<PAGE>
 
P R O S P E C T U S
 
 
                                                        SMITH BARNEY FUNDS, INC.
                                                                   Equity Income
                                                                       Portfolio
                                                             
                                                             APRIL 30, 1997 
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
[LOGO] SMITH BARNEY MUTUAL FUNDS
       Investing for your future.
       Every day.
<PAGE>
 

PROSPECTUS                                                 
                                                           April 30, 1997  

Smith Barney Funds, Inc. 

Equity Income Portfolio 
388 Greenwich Street
New York, New York 10013

(800) 451-2010 

  The Equity Income Portfolio (the "Portfolio") is one of four investment
portfolios that currently comprise Smith Barney Funds, Inc. (the "Fund"). The
 Portfolio  seeks current income and long-term
growth of income and capital. It invests primarily, but not exclusively, in
common stocks. 
 
  This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.

  Additional information about the Portfolio is contained in a Statement of
Additional Information dated April 30, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by con-
tacting a Smith Barney Financial Consultant. The Statement of Additional Infor-
mation has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety. 
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 

TABLE OF CONTENTS
 
<TABLE>
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            9
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   12
-------------------------------------------------
VALUATION OF SHARES                            13
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             13
-------------------------------------------------
PURCHASE OF SHARES                             15
-------------------------------------------------
EXCHANGE PRIVILEGE                             25
-------------------------------------------------
REDEMPTION OF SHARES                           28
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           30
-------------------------------------------------
PERFORMANCE                                    31
-------------------------------------------------
MANAGEMENT OF THE FUND                         31
-------------------------------------------------
DISTRIBUTOR                                    33
-------------------------------------------------
ADDITIONAL INFORMATION                         34
-------------------------------------------------
APPENDIX                                      A-1
-------------------------------------------------
</TABLE>
 
--------------------------------------------------------------------------------
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
--------------------------------------------------------------------------------
 
2
<PAGE>
 

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

INVESTMENT OBJECTIVES The Equity Income Portfolio is an open-end, management
investment company whose investment objective is to seek current income and
long-term growth of income and capital by investing primarily, but not exclu-
sively, in common stocks. See "Investment Objective and Management Policies."

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

  Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of
$500,000 or more, will be made at net asset value with no initial sales charge,
but will be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary--Reduced
or No Initial Sales Charge." 
 
  Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year
after the date of purchase to zero. This CDSC may be waived for certain redemp-
tions. Class B shares are subject to an annual service fee of 0.25% and an
annual distribution fee of 0.75% of the average daily net assets of the Class.
The Class B shares' distribution fee may cause that Class to have higher
expenses and pay lower dividends than Class A shares.
 
  Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and dis-
tributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
 
                                                                               3
<PAGE>
 

PROSPECTUS SUMMARY (CONTINUED)
 
 
  Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class C
shares, and investors pay a CDSC of 1.00% if they redeem Class C shares within
12 months of purchase. The CDSC may be waived for certain redemptions. The
Class C shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares. Purchases of Portfolio shares,
which when combined with current holdings of Class C shares of the Portfolio
equal or exceed $500,000 in the aggregate, should be made in Class A shares at
net asset value with no sales charge, and will be subject to a CDSC of 1.00%
on redemptions made within 12 months of purchase.
 
  Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any serv-
ice or distribution fees.
 
  In deciding which Class of Portfolio shares to purchase, investors should
consider the following factors, as well as any other relevant facts and cir-
cumstances:
 
  Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regu-
lar investment may wish to consider Class A shares; as the investment accumu-
lates shareholders may qualify for reduced sales charges and the shares are
subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Portfolio.
Any investment return on these additional invested amounts may partially or
wholly offset the higher annual expenses of these Classes. Because the Portfo-
lio's future return cannot be predicted, however, there can be no assurance
that this would be the case.
 
  Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature, and therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.

  Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Portfolio. In addition, Class A
share purchases, of $500,000 or more, will be made at net asset value with no
initial sales charge, but will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase. The $500,000 investment may be met by add-
ing the purchase to the net 
 
4
<PAGE>
 

PROSPECTUS SUMMARY (CONTINUED)
 
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney listed under "Exchange Privilege." Class A share pur-
chases also may be eligible for a reduced initial sales charge. See "Purchase
of Shares." Because the ongoing expenses of Class A shares may be lower than
those for Class B and Class C shares, purchasers eligible to purchase Class A
shares at net asset value or at a reduced sales charge should consider doing
so.

  Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares. 
 
  See "Purchase of Shares" and "Management of the Fund" for a complete descrip-
tion of the sales charges and service and distribution fees for each Class of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and "Ex-
change Privilege" for other differences between the Classes of shares.

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

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

INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed Retire-
ment Plan. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes is $25. The minimum investment requirements
for purchase of Portfolio 
 
                                                                               5
<PAGE>
 

PROSPECTUS SUMMARY (CONTINUED)

shares through the Systematic Investment Plan are described below. See "Pur-
chase of Shares." 

SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A, Class B and Class C shares and the subse-
quent investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a quar-
terly basis is $50. See "Purchase of Shares." 
 
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
 
MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc. (the
"Manager") serves as the Portfolio's investment manager. The Manager is a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is
a wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a diversified
financial services holding company engaged, through its subsidiaries,
principally in four business segments: Investment Services, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
See "Management of the Fund."

EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined. See "Exchange Privilege." 
 
VALUATION OF SHARES Net asset value of the Portfolio for the prior day gener-
ally is quoted daily in the financial section of most newspapers and is also
available from a Smith Barney Financial Consultant. See "Valuation of Shares."
 
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid quar-
terly on shares of the Portfolio. Distributions of net realized capital gains,
if any, are paid annually. See "Dividends, Distributions and Taxes."
 
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution rein-
vestments will become eligible for conversion to Class A shares on a pro rata
basis. See "Dividends, Distributions and Taxes."
 
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The value of the Portfolio's
investments, and thus the net asset value of the Portfolio's shares, will fluc-
tuate in
 
6
<PAGE>
 

PROSPECTUS SUMMARY (CONTINUED)
 
response to changes in market and economic conditions, as well as the financial
condition and prospects of issuers in which the Portfolio invests. The Portfo-
lio may invest in foreign securities. Investments in foreign securities incur
higher costs than investments in U.S. securities, including higher costs in
making securities transactions as well as foreign government taxes which may
reduce the investment return of the Portfolio. In addition, foreign investments
may include additional risks associated with currency exchange rates, less com-
plete financial information about individual companies, less market liquidity
and political instability. See "Investment Objective and Management Policies"
and "Appendix."
 
THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, the Portfolio's operating
expenses for its most recent fiscal year:
 
<TABLE>
<CAPTION>
            EQUITY INCOME PORTFOLIO             CLASS A CLASS B CLASS C CLASS Y
-------------------------------------------------------------------------------
 <S>                                            <C>     <C>     <C>     <C>
 SHAREHOLDER TRANSACTION EXPENSES
   Maximum sales charge imposed on purchases
     (as a percentage of offering price)         5.00%   None    None    None
   Maximum CDSC (as a percentage of original
     cost or redemption proceeds, whichever is   None*   5.00%   1.00%   None
     lower)
</TABLE>
 
<TABLE>
<CAPTION>
                                       CLASS A CLASS B CLASS C CLASS Y
----------------------------------------------------------------------
 <S>                                   <C>     <C>     <C>     <C>
 ANNUAL PORTFOLIO OPERATING EXPENSES
   (as a percentage of average net assets)
   Management fees                      0.58%   0.58%   0.58%   0.58%
   12b-1 fees**                         0.25    1.00    1.00     --
   Other expenses                       0.12    0.13    0.15    0.08
----------------------------------------------------------------------
 TOTAL PORTFOLIO OPERATING EXPENSES     0.95%   1.71%   1.73%   0.66%
----------------------------------------------------------------------
</TABLE>

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

  Class A shares of the Portfolio purchased through the Smith Barney Asset One
Program will be subject to an annual asset-based fee, payable quarterly, in
lieu of the initial sales change. The fee will vary to a maximum of 1.50%,
depending on the amount of assets held through the Program. For more informa-
tion, please call your Smith Barney Financial Consultant. 
 
 
                                                                               7
<PAGE>
 

PROSPECTUS SUMMARY (CONTINUED)

  The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of the Portfolio's shares and
investors may actually pay lower or no charges, depending on the amount pur-
chased and, in the case of Class B, Class C and certain Class A shares, the
length of time the shares are held and whether the shares are held through the
Smith Barney 401(k) and ExecChoice(TM) Programs. See "Purchase of Shares" and
"Redemption of Shares." Smith Barney receives an annual 12b-1 service fee of
0.25% of the value of average daily net assets of Class A shares. Smith Barney
also receives with respect to Class B and Class C shares an annual 12b-1 fee of
1.00% of the value of average daily net assets of the respective Classes, con-
sisting of a 0.75% distribution fee and a 0.25% service fee. "Other expenses"
in the above table include fees for shareholder services, custodial fees, legal
and accounting fees, printing costs and registration fees. 
 
EXAMPLE
 
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Portfolio will bear directly or indirect-
ly. The example assumes payment by the Portfolio of operating expenses at the
levels set forth in the table above. See "Purchase of Shares," "Redemption of
Shares" and "Management of the Fund."
 
<TABLE>
<CAPTION>
  EQUITY
  INCOME
  PORTFOLIO   1 YEAR 3 YEARS 5 YEARS 10 YEARS*
----------------------------------------------
  <S>         <C>    <C>     <C>     <C>
  An investor
  would pay the
  following
  expenses on a
  $1,000
  investment,
  assuming (1)
  5.00% annual
  return and (2)
  redemption
  at the end of
  each time
  period:
    Class A    $59     $79    $100     $161
    Class B     68      84     104      184
    Class C     28      54      94      204
    Class Y      7      21      37       82
  An investor
  would pay the
  following
  expenses on the
  same investment,
  assuming the
  same annual
  return and no
  redemption:
    Class A    $59     $79    $100     $161
    Class B     18      54      94      184
    Class C     18      54      94      204
    Class Y      7      21      37       82
----------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
  end of the eighth year following the date of purchase.
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, each Portfolio's actual return will vary and may be
greater or less than 5.00% THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
8
<PAGE>
 

FINANCIAL HIGHLIGHTS

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

FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
 
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO
CLASS A SHARES                        1996      1995      1994(1)    1993      1992      1991
------------------------------------------------------------------------------------------------
<S>                                 <C>       <C>       <C>        <C>       <C>       <C>
NET ASSET VALUE, BEGINNING OF YEAR    $14.59    $12.18    $13.31     $12.48    $12.51    $10.54
------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income                  0.36      0.39      0.43       0.46      0.50      0.56
 Net realized and unrealized gain
  (loss)                                1.99      3.59     (1.00)      1.56      0.38      2.19
------------------------------------------------------------------------------------------------
Total Income (Loss) from
 Operations                             2.35      3.98     (0.57)      2.02      0.88      2.75
------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                 (0.36)    (0.39)    (0.42)     (0.46)    (0.51)    (0.73)
 Net realized gains (2)                (1.79)    (1.18)    (0.14)     (0.73)    (0.40)    (0.05)
------------------------------------------------------------------------------------------------
Total Distributions                    (2.15)    (1.57)    (0.56)     (1.19)    (0.91)    (0.78)
------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR          $14.79    $14.59    $12.18     $13.31    $12.48    $12.51
------------------------------------------------------------------------------------------------
TOTAL RETURN (P)                       16.06%    33.05%    (4.31)%    16.38%     7.23%    26.57%
------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)      $645,935  $617,431  $544,572   $627,870  $573,085  $583,686
------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                               0.95%     1.02%     0.96%      0.91%     0.92%     0.84%
 Net investment income                  2.28      2.78      3.31       3.42      3.97      4.80
------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                   49%       51%       27%        46%       39%       45%
------------------------------------------------------------------------------------------------
AVERAGE COMMISSION PER SHARE PAID
 ON EQUITY TRANSACTIONS(3)             $0.06     $0.06       --         --        --        --
</TABLE>
 
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
CLASS A SHARES (CONTINUED)              1990       1989      1988      1987
-------------------------------------------------------------------------------
<S>                               <C> <C>        <C>       <C>       <C>
NET ASSET VALUE, BEGINNING OF
 YEAR                                   $12.69     $11.00    $10.05    $11.40
-------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income                    0.67       0.70      0.61      0.71
 Net realized and unrealized gain
  (loss)                                 (1.87)      2.00      1.14     (0.93)
-------------------------------------------------------------------------------
Total Income (Loss) from
 Operations                              (1.20)      2.70      1.75     (0.22)
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                   (0.70)     (0.70)    (0.63)    (0.50)
 Net realized gains (2)                  (0.25)     (0.31)    (0.17)    (0.63)
-------------------------------------------------------------------------------
Total Distributions                      (0.95)     (1.01)    (0.80)    (1.13)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR            $10.54     $12.69    $11.00    $10.05
-------------------------------------------------------------------------------
TOTAL RETURN (P)                         (9.46)%    25.11%    17.67%    (2.83)%
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)        $513,586   $589,952  $517,948  $546,974
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                 0.45%      0.44%     0.49%     0.45%
 Net investment income                    5.69       5.65      5.58      5.90
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                     48%        38%       26%       51%
-------------------------------------------------------------------------------
</TABLE>
(1) On October 10, 1994, former Class C shares were exchanged into Class A
    shares and therefore Class C share activity for the period from January 1,
    1994 through October 9, 1994 is included with Class A Share activity.
(2)Net short term gains, if any, are included and reported as ordinary income
    for income tax purposes.

(3)As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of the average commissions per share. 
 (P) Total returns do not reflect any sales charges.
 
                                                                              9
<PAGE>
 

FINANCIAL HIGHLIGHTS (CONTINUED)

FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR: 
 
 
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO
CLASS B SHARES            1996     1995    1994(1)
---------------------------------------------------------------------------------
<S>                      <C>      <C>      <C>         <C>       <C>          <C>
NET ASSET VALUE,
 BEGINNING OF YEAR        $14.54   $12.15   $12.54
---------------------------------------------------------------------------------
INCOME (LOSS) FROM
 OPERATIONS:
 Net investment income      0.25     0.24     0.03
 Net realized and
  unrealized gains
  (loss)                    1.98     3.62    (0.19)
---------------------------------------------------------------------------------
Total Income (Loss)
 from Operations            2.23     3.86    (0.16)
---------------------------------------------------------------------------------
LESS DISTRIBUTIONS
 FROM:
 Net investment income     (0.24)   (0.29)   (0.09)
 Net realized gains (2)    (1.79)   (1.18)   (0.14)
---------------------------------------------------------------------------------
Total Distributions        (2.03)   (1.47)   (0.23)
---------------------------------------------------------------------------------
NET ASSET VALUE, END OF
 YEAR                     $14.74   $14.54   $12.15
---------------------------------------------------------------------------------
TOTAL RETURN (P)           15.22%   32.07%   (1.28)%++
---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
 (000S)                  $14,883   $6,065     $354
---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
 ASSETS:
 Expenses                   1.71%    1.73%    1.59%+*
 Net investment income      1.55     1.83     2.11+
---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE       49%      51%      27%
---------------------------------------------------------------------------------
AVERAGE COMMISSION PER
 SHARE PAID ON EQUITY
 TRANSACTIONS(3)           $0.06    $0.06      ---
---------------------------------------------------------------------------------
<CAPTION>
CLASS C SHARES            1996     1995    1994(4)       1993    1992(5)
---------------------------------------------------------------------------------
<S>                      <C>      <C>      <C>         <C>       <C>          <C>
NET ASSET VALUE,
 BEGINNING OF YEAR        $14.57   $12.18   $13.30       $12.48    $12.87
---------------------------------------------------------------------------------
INCOME (LOSS) FROM
 OPERATIONS:
 Net investment income      0.24     0.27     0.31         0.38      0.17
 Net realized and
  unrealized
  gain (loss)               1.98     3.59    (0.95)        1.53     (0.10)
---------------------------------------------------------------------------------
Total Income (Loss)
 from Operations            2.22     3.86    (0.64)        1.91      0.07
---------------------------------------------------------------------------------
LESS DISTRIBUTIONS
 FROM:
 Net investment income     (0.24)   (0.29)   (0.34)       (0.36)    (0.06)
 Net realized gains (2)    (1.79)   (1.18)   (0.14)       (0.73)    (0.40)
---------------------------------------------------------------------------------
Total Distributions        (2.03)   (1.47)   (0.48)       (1.09)    (0.46)
---------------------------------------------------------------------------------
NET ASSET VALUE, END OF
 YEAR                     $14.76   $14.57   $12.18       $13.30    $12.48
---------------------------------------------------------------------------------
TOTAL RETURN (P)           15.15%   32.01%   (4.91)%      15.46%    (0.57)%++
---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
 (000S)                  $33,365  $29,758  $27,507      $15,408    $1,504
---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
 ASSETS:
 Expenses                   1.73%    1.79%    1.75%        1.65%     1.58%+
 Net investment income      1.50     2.00     2.49         2.59      1.80+
---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE       49%      51%      27%          46%       39%
---------------------------------------------------------------------------------
AVERAGE COMMISSION PER
 SHARE PAID ON EQUITY
 TRANSACTIONS(3)           $0.06    $0.06      --           --        --
---------------------------------------------------------------------------------
</TABLE>
(1)For the period from November 7, 1994 (inception date) to December 31, 1994.
(2) Net short term gains, if any, are included and reported as ordinary income
    for income tax purposes.

