<PAGE>
 
 
                                                                    SMITH BARNEY
                                                                        Balanced
                                                                            Fund
                                                           
                                                          November 27, 1998  
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
P R O S P E C T U S



[LOGO] SMITH BARNEY MUTUAL FUNDS
       Investing for your future.
       Every day.(R)
<PAGE>
 
PROSPECTUS                                                
                                                         NOVEMBER 27, 1998  
 
Smith Barney Balanced Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
 
  The Smith Barney Balanced Fund (the "Fund") (formerly known as Smith Barney
Utilities Fund) is a diversified fund that seeks current income and long-term
capital appreciation. The Fund is one of a number of funds, each having dis-
tinct investment objectives and policies, making up the Smith Barney Income
Funds (the "Trust"). The Trust is an open-end management investment company
commonly referred to as a mutual fund.  
 
  This Prospectus sets forth concisely certain information about the Fund and
the Trust, 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. Shares of other funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the tele-
phone number set forth above or by contacting a Salomon Smith Barney Financial
Consultant.  
 
  Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated November 27, 1998, as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth above
or by contacting a Salomon Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.  
 
CFBDS, INC.  
Distributor
 
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
 
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                           10
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   16
-------------------------------------------------
VALUATION OF SHARES                            30
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             30
-------------------------------------------------
PURCHASE OF SHARES                             32
-------------------------------------------------
EXCHANGE PRIVILEGE                             40
-------------------------------------------------
REDEMPTION OF SHARES                           43
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           46
-------------------------------------------------
PERFORMANCE                                    46
-------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND           47
-------------------------------------------------
DISTRIBUTION                                   48
-------------------------------------------------
ADDITIONAL INFORMATION                         49
-------------------------------------------------
    
</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 or
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 this Prospec-
tus. See "Table of Contents."
 
INVESTMENT OBJECTIVE The Fund is an open-end management investment company
that seeks current income and long-term capital appreciation by investing in
equity and debt securities. The Fund will maintain a target asset allocation
of approximately 60% of its total assets in equity securities and 40% of its
total assets in fixed-income securities. The Fund may also invest up to 25% of
its total assets in below investment grade securities. See "Investment Objec-
tive and Management Policies."
 
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of
expenses to which they are subject. A fourth Class of shares, Class O shares
(prior to June 12, 1998 called Class C shares) are offered only to persons who
held Class C shares on June 12, 1998, and a fifth Class of shares, Class Y
shares, is offered only to investors meeting an initial investment minimum of
$15,000,000. In addition, a sixth Class, Class Z shares, which is offered pur-
suant to a separate prospectus, is offered exclusively to (a) tax-exempt
employee benefit and retirement plans of Salomon Smith Barney Inc. ("Salomon
Smith Barney") and its affiliates and (b) unit investment trusts ("UITs")
sponsored by Salomon 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 5.00% imposed at the time of purchase 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. Pur-
chases 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 pur-
chase. 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
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.
 
                                                                              3
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
  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 Alternative."
 
  Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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 L shares, and investors pay a CDSC of 1.00% if
they redeem Class L shares within 12 months of purchase. This CDSC may be
waived for certain redemptions. Until June 22, 2001, purchases of Class L
shares by investors who were holders of Class C shares of the Fund on June 12,
1998 will not be subject to the 1.00% initial sales charge. The Class L shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A and Class B shares. Purchases of Fund shares, which when
combined with current holdings of Class L shares of the Fund equal or exceed
$500,000 in the aggregate, should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase.  
 
  Class O Shares. Class O shares are available for purchase only by sharehold-
ers who owned Class C shares of the Fund on June 12, 1998. Class O shares are
sold at net asset value and purchases of Class O shares will not be subject to
an initial sales charge of 1.00% of the purchase price until June 22, 2001.
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 O shares, and invest-
ors pay a CDSC of 1.00% if they redeem Class O shares within 12 months of pur-
chase. The CDSC may be waived for certain redemptions. The Class O shares' dis-
tribution fee may cause that Class to have higher expenses and pay lower divi-
dends than Class A and Class B shares. Purchases of Fund shares, which when
combined with the current holdings of Class O shares of the Fund equal or
exceed $500,000 in the aggregate, should be made in Class A shares at net asset
value with no sales charge, and will be subject to a CDSC of 1.00% on redemp-
tions made within 12 months of purchase.  
 
 
  Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
 
  In deciding which Class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
 
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
  Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the investment. As an
investment alternative, Class B shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional invested amounts may partially or wholly
offset the higher annual expenses of these Classes. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case. Finally, Class L shares which have a lower initial sales charge
but are subject to higher distribution fees than Class A shares, are suitable
for investors who are investing or intending to invest an amount which would
receive a substantial sales charge discount and who have a short-term or unde-
termined time frame.  
 
  Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class L shares have a shorter CDSC period than Class
B shares
they do not have a conversion feature and therefore are subject to an ongoing
distribution fee. Thus, Class B shares may be more attractive than Class L
shares to investors with longer-term investment outlooks.
 
  Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the pur-
chase to the net asset value of all Class A shares offered with a sales charge
held in other Smith Barney Mutual Funds listed under "Exchange Privilege."
Class A share purchases may also be eligible for a reduced initial sales
charge. See "Purchase of Shares."  
 
  Salomon Smith Barney Financial Consultants may receive different compensa-
tion for selling different Classes of shares. Investors should understand that
the purpose of the CDSC on the Class B and Class L shares is the same as that
of the initial sales charge on the Class A shares.  
 
  See "Purchase of Shares" and "Management of the Trust and 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 among 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
 
                                                                              5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
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 L shares are available
without a sales charge as investment alternatives under both of these pro-
grams. See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Pro-
grams."
   
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. to dis-
tribute the Fund's shares.  
 
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker
that clears securities through Salomon Smith Barney. (An investment dealer in
the selling group and a broker that clears securities through Salomon Smith
Barney are collectively referred to as "Dealer Representatives.") In addition,
certain investors, including qualified retirement plans and investors purchas-
ing through certain Dealer Representatives, may purchase shares directly from
the Fund through the Fund's transfer agent, First Data Investors Services
Group, Inc. ("First Data" or the "Transfer Agent"). See '"Purchase of Shares."
  
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open
an account by making an initial investment of at least $1,000 for each
account, or $250 for an individual retirement account ("IRA") or a Self-
Employed Retirement Plan. Investors in Class Y shares may open an account for
an initial investment of $15,000,000. Subsequent investments of at least $50
may be made for all Classes. For participants in retirement plans qualified
under Section 403(b)(7) or Section 401(a) of the Code, the minimum initial
investment requirement for Class A, Class B and Class L shares and the minimum
subsequent investment requirement for all Classes is $25. The minimum invest-
ment requirements for purchases of Fund shares through the Systematic Invest-
ment Plan are described below. There is no minimum investment required in
Class A for unitholders who invest distributions from a UIT sponsored by Salo-
mon Smith Barney. See "Purchase of Shares."  
 
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for Fund shares. The minimum initial investment
requirement for Class A, Class B and Class L shares and the minimum 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."
 
 
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
MANAGEMENT OF THE TRUST AND THE FUND Mutual Management Corp. ("MMC") (formerly
known as Smith Barney Mutual Funds Management Inc.) serves as the Fund's
investment adviser and administrator. MMC provides investment advisory and
management services to investment companies affiliated with Salomon Smith Bar-
ney. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). Citigroup businesses produce a broad range of financial servic-
es--asset management, banking and consumer finance, credit and charge cards,
insurance, investments, investment banking and trading--and use diverse chan-
nels to make them available to consumer and corporate customers around the
world. Among these businesses are Citibank, Commercial Credit, Primerica
Financial Services, Salomon Smith Barney, SSBC Asset Management, Travelers
Life & Annuity, and Travelers Property Casualty. See "Management of the Trust
and the Fund."  
 
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respec-
tive net asset value next determined.  See "Exchange Privilege."
 
VALUATION OF SHARES Net asset value of the Fund is generally quoted daily in
the financial section of most newspapers and is also available from Salomon
Smith Barney Financial Consultants. See "Valuation of Shares."  
 
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
quarterly and 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 dis-
tribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
 
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The Fund will be affected by
general changes in interest rates which will result in increases or decreases
in the market value of the debt securities held by the Fund; the market value
of the debt securities held by the Fund can be expected to vary inversely to
changes in prevailing interest rates. The Fund may invest up to 25% of its
assets in lower-rated fixed-income securities, which securities (a) will
likely have some quality and protective characteristics that, in the judgment
of a rating organization, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (b) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in accor-
dance with the terms of the securities. Certain of the investments
 
                                                                              7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
held by the Fund and certain of the investment strategies and techniques that
the Fund may employ might expose it to certain risks. The investments present-
ing the Fund with risks are low-rated securities, as described above, foreign
securities and non-publicly traded and illiquid securities. The investment
strategies and techniques presenting the Fund with risks are entering in repur-
chase agreements, lending portfolio securities, engaging in short sales against
the box and entering into transactions involving options and futures contracts.
See "Investment Objective and Management Policies."
 
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and the Fund's operating expenses for its most
recent fiscal year:
 
<TABLE> 
<CAPTION>
  SMITH BARNEY BALANCED FUND          CLASS A  CLASS B CLASS L CLASS O* CLASS Y
-------------------------------------------------------------------------------
  <S>                                 <C>      <C>     <C>     <C>      <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Maximum sales charge imposed on
      purchases (as a percentage of
      offering price)                  5.00%    None    1.00%    1.00%   None
    Maximum CDSC (as a percentage of
      original cost or redemption
      proceeds, whichever is lower)    None**   5.00%   1.00%    1.00%   None
-------------------------------------------------------------------------------
  ANNUAL FUND OPERATING EXPENSES
    (as a percentage of average net
    assets)
    Management fees                    0.65%    0.65%   0.65%    0.65%   0.65%
    12b-1 fees***                      0.25     0.75    1.00     0.70    None
    Other expenses                     0.15     0.12    0.09     0.13    0.02
-------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES        1.05%    1.52%   1.74%    1.48%   0.67%
-------------------------------------------------------------------------------
</TABLE> 
 
   * Class C shares were renamed Class O shares effective June 12, 1998.  
  ** Purchases of Class A shares of $500,000 or more will be made at net asset
     value with no sales charge, but will be subject to a CDSC of 1.00% on
     redemptions made within 12 months of purchase.
 *** Upon conversion of Class B shares to Class A shares, such shares will no
     longer be subject to a distribution fee. Class L shares and Class O shares
     do not have a conversion feature and, therefore, are subject to an ongoing
     distribution fee. As a result, long-term shareholders of Class L shares
     and Class O 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 "NASD").
   
  Class A shares of the Fund purchased through the Salomon Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable quarter-
ly, in lieu of the initial sales charge. The fee will vary to a maximum of
1.50%, depending on the amount of assets held through the Program. For more
information, please call your Salomon Smith Barney Financial Consultant.  
 
  The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class L, Class O and certain Class A shares the length of time
the shares are held  
 
8
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
and whether the shares are held through the Smith Barney 401(k) and
ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of Shares."
Salomon Smith Barney receives an annual 12b-1 service fee of 0.25% of the value
of average daily net assets of Class A shares. Salomon Smith Barney also
receives an annual 12b-1 fee of 0.75% of the value of average daily net assets
of Class B shares, consisting of a 0.50% distribution fee and a 0.25% service
fee. In Class L shares, Salomon Smith Barney receives an annual 12b-1 fee of
1.00% of the value of average daily net assets of this Class, consisting of a
0.75% distribution fee and a 0.25% service fee. In Class O shares, Salomon
Smith Barney 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 share-
holder services, custodial fees, legal and accounting fees, printing costs and
registration fees.  
 EXAMPLE
 
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares", "Redemption of Shares" and
"Management of the Trust and the Fund."  
<TABLE> 
<CAPTION>
  SMITH BARNEY BALANCED FUND                  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                                    $60     $82    $105     $172
    Class B                                     65      78      93      168
    Class L                                     38      64     103      213
    Class O                                     35      56      90      185
    Class Y                                      7      21      37       83
  An investor would pay the following
  expenses on the same investment, assuming
  the same annual return and no redemption:
    Class A                                     60      82     105      172
    Class B                                     15      48      83      168
    Class L                                     28      64     103      213
    Class O                                     25      56      90      185
    Class Y                                      7      21      37       83
------------------------------------------------------------------------------
</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, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                               9
<PAGE>
 
FINANCIAL HIGHLIGHTS
 
  The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal years ended July 31, 1989 through July
31, 1994 has been audited by other independent auditors. The information set
out below should be read in conjunction with the financial statements and
related notes that also appear in the Fund's 1998 Annual Report, which is
incorporated by reference into the Statement of Additional Information.  
 
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE> 
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR ENDED JULY 31             1998    1997    1996    1995    1994    1993(1)
--------------------------------------------------------------------------------
<S>                           <C>     <C>     <C>     <C>     <C>      <C>
NET ASSET VALUE, BEGINNING
OF YEAR                       $15.53  $14.51  $14.03  $13.28  $15.97   $14.36
--------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
 Net investment income          0.70    0.80    0.83    0.85    0.56     0.66
 Net realized and unrealized
 gain (loss) on  investments    1.80    1.36    0.47    0.82   (1.92)    1.72
--------------------------------------------------------------------------------
Total Income (Loss) From
Operations                      2.50    2.16    1.30    1.67   (1.36)    2.38
--------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income         (0.68)  (0.82)  (0.82)  (0.82)  (0.83)   (0.64)
 Net realized gains            (0.83)  (0.32)     --   (0.08)  (0.50)   (0.13)
 Capital                          --      --      --   (0.02)     --       --
--------------------------------------------------------------------------------
Total Distributions            (1.51)  (1.14)  (0.82)  (0.92)  (1.33)   (0.77)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR  $16.52  $15.53  $14.51  $14.03  $13.28   $15.97
--------------------------------------------------------------------------------
TOTAL RETURN                   16.70%  15.48%   9.21%  13.24%  (8.99)%  17.01%++
--------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS)                    $  279  $  248  $  266    $169     $41      $54
--------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                       1.05%   1.06%   1.04%   1.07%   1.07%    1.07%+
 Net investment income          4.29    5.29    5.55    6.36    5.54     5.67+
--------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE          110%     45%     58%     36%     28%      37%
--------------------------------------------------------------------------------
</TABLE> 
   
(1) For the period from November 6, 1992 (inception date) to July 31, 1993.
     
  
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
 
10
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
 
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE> 
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR ENDED                  7/31/98  7/31/97  7/31/96  7/31/95  7/31/94   7/31/93  7/31/92(1)
----------------------------------------------------------------------------------------------
<S>                         <C>      <C>      <C>      <C>      <C>       <C>      <C>
NET ASSET VALUE,
BEGINNING OF YEAR           $15.52   $14.51   $14.02   $13.28   $15.97    $14.83     $13.95
----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
 Net investment income        0.62     0.73     0.77     0.78     0.75      0.79       0.35
 Net realized and
  unrealized gain (loss)
  on investments              1.80     1.35     0.47     0.82    (2.19)     1.30       0.89
----------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations                    2.42     2.08     1.24     1.60    (1.44)     2.09       1.24
----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income       (0.62)   (0.75)   (0.75)   (0.76)   (0.75)    (0.80)     (0.35)
 Net realized gains          (0.83)   (0.32)      --    (0.08)   (0.50)    (0.15)        --
 Capital                        --       --       --    (0.02)      --        --      (0.01)
----------------------------------------------------------------------------------------------
Total Distributions          (1.45)   (1.07)   (0.75)   (0.86)   (1.25)    (0.95)     (0.36)
----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR                        $16.49   $15.52   $14.51   $14.02   $13.28    $15.97     $14.83
----------------------------------------------------------------------------------------------
TOTAL RETURN                 16.17%   14.88%    8.78%   12.62%   (9.52)%   14.69%      8.98%++
----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS)                  $  740   $  951   $1,310   $1,573   $1,823    $2,766     $1,721
----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                     1.52%    1.52%    1.55%    1.56%    1.54%     1.56%      1.57%+
 Net investment income        3.87     4.85     5.13     5.82     5.07      5.17       5.78+
----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE        110%      45%      58%      36%      28%       37%        10%
----------------------------------------------------------------------------------------------
</TABLE> 
   
(1) For the period from March 1, 1992 to July 31, 1992.  
  
