

$433,951 
$413,173
$400,232

Diversified Strategic Income Fund

18,641,336
19,195,740
19,373,203

Exchange Reserve Fund

748,208
737,595
543,651

High Income Fund
4,893,170
5,818,152
7,255,916

Municipal High Income Fund

4,945,112
4,316,732
3,734,428

Total Return Bond Fund

N/A
N/A
329,050

Balanced Fund
12,152,329
9,205,137
7,016,893
    

Under its terms, the Plan continues from year to year, provided such 
continuance is approved annually by vote of the Board of Trustees, 
including a majority of the Independent Trustees who have no direct or 
indirect financial interest in the operation of the Plan. The Plan may 
not be amended to increase the amount to be spent for the services 
provided by Salomon Smith Barney or PFS without shareholder approval, 
and all amendments of the Plan must be approved by the Trustees in the 
manner described above. The Plan may be terminated with respect to a 
Class at any time, without penalty, by vote of a majority of the 
Independent Trustees or, with respect to any Fund, by vote of a majority 
of the outstanding voting securities of the Class (as defined in the 
1940 Act). Pursuant to the Plan, Salomon Smith Barney and PFS will 
provide the Board of Trustees with periodic reports of amounts expended 
under the Plan and the purpose for which such expenditures were made.




VALUATION OF SHARES

Each Class' net asset value per share is calculated on each day, Monday 
through Friday, except days on which the NYSE is closed. The NYSE 
currently is scheduled to be closed on New 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 procedures used by a Fund 
in valuing its assets. 

	Because of the need to obtain prices as of the close of trading on 
various exchanges throughout the world, the calculation of the net asset 
value of Funds investing in foreign securities may not take place 
contemporaneously with the determination of the prices of many of their 
respective portfolio securities used in such calculation. A security 
which is listed or traded on more than one exchange is valued at the 
quotation on the exchange determined to be the primary market for such 
security. All assets and liabilities initially expressed in foreign 
currency values will be converted into U.S. dollar values at the mean 
between the bid and offered quotations of such currencies against U.S. 
dollars as last quoted by any recognized dealer. If such quotations are 
not available, the rate of exchange will be determined in good faith by 
the Trust's Board of Trustees. In carrying out the Board's valuation 
policies, MMC, as administrator, may consult with an independent pricing 
service (the "Pricing Service") retained by the Trust.

	Debt securities of United States issuers (other than U.S. 
government securities and short-term investments), including Municipal 
Securities held by Municipal High Income Fund, are valued by MMC, as 
administrator, after consultation with the Pricing Service approved by 
the Trust's Board of Trustees. When, in the judgment of the Pricing 
Service, quoted bid prices for investments are readily available and are 
representative of the bid side of the market, these investments are 
valued at the mean between the quoted bid prices and asked prices. 
Investments for which, in the judgment of the Pricing Service, there are 
no readily obtainable market quotations are carried at fair value as 
determined by the Pricing Service. The procedures of the Pricing Service 
are reviewed periodically by the officers of the Trust under the general 
supervision and responsibility of the Board of Trustees.


EXCHANGE PRIVILEGE

Except as noted below, 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 may exchange all or a portion of 
their shares of the respective Class without imposition of any 
sales charge. 

B.	Class A shares of any fund acquired by a previous exchange of 
shares purchased with a sales charge may be exchanged for Class 
A shares of any of the other funds.

C.	Class B shares of any fund may be exchanged without a sales 
charge. Class B shares of a Fund exchanged for Class B shares 
of another 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.

   
D.  Class L and Class O Shares may be exchanged with Class L 
shares of any of the other funds.
    	

Dealers other than Salomon Smith Barney must notify First Data of the 
investor's prior ownership of Class A shares of Smith Barney High Income 
Fund and the account number in order to accomplish an exchange of shares 
of Smith Barney High Income Fund under paragraph B above.

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

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


PERFORMANCE DATA
   
From time to time, the Trust may quote the Funds' yield or total return 
in advertisements or in reports and other communications to 
shareholders. The Trust may include comparative performance information 
in advertising or marketing each 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 
Class A, Class B, Class L, Class O or Class Y, it will also disclose 
such information for the other Classes.
    

Yield

Exchange Reserve Fund. The current yield for the Fund is computed by (a) 
determining the net change in the value of a hypothetical pre-existing 
account in the Fund having a balance of one share at the beginning of a 
seven-calendar-day period for which yield is to be quoted, (b) dividing 
the net change by the value of the account at the beginning of the 
period to obtain the base period return and (c) annualizing the results 
(i.e., multiplying the base period return by 365/7). The net change in 
the value of the account reflects the value of additional shares 
purchased with dividends declared on the original share and any such 
additional shares, but does not include realized gains and losses or 
unrealized appreciation and depreciation. In addition, the Fund may 
calculate a compound effective annualized yield by adding 1 to the base 
period return (calculated as described above), raising the sum to a 
power equal to 365/7 and subtracting 1.

   	For the seven-day period ended July 31, 1998, the annualized yield 
was 4.31% and 4.29% for Class B and Class C shares, respectively. The 
compound effective yield was 4.41% and 4.38% for Class B and Class C 
shares, respectively. As of July 31, 1998, the Fund's average portfolio 
maturity was 18 days. 

    	Other Funds. The 30-day yield figure of a Fund other than Exchange 
Reserve Fund is calculated according to a formula prescribed by the SEC. 
The formula can be expressed as follows:


	YIELD =2[(a-b+1)^6)-1]
               Cd
regarding:

a = dividends and interest earned during the period.
b = expenses accrued for the period (net of waiver and 
reimbursement).
c = the average daily number of shares outstanding during 
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of 
the period.

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

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

Average Annual Total Return

The "average annual total return" figures for each Fund, other than 
Exchange Reserve Fund, 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 the 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.