(3)As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share. 

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

(5) For the period from December 2, 1992 (inception date) to December 31, 1992.
    
 ++ Total return is not annualized, as it may not be representative of the
    total return for the year.
 +  Annualized.
 (P) Total returns do not reflect any sales charges.
 * Amount has been restated from the December 31, 1994 Annual Report.
 
10
<PAGE>
 

FINANCIAL HIGHLIGHTS (CONTINUED) 

FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR: 
 
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO
CLASS Y SHARES                                                 1996(1)(2)
--------------------------------------------------------------------------
<S>                                                            <C>
NET ASSET VALUE, BEGINNING OF YEAR                               $15.06
--------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income                                             0.36
 Net realized and unrealized gain                                  1.58
--------------------------------------------------------------------------
Total Income from Operations                                       1.94
--------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                                            (0.41)
 Net realized gains(3)                                            (1.79)
--------------------------------------------------------------------------
Total Distributions                                               (2.20)
--------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR                                     $14.80
--------------------------------------------------------------------------
TOTAL RETURN                                                      12.86%++
--------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)                                  $30,169
--------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                                          0.66%+
 Net investment income                                             3.02+
--------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                                              49%
--------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS (4)     $0.06
--------------------------------------------------------------------------
</TABLE>

(1) Per share amounts have been calculated using the monthly average shares
    method, which more appropriately presents per share data for this year
    since the use of the undistributed income method did not accord with
    results of operations. 

(2) For the period from February 6, 1996 (inception date) to December 31,
    1996. 

(3) Net short term gains, if any, are included and reported as ordinary income
    for income tax purposes. 

(4) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share. 
++Total return is not annualized, as it may not be representative of the total
  return for the year.

+ Annualized. 
 
                                                                             11
<PAGE>
 

INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
 
  The Portfolio seeks current income and long-term growth of income and capi-
tal by investing primarily, but not exclusively, in common stocks.
   
  The Portfolio invests primarily in common stocks offering a current return
from dividends and will also normally include some interest-paying debt obli-
gations (such as U.S. Government Obligations, investment grade bonds and
debentures) and high quality short-term debt obligations (such as commercial
paper and repurchase agreements collateralized by U.S. Government securities
with broker/dealers or other financial institutions, including the Fund's cus-
todian). At least 65% of the Portfolio's assets will at times be invested in
equity securities. The Portfolio may also purchase preferred stocks and con-
vertible securities. Temporary defensive investments or a higher percentage of
debt securities may be held when deemed advisable by the Manager. To the
extent the Portfolio's assets are invested for temporary defensive purposes,
such assets will not be invested in a manner designed to achieve the Portfo-
lio's investment objective. In the selection of common stock investments,
emphasis is generally placed on issues with established dividend records as
well as potential for price appreciation. From time to time, however, a por-
tion of the assets may be invested in non-dividend paying stocks. The Portfo-
lio may make investments in foreign securities, though management currently
intends to limit such investments to 5% of the Portfolio's assets (including
European, Continental and Global Depositary Receipts), 
and an additional 10% of its assets may be invested in
sponsored American Depositary Receipts representing shares in foreign securi-
ties that are traded in United States securities markets.     
 
  The Portfolio's investment objective and policies, are non-fundamental and,
as such, may be changed by the Board of Directors, provided such change is not
prohibited by the investment restrictions (which are set forth in the State-
ment of Additional Information) or applicable law, and any such change will
first be disclosed in the then current prospectus.
    
The Portfolio may also invest in (I)
options (including swaps, collars, floors and caps) ; (ii) REITs;(iii)
unseasoned issuers;( iv) investment companies; and 
borrow money as a temporary measure for extraordinary or emergency
purposes.
    
 

  PORTFOLIO TRANSACTIONS AND TURNOVER
 
  All orders for transactions in securities and options on behalf of the Port-
folio are placed by the Manager with broker/dealers that the Manager selects,
including Smith Barney and other affiliated brokers. Brokerage will be allo-
cated to Smith Barney, to the extent and in the manner permitted by applicable
law, provided that, in the judgment of the Board of Directors of the Fund, the
commission, fee or other remuneration received or to be received by Smith Bar-
ney (or any broker/dealer affiliate of Smith Barney that is also a member of a
securities exchange) is reasonable and fair compared to the commission, fee or
other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a securi-
ties exchange during the same or comparable period of time. The Fund normally
expects to allocate to Smith Barney between
 
12
<PAGE>
 

INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
50% and 60% of the Portfolio's transactions to be executed for such account on
an agency basis. In all trades directed to Smith Barney, the Fund has been
assured that its orders will be accorded priority over those received from
Smith Barney for its own account or for any of its directors, officers or
employees. The Fund will not deal with Smith Barney in any transaction in which
Smith Barney acts as principal.
 
  Although it is anticipated that most investments of the Portfolio will be
long-term in nature, the rate of portfolio turnover will depend upon market and
other conditions, and it will not be a limiting factor when the Manager
believes that portfolio changes are appropriate. It is expected that the Port-
folio's annual turnover rate will not exceed 100%. As the portfolio turnover
rate increases, so will the Portfolio's brokerage and other transaction related
expenses. Investors should realize that risk of loss is inherent in the owner-
ship of any securities and that shares of the Portfolio will fluctuate with the
market values of its securities.
 
VALUATION OF SHARES
 
 
  The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Portfolio's net assets attributable to each Class by the total
number of shares of the Class outstanding.
 
  Securities that are listed or traded on a securities exchange are valued at
the last sale price on the principal exchange on which they are listed and
securities trading on the NASDAQ System are valued at the last sale price
reported as of the close of the NYSE. If no last sale is reported, the forego-
ing securities and over-the-counter securities other than those traded on the
NASDAQ System are valued at the mean between the last reported bid and asked
prices. Debt obligations are valued at the mean between the bid and asked quo-
tations for those securities or if no quotations are available, then for secu-
rities of similar type, yield and maturity. Short-term investments that have a
maturity of more than 60 days are valued at prices based on market quotations
for securities of similar type, yield and maturity. Short-term investments that
have a maturity of 60 days or less are valued at amortized cost when the Board
of Directors has determined that amortized cost equals fair value, unless mar-
ket conditions dictate otherwise. Other investments of the Portfolio, if any,
including restricted securities, are valued at a fair value determined by the
Board of Directors in good faith.

DIVIDENDS, DISTRIBUTIONS AND TAXES 
 
 
  DIVIDENDS AND DISTRIBUTIONS
 
  The Fund declares quarterly income dividends on shares of the Portfolio and
makes annual distributions of capital gains, if any, on such shares.
 
                                                                              13
<PAGE>
 


DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED) 
 
 
  If a shareholder does not otherwise instruct, dividends and capital gain dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.
 
  Income dividends and capital gain distributions that are invested are cred-
ited to shareholders' accounts in additional shares at the net asset value as
of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by First Data should notify First Data in writing at
least five business days prior to the payment date to permit the change to be
entered in the shareholder's account.
 
  The per share dividends on Class B and Class C shares of the Portfolio may be
lower than the per share dividends on Class A and Class Y shares principally as
a result of the distribution fee applicable with respect to Class B and Class C
shares. The per share dividends on Class A shares of the Portfolio may be lower
than the per share dividends on Class Y shares principally as a result of the
service fee applicable to Class A shares. Distributions of capital gains, if
any, will be in the same amount for Class A, Class B, Class C and Class Y
shares.
 
  TAXES
 
  The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Code to be relieved of federal income tax on that part of
its net investment income and realized capital gains which it pays out to its
shareholders. To qualify, the Portfolio must meet certain tests, including dis-
tributing at least 90% of its investment company taxable income, and deriving
less than 30% of its gross income from the sale or other disposition of certain
investments held for less than three months.
 
  Dividends from net investment income and distributions of realized short-term
capital gains on the sale of securities, whether paid in cash or automatically
invested in additional shares of the same Portfolio, are taxable to sharehold-
ers of the Portfolio as ordinary income. The Portfolio's dividends will not
qualify for the dividends received deduction for corporations. Dividends and
distributions declared by the Portfolio may also be subject to state and local
taxes. Distributions out of net long-term capital gains (i.e., net long-term
capital gains in excess of net short-term capital losses) are taxable to share-
holders as long-term capital gains. Information as to the tax status of divi-
dends paid or deemed paid in each calendar year will be mailed to shareholders
as early in the succeeding year as practical but not later than January 31.
 
14
<PAGE>
 

PURCHASE OF SHARES 
 
 
  GENERAL

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

  Purchases of Portfolio shares must be made through a brokerage account main
tained with Smith Barney, an Introducing Broker or an investment dealer in the
selling group. In addition, certain investors, including qualified retirement
plans and certain other institutional investors, may purchase shares directly
from the Fund through First Data. When purchasing shares of the Portfolio,
investors must specify whether the purchase is for Class A, Class B, Class C
or Class Y shares. Smith Barney and other broker/dealers may charge their cus-
tomers an annual account maintenance fee in connection with a brokerage
account through which an investor purchases or holds shares. Accounts held
directly at First Data are not subject to a maintenance fee. 

  Investors in Class A, Class B and Class C shares may open an account by mak-
ing an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan in the Portfolio. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000. Sub-
sequent investments of at least $50 may be made for all Classes. For partici-
pants in retirement plans qualified under Section 403(b)(7) or Section 401(a)
of the Code, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes
in the Portfolio is $25. For shareholders purchasing shares of the Portfolio
through the Systematic Investment Plan on a monthly basis, the minimum initial
investment requirement for Class A, Class B and Class C shares and the subse-
quent investment requirement for all Classes is $25. For shareholders purchas-
ing shares of the Portfolio through the Systematic Investment Plan on a quar-
terly basis, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes
is $50. There are no minimum investment requirements 
 
                                                                             15
<PAGE>
 

PURCHASE OF SHARES (CONTINUED)
 
 
in Class A shares for employees of Travelers and its subsidiaries, including
Smith Barney, Directors or Trustees of any of the Smith Barney Mutual Funds,
and their spouses and children. The Fund reserves the right to waive or change
minimums, to decline any order to purchase its shares and to suspend the
offering of shares from time to time. Shares purchased will be held in the
shareholder's account by the Fund's transfer agent, First Data. Share certifi-
cates are issued only upon a shareholder's written request to First Data.
 
  Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day a Portfolio calculates its net asset
value, are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or Introducing Brokers prior to the
close of regular trading on the NYSE on any day a Portfolio calculates its net
asset value, are priced according to the net asset value determined on that
day, provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers, purchasing through Smith Barney, payment for Portfolio
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.
 
 SYSTEMATIC INVESTMENT PLAN

  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on
a quarterly basis to charge the regular bank account or other financial insti-
tution indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
First Data. The Systematic Investment Plan also authorizes Smith Barney to
apply cash held in the shareholder's Smith Barney brokerage account or redeem
the shareholder's shares of a Smith Barney money market fund to make additions
to the account. Additional information is available from the Fund or a Smith
Barney Financial Consultant. 
 
16
<PAGE>
 

PURCHASE OF SHARES (CONTINUED)
 
 
 INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
 
  The sales charges applicable to purchases of Class A shares of each Portfolio
are as follows:
 
<TABLE>
<CAPTION>
                                  SALES CHARGE
                         ------------------------------
                                                             DEALERS'
                              % OF           % OF       REALLOWANCE AS % OF
  AMOUNT OF INVESTMENT   OFFERING PRICE AMOUNT INVESTED   OFFERING PRICE
---------------------------------------------------------------------------
  <S>                    <C>            <C>             <C>
  Less than $25,000           5.00%          5.26%             4.50%
  $ 25,000 -  49,999          4.00           4.17              3.60
   50,000 -  99,999           3.50           3.63              3.15
   100,000 - 249,999          3.00           3.09              2.70
   250,000 - 499,999          2.00           2.04              1.80
   500,000   and over          *               *                 *
---------------------------------------------------------------------------
</TABLE>

* Purchases of Class A shares of $500,000 or more, will be made at net asset
  value without any initial sales charge, but will be subject to a CDSC of
  1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
  shares is payable to Smith Barney, which compensates Smith Barney Financial
  Consultants and other dealers whose clients make purchases of $500,000 or
  more. The CDSC is waived in the same circumstances in which the CDSC
  applicable to Class B and Class C shares is waived. See "Deferred Sales
  Charge Alternatives" and "Waivers of CDSC." 
 
  Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.

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

  Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families
of such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such per-
sons and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect with the combination of such
company with the Portfolio by merger, acquisition of assets or otherwise; (c)
purchases of Class A shares by any client of a newly employed Smith Barney
Financial Consultant (for a period up to 90 days from the commencement of the
Financial Consultant's employment with Smith Barney), on the 
 
                                                                              17
<PAGE>
 

PURCHASE OF SHARES (CONTINUED)

condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the Financial Con-
sultant and (iii) was subject to a sales charge; (d) purchases by shareholders
who have redeemed Class A shares in a Portfolio (or Class A shares of another
fund of the Smith Barney Mutual Funds that are offered with a sales charge) and
who wish to reinvest their redemption proceeds in the Portfolio, provided the
reinvestment is made within 60 calendar days of the redemption; (e) purchases
by accounts managed by registered investment advisory subsidiaries of Travel-
ers; and (f) direct rollovers by plan participants of distributions from a
401(k) plan offered to employees of Travelers or its subsidiaries or a 401(k)
plan enrolled in the Smith Barney 401(k) Program (Note: subsequent investments
will be subject to the applicable sales charge); (g) purchases by separate
accounts used to fund certain unregistered variable annuity contracts; and (h)
purchases by investors participating in a Smith Barney fee-based arrangement.
In order to obtain such discounts, the purchaser must provide sufficient infor-
mation at the time of purchase to permit verification that the purchase would
qualify for the elimination of the sales charge. 
 
 RIGHT OF ACCUMULATION
 
  Class A shares of a Portfolio may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Portfolio and of funds sponsored by Smith Barney which
are offered with a sales charge listed under "Exchange Privilege" then held by
such person and applying the sales charge applicable to such aggregate. In
order to obtain such discount, the purchaser must provide sufficient informa-
tion at the time of purchase to permit verification that the purchase qualifies
for the reduced sales charge. The right of accumulation is subject to modifica-
tion or discontinuance at any time with respect to all shares purchased there-
after.
 
 GROUP PURCHASES
 
  Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership- sanctioned plan
meeting certain require-
 
18
<PAGE>
 

PURCHASE OF SHARES (CONTINUED)
 
ments. One such requirement is that the plan must be open to specified part-
ners or employees of the employer and its subsidiaries, if any. Such plan may,
but is not required to, provide for payroll deductions, IRAs or investments
pursuant to retirement plans under Sections 401 or 408 of the Code. Smith Bar-
ney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales related expenses. An indi-
vidual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales
charge is based upon the aggregate dollar value of Class A shares offered with
a sales charge that have been previously purchased and are still owned by the
group, plus the amount of the current purchase. A "qualified group" is one
which (a) has been in existence for more than six months, (b) has a purpose
other than acquiring Portfolio shares at a discount and (c) satisfies uniform
criteria which enable Smith Barney to realize economies of scale in its costs
of distributing shares. A qualified group must have more than 10 members, must
be available to arrange for group meetings between representatives of the
Portfolio and the members, and must agree to include sales and other materials
related to the Portfolio in its publications and mailings to members at no
cost to Smith Barney. In order to obtain such reduced sales charge or to pur-
chase at net asset value, the purchaser must provide sufficient information at
the time of purchase to permit verification that the purchase qualifies for
the reduced sales charge. Approval of group purchase reduced sales charge
plans is subject to the discretion of Smith Barney.
 
  LETTER OF INTENT
 
  Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of each Portfolio and other funds of the Smith
Barney Mutual Funds offered with a sales charge over a 13 month period based
on the total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13
month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay the difference between
the sales charges applicable to the purchases made and the charges previously
paid, or an appropriate number of escrowed shares will be redeemed. Please
contact a Smith Barney Financial Consultant or First Data to obtain a Letter
of Intent application.
 
 
                                                                             19
<PAGE>
 

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

  CDSC Shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in a Portfolio. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to CDSC. 
 
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Portfolio assets; (b) reinvestment of dividends or capital gain distribu-
tions; (c) with respect to Class B shares, shares redeemed more than five years
after their purchase; or (d) with respect to Class C shares and Class A shares
that are CDSC Shares, shares redeemed more than 12 months after their purchase.

  Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
purchases by Participating Plans, as described below. See "Purchase of
Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs." 
 
 
20
<PAGE>
 

PURCHASE OF SHARES (CONTINUED)
 
<TABLE>
<CAPTION>
      YEAR SINCE PURCHASE
      PAYMENT WAS MADE      CDSC
    -----------------------------
      <S>                   <C>
      First                 5.00%
      Second                4.00
      Third                 3.00
      Fourth                2.00
      Fifth                 1.00
      Sixth                 0.00
      Seventh               0.00
      Eighth                0.00
    -----------------------------
</TABLE>

  Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There will also be converted at that time such pro-
portion of Class B Dividend Shares owned by the shareholder as the total number
of his or her Class B shares converting at the time bears to the total number
of outstanding Class B shares (other than Class B Dividend Shares) owned by the
shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements --
 Class B Shares Conversion Feature." 
 