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
 
                                                                              11
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
 
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE> 
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR ENDED                           2/28/92  2/28/91  2/28/90  2/28/89(1)
---------------------------------------------------------------------------
<S>                                  <C>      <C>      <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR   $13.21   $12.93   $12.09     $12.00
---------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income                 0.82     0.88     0.87       0.64
 Net realized and unrealized gain on
  investments                          0.94     0.40     1.08       0.17
---------------------------------------------------------------------------
Total Income From Operations           1.76     1.28     1.95       0.81
---------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                (0.84)   (0.90)   (0.90)     (0.57)
 Net realized gains                   (0.15)   (0.10)   (0.21)     (0.15)
 Capital                              (0.03)      --       --         --
---------------------------------------------------------------------------
Total Distributions                   (1.02)   (1.00)   (1.11)     (0.72)
---------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR         $13.95   $13.21   $12.93     $12.09
---------------------------------------------------------------------------
TOTAL RETURN                          13.63%   10.46%   16.34%      6.80%++
---------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS)   $1,275    $ 707    $ 604      $ 416
---------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                              1.58%    1.65%    1.70%      1.77%+
 Net investment income                 6.04     6.89     6.83       6.99+
---------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                  33%      31%      50%        46%
---------------------------------------------------------------------------
</TABLE> 
(1) For the period from March 28, 1988 (inception date) to February 28, 1989.
  
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
 
12
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
FOR A CLASS L SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH PERIOD:
 
<TABLE> 
<CAPTION>
SMITH BARNEY BALANCED FUND
PERIOD ENDED JULY 31                  1998(/1/)
-----------------------------------------------
<S>                                   <C>
NET ASSET VALUE, BEGINNING OF PERIOD   $17.14
-----------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income                   0.02
 Net realized and unrealized loss       (0.41)
-----------------------------------------------
Total Loss From Operations              (0.39)
-----------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                   --
 Net realized gains                     (0.23)
-----------------------------------------------
Total Distributions                     (0.23)
-----------------------------------------------
NET ASSET VALUE, END OF PERIOD         $16.52
-----------------------------------------------
TOTAL RETURN++                          (2.28)%
-----------------------------------------------
NET ASSETS, END OF PERIOD (000S)       $  486
-----------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
 Expenses                                1.74%
 Net investment income                   2.51
-----------------------------------------------
PORTFOLIO TURNOVER RATE                   110%
-----------------------------------------------
</TABLE> 
 
(1) For the period from June 15, 1988 (inception date) to July 31, 1998.  
   
 ++Total return is not annualized, as it may not be representative of the total
   return for the year.  
 + Annualized.
 
                                                                              13
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
FOR A CLASS O(1) SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:  
 
<TABLE> 
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR ENDED JULY 31          1998(2)  1997(2)   1996    1995(3)   1994    1993(4)
----------------------------------------------------------------------------------
<S>                         <C>      <C>      <C>      <C>      <C>      <C>
NET ASSET VALUE,
BEGINNING OF YEAR           $15.53   $14.51   $ 14.02  $13.28   $15.97   $15.17
----------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
 Net investment income        0.64     0.73      0.77    0.78     0.73     0.35
 Net realized and
  unrealized gain (loss)
  on investments              1.79     1.36      0.47    0.82    (2.17)    0.86
----------------------------------------------------------------------------------
Total Income (Loss) From
Operations                    2.43     2.09      1.24    1.60    (1.44)    1.21
----------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income       (0.63)   (0.75)    (0.75)  (0.76)   (0.75)   (0.39)
 Net realized gains          (0.83)   (0.32)       --   (0.08)   (0.50)   (0.02)
 Capital                        --       --        --   (0.02)      --       --
----------------------------------------------------------------------------------
Total Distributions          (1.46)   (1.07)    (0.75)  (0.86)   (1.25)   (0.41)
----------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR                     $16.50   $15.53   $ 14.51  $14.02   $13.28   $15.97
----------------------------------------------------------------------------------
TOTAL RETURN                16.19%    15.01%     8.80%  12.62%   (9.52)%   8.08%++
----------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000'S)                     $8,838   $9,381   $11,441  $3,925   $1,894   $  252
----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                     1.48%    1.47%     1.50%   1.51%    1.48%    1.49%+
 Net investment income        3.89     4.89      5.19    5.77     5.13     5.25+
----------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE        110%      45%       58%     36%      28%      37%
----------------------------------------------------------------------------------
</TABLE> 
 
(1) On June 12, 1998 Class C shares were renamed Class O shares.  
(2) Per share amounts have been calculated using the monthly average shares
    method rather than the undistributed net investment income method, because
    it more accurately reflects the per share data for the period.
 
(3) On November 7, 1994, the former Class D shares were renamed Class C
    shares.  
(4) For the period from February 4, 1993 (inception date) to July 31, 1993.
  
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
 
 
14
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
FOR A CLASS Y SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE> 
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR END JULY 31                            1998(1)   1997    1996(2)
-----------------------------------------------------------------------
<S>                                         <C>      <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR          $15.56   $ 14.52  $14.88
-----------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income                        0.76      0.83    0.64
 Net realized and unrealized gain (loss) on
 investment                                   1.74      1.38   (0.29)
-----------------------------------------------------------------------
Total Income From Operations                  2.50      2.21    0.35
-----------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                       (0.71)    (0.85)  (0.71)
 Net realized gains                          (0.83)    (0.32)     --
-----------------------------------------------------------------------
Total Distributions                          (1.54)    (1.17)  (0.71)
-----------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR                $16.52   $ 15.56  $14.52
-----------------------------------------------------------------------
TOTAL RETURN                                 16.67%    15.88%   2.28%++
-----------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)                  $1   $24,676  $7,617
-----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                     0.67%     0.67%   0.78%+
 Net investment income                        5.00      5.58   5.54+
-----------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                        110%       45%     58%
-----------------------------------------------------------------------
</TABLE> 
   
(1) Per share amounts have been calculated using the monthly average shares
    method, rather than the undistributed net investment income method,
    because it more accurately reflects the per share data for the period.
      
(2) For the period from October 9, 1995 (inception date) through July 31,
    1996.  
 ++Total return is not annualized, as it may not be representative of the
   total return for the year.
 + Annualized.
 
                                                                             15
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
 INVESTMENT OBJECTIVE
 
  The investment objective of the Fund is to provide current income and long-
term capital appreciation. The Fund's investment objective may be changed only
with the approval of a majority of the Fund's outstanding shares. There can be
no assurance that the Fund will achieve its investment objectives.
 
 INVESTMENT APPROACH
 
  The Fund is managed as a balanced fund and invests in equity and debt securi-
ties. The Fund will maintain a target asset allocation of approximately 60% of
its total assets in equity securities and approximately 40% of its total assets
in fixed-income securities. The Fund has the additional flexibility to invest a
minimum of 50% and a maximum of 70% of its total assets in equity securities
and a minimum of 30% and a maximum of 50% of its total assets in fixed-income
securities. The Fund may also invest up to 25% of its total assets in fixed-
income securities rated less than investment grade by a nationally recognized
statistical rating organization ("NRSRO") such as Moody's Investors Services,
Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P"). Such securities
are commonly referred to as "junk bonds."
 
 EQUITY INVESTMENTS
 
  With the equity portion of the Fund, MMC seeks to achieve its investment
objective by investing in equity securities (consisting of common stocks, pre-
ferred stocks, warrants and securities convertible into common stocks) which in
the opinion of MMC, are deemed to afford attractive opportunities for capital
appreciation and income. The Fund may invest in securities of companies with
attractive relative valuations based on underlying assets or earning potential,
as well as the securities of companies with favorable growth prospects. In ana-
lyzing securities for investment, MMC considers many factors including, but not
limited to, historical and future earnings and growth potential, current market
valuation, management strategy and economic and financial factors that may
affect the price of the securities. Typically, the Fund invests in a broadly
diversified portfolio across a wide range of industries consisting of middle to
large capitalization companies, though it may on occasion invest in smaller
capitalized companies when, in the opinion of MMC, such companies offer attrac-
tive capital appreciation opportunities.
 
 FIXED INCOME INVESTMENTS
 
  With the fixed-income portion of the Fund, MMC seeks to achieve its invest-
ment objective by investing in a diversified portfolio of fixed-income securi-
ties that are believed to afford opportunities for income and capital apprecia-
tion. Fixed-income securities the Fund will invest in include obligations of
the U.S. government, its agencies and instrumentalities, corporate securities
(including bonds, notes, and convertible issues), mortgage backed and asset-
backed securities. The  
 
16
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
fixed-income management strategies will be driven by the shape of the yield
curve and yield spread analysis. There are no maturity restrictions on the
fixed-income securities in which the Fund invests. Under normal market condi-
tions the weighted average portfolio maturity for the fixed-income portfolio
will be in the 5 to 15 year range.
 
  The Fund may also invest up to 25% of its total assets in fixed-income secu-
rities rated below investment grade by any NRSRO such as Moody's and S&P. Such
securities are commonly referred to as "junk bonds." The Fund may also hold,
from time to time, securities rated Caa by Moody's or CCC by S&P or, if unrated
or rated by other NRSROs, securities of comparable quality as determined by
MMC. While this portion of the securities held by the Fund are expected to pro-
vide greater income and possibly, opportunity for greater gain than investments
in more highly rated securities, they may be subject to greater risk of loss of
income and principal and are more speculative in nature. See "Risk Factors and
Special Considerations--Low-Rated Securities."  
 
 INVESTMENT SECURITIES, STRATEGIES AND TECHNIQUES
 
  The Fund has the ability to engage in a number of specialized investment
strategies and techniques designed to enable the Fund to achieve its investment
objectives. Included among these strategies are lending its portfolio securi-
ties, selling securities "short against the box," writing covered call and
secured put options, as well as purchasing options on securities, purchasing
and selling interest rate futures contracts, options on futures contracts,
stock index put and call options and stock index futures contracts, each of
which is discussed below. Certain investment restrictions, including fundamen-
tal restrictions as well as restrictions that may be changed without a share-
holder vote, adopted by the Trust are described in the Statement of Additional
Information.
 
  U.S. Government Securities. United States government securities are obliga-
tions of, or guaranteed by, the United States government, its agencies or
instrumentalities ("U.S. government securities"). These include bills, certifi-
cates of indebtedness, notes and bonds issued by the United States Treasury or
by agencies or instrumentalities of the United States government. Some U.S.
government securities, such as Treasury bills and bonds, are supported by the
full faith and credit of the United States; others, such as those of Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the
United States government to purchase the agency's obligations; still others,
such as those of the Student Loan Marketing Association, are supported only by
the credit of the instrumentality. U.S. government securities generally do not
involve the credit risks associated with other types of interest-bearing secu-
rities, although, as a result, the yields available from U.S. government secu-
rities are generally lower than the yields available from interest-bearing cor-
porate securities.
 
                                                                              17
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
  Zero Coupon Bonds. The Fund may also invest in zero coupon bonds. A zero
coupon bond pays no interest in cash to its holder during its life, although
interest is accrued during that period. Its value to an investor consists of
the difference between its face value at the time of maturity and the price
for which it was acquired, which is generally an amount significantly less
than its face value (sometimes referred to as a "deep discount" price).
Because such securities usually trade at a deep discount, they will be subject
to greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which make periodic distribu-
tions of interest. On the other hand, because there are no periodic interest
payments to be reinvested prior to maturity, zero coupon securities eliminate
reinvestment risk and lock in a rate of return to maturity.  
 
  Repurchase Agreements. The Fund may engage in repurchase agreements with
certain member banks of the Federal Reserve System and with certain dealers on
the Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities, the risk of a pos-
sible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its right to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. MMC, acting under the supervision of
the Trust's Board of Trustees, reviews on an ongoing basis the value of the
collateral and creditworthiness of those banks and dealers with which the Fund
enters into repurchase agreements to evaluate potential risks.
 
  Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreement transactions with member banks of the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is
considered a borrowing by the Fund, involves a sale by the Fund of securities
that it holds concurrently with an agreement by the Fund to repurchase the
same securities at an agreed-upon price and date. The Fund typically will
invest the proceeds of a reverse repurchase agreement in money market instru-
ments or repurchase agreements maturing not later than the expiration of the
reverse repurchase agreement. This use of the proceeds is known as leverage.
The Fund will enter into a reverse repurchase agreement for leverage purposes
only when the interest income to be
 
18
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
earned from the investment of the proceeds is greater than the interest expense
of the transaction. The Fund also may use the proceeds of reverse repurchase
agreements to provide liquidity to meet redemption requests when the sale of
the Fund's securities is considered to be disadvantageous.
 
  Forward Roll Transactions. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage-related securi-
ties issued by Government National Mortgage Association ("GNMA"), FNMA and Fed-
eral Home Loan Mortgage Corporation ("FHLMC"). In a forward roll transaction,
the Fund sells a mortgage security to a financial institution, such as a bank
or broker-dealer and simultaneously agrees to repurchase a similar security
from the institution at a later date at an agreed-upon price. The mortgage
securities that are repurchased will bear the same interest rate as those sold,
but generally will be collateralized by different pools of mortgages with dif-
ferent prepayment histories than those sold. During the period between the sale
and repurchase, the Fund will not be entitled to receive interest and principal
payments on the securities sold. Proceeds of the sale will be invested in
short-term instruments, particularly repurchase agreements, and the income from
these investments, together with any additional fee income received on the sale
will generate income for the Fund exceeding the yield on the securities sold.
Forward roll transactions involve the risk that the market value of the securi-
ties sold by the Fund may decline below the repurchase price of those securi-
ties. At the time the Fund enters into forward roll transactions, it will place
in a segregated account with the Fund's custodian cash, U.S. government securi-
ties, equity securities or debt securities of any grade having a value equal to
or greater than the Fund's purchase commitments, provided such securities have
been determined by MMC to be liquid and unencumbered and are marked to market
daily pursuant to guidelines established by the Trustees. The Fund will subse-
quently monitor the account to insure that such equivalent value is maintained.
  
  When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
securities on a when-issued or delayed-delivery basis. The Fund will enter into
a when-issued transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage. In such transactions delivery of the securi-
ties occurs beyond the normal settlement periods, but no payment or delivery is
made by the Fund prior to the actual delivery or payment by the other party to
the transaction. Due to fluctuations in the value of securities purchased or
sold on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers. The Fund
will establish with its custodian a segregated account consisting of cash, U.S.
government securities, equity securities or debt securities of any grade having
a value equal to or greater than the Fund's purchase commitments, provided such
securities have been determined by MMC to be liquid and unencumbered and are
marked to market daily pursuant to guidelines  
 
                                                                              19
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
established by the Trustees. Placing securities rather than cash in the segre-
gated account may have a leveraging effect on the Fund's net assets.
 
  Mortgage-Related Securities. Mortgage-related securities provide a monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees
or costs that may be incurred. Prepayments of principal on mortgage-related
securities may tend to increase due to refinancing of mortgages as interest
rates decline. Mortgage pools created by private organizations generally offer
a higher rate of interest than government and government-related pools because
no direct or indirect guarantees of payments are applicable with respect to
the former pools. Timely payment of interest and principal in these pools,
however, may be supported by various forms of private insurance or guarantees,
including individual loan, title, pool and hazard insurance. There can be no
assurance that the private insurers can meet their obligations under the poli-
cies. Prompt payment of principal and interest on GNMA mortgage pass-through
certificates is backed by the full faith and credit of the United States. FNMA
guaranteed mortgage pass-through certificates and FHLMC participation certifi-
cates are solely the obligations of those entities but are supported by the
discretionary authority of the United States government to purchase the agen-
cies' obligations. Collateralized mortgage obligations are a type of bond
secured by an underlying pool of mortgages or mortgage pass-through certifi-
cates that are structured to direct payments on underlying collateral to dif-
ferent series or classes of the obligations.
 
  To the extent that the Fund purchases mortgage-related securities at a pre-
mium, mortgage foreclosures and prepayments of principal by mortgagors (which
may be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The Fund's yield may
be affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related mort-
gage pools, generally will fluctuate in response to market interest rates.
 