	The average annual total returns with sales charges of the Fund's 
Class A shares were as follows for the periods indicated:
   

Fund*

One-Year 
Period

Five-Year 
Period

Since Inception

Convertible Fund

(3.13)%
8.25%
9.41%

Diversified Strategic 
Income Fund

2.60
6.69
7.47

High Income Fund

3.92
8.57
10.47

Municipal High Income Fund 

2.29
5.25
6.35

Total Return Bond Fund 

N/A
N/A
(1.97)

Balanced Fund

10.85
7.58
9.53

	*Each Fund, except Total Return Bond Fund, commenced selling Class 
A shares on November 6, 1992.  The Total Return Bond Fund commenced 
operations on February 27, 1998.

    
	The average annual total returns with CDSC (with fees waived) of 
the Fund's Class B shares were as follows for the periods indicated:

   
Fund

One-Year 
Period

Five-Year 
Period

Ten-Year 
Period

Since 
Inception

Convertible Fund (1)
(3.03)%
8.70%
9.00%
8.76%

Diversified Strategic Income 
Fund (2)(6)

2.46
7.05
N/A
8.90

High Income Fund(3)(6)

3.87
8.91
9.15
9.32

Municipal High Income 
Fund(4)(6)

1.53
5.43
7.43
8.17

Total Return Bond Fund(7)

N/A
N/A
N/A
(2.02)

Balanced Fund(5) 

11.17
8.00
10.94
10.78

 (1) Fund commenced operations on September 9, 1986.
(2) Fund commenced operations on December 28, 1989. 
(3) Fund commenced operations on September 2, 1986. 
(4) Fund commenced operations on September 16, 1985. 
(5) Fund commenced operations on March 28, 1988. 
(6) Prior to November 6, 1992, the maximum CDSC imposed on redemptions 
was 5.00%.
(7) Fund commenced operations on January 21, 1998.

    
	The average annual total returns with sales charges (with fees 
waived) of the Fund's Class L shares were as follows for the periods 
indicated:


   

Fund

One-Year 
Period

Five-Year 
Period

Since Inception

Convertible Fund(3)

N/A
N/A
(2.69)%

Diversified Strategic 
Income Fund (5)

5.04%
6.99%
7.16

High Income Fund (4)

6.31
N/A
11.40

Municipal High Income 
Fund(2)

3.88
N/A
9.80

Total Return Bond Fund
N/A
N/A
0.44

Balanced Fund(6)

N/A
N/A
(4.19)

 (1)	The Fund commenced selling Class L shares (previously designated 
as Class C shares) on June 1, 1993.
(2)	The Fund commenced selling Class L shares (previously designated as 
Class C shares) on November 17, 1994.
(3)	The Fund commenced selling Class L shares on June 15, 1998.
(4)	The Fund commenced selling Class L shares (previously designated as 
Class C shares) on August 24, 1994.
(5)	The Fund commenced selling Class L shares (previously designated as 
Class C shares) on March 19, 1993.
(6)	The Fund commenced selling Class L shares on June 15, 1998.

    
	The average annual total returns with sales charges (with fees 
waived) of the Fund's Class O shares were as follows for the periods 
indicated:

   
Fund

One-Year 
Period

Five-Year 
Period

Since Inception

Convertible Fund(1)

0.62%
N/A
12.21%

Balanced Fund(2)

15.19
8.17
8.95

 (1)	The Fund commenced selling Class O shares (previously designated 
as Class C shares) on November 7, 1994.
(2) The Fund commenced selling Class O shares (previously designated as 
Class C shares) on February 4, 1993.
    
	The average annual total returns (with fees waived) of the Fund's 
Class Y shares were as follows for the periods indicated:
   

Fund

One-Year 
Period

Five-Year 
Period

Since Inception
Convertible Fund(1)

2.42%
N/A
11.09%

Diversified Strategic 
Income Fund (2)

7.96
N/A
9.35

High Income Fund (3)

9.18
N/A
11.56

Balanced Fund(4)

16.67
N/A
12.22

 (1)	The Fund commenced selling Class Y shares on February 7, 1996.
(2)	The Fund commenced selling Class Y shares on October 10, 1995.
(3)	The Fund commenced selling Class Y shares on April 28, 1995.
(4)	The Fund commenced selling Class Y shares on October 9, 1995.

    
	The average annual total returns (with fees waived) of the Fund's 
Class Z shares were as follows for the periods indicated:

   
Fund

One-Year 
Period

Five-Year 
Period

Since Inception

Diversified Strategic 
Income Fund (1)

7.78%
8.05%
8.68%

High Income Fund (2)
9.33
9.88
11.65

Balanced Fund(3)

17.08
9.01
10.84

 (1)	The Fund commenced selling Class Z shares on November 6, 1992.
(2)	The Fund commenced selling Class Z shares on November 6, 1992.
(3)	The Fund commenced selling Class Z shares on November 6, 1992.
    
	A Class' total return figures calculated in accordance with the 
above formula assume that the maximum sales charge or maximum applicable 
CDSC, as the case may be, has been deducted for the hypothetical $1,000 
initial investment at the time of purchase.

	It is important to note that the yield and total return figures 
set forth above are based on historical earnings and are not intended to 
indicate future performance. 

	A Class' performance will vary from time to time depending upon 
market conditions, the composition of the relevant Fund's portfolio and 
operating expenses and the expenses exclusively attributable to that 
Class. Consequently, any given performance quotation should not be 
considered representative of the Class' performance for any specified 
period in the future. Because performance will vary, it may not provide 
a basis for comparing an investment in the Class with certain bank 
deposits or other investments that pay a fixed yield for a stated period 
of time. Investors comparing a Class' performance with that of other 
mutual funds should give consideration to the quality and maturity of 
the respective investment company's portfolio securities.


TAXES

The following is a summary of certain Federal income tax considerations 
that may affect the Trust and its shareholders. This 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 any Fund of the Trust.