  In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that CDSC Shares acquired through an
exchange have been held will be calculated from the date that the shares
exchanged were initially acquired in one of the other Smith Barney Mutual
Funds, and Portfolio shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax purposes, the amount
of the CDSC will reduce the gain or increase the loss, as the case may be, on
the amount realized on redemption. The amount of any CDSC will be paid to Smith
Barney.
 
  To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 addi-
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
 
 
                                                                              21
<PAGE>
 

PURCHASE OF SHARES (CONTINUED)
 
  WAIVERS OF CDSC

  The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic cash withdrawals in amounts equal to or less than 2.00% per month of the
value of the shareholder's shares will be permitted for withdrawal plans that
were established prior to November 7, 1994); (c) redemptions of shares within
twelve months following the death or disability of the shareholder; (d)
redemption of shares made in connection with qualified distributions from
retirement plans or IRAs upon the attainment of age 59 1/2; (e) involuntary
redemptions; and (f) redemptions of shares to effect a combination of the
Portfolio with any investment company by merger, acquisition of assets or oth-
erwise. In addition, a shareholder who has redeemed shares from other funds of
the Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption. 
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
  
  SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS 

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

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

  Class A Shares. Class A shares of the Portfolio are offered without any ini-
tial sales charge or CDSC to any Participating Plan that purchases from
$1,000,000 or more of Class A shares of one or more funds of the Smith Barney
Mutual Funds. 
 
 
22
<PAGE>
 

PURCHASE OF SHARES (CONTINUED)

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

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

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

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

  Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase

                                                                              23
<PAGE>
 

PURCHASE OF SHARES (CONTINUED)

such shares directly from First Data. For further information regarding the
these Programs, investors should contact a Smith Barney Financial Consultant.

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

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

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

  The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of any employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee 
 
24
<PAGE>
 

PURCHASE OF SHARES (CONTINUED)

in the Participating Plan; (e) hardship of an employee in the Participating
Plan to the extent permitted under Section 401(k) of the Code; or (f) redemp-
tions of shares in connection with a loan made by the Participating Plan to an
employee. 
 
EXCHANGE PRIVILEGE

  Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, Class B and Class C shares are subject to min-
imum investment requirements and all shares are subject to the other require-
ments of the fund into which exchanges are made. 
 
 FUND NAME
 
 Growth Funds
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Growth Opportunity Fund
    Smith Barney Managed Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Special Equities Fund
    
 Growth and Income Funds
    
    Concert Social Awareness Fund 
    Smith Barney Convertible Fund
    Smith Barney Growth and Income Fund
    Smith Barney Premium Total Return Fund
    
    Smith Barney Utilities Fund
 
 Taxable Fixed-Income Funds
   **Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
    
  +++Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities
  Portfolio
    Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
 
 Tax-Exempt Funds
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
    *Smith Barney Intermediate Maturity California Municipals Fund
    *Smith Barney Intermediate Maturity New York Municipals Fund
 
                                                                              25
<PAGE>
 

EXCHANGE PRIVILEGE (CONTINUED)
 
    Smith Barney Managed Municipals Fund Inc.
    
    Smith Barney Massachusetts Municipals Fund
    Smith Barney Muni Funds -- Florida Portfolio
    Smith Barney Muni Funds -- Georgia Portfolio
    *Smith Barney Muni Funds -- Limited Term Portfolio
    Smith Barney Muni Funds -- National Portfolio
    Smith Barney Muni Funds -- New York Portfolio
    Smith Barney Muni Funds -- Ohio Portfolio
    Smith Barney Muni Funds -- Pennsylvania Portfolio
    Smith Barney New Jersey Muncipals Fund Inc.
    Smith Barney Oregon Municipals Fund
    Smith Barney Tax-Exempt Income Fund
 
 International Funds
    Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
    Smith Barney World Funds, Inc. -- European Portfolio
    Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
    Smith Barney World Funds, Inc. -- International Balanced Portfolio
    Smith Barney World Funds, Inc. -- International Equity Portfolio
    Smith Barney World Funds, Inc. -- Pacific Portfolio
 
 Smith Barney Concert Allocation Series Inc. 
    
    Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio 
    
    Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
    
    Smith Barney Concert Allocation Series Inc. -- Growth Portfolio 
    
    Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
    
    
    Smith Barney Concert Allocation Series Inc. -- Income Portfolio 
 
 Money Market Funds
    +Smith Barney Exchange Reserve Fund
   ++Smith Barney Money Funds, Inc. -- Cash Portfolio
   ++Smith Barney Money Funds, Inc. -- Government Portfolio
  ***Smith Barney Money Funds, Inc. -- Retirement Portfolio
  +++Smith Barney Municipal Money Market Fund, Inc.
  +++Smith Barney Muni Funds -- California Money Market Portfolio
  +++Smith Barney Muni Funds -- New York Money Market Portfolio.
-------------------------------------------------------------------------------
  * Available for exchange with Class A, Class C and Class Y shares of the
    Portfolio.

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

 ++ Available for exchange with Class A and Class Y shares of the Portfolio.
    In addition, Participating Plans prior to June 21, 1996 and investing in
    Class C shares may exchange Portfolio shares for Class C shares of this
    fund. 
+++ Available for exchange with Class A and Class Y shares of each Portfolio.
 
26
<PAGE>
 

EXCHANGE PRIVILEGE (CONTINUED)

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

  Class A and Class Y Exchanges. Class A and Class Y shareholders of the Port-
folio who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without imposi-
tion of any charge. 
 
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Portfolio's performance and its shareholders. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Portfolio's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, the Fund will provide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege and during the 15 day period the shareholder
will be required to (a) redeem his or her shares in the Portfolio or (b) remain
invested in the Portfolio or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.
 
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined, plus any applicable
sales charge differential. Redemption procedures discussed below are also
applicable for exchanging shares, and exchanges will be made upon receipt of
all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the
shares of the fund exchanged, no signature guarantee is required. A capital
gain or loss for tax purposes will be realized upon the exchange, depending
upon the cost or other basis of shares redeemed. Before exchanging shares,
investors should read the current prospectus describing the shares to be
acquired. The Portfolio reserves the right to modify or discontinue exchange
privileges upon 60 days' prior notice to share- holders.
 
                                                                              27
<PAGE>
 

REDEMPTION OF SHARES 
 
 
  The Fund is required to redeem the shares of the Portfolio tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.

  If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following 
receipt of
proper tender, except on any days on which the NYSE is closed or as permitted
under the Investment Company Act of 1940, as amended (the "1940 Act") in
extraordinary circumstances. Generally, if the redemption proceeds are remitted
to a Smith Barney brokerage account, these funds will not be invested for the
shareholder's benefit without specific instruction and Smith Barney will bene-
fit from the use of temporarily uninvested funds. Redemption proceeds for
shares purchased by check, other than a certified or official bank check, will
be remitted upon clearance of the check, which may take up to ten days or more.

  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
 
  Smith Barney Funds, Inc./(Equity Income Portfolio)
  Class A, B, C or Y (please specify)
  c/o First Data Investor Services Group, Inc.
  
  P.O. Box 5128 
  
  Westborough, Massachusetts 01581-5128 
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a written redemption request in excess of
$2,000 or share certificate stock power must be guaranteed by an eligible
guarantor institution, such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Fed-
 
28
<PAGE>
 

REDEMPTION OF SHARES (CONTINUED)

eral Reserve System or member firm of a national securities exchange. Written
redemption requests of $2,000 or less do not require a signature guarantee
unless more than one such redemption request is made in any 10-day period.
Redemption proceeds will be mailed to an investor's address of record. First
Data may require additional supporting documents for redemptions made by corpo-
rations, executors, administrators, trustees or guardians. A redemption request
will not be deemed properly received until First Data receives all required
documents in proper form.
 
 AUTOMATIC CASH WITHDRAWAL PLAN
 
  The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the share-
holder is eligible to receive qualified distributions and has an account value
of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of a Portfolio. Any applicable CDSC will not be waived
on amounts withdrawn by a shareholder that exceed 1.00% per month of the value
of the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not
exceed 2.00% per month of the value of the shareholder's shares subject to the
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
  TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
 
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Portfolio shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a sig-
nature guarantee, that will be provided by First Data upon request. (Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with the applicant's signature guarantee when making his/her ini-
tial investment in the Porttfolio.)
 
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Portfolio's shares, may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this pro-
gram.
 
 
                                                                              29
<PAGE>
 

REDEMPTION OF SHARES (CONTINUED)
 
  A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal
fee for each wire redemption. Such charges, if any, will be assessed against
the shareholder's account from which shares were redeemed. In order to change
the bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee
and certain other documentation.
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day on which the NYSE is open. Exchange
requests received after the close of regular trading on the NYSE are processed
at the net asset value next determined.
 
  Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven (7) days prior notice to shareholders.
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in a Portfolio if the aggregate net asset value of the shares held in
that Portfolio account is less than $500. (If a shareholder has more than one
account in a Portfolio, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely on market reductions in
net asset value. Before the Fund exercises such right, shareholders will
receive written notice and will be permitted 60 days to bring accounts up to
the minimum to avoid involuntary liquidation.
 
30
<PAGE>
 

PERFORMANCE 
 
 
 
  From time to time the Portfolio may include its total return, average annual
total return, yield and current dividend return in advertisements and/or other
types of sales literature. These figures are computed separately for Class A,
Class B, Class C and Class Y shares of each Portfolio. These figures are based
on historical earnings and are not intended to indicate future performance.
Total return is computed for a specified period of time assuming deduction of
the maximum sales charge, if any, from the initial amount invested and rein-
vestment of all income dividends and capital gain distributions on the rein-
vestment dates at prices calculated as stated in this Prospectus, then dividing
the value of the investment at the end of the period so calculated by the ini-
tial amount invested and subtracting 100%. The standard average annual total
return, as prescribed by the SEC is derived from this total return, which pro-
vides the ending redeemable value. Such standard total return information may
also be accompanied with nonstandard total return information for differing
periods computed in the same manner but without annualizing the total return or
taking sales charges into account. The Portfolio calculates current dividend
return for each of its Classes by dividing the current dividend by the net
asset value or the maximum public offering price (including sales charge) on
the last day of the period for which current dividend return is presented. Each
Class' current dividend return may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating cur-
rent dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Portfolio may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.
 
MANAGEMENT OF THE FUND
 
 
  BOARD OF DIRECTORS
 
Overall responsibility for management and supervision of the Portfolio rests 
with the Fund's Board of Directors. The Directors approve all 
significant agreements
between the Fund and the companies that furnish services to the Fund and the
Portfolio, including agreements with the Fund's distributor, investment manag-
er, custodian and transfer agent. The day-to-day operations of the Portfolio
are delegated to the Manager. The Statement of Additional Information contains
background information regarding each Director and executive officer of the
Fund.
 
  MANAGER
 
  Smith Barney Mutual Funds Management Inc. (the "Manager") manages the day-to-
day operations of the Portfolio pursuant to a management agreement entered
 
                                                                              31
<PAGE>
 

MANAGEMENT OF THE FUND (CONTINUED)
 
 
into by the Fund on behalf of the Portfolio under which the Manager offers the
Portfolio advice and assistance with respect to the acquisition, holding or
disposal of securities and recommendations with respect to other aspects and
affairs of the Portfolio and furnishes the Portfolio with bookkeeping, account-
ing and administrative services, office space and equipment, and the services
of the officers and employees of the Fund. By written agreement the Research
and other departments and staff of Smith Barney will furnish the Manager with
information, advice and assistance and will be available for consultation on
the Portfolios, thus Smith Barney may also be considered an investment adviser
to the Fund. Smith Barney's services are paid for by the Manager on the basis
of direct and indirect costs to Smith Barney of performing such services; there
is no charge to the Fund for such services.

  For the Portfolio's last fiscal year the management fee was 0.58% of the
Portfolio's average net assets. Total operating expenses of the Portfolio were
0.95%, 1.71%, 1.73% and 0.66% of average net assets for Class A, Class B, Class
C and Class Y shares, respectively. 

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

  Bruce D. Sargent, a Vice President and Director of the Manager, is also a
Vice President and Director of Smith Barney Funds, Inc. and the portfolio man-
ager of the Portfolio. Mr. Sargent co-manages the day to day operations of the
Portfolio and has been involved in equity investing for over 25 years. 

  Ayako Weissman, Managing Director of Smith Barney, serves as co-manager of
the Portfolio. Ms. Weissman has been involved in equity investing for Smith
Barney for over 8 years. 

  Management's discussion and analysis, and additional performance information
regarding each Portfolio during the fiscal year ended December 31, 1996 is
included in the Annual Report dated December 31, 1996. A copy of the Annual

32
<PAGE>
 

MANAGEMENT OF THE FUND (CONTINUED) 
 
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
 
DISTRIBUTOR
 
 
  Smith Barney distributes shares of the Portfolio as principal underwriter and
as such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Portfolio
under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a serv-
ice fee with respect to Class A, Class B and Class C shares of the Portfolio at
the annual rate of 0.25% of the average daily net assets attributable to these
Classes. Smith Barney is also paid a distribution fee with respect to Class B
and Class C shares at the annual rate of 0.75% of the average daily net assets
attributable to these Classes. Class B shares that automatically convert to
Class A shares eight years after the date of original purchase will no longer
be subject to a distribution fee. The fees are used by Smith Barney to pay its
Financial Consultants for servicing shareholder accounts and, in the case of
Class B and Class C shares, to cover expenses primarily intended to result in
the sale of those shares. These expenses include: advertising expenses; the
cost of printing and mailing prospectuses to potential investors; payments to
and expenses of Smith Barney Financial Consultants and other persons who pro-
vide support services in connection with the distribution of shares; interest
and/or carrying charges; and indirect and overhead costs of Smith Barney asso-
ciated with the sale of Portfolio shares, including lease, utility, communica-
tions and sales promotion expenses.
 
  The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
 
  Payments under the Plan with respect to Class B and Class C shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Directors will evaluate the appropriate-
ness of the Plan and its payment terms on a continuing basis and in so doing
will consider all relevant factors, including expenses borne by Smith Barney,
amounts received under the Plan and proceeds of the CDSC.
 
 
                                                                              33
<PAGE>
 

ADDITIONAL INFORMATION 
 
 
  The Fund, an open-end, diversified investment company, was incorporated in
Maryland on December 2, 1966. The Fund has an authorized capital of
2,000,000,000 shares with a par value of $.01 per share. The Board of Direc-
tors has authorized the issuance of fifteen series of shares, each represent-
ing shares in one of fifteen separate Portfolios and may authorize the issu-
ance of additional series of shares in the future. The assets of each Portfo-
lio are segregated and separately managed and a shareholder's interest is in
the assets of the Portfolio in which he or she holds shares. Class A, Class B,
Class C, Class Y and Class Z (where available) shares of a Portfolio represent
interests in the assets of that Portfolio and have identical voting, dividend,
liquidation and other rights on the same terms and conditions except that
expenses related to the distribution of each Class of shares are borne solely
by each Class and each Class of shares has exclusive voting rights with
respect to provisions of the Fund's Rule 12b-1 distribution plan which pertain
to a particular Class. As described under "Voting" in the Statement of Addi-
tional Information, the Fund ordinarily will not hold shareholder meetings;
however, shareholders have the right to call a meeting upon a vote of 10% of
the Fund's outstanding shares for the purpose of voting to remove directors,
and the Fund will assist shareholders in calling such a meeting as required by
the 1940 Act. Shares do not have cumulative voting rights or preemptive rights
and are fully paid, transferable and nonassessable when issued for payment as
described in this Prospectus.
 
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103 serves as custodian of the Portfolio's invest-
ments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.

  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund
at the end of the period covered. In an effort to reduce the Fund's printing
and mailing costs, the Fund plans to consolidate the mailing of its semi-
annual and annual reports by household. This consolidation means that a house-
hold having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this con-
solidation to apply to their account should contact their Smith Barney Finan-
cial Consultant or the Fund's transfer agent. 
 
34
<PAGE>
 

APPENDIX
 
 
  U.S. GOVERNMENT OBLIGATIONS
 
  In addition to Government National Mortgage Association ("GNMA") securities
and direct obligations of the U.S. Treasury (such as Treasury Bills, Notes and
Bonds), U.S. Government Obligations in which the Fund may invest include: (1)
obligations of, or issued by, Banks for Cooperatives, Federal Land Banks, Fed-
eral Intermediate Credit Banks, Federal Home Loan Banks, the Federal Home Loan
Bank Board, or the Student Loan Marketing Association; (2) other securities
fully guaranteed as to principal and interest by the United States of America;
(3) other obligations of, or issued by, or fully guaranteed as to principal and
interest by the Federal National Mortgage Association or any agency of the
United States; and (4) obligations currently or previously sold by the Federal
Home Loan Mortgage Corporation.
 
  FOREIGN INVESTMENTS
 
  The Portfolio will ordinarily purchase foreign securities that are traded in
the United States or purchase American Depositary Receipts, which are certifi-
cates issued by U.S. banks representing the right to receive securities of a
foreign issuer deposited with that bank or a correspondent bank. However, the
Portfolio may purchase the securities of foreign issuers directly in foreign
markets. Foreign securities may involve a high degree of risk. Foreign securi-
ties usually are denominated in foreign currencies, which means their value
will be affected by changes in exchange rates between other currencies and the
U.S. dollar as well as the other factors that affect securities prices. Foreign
companies may not be subject to accounting standards or governmental supervi-
sion comparable to U.S. companies, and there may be less publicly available
information about their operations. There is generally less governmental regu-
lation of foreign securities markets, and security trading practices abroad may
offer less protection to investors such as the Portfolio. Foreign securities
can also be affected by political or financial instability abroad, and may be
less liquid or more volatile than domestic investments.
 