  Asset-Backed Securities. An asset-backed security represents an interest in
a pool of assets such as receivables from credit card loans, automobile loans
and other trade receivables. Changes in the market's perception of the asset
backing the security, the creditworthiness of the servicing agent for the loan
pool, the originator of the loans, or the financial institution providing any
credit enhancement will all effect the value of an asset-backed security, as
will the exhaustion of any credit enhancement. The risks of investing in
asset-backed securities ultimately depend upon the payment of the consumer
loans by the individual borrowers. In its capacity as purchaser of an asset-
backed security, the Fund would generally have no recourse to the entity that
originated the loans in the event of default by the
 
20
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
borrower. Additionally, in the same manner as described above under "Mortgage-
Related Securities" with respect to prepayment of a pool of mortgage loans
underlying mortgage-related securities, the loans underlying asset-backed secu-
rities are subject to prepayments, which may shorten the weighted average life
of such securities and may lower their return.
 
  Lending Portfolio Securities. Consistent with applicable regulatory require-
ments, the Fund may lend its portfolio securities to brokers, dealers and other
financial organizations. The Fund's loans of securities will be collateralized
by cash, letters of credit or U.S. government securities that are maintained at
all times in an amount at least equal to the current market value of the loaned
securities. By lending its securities, the Fund seeks to generate income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when U.S. government securities are used as col-
lateral.
 
  Short Sales Against the Box. The Fund may sell its securities short up to 5%
of the Fund's net assets. In addition, the Fund may make short sales if at all
times when a position is open, the Fund owns the stock or owns preferred stock
or debt securities convertible or exchangeable without payment of further con-
sideration for securities of the same issue as the securities sold short. Short
sales of this kind are referred to as "against the box."  
 
  Options Activities. The Fund may write (that is, sell) call options ("calls")
if the calls are covered throughout the life of the option. A call is covered
if the Fund (a) owns the optioned securities, (b) maintains in a segregated
account with the Trust's custodian, PNC Bank, National Association ("PNC
Bank"), cash, U.S. government securities, equity securities or debt securities
of any grade having a value equal to or greater than the Fund's obligations
under the call, provided such securities have been determined by MMC to be liq-
uid and unencumbered pursuant to guidelines established by the Trustees ("eli-
gible segregated assets") or (c) owns an offsetting call option. The aggregate
value of the obligations underlying calls on securities which are written by
the Fund and covered with cash or other eligible segregated assets, together
with the aggregate value of the obligations underlying put options written by
the Fund, will not exceed 50% of the Fund's net assets. When the Fund writes a
call, it receives a premium and gives the purchaser the right to buy the under-
lying security at any time during the call period (usually not more than nine
months in the case of common stock or fifteen months in the case of U.S. gov-
ernment securities) at a fixed exercise price regardless of market price
changes during the call period. If the call is exercised, the Fund forgoes any
gain from an increase in the market price of the underlying security over the
exercise price. The Fund may purchase calls on securities. The Fund also may
purchase and sell stock index calls which differ from calls on individual secu-
rities in that they
 
                                                                              21
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
are settled in cash based on the values of the securities in the underlying
index, rather than by delivery of the underlying securities. In writing a call
on a stock index, the Fund receives a premium and agrees that during the call
period purchasers of a call, upon exercise of the call, will receive an amount
of cash if the closing level of the stock index upon which the call is based is
greater than the exercise price of the call. When the Fund buys a call on a
stock index, it pays a premium and during the call period the Fund, upon exer-
cise of the call, receives an amount of cash if the closing level of the stock
index upon which the call is based is greater than the exercise price of the
call.
 
  The Fund may write and purchase put options ("puts"). When the Fund writes a
put, it receives a premium and gives the purchaser of the put the right to sell
the underlying security to the Fund at the exercise price at any time during
the option period. When the Fund purchases a put, it pays a premium in return
for the right to sell the underlying security at the exercise price at any time
during the option period. For the purchase of a put to be profitable, the mar-
ket price of the underlying security must decline sufficiently below the exer-
cise price to cover the premium and transaction costs, unless the put is sold
in a closing sale transaction; otherwise, the purchase of the put effectively
increases the cost of the security and thus reduces its yield. The Fund also
may purchase and sell stock index puts, which differ from puts on individual
securities in that they are settled in cash based on the values of the securi-
ties in the underlying index, rather than by delivery of the underlying securi-
ties. Purchase of a stock index put is designed to protect against a decline in
the value of the Fund's portfolio generally, rather than an individual security
in the portfolio. Stock index puts are sold primarily to realize income from
the premiums received on the sale of such options. If any put is not exercised
or sold, it will become worthless on its expiration date. The Fund will not
purchase puts or calls on securities if more than 5% of its assets would be
invested in premiums on puts and calls, not including that portion of the pre-
mium which reflects the value of the securities owned by the Fund and under-
lying a put at the time of purchase.
 
  The Fund may write puts on securities only if they are "secured." A put is
"secured" if the Fund maintains cash or other eligible segregated assets with a
value equal to the exercise price in a segregated account or holds a put on the
same underlying security at an equal or greater exercise price. The aggregate
value of the obligations underlying puts written by the Fund, together with the
aggregate value of the obligations underlying calls on securities which are
written by the Fund and covered with cash, cash equivalents or U.S. government
securities, will not exceed 50% of the Fund's net assets. The Fund also may
write "straddles," which are combinations of secured puts and covered calls on
the same underlying security.
 
  The Fund will realize a gain (or loss) on a closing purchase transaction with
respect to a call or put previously written by the Fund if the premium, plus
commis-
 
22
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
sion costs, paid to purchase the call or put is less (or greater) than the pre-
mium, less commission costs, received on the sale of the call or put. A gain
also will be realized if a call or put which the Fund has written lapses unex-
ercised, because the Fund would retain the premium. See "Dividends, Distribu-
tions and Taxes" below. The Fund will purchase and sell only options which are
listed on a national securities exchange and will write options only through a
national options clearing organization.
 
  There can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, trading in options on
U.S. government securities is relatively new, so that it is impossible to pre-
dict to what extent liquid markets will develop or continue. See the Statement
of Additional Information for a further discussion of risks involved in options
trading, and particular risks applicable to options trading on U.S. government
securities, including GNMA certificates and the characteristics and risks of
stock index options transactions.
 
  Futures Contracts--General. The Fund may not purchase futures contracts or
related options if, immediately thereafter, more than 30% of the Fund's total
assets would be so invested. In purchasing and selling futures contracts and
related options, the Fund 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 require, among other
things, that (a) futures and related options be used solely for bona fide hedg-
ing purposes (or that the underlying commodity value of the Fund's long posi-
tions not exceed the sum of certain identified liquid investments) and (b) the
Fund not enter into futures and related options for which the aggregate initial
margin and premiums exceed 5% of the fair market value of the Fund's assets. In
order to prevent leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash or other eligible segregated assets equal to the
market value of futures contracts purchased will be maintained in a segregated
account with PNC Bank. The Fund will engage only in futures contracts and
related options which are listed on a national commodities exchange.
 
  Interest Rate Futures Contracts. The Fund may purchase and sell interest rate
futures contracts as a hedge against changes in interest rates. An interest
rate futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. Interest rate futures contracts are
traded on designated "contracts markets" which, through their clearing corpora-
tions, guarantee performance of the contracts. Currently, there are interest
rate 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 an interest rate futures
contract for the sale of securities has an effect similar to the actual sale of
securities, although sale
 
                                                                              23
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
of the interest rate futures contract might be accomplished more easily and
quickly. For example, if the Fund holds long-term U.S. government securities
and MMC anticipates a rise in long-term interest rates, the Fund could, in lieu
of disposing of its portfolio securities, enter into interest rate futures con-
tracts for the sale of similar long-term securities. If interest rates
increased and the value of the Fund's securities declined, the value of the
Fund's interest rate futures contracts would increase, thereby protecting the
Fund by preventing the net asset value from declining as much as it otherwise
would have declined. Similarly, entering into interest rate futures contracts
for the purchase of securities has an effect similar to the actual purchase of
the underlying securities, but permits the continued holding of securities
other than the underlying securities. For example, if MMC expects long-term
interest rates to decline, the Fund might enter into interest rate futures con-
tracts 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
that it intends to purchase, while continuing to hold higher-yielding short-
term securities or waiting for the long-term market to stabilize.
 
  The Fund may purchase and sell listed put and call options on interest rate
futures contracts. An option on an interest rate futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in an
interest rate futures contract (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 exer-
cised, delivery of the interest rate futures position is accompanied by cash
representing the difference between the current market price of the interest
rate futures contract and the exercise price of the option. The Fund may pur-
chase put options on interest rate futures contracts in lieu of, and for the
same purpose as, sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying interest rate
futures contract in the same manner as it purchases puts on securities provided
they are similarly "secured". The purchase of call options on interest rate
futures contracts is intended to serve the same purpose as the actual purchase
of the futures contract, and the Fund will set aside cash and cash equivalents
sufficient to purchase the amount of portfolio securities represented by the
underlying futures contracts. See "Options Activities" and "Dividends, Distri-
butions and Taxes."  
 
  Stock Index Futures Contracts. The Fund may purchase and sell stock index
futures contracts. These transactions, if any, by the Fund will be made solely
for the purpose of hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in market conditions and will
be made when the transactions are economically appropriate to the reduction of
risks inherent in the management of the Fund. A stock index futures contract is
an agreement under which two parties agree to take or make delivery of the
amount of cash based on the difference between the value of a stock index at
the beginning and at the end of
 
24
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
the contract period. When the Fund enters into a stock index futures contract,
it must make an initial deposit, known as "initial margin," as a partial guar-
antee of its performance under the contract. As the value of the stock index
fluctuates, either party to the contract is required to make additional margin
deposits, known as "variation margin," to cover any additional obligation that
it may have under the contract. The Fund may not at any time commit more than
5% of its total assets to initial margin deposits on futures contracts.
 
  Successful use of stock index futures contracts by the Fund is subject to
certain special risk considerations. A liquid stock index futures market may
not be available when the Fund seeks to offset adverse market movements. In
addition, there may be an imperfect correlation between movements in the secu-
rities included in the index and movements in the securities in the Fund. Suc-
cessful use of stock index futures contracts is further dependent on MMC's
ability to predict correctly movements in the direction of the stock markets
and no assurance can be given that its judgment in this respect will be cor-
rect. Risks in the purchase and sale of stock index futures are further
referred to in the Statement of Additional Information.
 
  Foreign Securities and American Depositary Receipts. The Fund may purchase
foreign securities or American Depositary Receipts ("ADRs"). ADRs are U.S.
dollar-denominated receipts issued generally by domestic banks and representing
the deposit with the bank of a security of a foreign issuer. ADRs are publicly
traded on exchanges or over-the-counter in the United States.
 
  Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting stan-
dards, generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. Additionally, dividends payable on foreign secu-
rities may be subject to foreign taxes withheld prior to distribution. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility. Changes in foreign exchange
rates will affect the value of those securities which are denominated or quoted
in currencies other than the U.S. dollar. Many of the foreign securities held
by the Fund will not be registered with, nor will the issuers thereof be sub-
ject to the reporting requirements of, the SEC. Accordingly, there may be less
publicly available information about the securities and the foreign company or
government issuing them than is available about a domestic company or govern-
ment entity. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payment positions.
 
                                                                              25
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  Non-Publicly Traded and Illiquid Securities. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when MMC believes it desirable to
do so. The Fund's investments in illiquid securities are subject to the risk
that should the Fund desire to sell any of these securities when a ready buyer
is not available at a price that the Fund deems representative of their value,
the value of the Fund's net assets could be adversely affected.
 
  Eurodollar or Yankee Obligations. The Fund may invest in Eurodollar and Yan-
kee obligations. Eurodollar bank obligations are dollar denominated debt obli-
gations issued outside the U.S. capital markets by foreign branches of U.S.
banks and by foreign banks. Yankee obligations are dollar denominated obliga-
tions issued in the U.S. capital markets by foreign issuers. Eurodollar (and
to a limited extent, Yankee) obligations are subject to certain sovereign
risks. One such risk is the possibility that a foreign government might pre-
vent dollar denominated funds from flowing across its borders. Other risks
include: adverse political and economic developments in a foreign country; the
extent and quality of government regulation of financial markets and institu-
tions; the imposition of foreign withholding taxes; and expropriation or
nationalization of foreign issuers.
 
  Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended
(the "1933 Act"). Because Rule 144A Securities are freely transferable among
qualified institutional buyers, a liquid market may exist among such buyers.
The Board of Trustees has adopted guidelines and delegated to MMC the daily
function of determining and monitoring liquidity of Rule 144A Securities. How-
ever, the Board of Trustees maintains sufficient oversight and is ultimately
responsible for the liquidity determinations. Investments in restricted secu-
rities such as Rule 144A Securities could have the effect of increasing the
level of illiquidity in the Fund to the extent that there is temporarily no
market for these securities among qualified institutional buyers.  
 
  Real Estate Investment Trusts. The Fund may invest in real estate investment
trusts ("REITs"). REITs are pooled investment vehicles that invest primarily
in either real estate or real estate related loans. The value of the REIT is
affected by changes in the value of the properties owned by the REIT or secu-
rity mortgage loans held by the REIT. REITs are dependent upon cash flow from
its investments to repay financing costs and the management skill of the
REIT's manager. REITs are also subject to risks generally associated with
investments in real estate.  
 
26
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
 RISK FACTORS AND SPECIAL CONSIDERATIONS
 
  Investment in the Fund involves special considerations, such as those
described below:
 
  General. Investment in the Fund may involve above-average risk of loss
because of, among other things, the Fund's use of strategies and techniques
that may be considered to be speculative. The strategy followed by the Fund
and certain of the strategies and techniques used by the Fund depend on fore-
casts made by MMC that may or may not prove to be correct.
 
  Low-Rated Securities. Low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment
of the rating organization, are outweighed by large uncertainties or major
risk exposures to adverse conditions and (b) are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the securities.
 
  While the market values of low-rated and comparable unrated securities tend
to react less to fluctuations in interest rate levels than the market values
of higher-rated securities, the market values of certain low-rated and compa-
rable unrated securities also tend to be more sensitive to individual corpo-
rate developments and changes in economic conditions than higher-rated securi-
ties. In addition, low-rated securities and comparable unrated securities gen-
erally present a higher degree of credit risk. Issuers of low-rated and compa-
rable unrated securities are often highly leveraged and may not have more tra-
ditional methods of financing available to them so that their ability to serv-
ice their debt obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. The risk of loss due to
default by such issuers is significantly greater because low-rated and compa-
rable unrated securities generally are unsecured and frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund may incur addi-
tional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The exist-
ence of limited markets for low-rated and comparable unrated securities may
diminish the Fund's ability to (a) obtain accurate market quotations for pur-
poses of valuing such securities and calculating its net asset value and (b)
sell the securities at fair value either to meet redemption requests or to
respond to changes in the economy or in the financial markets.
 
  Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower yield-
ing security, thus resulting in a decreased return to the Fund.
 
                                                                             27
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  The market for certain low-rated and comparable unrated securities is rela-
tively new and has not fully weathered a major economic recession. Any such
economic downturn could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
 
  Interest Rate Risk. The Fund will be affected by general changes in interest
rates which will result in increases or decreases in the market value of the
debt securities held by the Fund. The market value of the debt securities held
by the Fund can be expected to vary inversely to changes in prevailing interest
rates.
 
  Options on Securities. Because option premiums paid by the Fund are small in
relation to the market value of the investments underlying the options, buying
put options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuation than would be the case if the Fund did not
invest in options.
 
  No assurance can be given that the Fund will be able to effect closing trans-
actions at a time when it wishes to do so. If the Fund cannot enter into a
closing transaction, the Fund will continue to be subject to the risk that a
put option it has purchased will decline in value or become worthless as a
result of an increase in the value of the underlying security. The Fund also
could face higher transaction costs, including brokerage commissions.  
 
  Lending of Portfolio Securities. The risk associated with lending portfolio
securities, as with other extensions of credit, consists of possible loss of
rights in the collateral should the borrower fail financially.
 