Tax Status of the Funds

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

	Each Fund has qualified and the Trust intends that each Fund 
continue to qualify separately each year as a "regulated investment 
company" under the Code. A qualified Fund will not be liable for Federal 
income taxes to the extent its taxable net investment income and net 
realized capital gains are distributed to its shareholders, provided 
that each Fund distributes at least 90% of its net investment income. 
One of the several requirements for qualification is that a Fund receive 
at least 90% of its gross income each year from dividends, interest, 
payments with respect to securities loans and gains from the sale or 
other disposition of equity or debt securities or foreign currencies, or 
other income (including but not limited to gains from options, futures, 
or forward contracts) derived with respect to the Fund's investment in 
such stock, securities, or currencies. The Trust does not expect any 
Fund to have difficulty meeting this test.

Taxation of Investment by the Funds

Gains or losses on sales of securities by a Fund generally will be long-
term capital gains or losses if the Fund has held the securities for 
more than one year. Gains or losses on sales of securities held for not 
more than one year generally will be short-term. If a Fund acquires a 
debt security at a substantial discount, a portion of any gain upon sale 
or redemption will be taxed as ordinary income, rather than capital 
gain, to the extent that it reflects accrued market discount.

	Options and Futures Transactions. The tax consequences of options 
transactions entered into by a Fund will vary depending on the nature of 
the underlying security, whether the option is written or purchased, and 
whether the "straddle" rules, discussed separately below, apply to the 
transaction. When a Fund writes a call or put option on an equity or 
convertible debt security, it will receive a premium that will, subject 
to the straddle rules, be treated as follows for tax purposes. If the 
option expires unexercised, or if the Fund enters into a closing 
purchase transaction, the Fund will realize a gain (or loss if the cost 
of the closing purchase transaction exceeds the amount of the premium) 
without regard to any unrealized gain or loss on the underlying 
security. Any such gain or loss will be a short-term capital gain or 
loss, except that any loss on a "qualified" covered call stock option 
that is not treated as a part of a straddle may be treated as long-term 
capital loss. If a call option written by a Fund is exercised, the Fund 
will recognize a capital gain or loss from the sale of the underlying 
security, and will treat the premium as additional sales proceeds. 
Whether the gain or loss will be long-term or short-term will depend on 
the holding period of the underlying security. If a put option written 
by a Fund is exercised, the amount of the premium will reduce the tax 
basis of the security that the Fund then purchases.

	If a put or call option that a Fund has purchased on an equity or 
convertible debt security expires unexercised, the Fund will realize 
capital loss equal to the cost of the option. If the Fund enters into a 
closing sale transaction with respect to the option, it will realize a 
capital gain or loss (depending on whether the proceeds from the closing 
transaction are greater or less than the cost of the option). The gain 
or loss will be short-term or long-term, depending on the Fund's holding 
period in the option. If the Fund exercises such a put option, it will 
realize a short-term capital gain or loss (long-term if the Fund holds 
the underlying security for more than one year before it purchases the 
put) from the sale of the underlying security measured by the sales 
proceeds decreased by the premium paid. If the Fund exercises such a 
call option, the premium paid for the option will be added to the tax 
basis of the security purchased.

	One or more Funds may invest in section 1256 contracts, and the 
Code imposes a special "mark-to-market" system for taxing these 
contracts. These contracts generally include options on non-convertible 
debt securities (including United States government securities), options 
on stock indexes, futures contracts, options on futures contracts and 
certain foreign currency contracts. Options on foreign currency, futures 
contracts on foreign currency and options on foreign currency futures 
will qualify as "section 1256" contracts if the options or futures are 
traded on or subject to the rules of a qualified board or exchange. 
Generally, most of the foreign currency options and foreign currency 
futures and related options in which certain Funds may invest will 
qualify as section 1256 contracts. In general, gain or loss on section 
1256 contracts will be taken into account for tax purposes when actually 
realized (by a closing transaction, by exercise, by taking delivery or 
by other termination). In addition, any section 1256 contracts held at 
the end of a taxable year will be treated as sold at their year-end fair 
market value (that is, marked to the market), and the resulting gain or 
loss will be recognized for tax purposes. Provided that section 1256 
contracts are held as capital assets and are not part of a straddle, 
both the realized and the unrealized year-end gain or loss from these 
investment positions (including premiums on options that expire 
unexercised) will be treated as 60% long-term and 40% short-term capital 
gain or loss, regardless of the period of time particular positions 
actually are held by a Fund. 

	Straddles. While the mark-to-market system is limited to section 
1256 contracts, the Code contains other rules applicable to transactions 
which create positions which offset positions in section 1256 or other 
investment contracts. Those rules, applicable to "straddle" 
transactions, are intended to eliminate any special tax advantages for 
such transactions. "Straddles" are defined to include "offsetting 
positions" in actively-traded personal property. Under current law, it 
is not clear under what circumstances one investment made by a Fund, 
such as an option or futures contract, would be treated as "offsetting" 
another investment also held by the Fund, such as the underlying 
security (or vice versa) and, therefore, whether the Fund would be 
treated as having entered into a straddle. In general, investment 
positions may be "offsetting" if there is a substantial diminution in 
the risk of loss from holding one position by reason of holding one or 
more other positions (although certain "qualified" covered call stock 
options written by a Fund may be treated as not creating a straddle). 
Also, the forward currency contracts entered into by a Fund may result 
in the creation of "straddles" for Federal income tax purposes.

	If two (or more) positions constitute a straddle, a realized loss 
from one position (including a mark-to-market loss) must be deferred to 
the extent of unrecognized gain in an offsetting position. Also, the 
holding period rules described above may be modified to re-characterize 
long-term gain as short-term gain, or to re-characterize short-term loss 
as long-term loss, in connection with certain straddle transactions. 
Furthermore, interest and other carrying charges allocable to personal 
property that is part of a straddle must be capitalized. In addition, 
"wash sale" rules apply to straddle transactions to prevent the 
recognition of loss from the sale of a position at a loss where a new 
offsetting position is or has been acquired within a prescribed period. 
To the extent that the straddle rules apply to positions established by 
a Fund, losses realized by the Fund may be either deferred or re-
characterized as long-term losses, and long-term gains realized by the 
Fund may be converted to short-term gains.