  SECURITIES LENDING
 
  The Portfolio may seek to increase its net investment income by lending its
securities to unaffiliated brokers, dealers and other financial institutions,
provided such loans are callable at any time and are continuously secured by
cash or U.S. Government securities equal to no less than the market value,
determined daily, of the securities loaned. The risks in lending portfolio
securities consist of possible delay in recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Manage-
ment will limit such lending to not more than twenty percent of the value of
the Portfolio's total assets.
 
                                                                             A-1
<PAGE>
 

APPENDIX (CONTINUED)
 
 
  WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

  The Portfolio may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when secu-
rities are purchased or sold by the Portfolio with payment and delivery taking
place in the future in order to secure what is considered to be an advanta-
geous price and yield to the Portfolio at the time of entering into the trans-
action. The Fund's Custodian will maintain, in a segregated account of the
Portfolio, cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Portfolio's purchase commitments, provided
such securities have been determined by the Manager to be liquid and unencum-
bered, and are marked to market daily, pursuant to guidelines established by
the Directors; the Custodian will likewise segregate securities sold on a
delayed basis. 
 
  REPURCHASE AGREEMENTS
 
  The Portfolio may on occasion enter into repurchase agreements, wherein the
seller agrees to repurchase a security from the Portfolio at an agreed-upon
future date, normally the next business day. The resale price is greater than
the purchase price, which reflects the agreed-upon rate of return for the
period the Portfolio holds the security and which is not related to the coupon
rate on the purchased security. The Fund requires continual maintenance of the
market value of the collateral in amounts at least equal to the resale price,
thus risk is limited to the ability of the seller to pay the agreed-upon
amount on the delivery date; however, if the seller defaults, realization upon
the collateral by the Portfolio may be delayed or limited or the Portfolio
might incur a loss if the value of the collateral securing the repurchase
agreement declines and might incur disposition costs in connection with liqui-
dating the collateral. The Portfolio will only enter into repurchase agree-
ments with broker/dealers or other financial institutions that are deemed
creditworthy by the Manager under guidelines approved by the Board of Direc-
tors. It is the policy of the Fund not to invest in repurchase agreements that
do not mature within seven days if any such investment together with any other
illiquid assets held by the Portfolio amount to more than 15% of the Portfo-
lio's total assets.
 
A-2
<PAGE>
 
 
                                                                    SMITH BARNEY
                                               ---------------------------------
 
                                               A Member of TravelersGroup [LOGO]
 
 
 
 
 
 
 
 
 
                                                        SMITH BARNEY FUNDS, INC.
                                                                   EQUITY INCOME
                                                                       PORTFOLIO
 
                                                            388 Greenwich Street
                                                        New York, New York 10013
                                                               
                                                               FD 2320 4/97 

<PAGE>

P R O S P E C T U S 

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


[LOGO] SMITH BARNEY MUTUAL FUNDS
       Investing for your future.
       Every day. 
<PAGE>
 

PROSPECTUS                                                  
                                                            April 30, 1997 

Smith Barney Funds, Inc. 

Equity Income Portfolio 
388 Greenwich Street
New York, New York 10013

(800) 451-2010 

  The Equity Income Portfolio is one of four investment portfolios that cur-
rently comprise Smith Barney Funds, Inc. (the "Fund"). The Equity Income Port-
folio seeks current income and long-term growth of income and capital. It
invests primarily, but not exclusively, in common stocks. 
 
  This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including expenses, that prospective investors will find helpful
in making an investment decision. Investors are encouraged to read this Pro-
spectus carefully and retain it for future reference.
 
  The Class Z shares described in this Prospectus are currently offered exclu-
sively for sale to tax-exempt employee benefit and retirement plans of
Smith Barney Inc. ("Smith Barney") or any of its affiliates ("Qualified
Plans").

  Additional information about the Portfolio is contained in a Statement of
Additional Information dated April 30, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by con-
tacting a Smith Barney Financial Consultant. The Statement of Additional Infor-
mation has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety. 
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 

TABLE OF CONTENTS                                                          DATE
 
<TABLE>
<S>                                           <C>
PORTFOLIO EXPENSES                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            4
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    5
-------------------------------------------------
VALUATION OF SHARES                             6
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES              7
-------------------------------------------------
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES     7
-------------------------------------------------
PERFORMANCE                                     8
-------------------------------------------------
MANAGEMENT OF THE FUND                          9
-------------------------------------------------
ADDITIONAL INFORMATION                         10
-------------------------------------------------
APPENDIX                                      A-1
-------------------------------------------------
</TABLE>
 
--------------------------------------------------------------------------------
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
--------------------------------------------------------------------------------
 
2
<PAGE>
 

PORTFOLIO EXPENSES                                                         DATE

 The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of Class Z shares of the
Portfolio, based on operating expenses for Class Z shares for the fiscal year
ended December 31, 1996. 
 
<TABLE>
  <S>                                   <C>   <C>
  ANNUAL PORTFOLIO OPERATING EXPENSES
    (as a percentage of average net assets)
    Management fees                           0.58%
    Other expenses                            0.04
---------------------------------------------------
  TOTAL PORTFOLIO OPERATING EXPENSES    0.62%
---------------------------------------------------
</TABLE>
 
  The nature of the services for which the Fund pays management fees is
described under "Management of the Fund." "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
 
 EXAMPLE

  The following example is intended to assist an investor in understanding the
various costs that an investor in the Portfolio will bear directly or indi-
rectly. The example assumes payment by the Portfolio of operating expenses at
the levels set forth in the table above. See "Purchase, Exchange and Redemp-
tion of Shares" and "Management of the Fund." 
 
<TABLE>
<CAPTION>
                                                1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
 <S>                                            <C>    <C>     <C>     <C>
 An investor would pay the following expenses
 on a $1,000 investment in Class Z shares of
 the Portfolio, assuming (1) a 5.00% annual
 return and (2) redemption at the end of each
 time period:                                     $6     $20     $35     $77
</TABLE>
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                              3
<PAGE>
 

FINANCIAL HIGHLIGHTS

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

FOR A SHARE OF CLASS Z CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR: 
 
 
<TABLE>
<CAPTION>
                              1996     1995    1994(1)
----------------------------------------------------------
  <S>                       <C>       <C>      <C>
  NET ASSET VALUE,
  BEGINNING OF YEAR           $14.61   $12.19   $12.54
----------------------------------------------------------
  INCOME (LOSS) FROM
  OPERATIONS:
   Net investment income        0.42     0.43     0.07
   Net realized and
   unrealized gain (loss)       1.99     3.59    (0.16)
----------------------------------------------------------
  Total Income (Loss) From
  Operations                    2.41     4.02    (0.09)
----------------------------------------------------------
  LESS DISTRIBUTIONS FROM:
   Net investment income       (0.41)   (0.42)   (0.12)
   Net realized gains(2)       (1.79)   (1.18)   (0.14)
----------------------------------------------------------
  Total Distributions          (2.20)   (1.60)   (0.26)
----------------------------------------------------------
  NET ASSET VALUE, END OF
  YEAR                        $14.82   $14.61   $12.19
----------------------------------------------------------
  TOTAL RETURN                 16.47%   33.41%   (0.73)%++
----------------------------------------------------------
  NET ASSETS, END OF YEAR
  (000S)                    $113,160  $98,661  $80,010
----------------------------------------------------------
  RATIOS TO AVERAGE NET
  ASSETS:
   Expenses                     0.62%    0.69%    0.42%+
   Net investment income        2.62     3.11     3.88+
----------------------------------------------------------
  PORTFOLIO TURNOVER RATE         49%      51%      27%
----------------------------------------------------------
  AVERAGE COMMISSIONS PER
  SHARE PAID ON
  EQUITY TRANSACTIONS(3)       $0.06    $0.06      --
----------------------------------------------------------
</TABLE>
(1) For the period from November 7, 1994 (inception date) to December 31, 1994.
(2) Net short term gains, if any, are included and reported as ordinary income
    for income tax purposes.

(3) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share. 
 ++Total return is not annualized, as it may not be representative of the total
   return for the year.
 + Annualized.
 
4
<PAGE>
 

INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 
 
  The Equity Income Portfolio (the "Portfolio") seeks current income and long-
term growth of income and capital by investing primarily, but not exclusively,
in common stocks. Of course, no assurance can be given that the Portfolio's
objective will be achieved.
   
  The Portfolio invests primarily in common stocks offering a current return
from dividends and will also normally include some interest-paying debt obli-
gations (such as U.S. Government Obligations, investment grade bonds and
debentures) and high quality short-term debt obligations (such as commercial
paper and repurchase agreements collateralized by U.S. Government securities
with broker/dealers or other financial institutions, including the Fund's cus-
todian). At least 65% of the Portfolio's assets will at times be invested in
equity securities. The Portfolio may also purchase preferred stocks and con-
vertible securities. Temporary defensive investments or a higher percentage of
debt securities may be held when deemed advisable by the Manager. To the
extent the Portfolio's assets are invested for temporary defensive purposes,
such assets will not be invested in a manner designed to achieve the Portfo-
lio's investment objective. In the selection of common stock investments,
emphasis is generally placed on issues with established dividend records as
well as potential for price appreciation. From time to time, however, a por-
tion of the assets may be invested in non-dividend paying stocks. The Portfo-
lio may make investments in foreign securities, though management currently
intends to limit such investments to 5% of the Portfolio's assets (including
European, Continental and Global Depositary Receipts), 
and an additional 10% of its assets may be invested in
sponsored American Depositary Receipts representing shares in foreign securi-
ties that are traded in United States securities markets.     
 
 
The Portfolio may also invest in (I)
options (including swaps, collars, floors and caps) ; (ii) REITs;(iii)
unseasoned issuers;( iv) investment companies; and 
borrow money on a temporary basis.


  The Portfolio's investment objective and policies, are non-fundamental and,
as such, may be changed by the Board of Directors, provided such change is not
prohibited by the investment restrictions (which are set forth in the State-
ment of Additional Information) or applicable law, and any such change will
first be disclosed in the then current prospectus.
 
 PORTFOLIO TRANSACTIONS AND TURNOVER
 
  All orders for transactions in securities and options on behalf of the Port-
folio are placed by the Manager with broker/dealers that the Manager selects,
including Smith Barney and other affiliated brokers. Brokerage will be allo-
cated to Smith Barney, to the extent and in the manner permitted by applicable
law, provided that, in the judgment of the Board of Directors of the Fund, the
commission, fee or other remuneration received or to be received by Smith Bar-
ney (or any broker/dealer affiliate of Smith Barney that is also a member of a
securities exchange) is reasonable and fair compared to the commission, fee or
other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a securi-
ties exchange during the same or compara-
 
                                                                              5
<PAGE>
 

INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
ble period of time. The Fund normally expects to allocate to Smith Barney
between 50% and 60% of the Portfolio's transactions to be executed for such
account on an agency basis. In all trades directed to Smith Barney, the Fund
has been assured that its orders will be accorded priority over those received
from Smith Barney for its own account or for any of its directors, officers or
employees. The Fund will not deal with Smith Barney in any transaction in which
Smith Barney acts as principal.
 
  Although it is anticipated that most investments of the Portfolio will be
long-term in nature, the rate of portfolio turnover will depend upon market and
other conditions, and it will not be a limiting factor when the Manager
believes that portfolio changes are appropriate. It is expected that the Port-
folio's annual turnover rate will not exceed 100%. As the portfolio turnover
rate increases, so will the Portfolio's brokerage and other transaction related
expenses. Investors should realize that risk of loss is inherent in the owner-
ship of any securities and that shares of the Portfolio will fluctuate with the
market values of its securities.
 
VALUATION OF SHARES
 
 
  The net asset value per share of Class Z shares is determined as of the close
of regular trading on the New York Stock Exchange, Inc. ("NYSE") on each day
that the NYSE is open, by dividing the value of the Portfolio's net assets
attributable to Class Z by the total number of shares of the Class outstanding.
The per share net asset value of the Class Z shares may be higher than those of
other Classes because of lower expenses attributable to Class Z shares.
 
  Securities that are listed or traded on a securities exchange are valued at
the last sale price on the principal exchange on which they are listed and
securities trading on the NASDAQ System are valued at the last sale price
reported as of the close of the NYSE. If no last sale is reported, the forego-
ing securities and over-the-counter securities other than those traded on the
NASDAQ System are valued at the mean between the last reported bid and asked
prices. Debt obligations are valued at the mean between the bid and asked quo-
tations for those securities or if no quotations are available, then for secu-
rities of similar type, yield and maturity. Short-term investments that have a
maturity of more than 60 days are valued at prices based on market quotations
for securities of similar type, yield and maturity. Short-term investments that
have a maturity of 60 days or less are valued at amortized cost when the Board
of Directors has determined that amortized cost equals fair value, unless mar-
ket conditions dictate otherwise. Other investments of the Portfolio, if any,
including restricted securities, are valued at a fair value determined by the
Board of Directors in good faith.
 
6
<PAGE>
 

DIVIDENDS, DISTRIBUTIONS AND TAXES 
 
 
 DIVIDENDS AND DISTRIBUTIONS
 
  The Fund declares quarterly income dividends on shares of the Equity Income
Portfolio and makes annual distributions of capital gains, if any, on such
shares.
 
  Unless a shareholder is eligible for qualified distributions and instructs
that dividends and capital gain distributions on shares be paid in cash and
credited to the shareholder's account, dividends and capital gain distributions
will be reinvested automatically in additional shares of the Class at net asset
value as of the close of business on the payment date, subject to no sales
charge or CDSC.
 
 TAXES
 
  The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, to be relieved
of Federal income tax on that part of its net investment income and realized
capital gains which it pays out to its shareholders. To qualify, the Portfolio
must meet certain tests, including distributing at least 90% of its investment
company taxable income, and deriving less than 30% of its gross income from the
sale or other disposition of certain investments held for less than three
months.
 
  Dividends from net investment income and distributions of realized short-term
capital gains on the sale of securities, whether paid in cash or automatically
invested in additional shares of the Portfolio, are taxable to shareholders of
the Portfolio as ordinary income. The Portfolio's dividends will not qualify
for the dividends received deduction for corporations. Dividends and distribu-
tions declared by the Portfolio may also be subject to state and local taxes.
Distributions out of net long-term capital gains are taxable to shareholders as
long-term capital gains. Information as to the tax status of dividends deemed
paid in each calendar year will be mailed to shareholders as early in the suc-
ceeding year as practical but not later than January 31. Shareholders should
consult their plan document or tax advisers about the tax consequences associ-
ated with participating in a Qualified Plan.
 
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
 
 
  Purchases of the Portfolio's Class Z shares must be made in accordance with
the terms of a Qualified Plan. Purchases are effected at the net asset value
next determined after a purchase order is received by Smith Barney (the "trade
date"). Payment is due to Smith Barney on the third business day (the "settle-
ment date") after the trade date. Investors who make payment prior to the set-
tlement date may designate a temporary investment (such as a money market fund
of the Smith Barney Mutual Funds) for such payment until settlement date. The
Fund reserves the right to reject any purchase order and to suspend the offer-
ing of shares for a period of time. There are no minimum investment require-
ments for Class Z shares; however, the Fund reserves the right to vary this
policy at any time.
 
                                                                               7
<PAGE>
 

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

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

  Holders of Class Z shares should consult their Qualified Plans for informa-
tion about available exchange options.
 
PERFORMANCE
 
 
  From time to time the Portfolio may include its total return, average annual
total return, yield and current dividend return for Class Z shares in adver-
tisements and/or other types of sales literature. These figures are based on
historical earnings and are not intended to indicate future performance. Total
return is computed for a specified period of time assuming deduction of the
maximum sales charge, if any, from the initial amount invested and reinvestment
of all income dividends and capital gain distributions on the reinvestment
dates at prices calculated as stated in this Prospectus, then dividing the
value of the investment at the end of the period so calculated by the initial
amount invested and subtracting 100%. The standard average annual total return,
as prescribed by the SEC is derived from this total return, which provides the
ending redeemable value. Such standard total return information may also be
accompanied with nonstandard total return information for differing periods
computed in the same manner but without annualizing the total return or taking
sales charges into account. The Portfolio calculates current dividend return
for Class Z by dividing the current dividend by the net asset value on the last
day of the period for which current dividend return is presented. The Portfo-
lio's current dividend return may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating cur-
rent dividend return should be considered when comparing the Portfolio's cur-
rent return to yields published for other investment companies and other
investment vehicles.
 
8
<PAGE>
 

PERFORMANCE (CONTINUED)
 
 
The Portfolio may also include comparative performance information in advertis-
ing or marketing Class Z shares. Such performance information may include data
from Lipper Analytical Services, Inc. and other financial publications.
 
MANAGEMENT OF THE FUND
 
 
 BOARD OF DIRECTORS
 
Overall responsibility for management and supervision of the 
Portfolio rests with
the Fund's Board of Directors. The Directors approve all significant agreements
between the Fund and the companies that furnish services to the Fund and the
Portfolio, including agreements with the Fund's distributor, investment manag-
er, custodian and transfer agent. The day-to-day operations of the Portfolio
are delegated to the Portfolio's investment manager. The Statement of Addi-
tional Information contains background information regarding each Director and
executive officer of the Fund.
 