  Short Sales. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
 
  Futures Transactions. The use of futures contracts as a hedging device
involves several risks. No assurance can be given that a correlation will exist
between price movements in the stock index and price movements in the securi-
ties that are the subject of the hedge; the risk of imperfect correlation
increases as the composition of the securities held by the Fund diverges from
the securities included in the applicable stock index. Positions in futures
contracts may be closed out only on the exchange on which they were entered
into (or through a linked exchange) and no secondary market exists for those
contracts. In addition, although the Fund intends to enter into futures con-
tracts only if an active market exists for the contracts, no assurance can be
given that an active market will exist for the contracts at any particular
time. Certain exchanges do not permit trading in particular contracts at prices
that represent a fluctuation in price during a single day's trading beyond a
certain set limit. If prices fluctuate during a single day's trading beyond
those lim- its, the Fund could be prevented from promptly liquidating unfavor-
able positions and thus be subjected to losses. Losses incurred in hedging
transactions and the
 
28
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
costs of these transactions will affect the Fund's performance. Successful use
of stock index futures by the Fund for hedging purposes is subject to the abil-
ity of MMC to correctly predict movements in the direction of the stock market.
 
  Year 2000. The investment management services provided to the Fund by MMC and
the services provided to shareholders by Salomon Smith Barney,depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That fail-
ure could have a negative impact on the Fund's operations, including the han-
dling of securities trades, pricing and account services. MMC and eSalomon
Smith Barney have advised the Fund that they have been reviewing all of their
computer systems and actively working on necessary changes to their systems to
prepare for the year 2000 and expect that their systems will be compliant
before that date. In addition, MMC has been advised by the Fund's custodian,
transfer agent, distributor and accounting service agent that they are also in
the process of modifying their systems with the same goal. There can, however,
be no assurance that MMC, Salomon Smith Barney or any other service provider
will be successful, or that interaction with other non-complying computer sys-
tems will not impair Fund services at that time.  
 
  In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
 
 PORTFOLIO TRANSACTIONS
 
  Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Salomon Smith Barney and
certain of its affiliated brokers. The Fund may use Salomon Smith Barney or a
Salomon Smith Barney-affiliated broker in connection with a purchase or sale of
securities when MMC believes that the charge for the transaction does not
exceed usual and customary levels. The Fund also may use Salomon Smith Barney
as a commodities broker in connection with entering into futures contracts and
commodity options. Salomon Smith Barney has agreed to charge the Fund commodity
commissions at rates comparable to those charged by Salomon Smith Barney to its
most favored clients for comparable trades in comparable accounts. In selecting
a broker for a transaction, including Salomon Smith Barney or its affiliates,
the primary consideration is prompt and effective execution of orders at the
most favorable price. Subject to that primary consideration, dealers may be
selected for research, statistical or other services to enable MMC to supple-
ment its own research and analysis with the views and information of other
securities firms.  
 
                                                                              29
<PAGE>
 
VALUATION OF SHARES
 
 
  The Fund'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 Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
 
  Generally, the Fund's investments are valued at market value, or in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfo-
lio securities which are traded primarily on foreign exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. A security that
is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trustees
determine that amortized cost reflects fair value of those investments. An
option generally is valued at the last sale price or, in the absence of the
last sale price, the last offer price. The value of a futures contract equals
the unrealized gain or loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract acquired on the
day on which the stock index futures contract is being valued. A settlement
price may not be used if the market makes a limited move with respect to a par-
ticular commodity or if the underlying securities market experiences signifi-
cant price fluctuations after the determination of the settlement price. In
such event, the futures contract will be valued at a fair market price to be
determined by or under the direction of the Board of Trustees. Further informa-
tion regarding the Trust's valuation policies with respect to the Fund is con-
tained in the Statement of Additional Information.  
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
 
  The Fund will be treated separately from the Trust's other funds in determin-
ing the amounts of dividends from investment income and distributions of capi-
tal gains payable to shareholders.
 
  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. Dividends from
net investment income, if any, of the Fund will be declared and paid quarterly.
Distributions of
 
30
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
any net long-term capital gains earned by the Fund will be made annually after
the close of the fiscal year in which they are earned. Distributions of short-
term capital gains may be paid more frequently with dividends from net invest-
ment income. In order to avoid the application of a 4% nondeductible excise tax
measured with respect to certain undistributed amounts of ordinary income and
capital gains, the Fund may make such additional distributions as may be neces-
sary to avoid the application of this tax.
 
  If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions gen-
erally will be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. Pursuant to the requirements of the Investment Company Act of 1940, as
amended (the "1940 Act") and other applicable laws, a notice will accompany any
distribution paid from sources other than net investment income. In the event
the Fund distributes amounts in excess of its net investment income and net
realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.
 
  The per share dividends on Class B, Class L and Class O shares may be lower
than the per share dividends on Class A and Y shares principally as a result of
the distribution fee applicable with respect to Class B, Class L and Class O
shares. The per share dividends on Class A shares of the Fund may be lower than
the per share dividends on Class Y shares principally as a result of the serv-
ice fee applicable to Class A shares. Distributions of capital gains, if any,
will be in the same amount for Class A, Class B, Class L, Class O and Class Y
shares.  
 
 TAXES
 
  The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Code. If the
Fund qualifies as a regulated investment company and meets certain distribution
requirements, the Fund will not be subject to Federal income tax on its net
investment income and net capital gains that it distributes to its sharehold-
ers.  
 
  Dividends paid by the Fund from investment income and distributions of short-
term capital gain will be taxable to shareholders as ordinary income for Fed-
eral income tax purposes, whether received in cash or reinvested in additional
shares. Distributions of long-term capital gain will be taxable to shareholders
as long-term capital gain, whether paid in cash or reinvested in additional
shares, and regardless of the length of time the investor has held his or her
shares of the Fund. Generally,
 
                                                                              31
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
dividends of investment income (to the extent derived from most types of divi-
dends from domestic corporations) from the Fund will qualify for the Federal
dividends-received deduction for corporate shareholders. Each shareholder of
the Fund will receive a statement annually from the Trust, which will set
forth separately the aggregate dollar amount of dividends and capital gains
distributed to the shareholder by the Fund with respect to the prior calendar
year and the portion of the distributions that qualifies for the dividends-
received deduction.  
 
  Shareholders should consult their tax advisers about the status of the
Fund's dividends and distributions for Federal, state and local tax liabili-
ties.
 
PURCHASE OF SHARES
 
 
 SALES CHARGE ALTERNATIVES
 
  The following Classes of shares are available for purchase through this Pro-
spectus. See "Prospectus Summary--Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to pur-
chase.
 
  Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:
 
<TABLE>
<CAPTION>
                                      SALES CHARGE
                         SALES CHARGE  AS A % OF         DEALERS
                          AS A % OF      AMOUNT    REALLOWANCE AS % OF
  AMOUNT OF INVESTMENT   TRANSACTION    INVESTED     OFFERING PRICE
----------------------------------------------------------------------
  <S>                    <C>          <C>          <C>
  Less than $25,000         5.00%        5.26%            4.50%
  $ 25,000 - $ 49,999       4.00%        4.21%            3.60%
  $ 50,000 - $ 99,999       3.50%        3.63%            3.15%
  $100,000 - $249,999       3.00%        3.09%            2.70%
  $250,000 - $499,999       2.00%        2.04%            1.80%
  $500,000 and over           *            *                *
----------------------------------------------------------------------
</TABLE>
 
* Purchases of Class A shares of $500,000 or more will be made at net asset
  value without any initial sales charge, but will be subject to a CDSC of
  1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
  shares is payable to Salomon Smith Barney, which compensates Salomon Smith
  Barney Financial Consultants and other dealers whose clients make purchases
  of $500,000 or more. The CDSC is waived in the same circumstances in which
  the CDSC applicable to Class B, Class L and Class O shares is waived. See
  "Deferred Sales Charge Provisions" and "Waivers of CDSC."  
 
  Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the 1933 Act. The
reduced sales charges shown above apply to the aggregate of purchases of Class
A shares of the Fund made at one time by "any person," which includes an indi-
vidual and his or her immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.  
 
32
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
  Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.
 
  Class L Shares. Class L shares are sold with an initial sales charge of
1.00% (which is equal to 1.01% of the amount invested) and are subject to a
CDSC payable upon certain redemptions. See "Deferred Sales Charge Provisions"
below. Until June 22, 2001, purchases of Class L shares by investors who were
holders of Class C shares of the Fund on June 12, 1998 will not be subject to
the 1.00% initial sales charge.  
 
  Class O Shares. Until June 22, 2001, purchases of Class O shares by invest-
ors who were holders of Class C shares of the Fund on June 12, 1998 will not
be subject to the 1.00% initial sales charge which will apply on and after
that date.  
 
  Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).  
 
 GENERAL
 
  Investors may purchase shares from a Salomon Smith Barney Financial Consul-
tant or a Dealer Representative. In addition, certain investors, including
qualified retirement plans purchasing through certain Dealer Representatives,
may purchase shares directly from the Fund. When purchasing shares of the
Fund, investors must specify whether the purchase is for Class A, Class B,
Class L or Class Y shares. (Class O shares are available for purchase only by
shareholders who owned Class C shares of the Fund on June 12, 1998.) Salomon
Smith Barney and Dealer Representatives may charge their customers an annual
account maintenance fee in connection with a brokerage account through which
an investor purchases or holds shares. Accounts held directly at the Transfer
Agent are not subject to a maintenance fee.  
 
  Investors in Class A, Class B and Class L shares may open an account in the
Fund 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 Fund. Investors in
Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Clas-
ses. For participants in retirement plans qualified under Section 403(b)(7) or
Section 401(c) of the Code, the minimum initial investment requirement for
Class A, Class B and Class L shares and the subsequent investment requirement
for all Classes in the Fund is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a monthly basis, the minimum
initial investment requirement for
 
                                                                             33
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
Class A, Class B and Class L shares and subsequent investment requirement for
all Classes is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a quarterly basis, the minimum initial investment
required for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment require-
ments for Class A shares for employees of Citigroup and its subsidiaries,
including Salomon Smith Barney, unitholders who invest distributions from a UIT
sponsored by Salomon Smith Barney, and Directors/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 Transfer Agent. Share certificates are
issued only upon a shareholder's written request to the Transfer Agent.  
 
  Purchase orders received by the Fund or a Salomon Smith Barney Financial Con-
sultant prior to the close of regular trading on the NYSE, on any day the Fund
calculates its net asset value, are priced according to the net asset value
determined on that day (the "trade date"). Orders received by a Dealer Repre-
sentative prior to the close of regular trading on the NYSE on any day the Fund
calculates its net asset value, are priced according to the net asset value
determined on that day, provided the order is received by the Fund or the
Fund's agent prior to its close of business. For shares purchased through Salo-
mon Smith Barney or a Dealer Representative purchasing through Salomon Smith
Barney, payment for Fund 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, Salomon Smith Barney or the Transfer Agent is
authorized through preauthorized transfers of at least $25 on a monthly basis
or at least $50 on a quarterly basis to charge the shareholder's account held
with a bank or other financial institution on a monthly or quarterly basis, as
indicated by the shareholder, to provide for systematic additions to the share-
holder's Fund account. A shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Salomon Smith Barney or the
Transfer Agent. The Systematic Investment Plan also authorizes Salomon Smith
Barney to apply cash held in the shareholder's Salomon Smith Barney brokerage
account or redeem the shareholder's shares of a Smith Barney money market fund
to make additions to the account. Additional information is available from the
Fund or a Salomon Smith Barney Financial Consultant.  
 
34
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
 SALES CHARGE WAIVERS AND REDUCTIONS
 
 INITIAL SALES CHARGE WAIVERS
 
  Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-shar-
ing or other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption
or repurchase, (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
Smith Barney), on the condition the purchase of Class A shares is made with the
proceeds of the redemption of shares of a mutual fund which (i) was sponsored
by the Financial Consultant's prior employer, (ii) was sold to the client by
the Financial Consultant and (iii) was subject to a sales charge; (d) purchases
by shareholders who have redeemed Class A shares in the Fund (or Class A shares
of another Smith Barney Mutual Fund that is offered with a sales charge) and
who wish to reinvest their redemption proceeds in the Fund, provided the rein-
vestment is made within 60 calendar days of the redemption; (e) purchases by
accounts managed by registered investment advisory subsidiaries of Citigroup;
(f) direct rollovers by plan participants of distribution from a 401(k) plan
offered to employees of Citigroup or its subsidiaries or a 401(k) plan enrolled
in the Smith Barney 401(k) Program (Note: subsequent investments will be sub-
ject to the applicable sales charge); (g) purchases by separate accounts used
to fund certain unregistered variable annuity contracts; (h) investments of
distributions from a UIT sponsored by Salomon Smith Barney; and (i) purchases
by investors participating in a Salomon Smith Barney fee-based arrangement. In
order to obtain such discounts, the purchaser must provide sufficient informa-
tion at the time of purchase to permit verification that the purchase would
qualify for the elimination of the sales charge.  
 
 RIGHT OF ACCUMULATION
 
  Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of other Smith Barney Mutual Funds that are
offered with a  
 
                                                                              35
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
sales charge as currently listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient 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.
  
  
 LETTER OF INTENT
 
  Class A Shares. A Letter of Intent for an amount of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. Each investment made dur-
ing the period receives the reduced sales charge applicable to the total amount
of the investment goal. If the goal is not achieved within the period, the
investor must pay the difference between the sales charges applicable to the
purchases made and the charges previously paid, or an appropriate number of
escrowed shares will be redeemed. The term of the Letter will commence upon the
date the Letter is signed, or at the option of the investor, up to 90 days
before such date. Please contact a Salomon Smith Barney Financial Consultant or
the Transfer Agent to obtain a Letter of Intent application.  
 
  Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares (except purchases of
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Fund and agree to purchase a
total of $15,000,000 of Class Y shares of the Fund within 13 months from the
date of the Letter. If a total investment of $15,000,000 is not made within the
13 month period, all Class Y shares purchased to date will be transferred to
Class A shares, where they will be subject to all fees (including a service fee
of 0.25%) and expenses applicable to the Fund's Class A shares, which may
include a CDSC of 1.00%. Please contact a Salomon Smith Barney Financial Con-
sultant or the Transfer Agent for further information.  
 
 DEFERRED SALES CHARGE PROVISIONS
 
  "CDSC Shares" are: (a) Class B shares; (b) Class L shares; (c) Class O
shares; and (d) Class A shares that were purchased without an initial sales
charge but are subject to a CDSC. A CDSC may be imposed on certain redemptions
of these shares.  
 
36
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class L shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
 
  Class L shares, Class O shares and Class A shares that are CDSC Shares are
subject to a 1.00% CDSC if redeemed within 12 months of purchase. In circum-
stances 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 pur-
chase payment from which the amount is being redeemed. Solely for purposes of
determining the number of years since a purchase payment, all purchase payments
made during a month will be aggregated and deemed to have been made on the last
day of the preceding Salomon Smith Barney statement month. The following table
sets forth the rates of the charge for redemptions of Class B shares by share-
holders, except in the case of Class B shares held under the Smith Barney
401(k) Program, as described below. See "Purchase of Shares--Smith Barney
401(k) and ExecChoice (TM) Programs."  
 
<TABLE>
<CAPTION>
      YEAR SINCE PURCHASE
      PAYMENT WAS MADE      CDSC
---------------------------------
      <S>                   <C>
      First                 5.00%
      Second                4.00%
      Third                 3.00%
      Fourth                2.00%
      Fifth                 1.00%
      Sixth and thereafter  0.00%
---------------------------------
</TABLE>
 
  Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There will also be converted at that time such pro-
portion of Class B Dividend Shares owned by the shareholders as the total num-
ber of his or her Class B shares converting at the time bears to the total num-
ber of outstanding Class B shares (other than Class B Dividend Shares) owned by
the shareholder. See "Prospectus Summary--Alternative Purchase Arrangements--
Class B Shares Conversion Feature."
 
  The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation
or divi-
 
                                                                              37
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
dend and capital gain distribution reinvestments in such other funds. For Fed-
eral income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any CDSC will be paid to Salomon Smith Barney.  
 
  To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated to $12 per share, the value of the investor's shares would be $1,260 (105
shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
 
  WAIVERS OF CDSC
 
  The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic cash withdrawals in amounts equal to or less than 2.00% per month of the
value of the shareholder's shares will be permitted for withdrawal plans that
were established prior to November 7, 1994); (c) redemptions of shares within
12 months following the death or disability of the shareholder; (d) redemp-
tions of shares made in connection with qualified distributions from retire-
ment plans or IRAs upon the attainment of age 59 1/2; (e) involuntary redemp-
tions; and (f) redemptions of shares to effect a combination of the Fund with
any investment company by merger, acquisition of assets or otherwise. In addi-
tion, a shareholder who has redeemed shares from other Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on
the prior redemption.
 