	If a Fund chooses to identify particular offsetting positions as 
being components of a straddle, a realized loss will be recognized, but 
only upon the liquidation of all of the components of the identified 
straddle. Special rules apply to the treatment of "mixed" straddles 
(that is, straddles consisting of a section 1256 contract and an 
offsetting position that is not a section 1256 contract). If a Fund 
makes certain elections, the section 1256 contract components of such 
straddles will not be subject to the "60%/40%" mark-to-market rules. If 
any such election is made, the amount, the nature (as long-or short-
term) and the timing of the recognition of the Fund's gains or losses 
from the affected straddle positions will be determined under rules that 
will vary according to the type of election made.

	Constructive Sales.  If a Fund effects a short sale of securities 
at a time when it has an unrealized gain on the securities, it may be 
required to recognize that gain as if it had actually sold the 
securities (as a "constructive sale") at the time it effects the short 
sale.  However, such constructive sale treatment may not apply if the 
Fund closes out the short sale with securities other than the 
appreciated securities held at the time of the short sale and if certain 
other conditions are satisfied.  Uncertainty regarding the tax 
consequences of effecting short sales may limit the extent to which a 
Fund may effect short sales.

	Section 988. Foreign currency gain or loss from transactions in 
(a) bank forward contracts not traded in the interbank market and (b) 
futures contracts traded on a foreign exchange may be treated as 
ordinary income or loss under the Code section 988. A Fund may elect to 
have section 988 apply to section 1256 contracts. Pursuant to that 
election, foreign currency gain or loss from these transactions would be 
treated entirely as ordinary income or loss when realized. A Fund will 
make the election necessary to gain such treatment if the election is 
otherwise in the best interests of the Fund. 

Taxation of the Trust's Shareholders

Dividends paid by a Fund from investment income and distributions of 
short-term capital gains will be taxable to shareholders as ordinary 
income for Federal income tax purposes, whether received in cash or 
reinvested in additional shares. Distributions of long-term capital 
gains will be taxable to shareholders as long-term capital gain, whether 
paid in cash or reinvested in additional shares, and regardless of the 
length of time that the shareholder has held his or her shares of the 
Fund.  A portion of long-term capital gains (including such gains 
attributable to the 60% long-term gains portion of gains on Section 1256 
contracts) may be designated as eligible for the 20% maximum capital 
gains tax rate on gains realized by individuals from capital assets held 
for more than 18 months.

	Dividends of investment income (but not capital gains) from any 
Fund generally will qualify for the Federal dividends-received deduction 
for domestic corporate shareholders to the extent that such dividends do 
not exceed the aggregate amount of dividends received by the Fund from 
domestic corporations. If securities held by a Fund are considered to be 
"debt-financed" (generally, acquired with borrowed funds), are held by 
the Fund for less than 46 days (91 days in the case of certain preferred 
stock), or are subject to certain forms of hedges or short sales, the 
portion of the dividends paid by the Fund which corresponds to the 
dividends paid with respect to such securities will not be eligible for 
the corporate dividends-received deduction.

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

	Capital Gains Distribution. As a general rule, a shareholder who 
redeems or exchanges his or her shares will recognize long-term capital 
gain or loss if the shares have been held for more than one year, and 
will recognize short-term capital gain or loss if the shares have been 
held for one year or less. However, if a shareholder receives a 
distribution taxable as long-term capital gain with respect to shares of 
a Fund and redeems or exchanges the shares before he or she has held 
them for more than six months, any loss on such redemption or exchange 
that is less than or equal to the amount of the distribution will be 
treated as a long-term capital loss.

	Backup Withholding. If a shareholder fails to furnish a correct 
taxpayer identification number, fails to fully report dividend or 
interest income, or fails to certify that he or she has provided a 
correct taxpayer identification number and that he or she is not subject 
to such withholding, then the shareholder may be subject to a 31% 
"backup withholding tax" with respect to (a) any taxable dividends and 
distributions and (b) any proceeds of any redemption of Trust 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.

	Municipal High Income Fund. Because the Municipal High Income Fund 
will distribute exempt-interest dividends, interest on indebtedness 
incurred by shareholders, directly or indirectly, to purchase or carry 
shares of the Fund will not be deductible for Federal income tax 
purposes. If a shareholder redeems or exchanges shares of the Fund with 
respect to which he receives an exempt-interest dividend before holding 
the shares for more than six months, no loss will be allowed on the 
redemption or exchange to the extent of the dividend received. Also, 
that portion of any dividend from the Fund which represents income from 
private activity bonds other than those issued for charitable, 
educational and certain other purposes held by the Fund may not retain 
its tax-exempt status in the hands of a shareholder who is a 
"substantial user" of a facility financed by such bonds or a person 
"related" to a substantial user. Investors should consult their own tax 
advisors to see whether they may be substantial users or related persons 
with respect to a facility financed by bonds in which the Fund may 
invest. Moreover, investors receiving social security or certain other 
retirement benefits should be aware that tax-exempt interest received 
from the Fund may under certain circumstances cause up to one-half of 
such retirement benefits to be subject to tax. If the Fund receives 
taxable investment income, it will designate as taxable the same 
percentage of each dividend as the actual taxable income bears to the 
total investment income earned during the period for which the dividend 
is paid. The percentage of each dividend designated as taxable, if any, 
may, therefore, vary. Dividends derived from interest from Municipal 
Securities which are exempt from Federal tax also may be exempt from 
personal income taxes in the state where the issuer is located, but in 
most cases will not be exempt under the tax laws of other states or 
local authorities. Annual statements will set forth the amount of 
interest from Municipal Securities earned by the Fund in each state or 
possession in which issuers of portfolio securities are located.