 MANAGER
 
  Smith Barney Mutual Funds Management Inc. (the "Manager") manages the day-to-
day operations of the Portfolio pursuant to a management agreement entered into
by the Fund on behalf of the Portfolio under which the Manager offers the Port-
folio advice and assistance with respect to the acquisition, holding or dis-
posal of securities and recommendations with respect to other aspects and
affairs of the Portfolio and furnishes the Portfolio with bookkeeping, account-
ing and administrative services, office space and equipment, and the services
of the officers and employees of the Fund. By written agreement research and
other departments and staff of Smith Barney will furnish the Manager with
information, advice and assistance and will be available for consultation on
the Fund's Portfolios, thus Smith Barney may also be considered an investment
adviser to the Fund. Smith Barney's services are paid for by the Manager; there
is no charge to the Fund for such services.

  For the Portfolio's last fiscal year the management fee was 0.58% of the
Portfolio's average net assets. The management agreement provides that the
Portfolio's management fee will be computed at the following annual rates:
0.60% of the first $500 million of the Portfolio's average daily net assets,
0.55% of the next $500 million of average daily net assets and 0.50% of average
daily net assets over $1 billion. Total operating expenses were 0.62% of the
Portfolio's average net assets for Class Z shares. 
 
  The Manager, incorporated on March 12, 1968 under the laws of Delaware, is a
wholly-owned subsidiary of Smith Barney Holdings Inc., the parent company of
 
                                                                               9
<PAGE>
 

MANAGEMENT OF THE FUND (CONTINUED)

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

  Bruce D. Sargent, a Vice President and Director of the Manager, is also a
Vice President and Director of Smith Barney Funds, Inc. and the portfolio man-
ager of the Portfolio. Mr. Sargent co-manages the day to day operations of the
Portfolio and has been involved in equity investing for over 25 years. 

  Ayako Weissman, Managing Director of Smith Barney, serves as co-manager of
the Portfolio. Ms. Weissman has been involved in equity investing for Smith
Barney for over 8 years. 

  Management's discussion and analysis, and additional performance information
regarding the Portfolio during the fiscal year ended December 31, 1996 is
included in the Annual Report dated December 31, 1996. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus. 
 
 DISTRIBUTOR
 
  Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidi-
ary of Travelers.
 
ADDITIONAL INFORMATION
 
 
  The Fund, an open-end, diversified investment company, was incorporated in
Maryland on December 2, 1966. The Fund has an authorized capital of
2,000,000,000 shares with a par value of $.01 per share. The Board of Direc-
tors has authorized the issuance of fifteen series of shares, each represent-
ing
 
10
<PAGE>
 

ADDITIONAL INFORMATION (CONTINUED)
 
shares in one of fifteen separate Portfolios and may authorize the issuance of
additional series of shares in the future. The assets of each Portfolio are
segregated and separately managed and a shareholder's interest is in the assets
of the Portfolio in which he or she holds shares. Class A, Class B, Class C,
Class Y and Class Z shares (where available) of a Portfolio represent interests
in the assets of that Portfolio and have identical voting, dividend, liquida-
tion and other rights on the same terms and conditions except that expenses
related to the distribution of each Class of shares are borne solely by each
Class and each Class of shares has exclusive voting rights with respect to pro-
visions of the Fund's Rule 12b-1 distribution plan which pertain to a particu-
lar Class. As described under "Voting" in the Statement of Additional Informa-
tion, the Fund ordinarily will not hold shareholder meetings; however, share-
holders have the right to call a meeting upon a vote of 10% of the Fund's out-
standing shares for the purpose of voting to remove directors and, as required
by the Investment Company Act of 1940, the Fund will assist shareholders in
calling such a meeting. Shares do not have cumulative voting rights or preemp-
tive rights and are fully paid, transferable and nonassessable when issued for
payment as described in this Prospectus.
 
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of the Portfolio's invest-
ments.
 
  First Data Investor Services Group, Inc. located at Exchange Place, Boston,
Massachusetts 02109, serves as the Fund's transfer agent.
 
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered.
 
                                                                              11
<PAGE>
 

APPENDIX
 
 U.S. GOVERNMENT OBLIGATIONS
 
  In addition to Government National Mortgage Association ("GNMA") securities
and direct obligations of the U.S. Treasury (such as Treasury Bills, Notes and
Bonds), U.S. Government Obligations in which the Fund may invest include: (1)
obligations of, or issued by, Banks for Cooperatives, Federal Land Banks, Fed-
eral Intermediate Credit Banks, Federal Home Loan Banks, the Federal Home Loan
Bank Board, or the Student Loan Marketing Association; (2) other securities
fully guaranteed as to principal and interest by the United States of America;
(3) other obligations of, or issued by, or fully guaranteed as to principal and
interest by the Federal National Mortgage Association or any agency of the
United States; and (4) obligations currently or previously sold by the Federal
Home Loan Mortgage Corporation.
 
 FOREIGN INVESTMENTS
 
  The Portfolio will ordinarily purchase foreign securities that are traded in
the United States or purchase American Depositary Receipts, which are certifi-
cates issued by U.S. banks representing the right to receive securities of a
foreign issuer deposited with that bank or a correspondent bank. However, the
Portfolio may purchase the securities of foreign issuers directly in foreign
markets. Foreign securities may involve a high degree of risk. Foreign securi-
ties usually are denominated in foreign currencies, which means their value
will be affected by changes in exchange rates between other currencies and the
U.S. dollar as well as the other factors that affect securities prices. Foreign
companies may not be subject to accounting standards or governmental supervi-
sion comparable to U.S. companies, and there may be less publicly available
information about their operations. There is generally less governmental regu-
lation of foreign securities markets, and security trading practices abroad may
offer less protection to investors such as the Portfolios. Foreign securities
can also be affected by political or financial instability abroad, and may be
less liquid or more volatile than domestic investments.
 
 SECURITIES LENDING
 
  The Portfolio may seek to increase its net investment income by lending its
securities to unaffiliated brokers, dealers and other financial institutions,
provided such loans are callable at any time and are continuously secured by
cash or U.S. Government securities equal to no less than the market value,
determined daily, of the securities loaned. The risks in lending portfolio
securities consist of possible delay in recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Manage-
ment will limit such lending to not more than twenty percent of the value of
the Portfolio's total assets.
 
                                                                             A-1
<PAGE>
 

APPENDIX (CONTINUED)
 
 
 WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

  The Portfolio may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when secu-
rities are purchased or sold by the Portfolio with payment and delivery taking
place in the future in order to secure what is considered to be an advanta-
geous price and yield to the Portfolio at the time of entering into the trans-
action. The Fund's Custodian will maintain, in a segregated account of each
Portfolio, cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Portfolio's purchase commitments, provided
such securities have been determined by the Manager to be liquid and unencum-
bered, and are marked to market daily, pursuant to guidelines established by
the Directors; the Custodian will likewise segregate securities sold on a
delayed basis. 
 
 REPURCHASE AGREEMENTS
 
  The Portfolio may on occasion enter into repurchase agreements, wherein the
seller agrees to repurchase a security from the Portfolio at an agreed-upon
future date, normally the next business day. The resale price is greater than
the purchase price, which reflects the agreed-upon rate of return for the
period the Portfolio holds the security and which is not related to the coupon
rate on the purchased security. The Fund requires continual maintenance of the
market value of the collateral in amounts at least equal to the resale price,
thus risk is limited to the ability of the seller to pay the agreed-upon
amount on the delivery date; however, if the seller defaults, realization upon
the collateral by the Portfolio may be delayed or limited or the Portfolio
might incur a loss if the value of the collateral securing the repurchase
agreement declines and might incur disposition costs in connection with liqui-
dating the collateral. The Portfolio will only enter into repurchase agree-
ments with broker/dealers or other financial institutions that are deemed
creditworthy by the Manager under guidelines approved by the Board of Direc-
tors. It is the policy of the Fund not to invest in repurchase agreements that
do not mature within seven days if any such investment together with any other
illiquid assets held by the Portfolio amount to more than 15% of the Portfo-
lio's total assets.
 
A-2
<PAGE>
 
 
                                               SMITH BARNEY
                                               ---------------------------------
                                               A Member of TravelersGroup [LOGO]
 
 
 
 
 
 
 
 
                                                                    SMITH BARNEY
                                                                     FUNDS, INC.
                                                                   EQUITY INCOME
                                                                       PORTFOLIO
 
 
                                                            388 Greenwich Street
                                                        New York, New York 10013
                                                               
                                                               FD 0661 4/97 
PROSPECTUS

                                                        SMITH BARNEY FUNDS, INC.

                                                                           U. S.
                                                                      Government
                                                                      Securities
                                                                       Portfolio


                                                                  APRIL 30, 1997


                                                   Prospectus begins on page one

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

<PAGE>


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

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

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

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

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

Smith Barney Inc.
Distributor


Smith Barney Mutual Funds Management Inc.
Investment Manager


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



                                                                               1
<PAGE>

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


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



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


2
<PAGE>

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

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


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

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

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

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


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


                                                                               3
<PAGE>

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

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


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


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

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

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

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


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



4
<PAGE>

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


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

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


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


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

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


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


                                                                               5
<PAGE>

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


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

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


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


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

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


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


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



6
<PAGE>

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

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


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

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


<TABLE>
<CAPTION>

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

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


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


                                                                               7
<PAGE>

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


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

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

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





8
<PAGE>

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


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

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

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

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


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


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



                                                                               9
<PAGE>

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


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

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


U.S. Government Securities Portfolio

<TABLE>
<CAPTION>

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


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

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

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


10
<PAGE>

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

U.S. Government Securities Portfolio

<TABLE>
<CAPTION>

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

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


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

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

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

+    Annualized.

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

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


                                                                              11
<PAGE>

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

U.S. Government Securities Portfolio

<TABLE>
<CAPTION>

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


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


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

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

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

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

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

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

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

  +  Annualized.

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


12
<PAGE>

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

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

     The Portfolio invests primarily in Government National Mortgage Association
("GNMA") Certificates of the modified pass-through type and in mortgage
participation certificates issued by the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") and will also
normally include other "U.S. Government Obligations," i.e., obligations issued
or guaranteed by the United States, its agencies or its instrumentalities and
related repurchase and reverse repurchase agreements( the Portfolio will limit 
its investments in reverse repur-
chase agreements  to no more than 5% of its net
assets). 

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

                                                                              13
<PAGE>

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

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


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

     The Board of Directors of the Fund may modify the investment objective and
policies of the Portfolio provided such modification is not prohibited by the
investment restrictions (which are set forth in the Statement of Additional
Information) or applicable laws, and any such change will first be disclosed in
the then current prospectus.


Portfolio Turnover


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


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


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


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


14
<PAGE>

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

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

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

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


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

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


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


     TAXES


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

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



                                                                              15
<PAGE>

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

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


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


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

     GENERAL


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

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



16
<PAGE>

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


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

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


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

     SYSTEMATIC INVESTMENT PLAN

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


                                                                              17
<PAGE>

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


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


     INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES


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


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

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

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

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

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

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


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

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

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


     INITIAL SALES CHARGE WAIVERS


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



18
<PAGE>

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


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


     RIGHT OF ACCUMULATION

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


                                                                              19
<PAGE>

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

     GROUP PURCHASES

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

     LETTER OF INTENT

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


20
<PAGE>

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


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

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


     DEFERRED SALES CHARGE ALTERNATIVES


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


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

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


                                                                              21
<PAGE>

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


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


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


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


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

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


22
<PAGE>

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

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

     WAIVERS OF CDSC


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


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


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

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

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



                                                                              23
<PAGE>

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


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

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

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

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

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

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



24
<PAGE>

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


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

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

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

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

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

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



                                                                              25
<PAGE>

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


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


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


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


FUND NAME

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




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

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



26
<PAGE>

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


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


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


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



                                                                              27
<PAGE>

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

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

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


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

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


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

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


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


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


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


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


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

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



28
<PAGE>

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

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


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


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


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


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


                                                                              29
<PAGE>

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

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


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

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


     AUTOMATIC CASH WITHDRAWAL PLAN


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



30
<PAGE>

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

     TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

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

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

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

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

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


                                                                              31
<PAGE>

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

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

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

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

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


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



32
<PAGE>

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


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


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

     BOARD OF DIRECTORS


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

     MANAGER

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



                                                                              33
<PAGE>

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


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

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


     PORTFOLIO MANAGEMENT


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

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

Distributor

     Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution under Rule 12b-1
under the 1940 Act (the "Plan") adopted by the Portfolio, Smith Barney is paid a
service fee with respect to Class A, Class B and Class C shares at the annual
rate of 0.25% of the average daily net assets attributable to these Classes.
Smith Barney is also paid a distribution fee with respect to Class B and Class C
shares of such Portfolio at the annual rate of 0.50% and 0.45%, respectively, of
the average daily net assets attributable to these Classes. Class B shares that
automatically convert to Class A shares eight years after the date of original
purchase will no longer be subject to a distribution fee.



34
<PAGE>

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

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


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


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

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


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



                                                                              35
<PAGE>

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

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


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


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


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



36
<PAGE>

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

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

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

     FHLMC and FNMA Securities. FHLMC is a U.S.
Government-created entity controlled by the Federal Home Loan Banks. FNMA is a
government-chartered corporation owned entirely by private stockholders, which
is subject to general regulation by the Secretary of Housing and Urban
Development. Timely payment of principal and interest on these mortgage
participation certificates is guaranteed soley by the issuer of the
certificates.


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

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


                                                                             A-1
<PAGE>

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

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

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


A-2
<PAGE>

                      (This page intentionally left blank)


                                                                             A-3
<PAGE>

                      (This page intentionally left blank)


A-4

                                                        SMITH BARNEY FUNDS, INC.

                                                                           U. S.
                                                                      Government
                                                                      Securities
                                                                       Portfolio


                                                             Class Z Shares Only

                                                                  APRIL 30, 1997

                                                   Prospectus begins on page one


PROSPECTUS


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

<PAGE>

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


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

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


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


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


Smith Barney Inc.
Distributor

Smith Barney Mutual Funds Management Inc.
Investment Manager



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


                                                                               1
<PAGE>

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


The Portfolio's Expenses                                                       3

--------------------------------------------------------------------------------
Financial Highlights                                                           4
--------------------------------------------------------------------------------

Investment Objective and Management Policies                                   5

--------------------------------------------------------------------------------
Valuation of Shares                                                            8
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                      9
--------------------------------------------------------------------------------
Purchase, Exchange and Redemption of Shares                      10
--------------------------------------------------------------------------------
Performance                                                           10
--------------------------------------------------------------------------------
Management of the Fund                                                     11
--------------------------------------------------------------------------------
Additional Information                                                        13
--------------------------------------------------------------------------------
Appendix                                                                     A-1
--------------------------------------------------------------------------------



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


2
<PAGE>

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


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

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


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

     EXAMPLE


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


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

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



                                                                               3
<PAGE>

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


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

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


U.S. Government Securities Portfolio         1996         1995        1994(1)
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Year          $13.60       $12.50       $12.47
--------------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income                       0.88         0.94         0.14
  Net realized and unrealized gain (loss)    (0.33)        1.11         0.13
--------------------------------------------------------------------------------
Total Income  From Operations                 0.55         2.05         0.27
--------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                      (0.89)       (0.95)       (0.24)
--------------------------------------------------------------------------------
Total Distributions                          (0.89)       (0.95)       (0.24)
--------------------------------------------------------------------------------
Net Asset Value, End of Year                $13.26       $13.60       $12.50
--------------------------------------------------------------------------------
Total Return                                  4.31%       16.89%       (2.15)%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000s)             $19,511      $20,093      $18,580
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                    0.49%*        0.50%        0.34%+
  Net investment income                       6.64         7.12         7.55+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                        265%       57%       40%
================================================================================

(1)  For the period from November 7, 1994 (inception date) to December 31, 1994.
++   Total return is not annualized, as it may not be representative of the
     total return for the year.

+    Annualized.
* Amount restated from the December 31, 1996 Annual Report.



4
<PAGE>

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

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

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


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


                                                                               5
<PAGE>

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

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


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

     The Board of Directors of the Fund may modify the investment objective and
policies of the Portfolio provided such modification is not prohibited by the
investment restrictions (which are set forth in the Statement of Additional
Information) or applicable laws, and any such change will first be disclosed in
the then current prospectus. 


     PORTFOLIO TURNOVER


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


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

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

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


6
<PAGE>

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

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

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

     DIVIDENDS AND DISTRIBUTIONS


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


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

     TAXES


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

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



                                                                               7
<PAGE>

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


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


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


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


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

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

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


8
<PAGE>

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


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


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

     BOARD OF DIRECTORS


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


     MANAGER


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



                                                                               9
<PAGE>

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

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


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

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


     PORTFOLIO MANAGEMENT


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

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



10
<PAGE>

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

     DISTRIBUTOR

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

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

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

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

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

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


                                                                              11
<PAGE>

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

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

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

     FHLMC and FNMA Securities. FHLMC is a U.S. Government-created entity
controlled by the Federal Home Loan Banks. FNMA is a government-chartered
corporation owned entirely by private stockholders, which is subject to general
regulation by the Secretary of Housing and Urban Development. Timely payment of
principal and interest on these mortgage participation certificates is
guaranteed solely by the issuer of the certificates.
	