  CDSC waivers will be granted subject to confirmation (by Salomon Smith
Barney in the case of shareholders who are also Salomon Smith Barney clients
or by the Transfer Agent in the case of all other shareholders) of the share-
holder's status or holdings, as the case may be.  
 
 SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
 
  Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below are offered to all plans par-
ticipating ("Participating Plans") in these Programs.
 
38
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
  The Fund offers to Participating Plans Class A and Class L shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class L shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class L shares
acquired by other investors; however, they are not subject to any initial sales
charge or CDSC. Once a Participating Plan has made an initial investment in the
Fund, all of its subsequent investments in the Fund must be in the same Class
of shares, except as otherwise described below.
 
  Class A Shares. Class A shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
 
  Class L Shares. Class L shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class L shares of one or more funds of the Smith Barney Mutual Funds.
 
  401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If 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, a Par-
ticipating Plan's total Class L and Class O holdings in all non-money market
Smith Barney Mutual Funds equal at least $1,000,000, the Participating Plan
will be offered the opportunity to exchange all of its Class L shares for Class
A shares of the Fund. For Participating Plans that were originally established
through a Salomon Smith Barney retail brokerage account, the five-year period
will be calculated from the date the retail brokerage account was opened. Such
Participating Plans will be notified of the pending exchange in writing within
30 days after the fifth anniversary of the enrollment date and, unless the
exchange offer has been rejected in writing, the exchange will occur on or
about the 90th day after the fifth anniversary date. If the Participating Plan
does not qualify for the five year exchange to Class A shares, a review of the
Participating Plan's holdings will be performed each quarter until either the
Participating Plan qualifies or the end of the eighth year.  
 
  401(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if a Participating
Plan's total Class L and Class O holdings in all non-money market Smith Barney
Mutual Funds equal at least $500,000 as of the calendar year-end, the Partici-
pating Plan will be offered the opportunity to exchange all of its Class L
shares and Class O shares for Class A shares of the Fund. Such Plans will be
notified in writing within 30 days after the last business day of the calendar
year and, unless the exchange offer has been rejected in writing, the exchange
will occur on or about the last business day of the following March.
 
  Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Programs,
whether opened before or after June 21, 1996, that has not previously qualified
for
 
                                                                              39
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
an exchange into Class A shares will be offered the opportunity to exchange all
of its Class L shares and Class O shares for Class A shares of a Fund, regard-
less of asset size, at the end of the eighth year after the date the Partici-
pating 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 L shares of the Fund but
instead may acquire Class A shares of the Fund. Any Class L shares not con-
verted 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
such shares directly from First Data. For further information regarding these
Programs, investors should contact a Salomon Smith Barney Financial Consultant.
 
  
EXCHANGE PRIVILEGE
 
 
  Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
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,
Class L and Class O 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
  Concert Peachtree Growth Fund
  Concert Social Awareness Fund
  Smith Barney Aggressive Growth Fund Inc.
  Smith Barney Appreciation Fund Inc.
  Smith Barney Contrarian Fund
  Smith Barney Convertible Fund
  Smith Barney Fundamental Value Fund Inc.
  Smith Barney Funds, Inc.--Large Cap Value Fund
  Smith Barney Large Cap Blend Fund
  Smith Barney Large Capitalization Growth Fund
  Smith Barney Mid Cap Blend Fund
  Smith Barney Natural Resources Fund Inc.
  Smith Barney Premium Total Return Fund
  Smith Barney Small Cap Blend Fund, Inc.
  Smith Barney Special Equities Fund
 
40
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
 
  Taxable Fixed-Income Funds
  *Smith Barney Adjustable Rate Government Income Fund
  Smith Barney Diversified Strategic Income Fund
  +Smith Barney Funds, Inc.--Short-Term High Grade Bond Fund
  Smith Barney Funds, Inc.--U.S. Government Securities Fund
  Smith Barney Government Securities Fund
  Smith Barney High Income Fund
  Smith Barney Investment Grade Bond Fund
  Smith Barney Managed Governments Fund Inc.
  Smith Barney Total Return Bond Fund
 
  Tax-Exempt Funds
  Smith Barney Arizona Municipals Fund Inc.
  Smith Barney California Municipals Fund Inc.
  **Smith Barney Intermediate Maturity California Municipals Fund
  **Smith Barney Intermediate Maturity New York Municipals Fund
  Smith Barney Managed Municipals Fund Inc.
  Smith Barney Massachusetts Municipals Fund
  Smith Barney Municipal High Income Fund
  Smith Barney Muni Funds--Florida Portfolio
  Smith Barney Muni Funds--Georgia Portfolio
  **Smith Barney Muni Funds--Limited Term Portfolio
  Smith Barney Muni Funds--National Portfolio
  Smith Barney Muni Funds--New York Portfolio
  Smith Barney Muni Funds--Pennsylvania Portfolio
  Smith Barney New Jersey Municipals Fund Inc.
  Smith Barney Oregon Municipals Fund
 
  Global-International Funds
  Smith Barney Hansberger Global Small Cap Value Fund
  Smith Barney Hansberger Global Value Fund
  Smith Barney World Funds, Inc.--Emerging Markets Portfolio
  Smith Barney World Funds, Inc.--European Portfolio
  Smith Barney World Funds, Inc.--Global Government Bond Portfolio
  Smith Barney World Funds, Inc.--International Balanced Portfolio
  Smith Barney World Funds, Inc.--International Equity Portfolio
  Smith Barney World Funds, Inc.--Pacific Portfolio
 
  Smith Barney Concert Allocation Series Inc.
  Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
  Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
  Smith Barney Concert Allocation Series Inc.--Global Portfolio
  Smith Barney Concert Allocation Series Inc.--Growth Portfolio
  Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
  Smith Barney Concert Allocation Series Inc.--Income Portfolio
 
 
                                                                              41
<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 and Class B shares of the Fund.
 ** Available for exchange with Class A, Class L and Class Y shares of the
    Fund.
*** Available for exchange with Class A shares of the Fund.
  + Available for exchange with Class A and Class Y shares of the Fund.
 ++ Available for exchange with Class B and Class L shares of the Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund. In
    addition, Participating Plans opened prior to June 21, 1996 and investing
    in Class L shares may exchange Fund shares for Class L shares of this
    fund.
 
  Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Fund that have been exchanged.
 
  Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Fund that
have been exchanged.
 
  Class O Exchanges. Class O shares may be exchanged with Class L shares of
other Smith Barney Mutual Funds. The new Class L shares will be deemed to have
been purchased on the same date as the Class O shares of the Fund that have
been exchanged.  
 
  Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without impo-
sition of any charge.
 
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. MMC may
determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Fund's other shareholders. In this event, the Fund
may, at its discretion, decide to limit additional purchases and/or exchanges
by a shareholder. Upon such a determination, the Fund will provide notice in
writing or by telephone to the shareholder at least 15 days prior to sus-
pending the exchange privilege and during the 15-day period the shareholder
will be required to (a) redeem his or her shares in
 
42
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
the Fund or (b) remain invested in the Fund or exchange into any of the funds
of the Smith Barney Mutual Funds ordinarily available, which position the
shareholder would be expected to maintain for a significant period of time. All
relevant factors will be considered in determining what constitutes an abusive
pattern of exchanges.
 
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures dis-
cussed 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 reg-
istration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
 
REDEMPTION OF SHARES
 
 
  The Fund is required to redeem the shares of the Fund 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 First Data receives further
instructions from Salomon Smith Barney, or if the shareholder's account is not
with Salomon Smith Barney, from the shareholder directly. The redemption pro-
ceeds 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 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Salomon Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruction
and Salomon Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other than a certi-
fied or official bank check, will be remitted upon clearance of the check,
which may take up to ten days or more.  
 
  Shares held by Salomon Smith Barney as custodian must be redeemed by submit-
ting a written request to a Salomon Smith Barney Financial Consultant. Shares
 
                                                                              43
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
other than those held by Salomon Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, Dealer Representatives or by sub-
mitting a written request for redemption to:  
 
  Smith Barney Balanced Fund
  Class A, B, L, O or Y (please specify)
  c/o First Data Investor Services Group, Inc.
  P.O. Box 5128
  Westborough, Massachusetts 01581-5128
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $10,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an invest-
or'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 Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the 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 Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. For further information regarding the automatic cash withdrawal
plan, shareholders should contact a Salomon Smith Barney Financial Consultant.
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
 
  Shareholders who do not have a Salomon Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should con-
tact First  
 
44
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
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 or her initial invest-
ment in the Fund.
 
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
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 or 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 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 4:00
p.m. (Eastern 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 com-
municated 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 days' prior notice to shareholders.
 
 
                                                                              45
<PAGE>
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
 
PERFORMANCE
 
 
 YIELD
 
  From time to time, the Fund advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is com-
puted by dividing the net investment income per share earned by the Class dur-
ing the period by the maximum offering price per share on the last day of the
period. This income is "annualized" by assuming that the amount of income is
generated each month over a one-year period and is compounded semi-annually.
The annualized income is then shown as a percentage of the net asset value.
 
 TOTAL RETURN
 
  From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class L, Class O and Class Y shares of the Fund. These figures are based on
historical earnings and are not intended to indicate future performance. Total
return is computed for a 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 gains distributions on the reinvestment
dates at prices calculated as stated in this Prospectus, then dividing the
value of the investment at the end of the period so calculated by the initial
amount invested and subtracting 100%. The standard average annual total return,
as prescribed by the SEC, is derived from this total return, which provides the
ending redeemable value. Such standard total return information may also be
accompanied with nonstandard total return information for differing periods
computed in the same manner but without annualizing the total return or taking
sales charges into account. The Fund calculates current dividend return for
each Class by annualizing the most recent monthly distribution 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 pre-
sented. The current dividend return for each Class may vary from
 
46
<PAGE>
 
PERFORMANCE (CONTINUED)
 
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 com-
panies and other investment vehicles. The Fund may also include comparative
performance information in advertising or marketing its shares. Such perfor-
mance information may include data from Lipper Analytical Services, Inc. and
other financial publications.
 
MANAGEMENT OF THE TRUST AND THE FUND
 
 
 BOARD OF TRUSTEES
 
  Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains background information regarding
each Trustee and executive officer of the Trust.
 
 INVESTMENT ADVISER
 
  MMC, located at 388 Greenwich Street, New York, New York 10013, serves as the
Fund's investment adviser. MMC (through predecessor entities) has been in the
investment counseling business since 1934 and is a registered investment advis-
er. MMC renders investment advice to investment companies that had aggregate
assets under management as of September 30, 1998 in excess of $108 billion.
  
  Subject to the supervision and direction of the Fund's Board of Trustees, MMC
manages the Fund's portfolio in accordance with the Fund's investment objective
and policies, makes investment decisions for the Fund, places orders to pur-
chase and sell securities and employs professional portfolio managers and secu-
rities analysts who provide research services to the Fund. For investment advi-
sory services rendered to the Fund, the Fund pays MMC a fee at the annual rate
of 0.45% of the value of the Fund's average daily net assets. This fee is com-
puted daily and paid monthly.  
 
 PORTFOLIO MANAGEMENT
 
  The equity portion of the Fund is managed by Chad Graves. Mr. Graves is a
Managing Director of Salomon Smith Barney.  
 
  The fixed-income portion of the Fund is managed by James Conroy and John
Bianchi. Both Mr. Conroy and Mr. Bianchi are Managing Directors of Salomon
Smith Barney.  
 
                                                                              47
<PAGE>
 
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
 
  Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1998 is included in
the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request without charge from a Salomon Smith Barney Financial Con-
sultant or by writing or calling the Fund at the address or phone number listed
on page one of this Prospectus.  
  
 ADMINISTRATOR
 
  MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays MMC a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. This fee is computed daily and paid monthly.  
 
  On October 8, 1998, Travelers Group Inc. and Citicorp consummated their
merger, thereby creating a new entity called Citigroup. Citigroup is a bank
holding company subject to regulation under the Bank Holding Company Act of
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain other
laws and regulations. MMC does not believe that its compliance with the
applicable law will have a material adverse effect on its ability to continue
to provide the Fund with the same level of investment advisory services that it
currently receives.  
    
DISTRIBUTION
     
  CFBDS, Inc., located at 21 Milk Street, Boston, MA 02109-5408, distributes
shares of the Fund as principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS, Inc. to take
and pay for only such securities as may be sold to the public. Pursuant to a
plan of distribution adopted by the Fund under Rule 12b-1 under the 1940 Act
(the "Plan"), Salomon Smith Barney is paid an annual service fee with respect
to Class A, Class B, Class L and Class O shares of the Fund at the annual rate
of 0.25% of the average daily net assets of the respective Class. Salomon Smith
Barney is also paid an annual distribution fee with respect to Class B, Class L
and Class O shares at the annual rate of 0.50%, 0.75% 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 distribution fees. The fees are
used by Salomon Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B, Class L and Class O 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 Salomon Smith
Barney Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying  
 
48
<PAGE>
    
DISTRIBUTION (CONTINUED)
     
charges; and indirect and overhead costs of Salomon Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and
sales promotion expenses.  
 
  The payments to Salomon Smith Barney Financial Consultants for selling shares
of a Class include a commission or fee paid by the investor or Salomon Smith
Barney at the time of sale and, with respect to Class A, Class B, Class L and
Class O shares, a continuing fee for servicing shareholder accounts for as long
as a shareholder remains a holder of that Class. Salomon Smith Barney Financial
Consultants may receive different levels of compensation for selling different
Classes of shares.  
 
  Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Salomon Smith Barney and the
payments may exceed distribution expenses actually incurred. The Trust's Board
of Trustees will evaluate the appropriateness of the Plan and its payment terms
on a continuing basis and in so doing will consider all relevant factors,
including expenses borne by Salomon Smith Barney, amounts received under the
Plan and proceeds of the CDSC.  
  
ADDITIONAL INFORMATION
 
 
  The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest of separate series hav-
ing a $.001 per share par value. Shares of beneficial interest of the Fund are
currently classified into six Classes: A, B, L, O, Y and Z.
 
  Each Class of Fund shares represents identical interests in the Fund's
investment portfolio. As such, they have the same rights, privileges and pref-
erences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees, if any, borne by each Class; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The Trust's Board of Trustees does not antici-
pate that there will be any conflicts among the interests of the holders of the
different Classes. The Trustees, on an ongoing basis, will consider whether any
such conflict exists and, if so, take appropriate action.
 
  When matters are submitted for shareholder vote, shareholders of each Class
of each fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Shares of the
Trust will be voted generally on a Trust-wide basis on all matters, except mat-
ters affecting the interests of one Fund or one Class of shares.
 
                                                                              49
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
 
 
  The Trust does not hold annual shareholder meetings. There normally will be
no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have
been elected by shareholders. The Trustees will call a meeting for any purpose
for voting on the written request of shareholders holding at least 10% of the
Fund's outstanding shares and the Fund will assist shareholders in calling such
a meeting as required by the 1940 Act.
 
  PNC Bank, located at 17th and Chestnut Streets, Philadelphia, PA 19103,
serves as custodian of the Trust's investments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Trust's Transfer Agent.
 
  The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Trust plans to consolidate the mailing of the
Fund's 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 accounts should contact their Salomon Smith
Barney Financial Consultants or the Fund's Transfer Agent.  
 
50
<PAGE>
 
 
 
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<PAGE>
 
 
 
                      [This page intentionally left blank]
 
 
<PAGE>
 
                                              SALOMON SMITH BARNEY
                                              ----------------------------------
                                                    A member of citigroup [LOGO]
 
             Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
 
 
 
 
                                                                    SMITH BARNEY
                                                                   BALANCED FUND

                                                            388 Greenwich Street
                                                        New York, New York 10013
                                                               
                                                              FD 0229 11/98  


<PAGE>
 
 
 
                                                                    SMITH BARNEY
                                                                        Balanced
                                                                            Fund
                                                             Class Z Shares Only
                                                           
                                                          NOVEMBER 27, 1998  
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
P R O S P E C T U S


[LOGO] Smith Barney Mutual Funds
       Investing for your future.
       Every day.
<PAGE>
 
 
PROSPECTUS                                              NOVEMBER 27, 1998  
 
Smith Barney Balanced Fund--Class Z Shares
388 Greenwich Street
New York, New York 10013
(800) 451-2010
 
  The Smith Barney Balanced Fund (the "Fund") (formerly known as Smith Barney
Utilities Fund) is a diversified fund that seeks current income and long-term
capital appreciation.  
 