ADDITIONAL INFORMATION

	The Trust was organized as an unincorporated business trust under 
the laws of the Commonwealth of Massachusetts pursuant to a Master Trust 
Agreement dated March 12, 1985, as amended from time to time, and on 
November 5, 1992 the Trust filed an Amended and Restated Master Trust 
Agreement (the "Trust Agreement"). The Trust commenced business as an 
investment company on September 16, 1985, under the name Shearson Lehman 
Special Portfolios. On February 21, 1986, December 6, 1988, August 27, 
1990, November 5, 1992, July 30, 1993 and October 14, 1994, the Trust 
changed its name to Shearson Lehman Special Income Portfolios, SLH 
Income Portfolios, Shearson Lehman Brothers Income Portfolios, Shearson 
Lehman Brothers Income Funds, Smith Barney Shearson Income Funds and 
Smith Barney Income Funds, respectively.

	PNC Bank is located at 17th and Chestnut Streets, Philadelphia, 
Pennsylvania 19103, and serves as the custodian for each of the Funds, 
except Diversified Strategic Income Fund. Chase, located at Chase 
MetroTech Center, Brooklyn, NY 11245, serves as the custodian for 
Diversified Strategic Income Fund. Under their respective custodian 
agreements with the respective Funds, each custodian is authorized to 
establish separate accounts for foreign securities owned by the 
appropriate Fund to be held with foreign branches of other U.S. banks as 
well as with certain foreign banks and securities depositories. For its 
custody services to the Trust, each custodian receives monthly fees 
based upon the month-end aggregate net asset value of the appropriate 
Fund, plus certain charges for securities transactions including out-of-
pocket expenses, and costs of any foreign and domestic sub-custodians. 
The assets of the Trust are held under bank custodianship in compliance 
with the 1940 Act.

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


VOTING RIGHTS

	The Trustees themselves have the power to alter the number and 
the terms of office of the Trustees, and they may at any time lengthen 
their own terms or make their terms of unlimited duration (subject to 
certain removal procedures) and appoint their own successors, provided 
that in accordance with the 1940 Act at any time at least a majority, 
but in most instances at least two-thirds, of the Trustees have been 
elected by the shareholders of the Fund.  Shares do not have cumulative 
voting rights and therefore the holders of more than 50% of the 
outstanding shares of the Fund may elect all of the Trustees 
irrespective of the votes of other shareholders.  Class A, Class B, 
Class O, Class L and Class Y shares of a Fund, if any, represent 
interests in the assets of that Fund and have identical voting, 
dividend, liquidation and other rights on the same terms and 
conditions, except that each Class of shares has exclusive voting 
rights with respect to provisions of the Fund's Rule 12b-1 distribution 
plan which pertain to a particular class.  For example, a change in 
investment policy for a Fund would be voted upon only by shareholders 
of the Fund involved.  Additionally, approval of each Fund's Investment 
Advisory Agreement is a matter to be determined separately by that 
Fund.  Approval of a proposal by the shareholders of one Fund is 
effective as to that Fund whether or not enough votes are received from 
the shareholders of the other Funds to approve the proposal as to those 
Funds. As of November 6, 1998, the following shareholders beneficially 
owned 5% or more of a class of shares of a Fund:
   
High Income Fund - Class Y

Smith Barney Concert Series, Inc.
Growth Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 6,702,935.779 (33.98%) shares

Smith Barney Concert Series, Inc.
High Growth Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 5,148,496.717 (26.10%) shares

Byrd & Co.
First Union National Bank
Taxable Account
Attn: Diane Pilegg
Mutual Funds DVD Proc. #PA4905
530 Walnut Street
Philadelphia, PA 19106-3620
Owned 2,271,447.367 (11.52%) shares
 
Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,371,711.234 (6.95%) shares

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,230,335.484 (6.24%) shares

Byrd & Co.
First Union National Bank
Taxable Account
Attn: Diane Pilegg
Mutual Funds DVD Proc. #PA4905
530 Walnut Street
Philadelphia, PA 19106-3620
Owned 1,099,252.743 (5.57%) shares

High Income Fund- Class Z

Ennis D. Robertson
Carefree Country Club
9705 Lake Bess Road #253
Winter Haven, FL 33884-3225
owned 4,219.858 (45.75%) shares


Ennis D. Robertson
Smith Barney Inc. IRA Custodian
Carefree Country Club
9705 Lake Bess Road #253
Winter Haven, FL 33884-3225
owned 4,032.265 (43.71%) shares

Michael A. Blum
Smith Barney Inc. Rollover Custodian
235 East 22nd Street, Apt. 101
New York, NY 10010-4637
owned 967.568 (10.49%) shares

Municipal High Income Fund - Class L

Margaret C. Glass
311 Louise Drive
Lafayette, LA 70506-3239
owned 8,933.416 (6.90%) shares

Joann Donovan
Separate Property
5302 Yarwell Dr.
Houston, TX 77096
owned  8,210.854 (6.35%) shares

Avery Brighton
Mason Flinn Trustees
Larsen Flinn TR 12/16/76
852 Navesink River Road
Locust, NJ 07760
owned 7,143.188 (5.52%) shares

Avery Brighton
Larsen Flinn Trustees
Mason Flinn TR 12/16/76
852 Navesink River Road
Locust, NJ 07760
owned 7,143.188 (5.52%) shares

Mason Flinn
Larsen Flinn Trustees
Avery Flinn Family TR 12/16/76
852 Navesink River Road
Locust, NJ 07760
owned 7,143.188 (5.52%) shares


Terrance Winkler TTEE
FBO Terrance Winkler
UAD 5/29/87
C/o Insurance Brokers Ser. Inc.
20 N. Wacker Drive, 40th  Floor
Chicago, Il 60606
Owned 6,904.292 (5.34%) shares

Katherine C. Ellis TTEE
UWD Robert J. Ellis
7580 Spalding Lane
Atlanta, GA 30350
Owned 6,802.927 (5.26%) shares