     Other U.S. Government Obligations. In addition to GNMA Securities and
direct obligations of the U.S. Treasury (such as Treasury Bills, Notes and
Bonds), U.S. Government Obligations in which the Fund may invest include: (1)
obligations of, or issued by, Banks for Cooperatives, Federal Land Banks,
Federal Intermediate Credit Banks, Federal Home Loan Banks, the Federal Home
Loan Bank Board, or the Student Loan Marketing Association and 
(2) other securities
fully guaranteed as to principal and interest by the United States of America.

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


                                                                             A-1
<PAGE>

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

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

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


A-2
<PAGE>

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





                                                                    Smith Barney
                                                                     Funds, Inc.

                                                                U. S. Government
                                                            Securities Portfolio


                                                            388 Greenwich Street
                                                        New York, New York 10013


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


[LOGO] SMITH BARNEY MUTUAL FUNDS
       Investing for your future.
       Every day.
<PAGE>
 
PROSPECTUS                                                  
                                                            April 30, 1997 

Smith Barney Funds, Inc. 

Short-Term U.S. Treasury Securities Portfolio 
388 Greenwich Street
New York, New York 10013

(800) 451-2010 

  The Short-Term U.S. Treasury Securities Portfolio (the "Portfolio") is one of
four investment portfolios that currently comprise Smith Barney Funds, Inc.
(the "Fund"). The Portfolio seeks current income, preservation of capital and
liquidity. The Portfolio seeks to achieve its objective by investing its assets
in U.S. Treasury securities backed by the full faith and credit of the U.S.
Government. Shares of the Portfolio are not issued, insured or guaranteed, as
to value or yield, by the U.S. Government or its agencies or instrumentalities.

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

  Additional information about the Portfolio is contained in a Statement of
Additional Information dated April 30, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by con-
tacting a Smith Barney Financial Consultant. The Statement of Additional Infor-
mation has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety. 
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            7
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    9
-------------------------------------------------
VALUATION OF SHARES                            12
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             13
-------------------------------------------------
PURCHASE OF SHARES                             14
-------------------------------------------------
EXCHANGE PRIVILEGE                             18
-------------------------------------------------
REDEMPTION OF SHARES                           20
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           24
-------------------------------------------------
PERFORMANCE                                    24
-------------------------------------------------
MANAGEMENT OF THE FUND                         25
-------------------------------------------------
DISTRIBUTOR                                    26
-------------------------------------------------
ADDITIONAL INFORMATION                         27
-------------------------------------------------
</TABLE>
 
--------------------------------------------------------------------------------
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
--------------------------------------------------------------------------------
 
2
<PAGE>
 
PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
 
INVESTMENT OBJECTIVE The Portfolio is an open-end, management investment com-
pany. The Portfolio seeks current income, preservation of capital and liquidi-
ty. The Portfolio seeks to achieve its objective by investing its assets in
U.S. Treasury securities backed by the full faith and credit of the U.S. Gov-
ernment. Shares of the Portfolio are not issued, insured or guaranteed, as to
value or yield, by the U.S. Government or its agencies or instrumentalities.
See "Investment Objective and Management Policies."
 
ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers two classes of shares
("Classes") to investors. The general public is offered Class A shares. Class
Y shares are offered only to investors meeting an initial investment minimum
of $5,000,000. See "Purchase of Shares" and "Redemption of Shares."
 
  Class A Shares. Class A shares are sold at net asset value without a sales
charge. Class A shares acquired as part of an exchange privilege transaction,
which were originally acquired in one of the other funds of the Smith Barney
Mutual Funds at net asset value subject to a contingent deferred sales charge
("CDSC"), remain subject to the original fund's CDSC while held in the Portfo-
lio. Class A shares are subject to an annual service fee of 0.25% and an
annual distribution fee of 0.10% of the average daily net assets of this
Class.
 
  Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any serv-
ice or distribution fees.
 
  See "Distributor" for a complete description of the service and distribution
fees for Class A shares and "Valuation of Shares," "Dividends, Distributions
and Taxes" and "Exchange Privilege" for other differences between the Classes
of shares.

SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A shares are available as investment alterna-
tives under both these programs. See "Purchase of Shares -- Smith Barney
401(k) and ExecChoice(TM) Programs." 
 
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained with Smith Barney Inc. ("Smith Barney"). Shares may also be purchased
through a broker that clears securities transactions through Smith Barney on
 
                                                                              3
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)

a fully disclosed basis (an "Introducing Broker") or an investment dealer in
the selling group. In addition, certain investors, including qualified retire-
ment plans and certain other institutional investors, may purchase shares
directly from the Fund through the Fund's transfer agent, First Data Investors
Services Group, Inc. ("First Data"). See "Purchase of Shares." 

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

SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A shares and the subsequent investment
requirement for all Classes for Shareholders purchasing shares through the Sys-
tematic Investment Plan on a monthly basis is $25 and on a quarterly basis is
$50. See "Purchase of Shares." 
 
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
 
MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc. (the
"Manager") serves as the Portfolio's investment manager. The Manager is a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is
a wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a diversified
financial services holding company engaged, through its subsidiaries, princi-
pally in four business segments: Investment Services, Consumer Finance Servic-
es, Life Insurance Services and Property & Casualty Insurance Services. See
"Management of the Fund."

EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined. See "Exchange Privilege." 
 
VALUATION OF SHARES Net asset value of the Portfolio for the prior day gener-
ally is quoted daily in the financial section of most newspapers and is also
available from a Smith Barney Financial Consultant. See "Valuation of Shares."
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly from net investment
income. Distributions of net realized capital gains, if any, are paid annually.
See "Dividends, Distributions and Taxes."
 
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of the
Portfolio will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
See "Dividends, Distributions and Taxes."
 
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The value of the Portfolio's
investments, and thus the net asset value of the Portfolio's shares, will fluc-
tuate in response to changes in market and economic conditions, as well as the
financial condition and prospects of issuers in which the Portfolio invests.
See "Investment Objective and Management Policies."
 
THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio based, unless otherwise noted, on the Portfolio's operating
expenses for its most recent fiscal year:
 
<TABLE>
<CAPTION>
  SHORT-TERM U.S. TREASURY SECURITIES PORTFOLIO        CLASS A CLASS Y
----------------------------------------------------------------------
  <S>                                                  <C>     <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Maximum sales charge imposed on purchases
      (as a percentage of offering price)               None    None
    Maximum CDSC
      (as a percentage of original cost or redemption
      proceeds, whichever is lower)                     None*   None
----------------------------------------------------------------------
  ANNUAL PORTFOLIO OPERATING EXPENSES
    (as a percentage of average net assets)
    Management fees                                     0.45%   0.45%
    12b-1 fees                                          0.35     --
    Other expenses                                      0.18    0.13
----------------------------------------------------------------------
  TOTAL PORTFOLIO OPERATING EXPENSES                    0.98%   0.58%
----------------------------------------------------------------------
</TABLE>
* Class A shares acquired as part of an exchange privilege transaction, which
  were originally acquired in one of the other funds of the Smith Barney Mutual
  Funds at net asset value subject to a CDSC, remain subject to the original
  fund's CDSC while held in the Portfolio.

  Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly. The
fee will vary to a maximum of 1.50%, depending on the amount of assets held
through the Program. For more information, please call your Smith Barney Finan-
cial Consultant. 
 
                                                                               5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
  Smith Barney receives an annual 12b-1 fee of 0.35% of the value of average
daily net assets of Class A shares, consisting of a 0.10% distribution fee and
a 0.25% service fee. "Other expenses" in the above table include fees for
shareholder services, custodial fees, legal and accounting fees, printing costs
and registration fees.
 
 EXAMPLE
 
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Portfolio will bear directly or indirect-
ly. The example assumes payment by the Portfolio of operating expenses at the
levels set forth in the table above. See "Purchase of Shares," "Redemption of
Shares" and "Management of the Fund."
 
<TABLE>
<CAPTION>
  SHORT-TERM U.S. TREASURY SECURITIES
  PORTFOLIO                                     1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
  <S>                                           <C>    <C>     <C>     <C>
  An investor would pay the following expenses
  on
  a $1,000 investment, assuming (1) 5.00%
  annual return and (2) redemption at the
  end of each time period:
   Class A....................................   $10     $31     $54     $120
   Class Y....................................     6      19      32       73
-------------------------------------------------------------------------------
</TABLE>
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
6
<PAGE>
 
FINANCIAL HIGHLIGHTS

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

FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR: 

<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY
SECURITIES PORTFOLIO
CLASS A SHARES               1996      1995     1994       1993      1992   1991(a)
-------------------------------------------------------------------------------------
<S>                       <C>      <C>       <C>       <C>       <C>       <C>
NET ASSET VALUE, BEGIN-
 NING OF YEAR               $4.19     $3.91    $4.16      $4.12     $4.09    $4.01
-------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPER-
 ATIONS:
Net investment income        0.23      0.22     0.18       0.18      0.19     0.03
Net realized and
 unrealized gain (loss)     (0.14)     0.28    (0.25)      0.06      0.04     0.09
-------------------------------------------------------------------------------------
Total Income (Loss) from
 Operations                  0.09      0.50    (0.07)      0.24      0.23     0.12
-------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income       (0.23)    (0.22)   (0.18)     (0.18)    (0.19)   (0.03)
Net realized gains            --         --       --      (0.02)    (0.01)   (0.01)
-------------------------------------------------------------------------------------
Total Distributions         (0.23)    (0.22)   (0.18)     (0.20)    (0.20)   (0.04)
-------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
 YEAR                       $4.05     $4.19    $3.91      $4.16     $4.12    $4.09
-------------------------------------------------------------------------------------
TOTAL RETURN                 2.17%    13.16%   (2.15)%     6.01%     5.92%    2.85%++
-------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
 (000S)                   $83,324  $107,099  $88,707   $205,758  $130,280  $93,946
-------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
 ASSETS:
 Expenses                    0.98%     0.98%    0.91%      0.88%     0.91%    0.80%+
 Net investment income       5.62      5.29     4.54       4.40      4.76     4.89+
-------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE       130%       29%      25%        41%       45%       5%
-------------------------------------------------------------------------------------
</TABLE>
(a)For the period from November 11, 1991 (commencement of operations) to
    December 31, 1991.

 +Annualized. 

 ++Total return is not annualized, as it may not be representative of the total
    return for the year. 
 
                                                                               7
<PAGE>
 

FINANCIAL HIGHLIGHTS (CONTINUED) 
 
<TABLE>
<S>                                            <C>
SHORT-TERM U.S. TREASURY SECURITIES PORTFOLIO
CLASS Y SHARES                                 1996(1)
-------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR               $4.19
-------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income                            0.22
 Net realized and unrealized loss                (0.14)
-------------------------------------------------------
 Total Income From Operations                     0.08
-------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                           (0.22)
-------------------------------------------------------
 Total Distributions                             (0.22)
-------------------------------------------------------
 NET ASSET VALUE, END OF YEAR                    $4.05
-------------------------------------------------------
 TOTAL RETURN++                                   2.08%
-------------------------------------------------------
 NET ASSETS, END OF YEAR (000S)                $32,114
-------------------------------------------------------
 RATIOS TO AVERAGE NET ASSETS+:
 Expenses                                         0.58%
 Net investment income                            5.99
-------------------------------------------------------
PORTFOLIO TURNOVER RATE                            130%
-------------------------------------------------------
</TABLE>

(1) For the period February 7, 1996 (inception date)through December 31, 1996. 

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

 +  Annualized. 
 
 
8
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
  The investment objective of the Portfolio is current income, preservation of
capital and liquidity. There can be no assurance that the investment objective
of the Portfolio will be achieved.
 
  The Portfolio will seek to achieve its objective by investing its assets in
U.S. Treasury debt securities guaranteed by the direct "full faith and credit"
pledge of the United States Government. U.S. Treasury debt securities (includ-
ing Treasury bills, notes and bonds) are direct obligations of the U.S. Trea-
sury. The payment of principal and interest on such securities is uncondition-
ally guaranteed by the U.S. Government and, therefore, they are deemed to be of
the highest possible credit quality.
 
  Though U.S. Treasury debt securities have historically not involved risk of
loss of principal if held to maturity, they are subject to variations in market
value due to fluctuations in interest rates. Changes in the value of portfolio
securities will not affect interest income from those securities but will be
reflected in the Portfolio's net asset value. Thus, a decrease in interest
rates will generally result in an increase in the value of the Portfolio's
shares. Conversely, during periods of rising interest rates, the value of the
Portfolio's shares will generally decline. In an effort to minimize fluctua-
tions in market value of its portfolio securities, the Portfolio is expected to
maintain a dollar-weighted average maturity of approximately 3 years.
 
  Pending direct investment in U.S. Treasury debt securities, the Portfolio may
enter into repurchase agreements secured by such securities in order to earn
income on available cash but only in an amount up to 10% of the value of its
total assets. A repurchase agreement arises when the Portfolio acquires a secu-
rity and simultaneously agrees to resell it to the vendor at an agreed-upon
future date, normally the next business day. The resale price is greater than
the purchase price and reflects an agreed-upon return unrelated to the coupon
rate on the purchased security. Such transactions afford an opportunity for the
Portfolio to invest temporarily available cash at no market risk. The Portfolio
requires continual maintenance of the market value of the collateral in amounts
at least equal to the resale price. The Portfolio's risk is limited to the
ability of the seller to pay the agreed-upon amount on the delivery date; how-
ever, if the seller defaults, realization upon the collateral by the Portfolio
may be delayed or limited, or the Portfolio might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur dis-
position costs in connection with liquidating the collateral.
 
  In addition, the Portfolio may invest in zero-coupon Treasury securities,
which may be subject to greater volatility than other types of Treasury securi-
ties. Because zero-coupon securities do not receive interest payments, such
securities may fall more dramatically when interest rates rise than securities
paying out interest on a current basis. However, when interest rates fall,
zero-coupon securities may rise more rapidly in value because the securities
have locked-in a particular rate of
 
                                                                               9
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
reinvestment that becomes more attractive the further rates fall. These assump-
tions are based on a comparison of like maturity securities. Management does
not believe that additional risks exist, however, when comparing securities of
like duration (the weighted average time to full recovery of principal and
interest payments), which is the strategy used by the Manager of the Portfolio.
 
  The Portfolio may, to a limited degree, engage in short-term trading to
attempt to take advantage of short-term market variations, or may dispose of a
portfolio security prior to its maturity if it believes such disposition advis-
able or it needs to generate cash to satisfy redemptions. As the portfolio
turnover rate increases, so will the Portfolio's dealer mark-ups and other
transaction related expenses. Investors should realize that risk of loss is
inherent in the ownership of any securities and that shares of the Portfolio
will fluctuate with the market value of its securities.
 
  As a matter of fundamental policy, the Portfolio may borrow money from banks
for temporary purposes but only in an amount up to 10% of the value of its
total assets and may pledge its assets in an amount up to 10% of the value of
its total assets to secure such borrowings. The Portfolio will borrow money
only to accommodate requests for the redemption of shares while effecting an
orderly liquidation of portfolio securities or to clear securities transactions
and not for leveraging purposes. Whenever borrowings exceed 5% of the value of
its total assets, the Portfolio will not make any additional investments.
   
  The Portfolio may purchase and sell interest rate futures contracts ("futures
contracts") as a hedge against changes in interest rates. A futures contract is
an agreement between two parties to buy and sell a security for a set price on
a future date. Futures contracts are traded on designated "contracts markets"
which, through their clearing corporations, guarantee performance of the con-
tracts. Currently, there are futures contracts based on securities such as
long-term Treasury bonds, Treasury notes, GNMA Certificates and three-month
Treasury bills.     
   
  Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although the sale of the futures contract might be accomplished more easily and
quickly. For example, if the Portfolio holds long-term U.S. government securi-
ties and the Manager anticipates a rise in long-term interest rates, it could,
in lieu of disposing of its portfolio securities, enter into futures contracts
for the sale of similar long-term securities. If interest rates increased and
the value of the Portfolio's securities declined, the value of the Portfolio's
futures contracts would increase, thereby protecting the Portfolio by prevent-
ing the net asset value from declining as much as it otherwise would have. Sim-
ilarly, entering into futures contracts for the purchase of securities has an
effect similar to actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying securities. For exam-
ple, if the     
 
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)

Manager expects long-term interest rates to decline, the Portfolio might enter
into futures contracts for the purchase of long-term securities, so that it
could gain rapid market exposure that may offset anticipated increases in the
cost of securities it intends to purchase, while continuing to hold higher-
yielding short-term securities or waiting for the long-term market to stabi-
lize. 

   
  The Portfolio may not purchase futures contracts if, imme-
diately thereafter, more than 30% of the Portfolio's total assets would be so
invested. In purchasing and selling futures contracts, the
Portfolio will comply with rules and interpretations of the Commodity Futures
Trading Commission ("CFTC"), under which the Fund is excluded from regulation
as a "commodity pool." CFTC regulations permit use of commodity futures 
for bona fide hedging purposes without limitations on the amount of
assets committed to margin.     
   
  The Portfolio will not engage in transactions involving futures contracts 
for speculation but only as a hedge against changes in the mar-
ket values of debt securities held, or intended to be purchased, by the Portfo-
lio's risks. The Portfolio's futures transactions will be entered into for tra-
ditional hedging purposes-- that is, futures contracts will be sold 
 to protect against a decline in the price of securities
that the Portfolio owns, or futures contracts  will be
purchased to protect the Fund against an increase in the price of securities it
is committed to purchase.     
   