  The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up the Smith Barney Income Funds (the "Trust"). The
Trust is an open-end, management investment company commonly referred to as a
mutual fund.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Trust, 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
("Qualified Plans") of Salomon Smith Barney Inc. ("Salomon Smith Barney") or
any of its affiliates and to certain unit investment trusts sponsored by
Salomon Smith Barney or any of its affiliates ("Salomon Smith Barney UITs").
  
  Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated November 27, 1998 as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth above
or by contacting a Salomon Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.  
 
CFBDS, INC.  
Distributor
 
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
 
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
ACRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>
<S>                                           <C>
THE FUND'S EXPENSES                             3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            4
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    5
-------------------------------------------------
VALUATION OF SHARES                            19
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             19
-------------------------------------------------
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES    21
-------------------------------------------------
PERFORMANCE                                    22
-------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND           23
-------------------------------------------------
ADDITIONAL INFORMATION                         24
-------------------------------------------------
</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 or
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 to
buy or the Distributor to sell any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such an offer or
solicitation in such jurisdiction.
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
THE FUND'S EXPENSES
 
 
The following expense table lists the costs and expenses an investor will incur
either directly or indirectly as a shareholder of Class Z shares of the Fund,
based on the Fund's operating expenses for its most recent fiscal year:
 
<TABLE> 
<CAPTION>
  SMITH BARNEY BALANCED FUND--        AS A % OF
  CLASS Z SHARES                  AVERAGE NET ASSETS
----------------------------------------------------
  <S>                             <C>
  ANNUAL FUND OPERATING EXPENSES
    Management fees                      0.65%
    Other expenses                       0.09%
----------------------------------------------------
  TOTAL FUND OPERATING EXPENSES          0.74%
----------------------------------------------------
</TABLE> 
 
  The nature of the services for which the Fund pays management fees is
described under "Management of the Trust and 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 Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase, Exchange and Redemption of Shares" and
"Management of the Trust and the Fund."  
 
<TABLE> 
<CAPTION>
  SMITH BARNEY BALANCED FUND--CLASS Z SHARES   1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------------------------------------
  <S>                                          <C>    <C>     <C>     <C>
  You would pay the following expenses on a
  $1,000 investment in Class Z shares of the
  Fund, assuming (1) 5% annual return and (2)
  redemption at the end of each time period:    $ 8     $24     $41     $92
------------------------------------------------------------------------------
</TABLE> 
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                               3
<PAGE>
 
FINANCIAL HIGHLIGHTS
 
 The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
and appears in the Fund's Annual Report dated July 31, 1998. The following
information for the fiscal years ended July 31, 1993 and July 31, 1994 has been
audited by other independent auditors. The information set out below should be
read in conjunction with the financial statements and related notes that also
appear in the Fund's 1998 Annual Report, which is incorporated by reference
into the Statement of Additional Information.  
 
FOR A CLASS Z SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE> 
<CAPTION>
SMITH BARNEY BALANCED
FUND
YEAR ENDED JULY 31        1998(1)  1997(1)   1996   1995(2)   1994    1993(3)
-------------------------------------------------------------------------------
<S>                       <C>      <C>      <C>     <C>      <C>      <C>
NET ASSET VALUE,
  BEGINNING OF YEAR       $15.55   $14.52   $14.02  $13.28   $15.97   $14.36
-------------------------------------------------------------------------------
INCOME (LOSS) FROM
  OPERATIONS:
 Net investment income      0.75     0.83     0.88    0.89     0.89     0.69
 Net realized and
   unrealized gain (loss)
   on investments           1.81     1.37     0.47    0.82    (2.21)    1.72
-------------------------------------------------------------------------------
Total Income (Loss) From
  Operations                2.56     2.20     1.35    1.71    (1.32)    2.41
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income     (0.71)   (0.85)   (0.85)  (0.87)   (0.87)   (0.66)
 Net realized gains        (0.83)   (0.32)      --   (0.08)   (0.50)   (0.14)
 Capital                     --       --        --   (0.02)      --       --
-------------------------------------------------------------------------------
Total Distributions        (1.54)   (1.17)   (0.85)  (0.97)   (1.37)   (0.80)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF
  YEAR                    $16.57   $15.55   $14.52  $14.02   $13.28   $15.97
-------------------------------------------------------------------------------
TOTAL RETURN               17.08%   15.81%    9.62%  13.55%   (8.78)%  17.21%++
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
  (MILLIONS)                 $12      $14      $15     $15      $11      $22
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
  ASSETS:
 Expenses                   0.74%    0.73%    0.78%   0.81%    0.69%    0.68%+
 Net investment income      4.65     5.63     5.90    6.58     5.92     6.06+
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE      110%     45%       58%     36%      28%      37%
-------------------------------------------------------------------------------
</TABLE> 
 
(1) Per share amounts have been calculated using the monthly average shares
    method rather than the undistributed net investment income method, because
    it more accurately reflects the per share data for the period.  
 
(2) On November 7, 1994, the former Class C shares were renamed Class Z shares.
      
(3) For the period from November 6, 1992 (inception date) to July 31, 1993.
     
  
  ++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
 
 INVESTMENT OBJECTIVE
 
  The investment objective of the Fund is to provide current income and long-
term capital appreciation. The Fund's investment objective may be changed only
with the approval of a majority of the Fund's outstanding shares. There can be
no assurance that the Fund will achieve its investment objectives.
 
 INVESTMENT APPROACH
 
  The Fund is managed as a balanced fund and invests in equity and debt secu-
rities. The Fund will maintain a target asset allocation of approximately 60%
of its total assets in equity securities and approximately 40% of its total
assets in fixed-income securities. The Fund has the additional flexibility to
invest a minimum of 50% and a maximum of 70% of its total assets in equity
securities and a minimum of 30% and a maximum of 50% of its total assets in
fixed-income securities. The Fund may also invest up to 25% of its total
assets in fixed-income securities rated less than investment grade by a
nationally recognized statistical rating organization ("NRSRO") such as
Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("S&P"). Such securities are commonly referred to as "junk bonds."
 
 EQUITY INVESTMENTS
 
  With the equity portion of the Fund, Mutual Management Corp. ("MMC") (for-
merly known as Smith Barney Mutual Funds Management Inc.), seeks to achieve
its investment objective by investing in equity securities (consisting of com-
mon stocks, preferred stocks, warrants and securities convertible into common
stocks) which in the opinion of MMC, are deemed to afford attractive opportu-
nities for capital appreciation and income. The Fund may invest in securities
of companies with attractive relative valuations based on underlying assets or
earning potential, as well as the securities of companies with favorable
growth prospects. In analyzing securities for investment, MMC considers many
factors including, but not limited to, historical and future earnings and
growth potential, current market valuation, management strategy and economic
and financial factors that may affect the price of the securities. Typically,
the Fund invests in a broadly diversified portfolio across a wide range of
industries consisting of middle to large capitalization companies, though it
may on occasion invest in smaller capitalized companies when, in the opinion
of MMC, such companies offer attractive capital appreciation opportunities.
 
 FIXED INCOME INVESTMENTS
 
  With the fixed-income portion of the Fund, MMC seeks to achieve its invest-
ment objective by investing in a diversified portfolio of fixed-income securi-
ties that are believed to afford opportunities for income and capital appreci-
ation. Fixed-income securities the Fund will invest in include obligations of
the U.S. government, its agencies and instrumentalities, corporate securities
(including bonds, notes, and convertible issues), mortgage backed and asset-
backed securities. The  
 
                                                                              5
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
fixed-income management strategies will be driven by the shape of the yield
curve and yield spread analysis. There are no maturity restrictions on the
fixed-income securities in which the Fund invests. Under normal market condi-
tions the weighted average portfolio maturity for the fixed-income portfolio
will be in the 5 to 15 year range.
 
  The Fund may also invest up to 25% of its total assets in fixed-income secu-
rities rated below investment grade by any NRSRO such as Moody's and S&P. Such
securities are commonly referred to as "junk bonds." The Fund may also hold,
from time to time, securities rated Caa by Moody's or CCC by S&P or, if unrated
or rated by other NRSROs, securities of comparable quality as determined by
MMC. While this portion of the securities held by the Fund are expected to pro-
vide greater income and possibly, opportunity for greater gain than investments
in more highly rated securities, they may be subject to greater risk of loss of
income and principal and are more speculative in nature. See "Risk Factors and
Special Considerations--Low-Rated Securities."  
 
 INVESTMENT SECURITIES, STRATEGIES AND TECHNIQUES
 
  The Fund has the ability to engage in a number of specialized investment
strategies and techniques designed to enable the Fund to achieve its investment
objectives. Included among these strategies are lending its portfolio securi-
ties, selling securities "short against the box," writing covered call and
secured put options, as well as purchasing options on securities, purchasing
and selling interest rate futures contracts, options on futures contracts,
stock index put and call options and stock index futures contracts, each of
which is discussed below. Certain investment restrictions, including fundamen-
tal restrictions as well as restrictions that may be changed without a share-
holder vote, adopted by the Trust are described in the Statement of Additional
Information.
 
  U.S. Government Securities. United States government securities are obliga-
tions of, or guaranteed by, the United States government, its agencies or
instrumentalities ("U.S. government securities"). These include bills, certifi-
cates of indebtedness, notes and bonds issued by the United States Treasury or
by agencies or instrumentalities of the United States government. Some U.S.
government securities, such as Treasury bills and bonds, are supported by the
full faith and credit of the United States; others, such as those of Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the
United States government to purchase the agency's obligations; still others,
such as those of the Student Loan Marketing Association, are supported only by
the credit of the instrumentality. U.S. government securities generally do not
involve the credit risks associated with other types of interest-bearing secu-
rities, although, as a result, the yields available from U.S. government secu-
rities are generally lower than the yields available from interest-bearing cor-
porate securities.
 
6
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
  Zero Coupon Bonds. The Fund may also invest in zero coupon bonds. A zero
coupon bond pays no interest in cash to its holder during its life, although
interest is accrued during that period. Its value to an investor consists of
the difference between its face value at the time of maturity and the price
for which it was acquired, which is generally an amount significantly less
than its face value (sometimes referred to as a "deep discount" price).
Because such securities usually trade at a deep discount, they will be subject
to greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which make periodic distribu-
tions of interest. On the other hand, because there are no periodic interest
payments to be reinvested prior to maturity, zero coupon securities eliminate
reinvestment risk and lock in a rate of return to maturity.  
 
  Repurchase Agreements. The Fund may engage in repurchase agreements with
certain member banks of the Federal Reserve System and with certain dealers on
the Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities, the risk of a pos-
sible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its right to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. MMC, acting under the supervision of
the Trust's Board of Trustees, reviews on an ongoing basis the value of the
collateral and creditworthiness of those banks and dealers with which the Fund
enters into repurchase agreements to evaluate potential risks.
 
  Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreement transactions with member banks of the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is
considered a borrowing by the Fund, involves a sale by the Fund of securities
that it holds concurrently with an agreement by the Fund to repurchase the
same securities at an agreed-upon price and date. The Fund typically will
invest the proceeds of a reverse repurchase agreement in money market instru-
ments or repurchase agreements maturing not later than the expiration of the
reverse repurchase agreement. This use of the proceeds is known as leverage.
The Fund will enter into a reverse repurchase agreement for leverage purposes
only when the interest income to be
 
                                                                              7
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
earned from the investment of the proceeds is greater than the interest expense
of the transaction. The Fund also may use the proceeds of reverse repurchase
agreements to provide liquidity to meet redemption requests when the sale of
the Fund's securities is considered to be disadvantageous.
 
  Forward Roll Transactions. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage-related securi-
ties issued by Government National Mortgage Association ("GNMA"), FNMA and Fed-
eral Home Loan Mortgage Corporation ("FHLMC"). In a forward roll transaction,
the Fund sells a mortgage security to a financial institution, such as a bank
or broker-dealer and simultaneously agrees to repurchase a similar security
from the institution at a later date at an agreed-upon price. The mortgage
securities that are repurchased will bear the same interest rate as those sold,
but generally will be collateralized by different pools of mortgages with dif-
ferent prepayment histories than those sold. During the period between the sale
and repurchase, the Fund will not be entitled to receive interest and principal
payments on the securities sold. Proceeds of the sale will be invested in
short-term instruments, particularly repurchase agreements, and the income from
these investments, together with any additional fee income received on the sale
will generate income for the Fund exceeding the yield on the securities sold.
Forward roll transactions involve the risk that the market value of the securi-
ties sold by the Fund may decline below the repurchase price of those securi-
ties. At the time the Fund enters into forward roll transactions, it will place
in a segregated account with the Fund's custodian cash, U.S. government securi-
ties, equity securities or debt securities of any grade having a value equal to
or greater than the Fund's purchase commitments, provided such securities have
been determined by MMC to be liquid and unencumbered and are marked to market
daily pursuant to guidelines established by the Trustees. The Fund will subse-
quently monitor the account to insure that such equivalent value is maintained.
  
  When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
securities on a when-issued or delayed-delivery basis. The Fund will enter into
a when-issued transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage. In such transactions delivery of the securi-
ties occurs beyond the normal settlement periods, but no payment or delivery is
made by the Fund prior to the actual delivery or payment by the other party to
the transaction. Due to fluctuations in the value of securities purchased or
sold on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers. The Fund
will establish with its custodian a segregated account consisting of cash, U.S.
government securities, equity securities or debt securities of any grade having
a value equal to or greater than the Fund's purchase commitments, provided such
securities have been determined by MMC to be liquid and unencumbered and are
marked to market daily pursuant to guidelines  
 
8
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
established by the Trustees. Placing securities rather than cash in the segre-
gated account may have a leveraging effect on the Fund's net assets.
 
  Mortgage-Related Securities. Mortgage-related securities provide a monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees
or costs that may be incurred. Prepayments of principal on mortgage-related
securities may tend to increase due to refinancing of mortgages as interest
rates decline. Mortgage pools created by private organizations generally offer
a higher rate of interest than government and government-related pools because
no direct or indirect guarantees of payments are applicable with respect to
the former pools. Timely payment of interest and principal in these pools,
however, may be supported by various forms of private insurance or guarantees,
including individual loan, title, pool and hazard insurance. There can be no
assurance that the private insurers can meet their obligations under the poli-
cies. Prompt payment of principal and interest on GNMA mortgage pass-through
certificates is backed by the full faith and credit of the United States. FNMA
guaranteed mortgage pass-through certificates and FHLMC participation certifi-
cates are solely the obligations of those entities but are supported by the
discretionary authority of the United States government to purchase the agen-
cies' obligations. Collateralized mortgage obligations are a type of bond
secured by an underlying pool of mortgages or mortgage pass-through certifi-
cates that are structured to direct payments on underlying collateral to dif-
ferent series or classes of the obligations.
 
  To the extent that the Fund purchases mortgage-related securities at a pre-
mium, mortgage foreclosures and prepayments of principal by mortgagors (which
may be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The Fund's yield may
be affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related mort-
gage pools, generally will fluctuate in response to market interest rates.
 
  Asset-Backed Securities. An asset-backed security represents an interest in
a pool of assets such as receivables from credit card loans, automobile loans
and other trade receivables. Changes in the market's perception of the asset
backing the security, the creditworthiness of the servicing agent for the loan
pool, the originator of the loans, or the financial institution providing any
credit enhancement will all effect the value of an asset-backed security, as
will the exhaustion of any credit enhancement. The risks of investing in
asset-backed securities ultimately depend upon the payment of the consumer
loans by the individual borrowers. In its capacity as purchaser of an asset-
backed security, the Fund would generally have no recourse to the entity that
originated the loans in the event of default by the
 
                                                                              9
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
borrower. Additionally, in the same manner as described above under "Mortgage-
Related Securities" with respect to prepayment of a pool of mortgage loans
underlying mortgage-related securities, the loans underlying asset-backed secu-
rities are subject to prepayments, which may shorten the weighted average life
of such securities and may lower their return.
 