Balanced Fund- Class L

Roy G. Childers Sr.
Smith Barney Inc. IRA Custodian
559 Vaughan Drive
Satsuma, AL 36572-2861
Owned 23,843.047 (16.05%) shares

Dorothy M Burns
Smith Barney Inc. IRA custodian
21257 Westover Circle
Riverside, CA 92518-2922
Owned 15,916.06 (10.71%) shares

Balanced Fund Class Z

Citibank NA, Custodian
Smith Barney Shearson 401(k) Savings Plan
Smith Barney Account
Attn: Nancy Kronenberg
111 Wall Street FISD/20th Floor
New York, NY 10043
owned 877,093.853 (95.53%) shares

Convertible Fund - Class L

Harold Egon Gottschalk Jr.
And Barbara Gottschalk
Community Property
11603 Osage Trail
Lakeside, CA 92040
Owned 3,409.697 (15.32%) shares

Raymond Trudeau
Smith Barney Inc. IRA Custodian
99 Plummer Hill Road
Belmont, NH 03220-5811
Owned 2,906.239(13.06%) shares

James Kononuk
Smith Barney Inc. Rollover Cust.
130 K 6th Street
North Arlington, NJ 07031
Owned 2,783.765 (12.51%) shares

Harold A. Savage
Smith Barney Inc. IRA Custodian
2108 Ludwick Drive
Maryville, TN 37803
Owned 1,727.101 (7.76%) shares

Wilmer L. Keiser
Betty L. Keiser TTEES
The Keiser Family Trust
UAD 4/1/97
13060 Metcalf, Apt. 303
Overland Park, KS 66213
Owned 1,641.497(7.38%) shares

Rudolph B. and Helen E. Grom
UAD 5/11/92
Rudolph B. & Helen Grom Trust
13627 W. Pyracantha Dr.
Sun City West, AZ 85375
Owned 1,601.537 (7.20%) shares

George K. Stoltenberg
Smith Barney Inc. KEO PS Cust.
44 Church St.
Apt. 3
Burlington, VT 05401
Owned 1,372.171(6.17%) shares

Jay Burgess TRS
FBO Jay G. Burgess
UAD 7/23/85
3061 N. Southern Hills Ave.
Wadsworth, IL 60083
Owned 1,151.401 (5.17%)shares

Marjorie C. Gilmore
Smith Barney Inc. IRA Custodian
1055 West River Road
Grand Island, NY 14072
Owned 1,115.854(5.01%) shares




Convertible Fund - Class O

Norman O. Davis and Karen J. Davis, Trustees
Davis Trust 1995 u/a/d 10/18/95
5280 Via Ester
Yorba Linda, CA 92686-4530
owned 6,862.065 (8.74%) shares

C. Travis Hedemann 
2115 Lexington
Houston, TX 77254-0303
owned 4,447.162 (5.66%) shares

Convertible Fund - Class Y

Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 3,123,029.234 (61.01%) shares

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 863,496.605 (16.87%) shares

Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 671,129.248 (13.11%) shares

Diversified Strategic Income Fund Class Y

Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 9,225,586.838(52.88%) shares

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 3,302,383.059 (18.93%) shares


Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,992,220.376 (11.42%) shares

Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,833,945.945 (10.51%) shares


Diversified Strategic Income Fund Class Z

Citibank NA, Custodian
Smith Barney Shearson 401(k) Savings Plan
Smith Barney Account
Attn: Nancy Kronenberg
111 Wall Street FISD/20th Floor
New York, NY 10043
owned 2,631,963.692 (99.99%) shares

    
FINANCIAL STATEMENTS
   
The Funds' Annual Reports for the fiscal year ended July 31, 1998 
(accompany this Statement of Additional Information and are incorporated 
herein by reference in their entirety.
    

APPENDIX

Description of Ratings

Description of S&P Corporate Bond Ratings

AAA

	Bonds rated AAA have the highest rating assigned by S&P to a debt 
obligation. Capacity to pay interest and repay principal is extremely 
strong.

AA

	Bonds rated AA have a very strong capacity to pay interest and 
repay principal and differ from the highest rated issues only in small 
degree.

A

	Bonds rated A have a strong capacity to pay interest and repay 
principal although they are somewhat more susceptible to the adverse 
effects of changes in circumstances and economic conditions than bonds 
in higher rated categories.

BBB

	Bonds rated BBB are regarded as having an adequate capacity to pay 
interest and repay principal. Whereas they normally exhibit adequate 
protection parameters, adverse economic conditions or changing 
circumstances are more likely to lead to a weakened capacity to pay 
interest and repay principal for bonds in this category than for bonds 
in higher rated categories.

BB, B and CCC

	Bonds rated BB and B are regarded, on balance, as predominantly 
speculative with respect to capacity to pay interest and repay principal 
in accordance with the terms of the obligation. BB represents a lower 
degree of speculation than B and CCC, the highest degrees of 
speculation. While such bonds will likely have some quality and 
protective characteristics, these are outweighed by large uncertainties 
or major risk exposures to adverse conditions.

Description of Moody's Corporate Bond Ratings

Aaa

	Bonds which are rated Aaa are judged to be the best quality. They 
carry the smallest degree of investment risk and are generally referred 
to as "gilt-edge." Interest payments are protected by a large or 
exceptionally stable margin and principal is secure. While the various 
protective elements are likely to change, such changes as can be 
visualized are most unlikely to impair the fundamentally strong position 
of such issues.

Aa

	Bonds which are rated Aa are judged to be of high quality by all 
standards. Together with the Aaa group they comprise what are generally 
known as high grade bonds. They are rated lower than the best bonds 
because margins of protection may not be as large as in Aaa securities, 
or fluctuation of protective elements may be of greater amplitude or 
there may be other elements present which make the long-term risks 
appear somewhat larger than in Aaa securities.

A

	Bonds which are rated A possess favorable investment attributes 
and are to be considered as upper medium grade obligations. Factors 
giving security to principal and interest are considered adequate but 
elements may be present which suggest a susceptibility to impairment 
sometime in the future.