  There is no assurance that the Portfolio will be able to close out its
futures positions at any time, in which case it would be required to maintain
the margin     
 
                                                                              11
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
deposits on the contract. There can be no assurance that hedging transactions
will be successful, as there may be an imperfect correlation (or no correla-
tion) between movements in the prices of the futures contracts and of the debt
securities being hedged, or price distortions due to market conditions in the
futures markets. Where futures contracts are purchased to hedge against an
increase in the price of long-term securities, but the long-term market
declines and the Portfolio does not invest in long-term securities, the Portfo-
lio would realize a loss on the futures contracts, which would not be offset by
a reduction in the price of securities purchased. Where futures contracts are
sold to hedge against a decline in the price of the Portfolio's long-term secu-
rities but the long-term market advances, the Portfolio would lose part or all
of the benefit of the advance due to offsetting losses in its futures posi-
tions.     


  The Portfolio's investment objective may be changed only by the "vote of a
majority of the outstanding voting securities" as defined in the 1940 Act.
Except as specifically noted, the Portfolio's investment policies are not fun-
damental and, as such, may be modified by the directors of the Fund provided
such modification is not prohibited by the investment restrictions (which are
set forth in the Statement of Additional Information) or applicable law, and
any such change will first be disclosed in the then current prospectus. 
 
VALUATION OF SHARES
 
 
  The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Portfolio's net assets attributable to each Class by the total
number of shares of the Class outstanding.
 
  Securities owned by the Portfolio are valued at the mean between the bid and
asked quotations for those securities or if no quotations are available, then
for secu-
 
12
<PAGE>
 
VALUATION OF SHARES (CONTINUED)
 
rities of similar type, yield and maturity. Short-term investments that have a
maturity of more than 60 days are valued at prices based on market quotations
for securities of similar type, yield and maturity. Short-term investments with
a remaining maturity of 60 days or less are valued at amortized cost where the
Board has determined that amortized cost is fair value. Other investments of
the Portfolio, if any, are valued at a fair value determined by the Board of
Directors in good faith.
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
 
  The Portfolio declares a dividend of substantially all of its net investment
income on each day the NYSE is open. Net investment income includes interest
accrued and discount earned and all short-term realized gains and losses on
portfolio securities and is less premium amortized and expenses accrued. Income
dividends are paid monthly. Distributions of net realized capital gains, if
any, are paid annually.
 
  If a shareholder does not otherwise instruct, dividends and capital gain dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value.
 
  Income dividends and capital gain distributions that are invested are cred-
ited to shareholders' accounts in additional shares at the net asset value as
of the close of business on the payment date. A shareholder may change the
option at any time by notifying a Smith Barney Financial Consultant. Accounts
held directly by First Data should notify First Data in writing at least five
business days prior to the payment date to permit the change to be entered in
the share holder's account. If a shareholder redeems in full an account between
payment dates, all dividends accrued to the date of liquidation will be paid
with the proceeds from the redemption of shares.
 
  The per share dividends on Class A shares of the Portfolio may be lower than
the per share dividends on Class Y shares principally as a result of the serv-
ice and distribution fees applicable to Class A shares. Distributions of capi-
tal gains, if any, will be in the same amount for Class A and Class Y shares.
 
 TAXES
 
  The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Code to be relieved of Federal income tax on that part of
its net investment income and realized capital gains which it pays out to its
shareholders. To qualify, the Portfolio must meet certain tests, including dis-
tributing at least 90% of its investment company taxable income, and deriving
less than 30% of its gross income from the sale or other disposition of certain
investments held for less than three months.
 
                                                                              13
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
 
  Dividends from net investment income and distributions of realized short-term
capital gains on the sale of securities, whether paid in cash or automatically
invested in additional shares of the Portfolio, are taxable to shareholders of
the Portfolio as ordinary income. The Portfolio's dividends will not qualify
for the dividends received deduction for corporations. Distributions out of net
long-term capital gains (i.e., net long-term capital gains in excess of net
short-term capital losses) are taxable to shareholders as long-term capital
gains. Information as to the tax status of dividends paid or deemed paid in
each calendar year will be mailed to shareholders as early in the succeeding
year as practical but not later than January 31.
 
  The Fund is required to withhold and remit to the U.S. Treasury 31% of divi-
dends, distributions and redemption proceeds to shareholders who fail to pro-
vide a correct taxpayer identification number (the Social Security number in
the case of an individual) or to make the required certifications, or who have
been notified by the Internal Revenue Service that they are subject to backup
withholding and who are not otherwise exempt. The 31% withholding tax is not an
additional tax, but is creditable against a shareholder's Federal income tax
liability.
 
  State Taxes. The Fund believes that dividends paid by the Portfolio are
exempt from state income taxation.
 
  Prior to investing in shares of the Portfolio, investors should consult with
their tax advisors concerning the Federal, state and local tax consequences of
such an investment.
 
PURCHASE OF SHARES
 
 
 GENERAL

  The Portfolio offers two Classes of shares. Class A shares are sold to
investors without an initial sales charge or CDSC but are subject to annual
service and distribution fees. (In addition, Class A shares acquired as part of
an exchange privilege transaction, which were originally acquired in one of the
other funds of the Smith Barney Mutual Funds at net asset value subject to a
CDSC, remain subject to the original fund's CDSC while held in the Portfolio.)
Class Y shares are sold without an initial sales charge or CDSC or service or
distribution fees, and are available only to investors investing a minimum of
$5,000,000 (except for purchases of Class Y shares by Smith Barney Concert
Allocation Series Inc., for which there is no minimum purchase amount). 

  Purchases of Portfolio shares must be made through a brokerage account main-
tained with Smith Barney, an Introducing Broker or an investment dealer in the
selling group. In addition, certain investors, including qualified retirement
plans and certain other institutional investors, may purchase shares directly
from the Fund through First Data. When purchasing shares of the Portfolio,
investors must specify whether the purchase is for Class A or Class Y shares.
Smith Barney and other 
 
14
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)

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

  Investors in Class A shares may open an account by making an initial invest-
ment of at least $1,000 for each account, or $250 for an IRA or a Self-Employed
Retirement Plan in the Portfolio. Investors in Class Y shares may open an
account by making an initial investment of $5,000,000. Subsequent investments
of at least $50 may be made for each Class. For participants in retirement
plans qualified under Section 403(b)(7) or Section 401(a) of the Code, the min-
imum initial investment requirement for Class A shares and the subsequent
investment requirement for both Classes in the Portfolio is $25. For sharehold-
ers purchasing shares of the Portfolio through the Systematic Investment Plan
on a monthly basis, the minimum initial investment requirement for Class A
Shares and the subsequent investment requirement for both Classes is $25. For
shareholders purchasing shares of the Portfolio through the Systematic Invest-
ment Plan on a quarterly basis, the minimum initial investment requirement for
Class A shares and the subsequent requirement for all classes is $50. There are
no minimum investment requirements in Class A shares for employees of Travelers
and its subsidiaries, including Smith Barney, Directors or Trustees of any of
the Smith Barney Mutual Funds, and their spouses and children. Share certifi-
cates are issued only upon a shareholder's written request to First Data. The
Fund reserves the right to waive or change minimums, to decline any order to
purchase its shares and to suspend the offering of shares from time to time.
Shares purchased will be held in the shareholder's account by the Fund's trans-
fer agent, First Data. 
 
  The Portfolio's shares are sold continuously at their net asset value next
determined after a purchase order is received and becomes effective. A purchase
order becomes effective when the Fund, Smith Barney or an Introducing Broker
receives, or converts the purchase amount into, Federal funds (i.e., monies of
member banks within the Federal Reserve System held on deposit at a Federal
Reserve Bank). When orders for the purchase of Portfolio shares are paid for in
Federal funds, or are placed by an investor with sufficient Federal funds or
cash balance in the investor's brokerage account with Smith Barney or the
Introducing Broker, the order becomes effective on the day of receipt prior to
the close of regular trading on the NYSE, on any day the Portfolio calculates
its net asset value. See "Valuation of Shares." Purchase orders received after
the close of regular trading on the NYSE are effective as of the time the net
asset value is next determined. When orders for the purchase of Portfolio
shares are paid for other than in Federal funds, Smith Barney or the Introduc-
ing Broker, acting on behalf of the investor, will complete the conversion
into, or itself advance, Federal funds, and the order will become effective on
the day following its receipt by the Fund, Smith Barney or the Introducing Bro-
ker. Shares purchased directly through First Data begin to accrue income divi-
dends on the day that the purchase order becomes effective. All other shares
 
                                                                              15
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
purchased begin to accrue dividends on the next business day following the day
the purchase order becomes effective.
 
 SYSTEMATIC INVESTMENT PLAN

  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial institu-
tion indicated by the shareholder to provide systematic additions to the share-
holder's Portfolio account. A shareholder who has insufficient funds to com-
plete the transfer will be charged a fee of up to $25 by Smith Barney or First
Data. The Systematic Investment Plan also authorizes Smith Barney to apply cash
held in the shareholder's Smith Barney brokerage account or redeem the share-
holder's shares of a Smith Barney money market fund to make additions to the
account. Additional information is available from the Fund or a Smith Barney
Financial Consultant. 
 
 LETTER OF INTENT
 
  Class Y Shares. A Letter of Intent provides an opportunity for investors to
meet the minimum investment requirement for Class Y shares by aggregating
investments over a six-month period. Such investors must make an initial mini-
mum purchase of $1,000,000 in Class Y shares of the Portfolio and agree to pur-
chase a total of $5,000,000 of Class Y shares of the same Portfolio within six
months from the date of the Letter. If a total investment of $5,000,000 is not
made within the six-month period, all Class Y shares purchased to date will be
transferred to Class A shares, where they will be subject to all fees (includ-
ing a service fee of 0.25% and a distribution fee of 0.10%) and expenses appli-
cable to the Portfolio's Class A shares. Please contact a Smith Barney Finan-
cial Consultant or First Data for further information.
 
 SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS 

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

  The Portfolio offers to Participating Plans Class A shares as an investment
choice under the Smith Barney 401(k) and ExecChoice(TM) Programs, provided the
Participating Plan makes an initial investment of $1,000,000 or more of Class A
shares of one or more funds of the Smith Barney Mutual Funds. Class A shares
acquired through the Participating Plans are subject to the same service and/or
dis- 
 
16
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)

tribution fees as the Class A shares acquired by other investors; however, they
are not subject to any initial sales charge or contingent deferred sales charge
("CDSC"). 

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

                                                                              17
<PAGE>
 
EXCHANGE PRIVILEGE

  Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A shares are subject to minimum investment
requirements and all shares are subject to the other requirements of the fund
into which exchanges are made. 
 
 FUND NAME
 
 Growth Funds
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Growth Opportunity Fund
    Smith Barney Managed Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Special Equities Fund
  
 Growth and Income Funds
    
    Concert Social Awareness Fund 
    Smith Barney Convertible Fund
    Smith Barney Funds, Inc. -- Equity Income Portfolio
    Smith Barney Growth and Income Fund
    Smith Barney Premium Total Return Fund
  
    Smith Barney Utilities Fund
 
 Taxable Fixed-Income Funds
    Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
  
    Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
 
 Tax-Exempt Funds
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
    Smith Barney Intermediate Maturity California Municipals Fund
    Smith Barney Intermediate Maturity New York Municipals Fund
    Smith Barney Managed Municipals Fund Inc.
    Smith Barney Massachusetts Municipals Fund
  
    Smith Barney Muni Funds -- Florida Portfolio
    Smith Barney Muni Funds -- Georgia Portfolio
    Smith Barney Muni Funds -- Limited Term Portfolio
    Smith Barney Muni Funds -- National Portfolio
 
18
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
    Smith Barney Muni Funds -- New York Portfolio
    Smith Barney Muni Funds -- Ohio Portfolio
    Smith Barney Muni Funds -- Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund
    Smith Barney Tax-Exempt Income Fund
 
 International Funds
    Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
    Smith Barney World Funds, Inc. -- European Portfolio
    Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
    Smith Barney World Funds, Inc. -- International Balanced Portfolio
    Smith Barney World Funds, Inc. -- International Equity Portfolio
    Smith Barney World Funds, Inc. -- Pacific Portfolio
 
 Smith Barney Concert Allocation Series Inc. 
    
    Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio 
  
    Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
  
    Smith Barney Concert Allocation Series Inc. -- Growth Portfolio 
  
    Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
  
    Smith Barney Concert Allocation Series Inc. -- Income Portfolio 
 
 Money Market Funds
    Smith Barney Money Funds, Inc. -- Cash Portfolio
    Smith Barney Money Funds, Inc. -- Government Portfolio
    *Smith Barney Money Funds, Inc. -- Retirement Portfolio
    Smith Barney Municipal Money Market Fund, Inc.
    Smith Barney Muni Funds -- California Money Market Portfolio
    Smith Barney Muni Funds -- New York Money Market Portfolio
--------------------------------------------------------------------------------
* Available only for exchange with Class A shares of the Portfolio.

  Class A and Class Y Exchanges. Class A and Class Y shareholders of the Port-
folio who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without imposi-
tion of any charge. 
 
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Portfolio's performance and its shareholders. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Portfolio's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, the Fund will pro vide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege
 
                                                                              19
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
and during the 15 day period the shareholder will be required to (a) redeem his
or her shares in the Portfolio or (b) remain invested in the Portfolio or
exchange into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in deter-
mining what constitutes an abusive pattern of exchanges.
 
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined, plus any applicable sales
charge differential. Redemption procedures discussed below are also applicable
for exchanging shares, and exchanges will be made upon receipt of all support-
ing documents in proper form. If the account registration of the shares of the
fund being acquired is identical to the registration of the shares of the fund
exchanged, no signature guarantee is required. A capital gain or loss for tax
purposes will be realized upon the exchange, depending upon the cost or other
basis of shares redeemed. Before exchanging shares, investors should read the
current prospectus describing the shares to be acquired. The Portfolio reserves
the right to modify or discontinue exchange privileges upon 60 days' prior
notice to shareholders.
 
REDEMPTION OF SHARES
 
 
  The Fund is required to redeem the shares of the Portfolio tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
 
  If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will normally be remitted on the business day following receipt of
proper tender but, in any event, payment will be made within three business
days there-
after, except on any days on which the NYSE is closed or as permitted under the
1940 Act in extraordinary circumstances. Generally, if the redemption proceeds
are remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.
 
20
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
 
  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
 
  Smith Barney Funds, Inc./Short-Term U.S. Treasury Securities Portfolio
  Class A or Y (please specify)
  c/o First Data Investor Services Group, Inc.
  
  P.O. Box 5128 
  
  Westborough, Massachusetts 01581-5128 
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a written redemption request in excess of
$2,000 or share certificate stock power must be guaranteed by an eligible
guarantor institution, such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal Reserve System or member firm
of a national securities exchange. Written redemption requests of $2,000 or
less do not require a signature guarantee unless more than one such redemption
request is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting doc-
uments for redemptions made by corporations, executors, administrators, trust-
ees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
 
 AUTOMATIC CASH WITHDRAWAL PLAN
 
  The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the share-
holder is eligible to receive qualified distributions and has an account value
of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Portfolio. Any applicable CDSC will not be
waived on amounts withdrawn by a shareholder that exceed 1.00% per month of the
value of the shareholder's shares subject to the CDSC at the time the with-
drawal plan commences. (With respect to withdrawal plans in effect prior to
November 7, 1994, any applicable CDSC will be waived on amounts withdrawn that
do not exceed 2.00% per month of the value of the shareholder's shares subject
to the CDSC.) For further information regarding the automatic cash withdrawal
plan, shareholders should contact a Smith Barney Financial Consultant.
 
                                                                              21
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
 
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Portfolio shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a sig-
nature guarantee, that will be provided by First Data upon request. (Alterna-
tively, an invest or may authorize telephone redemptions on the new account
application with the applicant's signature guarantee when making his/her ini-
tial investment in the Portfolio.)
 
  Redemptions. Redemption requests of up $10,000 of any class or classes of the
Portfolio's shares, may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
 
  A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedure, the bank receiving the proceeds must be a mem-
ber of the Federal Reserve System or have a correspondent relationship with a
member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must com-
plete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day on which the NYSE is open.
 
  Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine. The
Fund and its agents will employ procedures designed to verify the identity of
the caller and legitimacy of instructions (for example, a shareholder's name
and account number will be required and phone calls may be recorded). The Fund
reserves the right
 
22
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
to suspend, modify or discontinue the telephone redemption and exchange program
or to impose a charge for this service at any time following at least (7) days
prior notice to shareholders.
 
 CONTINGENT DEFERRED SALES CHARGE
 
  Class A shares of the Portfolio acquired as part of an exchange privilege
transaction, which were originally acquired in one of the other Smith Barney
Mutual Funds at net asset value subject to a CDSC, continue to be subject to
any applicable CDSC of the original fund. Therefore, Class A shares that are
redeemed within 12 months of the date of purchase of the original fund may be
subject to a CDSC of 1.00%. The amount of any CDSC will be paid to and retained
by Smith Barney. The CDSC will be assessed based on an amount equal to the
lesser of the cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no CDSC will be imposed on increases in net
asset value above the initial purchase price in the original fund. In addition,
no charge will be assessed on shares derived from reinvestment of dividends or
capital gain distributions.
 