  Lending Portfolio Securities. Consistent with applicable regulatory require-
ments, the Fund may lend its portfolio securities to brokers, dealers and other
financial organizations. The Fund's loans of securities will be collateralized
by cash, letters of credit or U.S. government securities that are maintained at
all times in an amount at least equal to the current market value of the loaned
securities. By lending its securities, the Fund seeks to generate income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when U.S. government securities are used as col-
lateral.
 
  Short Sales Against the Box. The Fund may sell its securities short up to 5%
of the Fund's net assets. In addition, the Fund may make short sales if at all
times when a position is open, the Fund owns the stock or owns preferred stock
or debt securities convertible or exchangeable without payment of further con-
sideration for securities of the same issue as the securities sold short. Short
sales of this kind are referred to as "against the box."  
 
  Options Activities. The Fund may write (that is, sell) call options ("calls")
if the calls are covered throughout the life of the option. A call is covered
if the Fund (a) owns the optioned securities, (b) maintains in a segregated
account with the Trust's custodian, PNC Bank, National Association ("PNC
Bank"), cash, U.S. government securities, equity securities or debt securities
of any grade having a value equal to or greater than the Fund's obligations
under the call, provided such securities have been determined by MMC to be liq-
uid and unencumbered pursuant to guidelines established by the Trustees ("eli-
gible segregated assets") or (c) owns an offsetting call option. The aggregate
value of the obligations underlying calls on securities which are written by
the Fund and covered with cash or other eligible segregated assets, together
with the aggregate value of the obligations underlying put options written by
the Fund, will not exceed 50% of the Fund's net assets. When the Fund writes a
call, it receives a premium and gives the purchaser the right to buy the under-
lying security at any time during the call period (usually not more than nine
months in the case of common stock or fifteen months in the case of U.S. gov-
ernment securities) at a fixed exercise price regardless of market price
changes during the call period. If the call is exercised, the Fund forgoes any
gain from an increase in the market price of the underlying security over the
exercise price. The Fund may purchase calls on securities. The Fund also may
purchase and sell stock index calls which differ from calls on individual secu-
rities in that they
 
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
are settled in cash based on the values of the securities in the underlying
index, rather than by delivery of the underlying securities. In writing a call
on a stock index, the Fund receives a premium and agrees that during the call
period purchasers of a call, upon exercise of the call, will receive an amount
of cash if the closing level of the stock index upon which the call is based is
greater than the exercise price of the call. When the Fund buys a call on a
stock index, it pays a premium and during the call period the Fund, upon exer-
cise of the call, receives an amount of cash if the closing level of the stock
index upon which the call is based is greater than the exercise price of the
call.
 
  The Fund may write and purchase put options ("puts"). When the Fund writes a
put, it receives a premium and gives the purchaser of the put the right to sell
the underlying security to the Fund at the exercise price at any time during
the option period. When the Fund purchases a put, it pays a premium in return
for the right to sell the underlying security at the exercise price at any time
during the option period. For the purchase of a put to be profitable, the mar-
ket price of the underlying security must decline sufficiently below the exer-
cise price to cover the premium and transaction costs, unless the put is sold
in a closing sale transaction; otherwise, the purchase of the put effectively
increases the cost of the security and thus reduces its yield. The Fund also
may purchase and sell stock index puts, which differ from puts on individual
securities in that they are settled in cash based on the values of the securi-
ties in the underlying index, rather than by delivery of the underlying securi-
ties. Purchase of a stock index put is designed to protect against a decline in
the value of the Fund's portfolio generally, rather than an individual security
in the portfolio. Stock index puts are sold primarily to realize income from
the premiums received on the sale of such options. If any put is not exercised
or sold, it will become worthless on its expiration date. The Fund will not
purchase puts or calls on securities if more than 5% of its assets would be
invested in premiums on puts and calls, not including that portion of the pre-
mium which reflects the value of the securities owned by the Fund and under-
lying a put at the time of purchase.
 
  The Fund may write puts on securities only if they are "secured." A put is
"secured" if the Fund maintains cash or other eligible segregated assets with a
value equal to the exercise price in a segregated account or holds a put on the
same underlying security at an equal or greater exercise price. The aggregate
value of the obligations underlying puts written by the Fund, together with the
aggregate value of the obligations underlying calls on securities which are
written by the Fund and covered with cash, cash equivalents or U.S. government
securities, will not exceed 50% of the Fund's net assets. The Fund also may
write "straddles," which are combinations of secured puts and covered calls on
the same underlying security.
 
  The Fund will realize a gain (or loss) on a closing purchase transaction with
respect to a call or put previously written by the Fund if the premium, plus
commis-
 
                                                                              11
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
sion costs, paid to purchase the call or put is less (or greater) than the pre-
mium, less commission costs, received on the sale of the call or put. A gain
also will be realized if a call or put which the Fund has written lapses unex-
ercised, because the Fund would retain the premium. See "Dividends, Distribu-
tions and Taxes" below. The Fund will purchase and sell only options which are
listed on a national securities exchange and will write options only through a
national options clearing organization.
 
  There can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, trading in options on
U.S. government securities is relatively new, so that it is impossible to pre-
dict to what extent liquid markets will develop or continue. See the Statement
of Additional Information for a further discussion of risks involved in options
trading, and particular risks applicable to options trading on U.S. government
securities, including GNMA certificates and the characteristics and risks of
stock index options transactions.
 
  Futures Contracts--General. The Fund may not purchase futures contracts or
related options if, immediately thereafter, more than 30% of the Fund's total
assets would be so invested. In purchasing and selling futures contracts and
related options, the Fund 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 require, among other
things, that (a) futures and related options be used solely for bona fide hedg-
ing purposes (or that the underlying commodity value of the Fund's long posi-
tions not exceed the sum of certain identified liquid investments) and (b) the
Fund not enter into futures and related options for which the aggregate initial
margin and premiums exceed 5% of the fair market value of the Fund's assets. In
order to prevent leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash or other eligible segregated assets equal to the
market value of futures contracts purchased will be maintained in a segregated
account with PNC Bank. The Fund will engage only in futures contracts and
related options which are listed on a national commodities exchange.
 
  Interest Rate Futures Contracts. The Fund may purchase and sell interest rate
futures contracts as a hedge against changes in interest rates. An interest
rate futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. Interest rate futures contracts are
traded on designated "contracts markets" which, through their clearing corpora-
tions, guarantee performance of the contracts. Currently, there are interest
rate 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 an interest rate futures
contract for the sale of securities has an effect similar to the actual sale of
securities, although sale
 
12
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
of the interest rate futures contract might be accomplished more easily and
quickly. For example, if the Fund holds long-term U.S. government securities
and MMC anticipates a rise in long-term interest rates, the Fund could, in lieu
of disposing of its portfolio securities, enter into interest rate futures con-
tracts for the sale of similar long-term securities. If interest rates
increased and the value of the Fund's securities declined, the value of the
Fund's interest rate futures contracts would increase, thereby protecting the
Fund by preventing the net asset value from declining as much as it otherwise
would have declined. Similarly, entering into interest rate futures contracts
for the purchase of securities has an effect similar to the actual purchase of
the underlying securities, but permits the continued holding of securities
other than the underlying securities. For example, if MMC expects long-term
interest rates to decline, the Fund might enter into interest rate futures con-
tracts 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
that it intends to purchase, while continuing to hold higher-yielding short-
term securities or waiting for the long-term market to stabilize.
 
  The Fund may purchase and sell listed put and call options on interest rate
futures contracts. An option on an interest rate futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in an
interest rate futures contract (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 exer-
cised, delivery of the interest rate futures position is accompanied by cash
representing the difference between the current market price of the interest
rate futures contract and the exercise price of the option. The Fund may pur-
chase put options on interest rate futures contracts in lieu of, and for the
same purpose as, sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying interest rate
futures contract in the same manner as it purchases puts on securities provided
they are similarly "secured." The purchase of call options on interest rate
futures contracts is intended to serve the same purpose as the actual purchase
of the futures contract, and the Fund will set aside cash and cash equivalents
sufficient to purchase the amount of portfolio securities represented by the
underlying futures contracts. See "Options Activities" and "Dividends, Distri-
butions and Taxes."  
 
  Stock Index Futures Contracts. The Fund may purchase and sell stock index
futures contracts. These transactions, if any, by the Fund will be made solely
for the purpose of hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in market conditions and will
be made when the transactions are economically appropriate to the reduction of
risks inherent in the management of the Fund. A stock index futures contract is
an agreement under which two parties agree to take or make delivery of the
amount of cash based on the difference between the value of a stock index at
the beginning and at the end of
 
                                                                              13
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
the contract period. When the Fund enters into a stock index futures contract,
it must make an initial deposit, known as "initial margin," as a partial guar-
antee of its performance under the contract. As the value of the stock index
fluctuates, either party to the contract is required to make additional margin
deposits, known as "variation margin," to cover any additional obligation that
it may have under the contract. The Fund may not at any time commit more than
5% of its total assets to initial margin deposits on futures contracts.
 
  Successful use of stock index futures contracts by the Fund is subject to
certain special risk considerations. A liquid stock index futures market may
not be available when the Fund seeks to offset adverse market movements. In
addition, there may be an imperfect correlation between movements in the secu-
rities included in the index and movements in the securities in the Fund. Suc-
cessful use of stock index futures contracts is further dependent on MMC's
ability to predict correctly movements in the direction of the stock markets
and no assurance can be given that its judgment in this respect will be cor-
rect. Risks in the purchase and sale of stock index futures are further
referred to in the Statement of Additional Information.
 
  Foreign Securities and American Depositary Receipts. The Fund may purchase
foreign securities or American Depositary Receipts ("ADRs"). ADRs are U.S.
dollar-denominated receipts issued generally by domestic banks and representing
the deposit with the bank of a security of a foreign issuer. ADRs are publicly
traded on exchanges or over-the-counter in the United States.
 
  Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting stan-
dards, generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. Additionally, dividends payable on foreign secu-
rities may be subject to foreign taxes withheld prior to distribution. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility. Changes in foreign exchange
rates will affect the value of those securities which are denominated or quoted
in currencies other than the U.S. dollar. Many of the foreign securities held
by the Fund will not be registered with, nor will the issuers thereof be sub-
ject to the reporting requirements of, the SEC. Accordingly, there may be less
publicly available information about the securities and the foreign company or
government issuing them than is available about a domestic company or govern-
ment entity. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payment positions.
 
14
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  Non-Publicly Traded and Illiquid Securities. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when MMC believes it desirable to
do so. The Fund's investments in illiquid securities are subject to the risk
that should the Fund desire to sell any of these securities when a ready buyer
is not available at a price that the Fund deems representative of their value,
the value of the Fund's net assets could be adversely affected.
 
  Eurodollar or Yankee Obligations. The Fund may invest in Eurodollar and Yan-
kee obligations. Eurodollar bank obligations are dollar denominated debt obli-
gations issued outside the U.S. capital markets by foreign branches of U.S.
banks and by foreign banks. Yankee obligations are dollar denominated obliga-
tions issued in the U.S. capital markets by foreign issuers. Eurodollar (and
to a limited extent, Yankee) obligations are subject to certain sovereign
risks. One such risk is the possibility that a foreign government might pre-
vent dollar denominated funds from flowing across its borders. Other risks
include: adverse political and economic developments in a foreign country; the
extent and quality of government regulation of financial markets and institu-
tions; the imposition of foreign withholding taxes; and expropriation or
nationalization of foreign issuers.
 
  Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended
(the "1933 Act"). Because Rule 144A Securities are freely transferable among
qualified institutional buyers, a liquid market may exist among such buyers.
The Board of Trustees has adopted guidelines and delegated to MMC the daily
function of determining and monitoring liquidity of Rule 144A Securities. How-
ever, the Board of Trustees maintains sufficient oversight and is ultimately
responsible for the liquidity determinations. Investments in restricted secu-
rities such as Rule 144A Securities could have the effect of increasing the
level of illiquidity in the Fund to the extent that there is temporarily no
market for these securities among qualified institutional buyers.  
 
  Real Estate Investment Trusts. The Fund may invest in real estate investment
trusts ("REITs"). REITs are pooled investment vehicles that invest primarily
in either real estate or real estate related loans. The value of the REIT is
affected by changes in the value of the properties owned by the REIT or secu-
rity mortgage loans held by the REIT. REITs are dependent upon cash flow from
its investments to repay financing costs and the management skill of the
REIT's manager. REITs are also subject to risks generally associated with
investments in real estate.  
 
                                                                             15
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
 RISK FACTORS AND SPECIAL CONSIDERATIONS
 
  Investment in the Fund involves special considerations, such as those
described below:
 
  General. Investment in the Fund may involve above-average risk of loss
because of, among other things, the Fund's use of strategies and techniques
that may be considered to be speculative. The strategy followed by the Fund
and certain of the strategies and techniques used by the Fund depend on fore-
casts made by MMC that may or may not prove to be correct.
 
  Low-Rated Securities. Low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment
of the rating organization, are outweighed by large uncertainties or major
risk exposures to adverse conditions and (b) are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the securities.
 
  While the market values of low-rated and comparable unrated securities tend
to react less to fluctuations in interest rate levels than the market values
of higher-rated securities, the market values of certain low-rated and compa-
rable unrated securities also tend to be more sensitive to individual corpo-
rate developments and changes in economic conditions than higher-rated securi-
ties. In addition, low-rated securities and comparable unrated securities gen-
erally present a higher degree of credit risk. Issuers of low-rated and compa-
rable unrated securities are often highly leveraged and may not have more tra-
ditional methods of financing available to them so that their ability to serv-
ice their debt obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. The risk of loss due to
default by such issuers is significantly greater because low-rated and compa-
rable unrated securities generally are unsecured and frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund may incur addi-
tional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The exist-
ence of limited markets for low-rated and comparable unrated securities may
diminish the Fund's ability to (a) obtain accurate market quotations for pur-
poses of valuing such securities and calculating its net asset value and (b)
sell the securities at fair value either to meet redemption requests or to
respond to changes in the economy or in the financial markets.
 
  Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower yield-
ing security, thus resulting in a decreased return to the Fund.
 
16
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  The market for certain low-rated and comparable unrated securities is rela-
tively new and has not fully weathered a major economic recession. Any such
economic downturn could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
 
  Interest Rate Risk. The Fund will be affected by general changes in interest
rates which will result in increases or decreases in the market value of the
debt securities held by the Fund. The market value of the debt securities held
by the Fund can be expected to vary inversely to changes in prevailing interest
rates.
 
  Options on Securities. Because option premiums paid by the Fund are small in
relation to the market value of the investments underlying the options, buying
put options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuation than would be the case if the Fund did not
invest in options.
 
  No assurance can be given that the Fund will be able to effect closing trans-
actions at a time when it wishes to do so. If the Fund cannot enter into a
closing transaction, the Fund will continue to be subject to the risk that a
put option it has purchased will decline in value or become worthless as a
result of an increase in the value of the underlying security. The Fund also
could face higher transaction costs, including brokerage commissions.  
 
  Lending of Portfolio Securities. The risk associated with lending portfolio
securities, as with other extensions of credit, consists of possible loss of
rights in the collateral should the borrower fail financially.
 
  Short Sales. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
 
  Futures Transactions. The use of futures contracts as a hedging device
involves several risks. No assurance can be given that a correlation will exist
between price movements in the stock index and price movements in the securi-
ties that are the subject of the hedge; the risk of imperfect correlation
increases as the composition of the securities held by the Fund diverges from
the securities included in the applicable stock index. Positions in futures
contracts may be closed out only on the exchange on which they were entered
into (or through a linked exchange) and no secondary market exists for those
contracts. In addition, although the Fund intends to enter into futures con-
tracts only if an active market exists for the contracts, no assurance can be
given that an active market will exist for the contracts at any particular
time. Certain exchanges do not permit trading in particular contracts at prices
that represent a fluctuation in price during a single day's trading beyond a
certain set limit. If prices fluctuate during a single day's trading beyond
those lim- its, the Fund could be prevented from promptly liquidating unfavor-
able positions and thus be subjected to losses. Losses incurred in hedging
transactions and the
 
                                                                              17
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
costs of these transactions will affect the Fund's performance. Successful use
of stock index futures by the Fund for hedging purposes is subject to the abil-
ity of MMC to correctly predict movements in the direction of the stock market.
 