Baa

	Bonds which are rated Baa are considered as medium grade 
obligations, i.e., they are neither highly protected nor poorly secured. 
Interest payments and principal security appear adequate for the present 
but certain protective elements may be lacking or may be 
characteristically unreliable over any great length of time. Such bonds 
lack outstanding investment characteristics and in fact have speculative 
characteristics as well.

Ba

	Bonds which are rated Ba are judged to have speculative elements; 
their future cannot be considered as well assured. Often the protection 
of interest and principal payments may be very moderate and thereby not 
well safeguarded during both good and bad times over the future. 
Uncertainty of position characterizes bonds in this class.

B

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

Caa

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

	Moody's applies the numerical modifier 1, 2 and 3 to each generic 
rating classification from Aa through B. The modifier 1 indicates that 
the security ranks in the higher end of its generic rating category; the 
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates 
that the issue ranks in the lower end of its generic rating category.

Description of S&P Municipal Bond Ratings

AAA

	Prime -- These are obligations of the highest quality. They have 
the strongest capacity for timely payment of debt service.

	General Obligation Bonds -- In a period of economic stress, the 
issuers will suffer the smallest declines in income and will be least 
susceptible to autonomous decline. Debt burden is moderate. A strong 
revenue structure appears more than adequate to meet future expenditure 
requirements. Quality of management appears superior.

	Revenue Bonds -- Debt service coverage has been, and is expected 
to remain, substantial. Stability of the pledged revenues is also 
exceptionally strong due to the competitive position of the municipal 
enterprise or to the nature of the revenues. Basic security provisions 
(including rate covenant, earnings test for issuance of additional 
bonds, debt service reserve requirements) are rigorous. There is 
evidence of superior management.

AA

	High Grade -- The investment characteristics of bonds in this 
group are only slightly less marked than those of the prime quality 
issues. Bonds rated AA have the second strongest capacity for payment of 
debt service.

A

	Good Grade -- Principal and interest payments on bonds in this 
category are regarded as safe although the bonds are somewhat more 
susceptible to the adverse affects of changes in circumstances and 
economic conditions than bonds in higher rated categories. This rating 
describes the third strongest capacity for payment of debt service. 
Regarding municipal bonds, the ratings differ from the two higher 
ratings because:

	General Obligation Bonds -- There is some weakness, either in the 
local economic base, in debt burden, in the balance between revenues and 
expenditures, or in quality of management. Under certain adverse 
circumstances, any one such weakness might impair the ability of the 
issuer to meet debt obligations at some future date.

	Revenue Bonds -- Debt service coverage is good, but not 
exceptional. Stability of the pledged revenues could show some 
variations because of increased competition or economic influences on 
revenues. Basic security provisions, while satisfactory, are less 
stringent. Management performance appears adequate.

BBB

	Medium Grade -- Of the investment grade ratings, this is the 
lowest. Bonds in this group are regarded as having an adequate capacity 
to pay interest and repay principal. Whereas they normally exhibit 
adequate protection parameters, adverse economic conditions or changing 
circumstances are more likely to lead to a weakened capacity to pay 
interest and repay principal for bonds in this category than for bonds 
in higher rated categories.

	General Obligation Bonds -- Under certain adverse conditions, 
several of the above factors could contribute to a lesser capacity for 
payment of debt service. The difference between A and BBB ratings is 
that the latter shows more than one fundamental weakness, or one very 
substantial fundamental weakness, whereas the former shows only one 
deficiency among the factors considered.

	Revenue Bonds -- Debt coverage is only fair. Stability of the 
pledged revenues could show substantial variations, with the revenue 
flow possibly being subject to erosion over time. Basic security 
provisions are no more than adequate. Management performance could be 
stronger.



BB, B, CCC and CC

	Bonds rated BB, B, CCC and CC are regarded, on balance, as 
predominately speculative with respect to capacity to pay interest and 
repay principal in accordance with the terms of the obligation. BB 
includes the lowest degree of speculation and CC the highest degree of 
speculation. While such bonds will likely have some quality and 
protective characteristics, these are outweighed by large uncertainties 
or major risk exposures to adverse conditions.
C

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

D

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

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


Description of S&P Municipal Note Ratings

Municipal notes with maturities of three years or less are usually given 
note ratings (designated SP-1, -2 or -3) to distinguish more clearly the 
credit quality of notes as compared to bonds. Notes rated SP-1 have a 
very strong or strong capacity to pay principal and interest. Those 
issues determined to possess overwhelming safety characteristics are 
given the designation of SP-1+. Notes rated SP-2 have satisfactory 
capacity to pay principal and interest.

Description of Moody's Municipal Bond Ratings

Aaa

	Bonds which are rated Aaa are judged to be the best quality. They 
carry the smallest degree of investment risk and are generally referred 
to as "gilt edge." Interest payments are protected by a large or by an 
exceptionally stable margin and principal is secure. While the various 
protective elements are likely to change, such changes as can be 
visualized are most unlikely to impair the fundamentally strong position 
of such issues.

Aa

	Bonds which are rated Aa are judged to be of high quality by all 
standards. Together with the Aaa group they comprise what are generally 
known as high grade bonds. They are rated lower than the best bonds 
because margins of protection may not be as large as in Aaa securities, 
or fluctuation of protective elements may be of greater amplitude, or 
there may be other elements present which make the long-term risks 
appear somewhat larger than in Aaa securities.

A

	Bonds which are rated A possess many favorable investment 
attributes and are to be considered as upper medium grade obligations. 
Factors giving security to principal and interest are considered 
adequate, but elements may be present which suggest a susceptibility to 
impairment sometime in the future.

Baa

	Bonds which are rated Baa are considered as medium grade 
obligations, i.e., they are neither highly protected nor poorly secured. 
Interest payments and principal security appear adequate for the present 
but certain protective elements may be lacking or may be 
characteristically unreliable over any great length of time. Such bonds 
lack outstanding investment characteristics and in fact have speculative 
characteristics as well.