  In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestments of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that Class A shares acquired through an
exchange have been held will be calculated from the date that the Class A
shares were initially acquired in one of the other Smith Barney Mutual Funds,
and such shares being redeemed will be considered to represent, as applicable,
capital appreciation or dividend and capital gain distribution reinvestments in
such other funds. For Federal income tax purposes, the amount of the CDSC will
reduce the gain or increase the loss, as the case may be, on the amount real-
ized on redemption.

  The CDSC on Class A shares, if any, will be waived on (a) exchanges (see "Ex-
change Privilege" above); (b) automatic cash withdrawals in amounts equal to or
less than 1.00% per month of the value of the shareholder's shares at the time
the withdrawal plan commences (see "Automatic Cash Withdrawal Plan") (provided,
however, that automatic cash withdrawals in amounts equal to or less than 2.00%
per month of the value of the shareholder's shares will be permitted for with-
drawal plans that were established prior to November 7, 1994); (c) redemptions
of shares within twelve months following the death or disability of the share-
holder; (d) redemption of shares made in connection with qualified distribu-
tions from retirement plans or IRAs upon the attainment of age 59 1/2; (e)
involuntary redemptions; and (f) redemptions of shares to effect a combination
of a Portfolio with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other funds
of the Smith Barney Mutual 
 
                                                                              23
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.

  For information concerning the CDSC applicable to Class A shares acquired
through the Smith Barney 401(k) Program or Smith Barney ExecChoice(TM) Program.
See "Purchase of Shares --Smith Barney 401(k) and Smith Barney ExecChoice(TM)
Programs." 
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Portfolio if the aggregate net asset value of the shares held in
the Portfolio account is less than $500. (If a shareholder has more than one
account in this Portfolio, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely upon market reductions
in net asset value. Before the Fund exercises such right, shareholders will
receive written notice and will be permitted 60 days to bring accounts up to
the minimum to avoid involuntary liquidation.
 
PERFORMANCE
 
 
  From time to time the Portfolio may include its total return, average annual
total return and yield in advertisements. In addition, in other types of sales
liter- ature the Portfolio may include its current dividend return. These fig-
ures are computed separately for Class A and Class Y shares of the Portfolio.
These figures are based on historical earnings and are not intended to indicate
future performance. Total return is computed for a specified period of time
assuming reinvestment of all income dividends and capital gain distributions on
the reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calculated by
the initial amount invested and subtracting 100%. The standard average annual
total return, as prescribed by the SEC is derived from this total return, which
provides the ending redeemable value. Such standard total return information
may also be accompanied with nonstandard total return information for differing
periods computed in the same manner but without annualizing the total return.
The yield of the Portfolio refers to the net investment income earned by
investments in the Portfolio over a thirty-day period. This net investment
income is then annualized, i.e., the amount of income earned
 
24
<PAGE>
 
PERFORMANCE (CONTINUED)
 
by the investment during that thirty-day period is assumed to be earned each
30-day period for twelve periods and is expressed as a percentage of the
investments. The yield quotation is calculated according to a formula pre-
scribed by the SEC to facilitate comparison with yields quoted by other invest-
ment companies. The Portfolio calculates current dividend return for each Class
by annualizing the most recent distribution and dividing by the net asset value
on the last day of the period for which current dividend return is presented.
The Portfolio's current dividend return for each Class may vary from time to
time depending on market conditions, the composition of its investment portfo-
lio and operating expenses. These factors and possible differences in the meth-
ods used in calculating current dividend return should be considered when com-
paring the Portfolio's current return to yields published for other investment
companies and other investment vehicles. The Portfolio may also include compar-
ative performance information in advertising or marketing its shares. Such per-
formance information may include data from Lipper Analytical Services, Inc. and
other financial publications.
 
MANAGEMENT OF THE FUND
 
 
  BOARD OF DIRECTORS
 
Overall responsibility for management and supervision of the Portfolio 
rests with
the Fund's Board of Directors. The Directors approve all significant agreements
between the Fund and the companies that furnish services to the Fund and the
Portfolio, including agreements with the Fund's distributor, investment manag-
er, custodian and transfer agent. The day-to-day operations of the Portfolio
are delegated to the Manager. The Statement of Additional Information contains
background information regarding each Director and executive officer of the
Fund.
 
  MANAGER
 
  Smith Barney Mutual Funds Management Inc. (the "Manager") manages the day-to-
day operations of the Portfolio pursuant to a management agreement entered into
by the Fund on behalf of the Portfolio under which the Manager offers the Port-
folio advice and assistance with respect to the acquisition, holding or dis-
posal of securities and recommendations with respect to other aspects and
affairs of the Portfolio and furnishes the Portfolio with bookkeeping, account-
ing and administrative services, office space and equipment, and the services
of the officers and employees of the Fund. By written agreement the research
and other departments of Smith Barney and staff furnish the Manager with infor-
mation, advice and assistance and are available for consultation on the Fund's
Portfolios, thus Smith Barney may also be considered an investment adviser to
the Fund. Smith Barney's services are paid for by the Manager on the basis of
direct and indirect costs to Smith Barney for performing such services; there
is no charge to the Fund for such services.
 
                                                                              25
<PAGE>
 
MANAGEMENT OF THE FUND (CONTINUED)

  For the Portfolio's last fiscal year, the management fee was 0.45% of the
Portfolio's average net assets and the Portfolio's total operating expenses
were 0.98% and 0.58% of the average net assets for Class A shares and Class Y
shares, respectively. 

  The Manager was incorporated on March 12, 1968 under the laws of Delaware. As
of January 31, 1997 the Manager had aggregate assets under management in excess
of $80 billion. The Manager, Smith Barney and Holdings are each located at 388
Greenwich Street, New York, New York 10013. The term "Smith Barney" in the
title of the Fund has been adopted by permission of Smith Barney and is subject
to the right of Smith Barney to elect that the Fund stop using the term in any
form or combination of its name. 
 
  PORTFOLIO MANAGEMENT
 
  James Conroy, Vice President of the Manager is Portfolio Manager of the Port-
folio and is responsible for managing the day-to-day operations of the Portfo-
lio, including the making of investment decisions since January 1996. Mr.
Conroy is also Portfolio Manager of the Fund's U.S. Government Securities Port-
folio. Mr. Conroy has also served as Vice President and Investment Officer of
Smith Barney Managed Governments Fund Inc. since February 1990 and as First
Vice President and Investment Officer of Smith Barney Government Securities
Fund since its inception in March 1984.

  Management's discussion and analysis, and additional performance information
regarding the Portfolio during the fiscal year ended December 31, 1996 is
included in the Annual Report dated December 31, 1996. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus. 
 
DISTRIBUTOR
 
 
  Smith Barney distributes shares of the Portfolio as principal underwriter and
as such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Portfolio
under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a serv-
ice fee with respect to Class A shares of the Portfolio at the annual rate of
0.25% of the average daily net assets of that Class. Smith Barney is also paid
a distribution fee with respect to Class A shares at the annual rate of 0.10%
of the average daily net assets attributable to those shares. The fees are used
by Smith Barney to pay its Financial Consultants for servicing shareholder
accounts and to cover expenses primarily intended to result in the sale of
those shares. These expenses include: advertising expenses; the cost of print-
ing and mailing prospectuses to potential investors; payments to and
 
26
<PAGE>
 
DISTRIBUTOR (CONTINUED)
 
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Portfolio shares, including lease, utility, communications and
sales promotion expenses.
 
  Amounts expended by Smith Barney but not reimbursed by the Portfolio in any
year will not be a continuing liability of the Portfolio in subsequent years.
Because the Portfolio reimburses Smith Barney only for actual expenditures,
Smith Barney realizes no profit from the Plan.
 
ADDITIONAL INFORMATION
 
 
  The Fund, an open-end, diversified investment company, was incorporated in
Maryland on December 2, 1966. The Fund has an authorized capital of
2,000,000,000 shares with a par value of $.01 per share. The Board of Directors
has authorized the issuance of fifteen series of shares, each representing
shares in one of fifteen separate Portfolios and may authorize the issuance of
additional classes of shares in the future. The assets of each Portfolio are
segregated and separately managed and a shareholder's interest is in the assets
and earnings of the Portfolio in which he or she holds shares. Class A and
Class Y shares of the Portfolio represent interests in the assets of the Port-
folio and have identical voting, dividend, liquidation and other rights on the
same terms and conditions except that expenses related to the distribution of
each Class of shares are borne solely by each Class and each Class of shares
has exclusive voting rights with respect to provisions of the Fund's Rule 12b-1
distribution plan which pertains to a particular Class. Shareholders are enti-
tled to one vote for each share held and will vote in the aggregate and not by
Portfolio except as otherwise required by the 1940 Act or Maryland law. As
described under "Voting" in the Statement of Additional Information, the Fund
ordinarily will not hold meetings of shareholders annually; however, sharehold-
ers have the right to call a meeting upon a vote of 10% of the Fund's outstand-
ing shares for the purpose of voting to remove directors. Shareholders will
receive assistance in communicating with other shareholders in connection with
the removal of directors as required by the 1940 Act. Shares do not have cumu-
lative voting rights or preemptive rights and are fully paid, transferable and
nonassessable when issued for payment as described in this Prospectus.
 
  PNC Bank, National Association, located at 17th and Chestnuts Streets,
Philadelphia, Pennsylvania 19103, serves as custodian of the Portfolio's
investments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
 
                                                                              27
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)

  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply
to their account should contact their Smith Barney Financial Consultant or the
Fund's transfer agent. 
 
28
<PAGE>
 
 
                                                                    SMITH BARNEY
                                               ---------------------------------

                                               A Member of TravelersGroup [LOGO]

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


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

Income Return
Account Portfolio

APRIL 30, 1997

PROSPECTUS BEGINS ON PAGE ONE

Smith Barney Mutual Funds
Investing for your future.
Everyday.


PROSPECTUS
APRIL 30, 1997

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

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

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

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

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

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager

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




TABLE OF CONTENTS



PROSPECTUS SUMMARY	3

FINANCIAL HIGHLIGHTS	12

INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES	17

VALUATION OF SHARES	19

DIVIDENDS, DISTRIBUTIONS AND TAXES	19

PURCHASE OF SHARES	21

EXCHANGE PRIVILEGE	32

REDEMPTION OF SHARES	36

MINIMUM ACCOUNT SIZE	39

PERFORMANCE	40

MANAGEMENT OF THE FUND	41

DISTRIBUTOR	43

ADDITIONAL INFORMATION	44

APPENDIX	A-1


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


PROSPECTUS SUMMARY

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

INCOME RETURN ACCOUNT PORTFOLIO

CLASS A
CLASS C
CLASS Y






SHAREHOLDER TRANSACTION EXPENSES



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


2.00 %


None


None

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

None*

1.00%

None






INCOME RETURN ACCOUNT PORTFOLIO





Management fees
0.45%
0.45%
0.45%

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

Other expenses
0.81
0.80
0.72

TOTAL PORTFOLIO OPERATING 
EXPENSES

1.26%

1.60%

1.17%






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

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

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


EXAMPLE

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


1 YEAR
3 YEARS
5 YEARS
10 YEARS







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











Income Return 
Account Portfolio





Class A
$ 33
$ 59
$ 88
$ 169

Class C
26
50
87
190

Class Y
12
37
64
142

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





Income Return Account 
Portfolio





Class A
$ 33
$ 59
$ 88
$ 169

Class C
16
50
87
190

Class Y
12
37
64
142







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



FINANCIAL HIGHLIGHTS

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

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

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

NET ASSET VALUE, 
BEGINNING OF YEAR

$9.60

$ 9.34

$ 9.59

$ 9.68

$ 9.65

$ 9.38

INCOME FROM OPERATIONS:







Net investment income
0.44
0.51
0.46
0.45
0.52
0.67

Net realized and 
unrealized gain (loss)

(0.06)

0.26

(0.26)

(0.07)

0.03

0.33

Total Income from 
Operations
0.38
0.77
0.20
0.38
0.55
1.00

LESS DISTRIBUTIONS 
FROM:







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

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

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

NET ASSET VALUE, END OF 
YEAR

$ 9.48

$ 9.60

$ 9.34

$ 9.59

$ 9.68

$ 9.65

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

NET ASSETS, END OF YEAR 
(000S)

$14,948

$16,324

$18,918

$50,874

$48,538

$33,682

RATIOS TO AVERAGE NET 
ASSETS:







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

Net investment income
4.82
5.38
4.60
4.67
5.33
6.98

PORTFOLIO TURNOVER RATE

122%

107.30%

126.64%

152.04%

84.15%

30.44%

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

1990

1989

1988

1987

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

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

INCOME FROM OPERATIONS:





Net investment income
0.73
0.75
0.71
0.68

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

Total Income from 
Operations
0.81
0.94
0.58
0.49

LESS DISTRIBUTIONS FROM:





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

Net realized gains
n/a
n/a
n/a
(0.06)

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

NET ASSET VALUE, END OF 
YEAR

$ 9.38

$ 9.31

$ 9.12

$ 9.26

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

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

RATIOS TO AVERAGE NET 
ASSETS:





Expenses
0.43%
0.43%
0.44%
0.35%

Net investment income
7.92
8.13
7.78
7.37

PORTFOLIO TURNOVER RATE
27.90%
33.17%
124.33%
68.21%

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

(PTotal)returns do not reflect any sales charges. 



<TABLE>
<CAPTION>
INCOME RETURN ACCOUNT PORTFOLIO

CLASS C SHARES

CLASS Y SHARES


1996
1995
1994(1)
1993
1992(2)

1996
1995
1994(3)
1993(4)

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

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

NET ASSET 
VALUE, 
BEGINNING OF 
YEAR



$9.60



$ 9.34



$ 9.58



$ 9.68



$ 9.69




$ 9.60



$ 9.34



$ 9.59



$ 9.72

INCOME FROM 
OPERATIONS:











Net 
investment 
income

0.41

0.48

0.42

0.45

0.03


0.45

0.51

0.44

0.42

Net realized 
and 
unrealized 
gain (loss)


(0.06)


0.26


(0.24)


(0.12)


n/a



(0.06)


0.26


(0.25)


(0.13)

Total Income 
from 
Operations

0.35

0.74

0.18

0.33

0.03


0.39

0.77

0.19

0.29

LESS 
DISTRIBUTION
S FROM:











Net 
investment 
income

(0.44)

(0.48)

(0.42)

(0.43)

(0.04)


(0.48)

(0.51)

(0.44)

(0.42)

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

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

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

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

NET ASSET 
VALUE, END 
OF YEAR


$ 9.48


$ 9.60


$ 9.34


$ 9.58


$ 9.68



$9.48


$ 9.60


$ 9.34


$ 9.59

TOTAL RETURN 
(P)

3.72%

8.06%

1.86%

3.53%

0.31%
++


4.18%

8.43%

2.01%

3.01%++


NET ASSETS, 
END OF YEAR 
(000S)


$2,090


$2,520


$3,055


$3,993


$10



$ 636


$ 952


$3,235


$5,412

RATIOS TO 
AVERAGE NET 
ASSETS:











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


1.17%
0.73%
0.69%
0.75%+

Net 
investment 
income

4.46

4.89

4.40

4.25

5.71+


5.12

5.43

4.65

4.78+

PORTFOLIO 
TURNOVER RATE


122%


107%


127%


152%


84%



122%


107%


127%


152%

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



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

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

INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES

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

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

PORTFOLIO TURNOVER

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

VALUATION OF SHARES

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

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

DIVIDENDS, DISTRIBUTIONS AND TAXES


DIVIDENDS AND DISTRIBUTIONS

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

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

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

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

TAXES

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

PURCHASE OF SHARES


GENERAL

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

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

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

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

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

INITIAL SALES CHARGE ALTERNATIVE :  CLASS A SHARES

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

SALES CHARGE




AMOUNT OF 
TRANSACTION


% OF OFFERING 
PRICE


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






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

$500,000 and over
*
*
*











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

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

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

INITIAL SALES CHARGE WAIVERS

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

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

LETTER OF INTENT

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

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

DEFERRED SALES CHARGE ALTERNATIVES

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

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

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


EXCHANGE PRIVILEGE

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

FUND NAME

Growth Funds

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

Growth and Income Funds

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

Taxable Fixed-Income Funds

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

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

Tax-Exempt Funds

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

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

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

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

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

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

International Funds

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

Smith Barney Concert Allocation Series Inc. 

Smith Barney Concert  Allocation Series Inc. : High Growth 
Portfolio

Smith Barney Concert  Allocation Series Inc. : Growth 
Portfolio 

Smith Barney Concert Allocation Series Inc. : Balanced 
Portfolio 

Smith Barney Concert Allocation Series Inc. : Conservative 
Portfolio 

Smith Barney Concert Allocation Series Inc. : Income 
Portfolio 

Money Market Funds

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

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

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

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

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

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

REDEMPTION OF SHARES

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

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


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

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


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

AUTOMATIC CASH WITHDRAWAL PLAN

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

TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

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

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

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

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

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

MINIMUM ACCOUNT SIZE

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

PERFORMANCE

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

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS

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

MANAGER

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

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

PORTFOLIO MANAGEMENT

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

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

DISTRIBUTOR

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

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

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

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

ADDITIONAL INFORMATION

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

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

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

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

APPENDIX

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

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

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

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


Smith Barney

A Member of TravelersGroup [LOGO]




SMITH BARNEY
FUNDS, INC.



INCOME RETURN
ACCOUNT PORTFOLIO

388 Greenwich Street
New York, New York 10013

FD 4/97