Ba

	Bonds which are rated Ba are judged to have speculative elements; 
their future cannot be considered as well assured. Often the protection 
of interest and principal payments may be very moderate and thereby not 
well safeguarded during both good and bad times over the future. 
Uncertainty of position characterize bonds in this class.

B

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

Caa

	Bonds which are rated Caa are of poor standing. Such issues may be 
in default or there may be present elements of danger with respect to 
principal or interest.

Ca

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

C

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

	Moody's applies the numerical modifiers 1, 2 and 3 in each generic 
rating classification from Aa through B. The modifier 1 indicates that 
the security ranks in the higher end of its generic ratings category; 
the modifier 2 indicates a mid-range ranking; and the modifier 3 
indicates that the issue ranks in the lower end of its generic ratings 
category.

Description of Moody's Municipal Note Ratings

Moody's ratings for state and municipal notes and other short-term loans 
are designated Moody's Investment Grade (MIG) and for variable rate 
demand obligations are designated Variable Moody's Investment Grade 
(VMIG). This distinction recognizes the differences between short- and 
long-term credit risk. Loans bearing the designation MIG 1/VMIG 1 are 
the best quality, enjoying strong protection from established cash flows 
of funds for their servicing or from established and broad-based access 
to the market for refinancing, or both. Loans bearing the designation 
MIG 2/VMIG 2 are of high quality, with margins of protection ample, 
although not as large as the preceding group. Loans bearing the 
designation MIG 3/VMIG 3 are of favorable quality, with all security 
elements accounted for but lacking the undeniable strength of the 
preceding grades. Market access for refinancing, in particular, is 
likely to be less well established. Loans bearing the designation MIG 
4/VMIG 4 are of adequate quality. Protection commonly regarded as 
required of an investment security is present and although not 
distinctly or predominantly speculative, there is specific risk.

Description of Commercial Paper Ratings

The rating A-1+ is the highest, and A-1 the second highest, commercial 
paper rating assigned by S&P. Paper rated A-1+ must have either the 
direct credit support of an issuer or guarantor that possesses excellent 
long-term operating and financial strength combined with strong 
liquidity characteristics (typically, such issuers or guarantors would 
display credit quality characteristics which would warrant a senior bond 
rating of A- or higher) or the direct credit support of an issuer or 
guarantor that possesses above average long-term fundamental operating 
and financing capabilities combined with ongoing excellent liquidity 
characteristics. Paper rated A-1 must have the following 
characteristics: liquidity ratios are adequate to meet cash 
requirements; long-term senior debt is rated A or better; the issuer has 
access to at least two additional channels of borrowing; basic earnings 
and cash flow have an upward trend with allowance made for unusual 
circumstances; typically, the issuer's industry is well established and 
the issuer has a strong position within the industry; and the 
reliability and quality of management are unquestioned.

	The rating Prime-1 is the highest commercial paper rating assigned 
by Moody's. Among the factors considered by Moody's in assigning ratings 
are the following: (a) evaluation of the management of the issuer; (b) 
economic evaluation of the issuer's industry or industries and an 
appraisal of speculative-type risks which may be inherent in certain 
areas; (c) evaluation of the issuer's products in relation to 
competition and customer acceptance; (d) liquidity; (e) amount and 
quality of long-term debt; (f) trend of earnings over a period of ten 
years; (g) financial strength of parent company and the relationships 
which exist with the issuer; and (h) recognition by the management of 
obligations which may be present or may arise as a result of public 
interest questions and preparations to meet such obligations.

	Short-term obligations, including commercial paper, rated A-1+ by 
IBCA Limited or its affiliate IBCA Inc. are obligations supported by the 
highest capacity for timely repayment. Obligations rated A-1 have a very 
strong capacity for timely repayment. Obligations rated A-2 have a 
strong capacity for timely repayment, although such capacity may be 
susceptible to adverse changes in business, economic and financial 
conditions.

	Thomson BankWatch employs the rating "TBW-1" as its highest 
category, which indicates that the degree of safety regarding timely 
repayment of principal and interest is very strong. "TBW-2" is its 
second highest rating category. While the degree of safety regarding 
timely repayment of principal and interest is strong, the relative 
degree of safety is not as high as for issues rated "TBW-1."

	Fitch Investors Services, Inc. employs the rating F-1+ to indicate 
issues regarded as having the strongest degree of assurance of timely 
payment. The rating F-1 reflects an assurance of timely payment only 
slightly less in degree than issues rated F-1+, while the rating F-2 
indicates a satisfactory degree of assurance of timely payment although 
the margin of safety is not as great as indicated by the F-1+ and F-1 
categories. 

	Duff & Phelps Inc. employs the designation of Duff 1 with respect 
to top grade commercial paper and bank money instruments. Duff 1+ 
indicates the highest certainty of timely payment: short-term liquidity 
is clearly outstanding and safety is just below risk-free U.S. Treasury 
short-term obligations. Duff 1- indicates high certainty of timely 
payment. Duff 2 indicates good certainty of timely payment: liquidity 
factors and company fundamentals are sound.

	Various NRSROs utilize rankings within ratings categories 
indicated by a + or -. The Funds, in accordance with industry practice, 
recognize such ratings within categories as gradations, viewing for 
example S&P's rating of A-1+ and A-1 as being in S&P's highest rating 
category.




						Smith Barney
						INCOME FUNDS





						Statement of
   						Additional Information
November 27, 1998, as amended December 4, 1998 
    

Convertible Fund

Diversified Strategic Income Fund

Exchange Reserve Fund

High Income Fund

Municipal High Income Fund

Total Return Bond Fund

Balanced Fund



   
Smith Barney
Income Funds
388 Greenwich Street
New York, New York 10013					SALOMON SMITH BARNEY
								A Member of  CitiGroup

    
FD 01217     11/98