  Year 2000. The investment management services provided to the Fund by MMC and
the services provided to shareholders by Salomon Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That fail-
ure could have a negative impact on the Fund's operations, including the han-
dling of securities trades, pricing and account services. MMC and Salomon Smith
Barney have advised the Fund that they have been reviewing all of their com-
puter systems and actively working on necessary changes to their systems to
prepare for the year 2000 and expect that their systems will be compliant
before that date. In addition, MMC has been advised by the Fund's custodian,
transfer agent, distributor and accounting service agent that they are also in
the process of modifying their systems with the same goal. There can, however,
be no assurance that MMC, Salomon Smith Barney or any other service provider
will be successful, or that interaction with other non-complying computer sys-
tems will not impair Fund services at that time.  
 
  In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
 
 PORTFOLIO TRANSACTIONS
 
  Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Salomon Smith Barney. The
Fund may use Salomon Smith Barney in connection with a purchase or sale of
securities when MMC believes that the charge for the transaction does not
exceed usual and customary levels. The Fund also may use Salomon Smith Barney
as a commodities broker in connection with entering into futures contracts and
commodity options. Salomon Smith Barney has agreed to charge the Fund commodity
commissions at rates comparable to those charged by Salomon Smith Barney to its
most favored clients for comparable trades in comparable accounts.  
 
  In selecting a broker for a transaction, including Salomon Smith Barney or
its affiliates, the primary consideration is prompt and effective execution of
orders at the most favorable price. Subject to that primary consideration,
dealers may be selected for research, statistical or other services to enable
MMC to supplement its own research and analysis with the views and information
of other securities firms.  
 
18
<PAGE>
 
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. (the "NYSE"), on each
day that the NYSE is open, by dividing the value of the Fund'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.
 
  Generally, the Fund's investments are valued at market value, or in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfo-
lio securities which are traded primarily on foreign exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. A security that
is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trustees
determine that amortized cost reflects fair value of those investments. An
option generally is valued at the last sale price or, in the absence of the
last sale price, the last offer price. The value of a futures contract equals
the unrealized gain or loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract acquired on the
day on which the stock index futures contract is being valued. A settlement
price may not be used if the market makes a limited move with respect to a par-
ticular commodity or if the underlying securities market experiences signifi-
cant price fluctuations after the determination of the settlement price. In
such event, the futures contract will be valued at a fair market price to be
determined by or under the direction of the Board of Trustees. Further informa-
tion regarding the Trust's valuation policies with respect to the Fund is con-
tained in the Statement of Additional Information.  
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
  The Fund will be treated separately from the Trust's other funds in determin-
ing the amounts of dividends from investment income and distributions of capi-
tal gains payable to shareholders. Dividends and capital gain distributions
will be reinvested automatically for each shareholder's account at net asset
value in additional Class Z
 
                                                                              19
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
shares of the Fund, unless the shareholder is eligible for qualified distribu-
tions and instructs the Fund to pay all dividends and capital gain distribu-
tions in cash. Dividends from net investment income, if any, of the Fund will
be declared quarterly. Distributions of any net long-term capital gains earned
by the Fund will be made annually after the close of the fiscal year in which
they are earned. Distributions of short-term capital gains may be paid more
frequently with dividends from net investment income. In addition, in order to
avoid the application of a 4% nondeductible excise tax measured with respect
to certain undistributed amounts of ordinary income and capital gains, the
Fund may make an additional distribution shortly before December 31 in each
year of any undistributed ordinary income or capital gains and expects to pay
any other dividends and distributions necessary to avoid the application of
this tax.  
 
  If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his
or her shares. Pursuant to the requirements of the Investment Company Act of
1940, as amended (the "1940 Act") and other applicable laws, a notice will
accompany any distribution paid from sources other than net investment income.
In the event the Fund distributes amounts in excess of its net investment
income and net realized capital gains, such distributions may have the effect
of decreasing the Fund's total assets, which may increase the Fund's expense
ratio.
 
 TAXES
 
  The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended. If the Fund qualifies as a regu-
lated investment company and meets certain distribution requirements, the Fund
will not be subject to Federal income tax on its net investment income and net
capital gains that it distributes to its shareholders.  
 
  Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in addi-
tional shares. Distributions of long-term capital gain will be taxable to
shareholders as long-term capital gain, whether paid in cash or reinvested in
additional shares, and regardless
 
20
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
of the length of time the investor has held his or her shares of the Fund. Gen-
erally, dividends of investment income (to the extent derived from most types
of dividends from domestic corporations) from the Fund will qualify for the
Federal dividends-received deduction for corporate shareholders. Each share-
holder of the Fund will receive a statement annually from the Trust, which will
set forth separately the aggregate dollar amount of dividends and capital gains
distributed to the shareholder by the Fund with respect to the prior calendar
year and the portion of the distributions that qualifies for the dividends-
received deduction.  
 
  Shareholders should consult their plan document or tax advisers about the
consequences associated with participating in a Qualified Plan or Smith Barney
UIT.
 
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
 
  Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Salomon Smith Barney UIT. Purchases are effected
at net asset value next determined after a purchase order is received by Salo-
mon Smith Barney (the "trade date"). Payment is due to Salomon 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 invest-
ment (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 pur-
chase 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 the Fund or Salomon Smith Barney prior to the
close of regular trading on the NYSE, currently 4:00 p.m., New York time, on
any day that the Fund calculates its net asset value are priced according to
the net asset value determined on that day. See "Valuation of Shares." Certifi-
cates for Fund shares are issued upon request to the Trust's transfer agent.
  
  Qualified Plans may redeem their shares on any day on which the Fund 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 as next determined. Shareholders acquiring Class Z shares
through a Qualified Plan or a Salomon Smith Barney UIT should consult the terms
of their respective plans for redemption provisions.  
 
  Holders of Class Z shares should consult their Qualified Plans for informa-
tion about available exchange options.
 
                                                                              21
<PAGE>
 
PERFORMANCE
 
 
 YIELD
  From time to time, the Fund advertises the 30-day "yield" of its Class Z
shares. The yield refers to the income generated by an investment in the Fund
over the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by the Fund with respect to
a Class during the period by the maximum public offering price per share on the
last day of the period. This income is "annualized" by assuming the amount of
income is generated each month over a one-year period and is compounded semi-
annually. The annualized income is then shown as a percentage of the net asset
value.
 
 TOTAL RETURN
  From time to time the Fund may include its total return, average annual total
return 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 divi-
dends and capital gains distributions on the reinvestment dates at prices cal-
culated 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 sub-
tracting 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 non-
standard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return by annualizing the most
recent monthly distribution and dividing by the net asset value or the maximum
public offering price (including sales charge) on the last day of the period
for which current dividend return is presented. The Fund's current dividend
return may vary from time to time depending on market conditions, the composi-
tion of its investment portfolio and operating expenses. These factors and pos-
sible differences in the methods used in calculating current dividend return
should be considered when comparing the Fund's current return to yields pub-
lished for other investment companies and other investment vehicles. The Fund
may also include comparative performance information in advertising or market-
ing the Fund's shares. Such performance information may include data from
Lipper Analytical Services, Inc. and other financial publications.
 
22
<PAGE>
 
MANAGEMENT OF THE TRUST AND THE FUND
 
 
 BOARD OF TRUSTEES
  Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains background information regarding
each Trustee and executive officer of the Trust.
 
 INVESTMENT ADVISER
 
  MMC is a registered investment adviser whose principal executive offices are
located at 388 Greenwich Street, New York, New York 10013, and serves as the
Fund's investment adviser. MMC is a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of
Citigroup Inc. ("Citigroup"). Citigroup businesses produce a broad range of
financial services--asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading--and use
diverse channels to make them available to consumer and corporate customers
around the world. Among these businesses are Citibank, Commercial Credit,
Primerica Financial Services, Salomon Smith Barney, SSBC Asset Management,
Travelers Life & Annuity, and Travelers Property Casualty. MMC (through its
predecessor entities) has been in the investment counseling business since 1934
and is a registered investment adviser. MMC renders investment advice to
investment companies that had aggregate assets under management as of September
30, 1998 in excess of $108 billion.  
 
  Subject to the supervision and direction of the Fund's Board of Trustees, MMC
manages the Fund's portfolio in accordance with the Fund's investment objec-
tives and policies, makes investment decisions for the Fund, places orders to
purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. For investment
advisory services rendered the Fund pays MMC a fee at the annual rate of 0.45%
of the value of the Fund's daily net assets. This fee is computed daily and
paid monthly.  
 
 PORTFOLIO MANAGEMENT
 
  The equity portion of the Fund is managed by Chad Graves. Mr. Graves is a
Managing Director of Salomon Smith Barney.  
 
  The fixed-income portion of the Fund is managed by James Conroy and John
Bianchi. Both Mr. Conroy and Mr. Bianchi are Managing Directors of Salomon
Smith Barney.   
 
                                                                              23
<PAGE>
 
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
 
  Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1998 is included in
the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request and without charge from a Salomon Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.  
  
 ADMINISTRATOR  
 
  MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered, the Fund pays MMC
a fee at the annual rate of 0.20% of the value of the Fund's average daily net
assets. This fee is computed daily and paid monthly.  
   
  On October 8, 1998, Travelers Group Inc. and Citicorp consummated their merg-
er, thereby creating a new entity called Citigroup. Citigroup is a bank holding
company subject to regulation under the Bank Holding Company Act of 1956 (the
"BHCA"), the requirements of the Glass-Steagall Act and certain other laws and
regulations. MMC does not believe that its compliance with the applicable law
will have a material adverse effect on its ability to continue to provide the
Fund with the same level of investment advisory services that it currently
receives.  
     
 DISTRIBUTION
     
  CFBDS, Inc., located at 21 Milk Street, Boston, MA 02109-5408, serves as the
Fund's distributor.  
  
ADDITIONAL INFORMATION
 
 
  The Trust was organized on March 12, 1985 in the Commonwealth of Massachu-
setts and is a business entity commonly known as a "Massachusetts business
trust."
 
  The Trust offers shares of beneficial interest of separate series having a
$.001 per share par value. Shares of beneficial interest of the Fund are cur-
rently classified into six Classes: A, B, L, O, Y and Z. Each Class of shares
represents identical pro rata interests in the Fund's investment portfolio. As
a result, the Classes have the same rights, privileges and preferences, except
with respect to: (a) the designation of each Class; (b) the effect of the
respective sales charges, if any, for each Class; (c) the distribution and/or
service fees, if any, borne by each Class pursuant to a plan adopted under Rule
12b-1 under the 1940 Act; (d) the expenses allocable exclusively to each Class;
(e) voting rights on matters exclusively affecting a single Class; (f) the
exchange privilege of each Class; and (g) the conversion feature of a Class.
The Trust's Board of Trustees does not anticipate that there will be any
 
24
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
 
conflicts among the interests of the holders of the different Classes of shares
of the Fund. The Trustees, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.
 
  The Trust does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have
been elected by shareholders. The Trustees will call a meeting for any purpose
upon the written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Trust will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for shareholder
vote, shareholders of each Class of the Fund will have one vote for each full
share owned and a proportionate, fractional vote for any fractional share held
of that Class. Shares of the Trust will be voted generally on a Trust-wide
basis on all matters, except matters affecting only the interests of one Fund
or one or more of the Classes of shares.
 
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include a listing of the investment securities held by the Fund
at the end of the reporting period. In an effort to reduce the Fund's printing
and mailing costs, the Trust plans to consolidate the mailing of the Fund's
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. In addition, the Trust also plans to con-
solidate the mailing of the Fund's Prospectus so that a shareholder having
multiple accounts (that is, individual, IRA and/or Self-Employed Retirement
Plan accounts) will receive a single Prospectus annually. Shareholders who do
not want this consolidation to apply to their accounts should contact a Salomon
Smith Barney Financial Consultant or First Data Investor Services Group, Inc.
 
  PNC Bank, located at 17th and Chestnut Streets, Philadelphia, PA 19103,
serves as custodian of the Fund's investments.
 
  First Data Investor Services Group, Inc., located at Exchange Place, Boston,
Massachusetts 02109, serves as the Trust's Transfer Agent.  
 
                                                                              25
<PAGE>
 
                                              SALOMON SMITH BARNEY
                                              ----------------------------------
                                                    A member of citigroup [LOGO]


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

                                                                    SMITH BARNEY
                                                                   BALANCED FUND
                                                                                

                                                            388 Greenwich Street
                                                        New York, New York 10013
                                                               
                                                              FD 0791 11/98  



PROSPECTUS

                                                                    SMITH BARNEY

                                                                     Convertible
                                                                            Fund

 
                                                               November 27, 1998
 

                                                   Prospectus begins on page one


[LOGO] Smith Barney Mutual Funds
       Investing for your future.
       Every day.(Registered)
<PAGE>

 
--------------------------------------------------------------------------------
Prospectus                                                     November 27, 1998
--------------------------------------------------------------------------------
 

   Smith Barney Convertible Fund
   388 Greenwich Street
   New York, New York 10013
   (800) 451-2010

   The Smith Barney Convertible Fund (the "Fund") is a diversified fund that
seeks current income and capital appreciation by investing in convertible
securities and in combinations of nonconvertible fixed-income securities and
warrants or call options that together resemble convertible securities. The Fund
is one of a number of funds, each having distinct investment objectives and
policies, making up Smith Barney Income Funds (the "Trust"). The Trust is an
open-end management investment company commonly referred to as a mutual fund.

 
   This Prospectus sets forth concisely certain information about the Fund and
the Trust, 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. Shares of other investment funds offered by the Trust are
described in separate prospectuses that may be obtained by calling the Trust at
the telephone number set forth above or by contacting a Salomon Smith Barney
Financial Consultant.

   Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 27, 1998, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Salomon 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. 

CFBDS, INC. 
Distributor 

MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
 

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                                                          11
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                  17
--------------------------------------------------------------------------------
Valuation of Shares                                                           28
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                            28
--------------------------------------------------------------------------------
Purchase of Shares                                                            30
--------------------------------------------------------------------------------
Exchange Privilege                                                            38
--------------------------------------------------------------------------------
Redemption of Shares                                                          41
--------------------------------------------------------------------------------
Minimum Account Size                                                          44
--------------------------------------------------------------------------------
Performance                                                                   44
--------------------------------------------------------------------------------
Management of the Trust and the Fund                                          45
--------------------------------------------------------------------------------
Distribution                                                                  47
--------------------------------------------------------------------------------
Additional Information                                                        47
--------------------------------------------------------------------------------
     

================================================================================
   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, diversified management investment
company that seeks current income and capital appreciation by investing in
convertible securities and in combinations of nonconvertible fixed-income
securities and warrants or call options that together resemble convertible
securities ("synthetic convertible securities"). Under normal circumstances, the
Fund will invest at least 65% of its assets in convertible securities, and may
invest up to 35% of its assets in synthetic convertible securities and in equity
and debt securities that are not convertible into common stock. See "Investment
Objective and Management Policies."

 
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class O shares (prior to
June 12, 1998 called Class C shares) are offered only to persons who held Class
C shares on June 12, 1998, and a fifth Class of shares, Class Y shares, is
offered only to investors meeting an initial investment minimum of $15,000,000.
See "Purchase of Shares" and "Redemption of Shares."
 

   Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary --
Reduced or No Initial Sales Charge."

   Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year after
the date of purchase to zero. This CDSC may be waived for certain 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.


                                                                               3
<PAGE>

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

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

 
   Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of 0.25% and an annual distribution fee of 0.75% of the average
daily net assets of the Class, and investors pay a CDSC of 1.00% if they redeem
Class L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. Until June 22, 2001, purchases of Class L shares by investors who
were holders of Class C shares of the Fund on June 12, 1998 will not be subject
to the 1.00% initial sales charge. The Class L shares' distribution fee may
cause that Class to have higher expenses and pay lower dividends than Class A
and Class B shares. Purchases of Fund shares, which when combined with current
holdings of Class L shares of the Fund equal or exceed $500,000 in the
aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.

   Class O Shares. Class O shares are available for purchase only by
shareholders who owned Class C shares of the Fund on June 12, 1998. Class O
shares are sold at net asset value and purchases of Class O shares will not be
subject to an initial sales charge of 1.00% of the purchase price until June 22,
2001. 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, and
investors pay a CDSC of 1.00% if they redeem Class O shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class O shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A and Class B shares. Purchases of Fund shares, which when
combined with the current holdings of Class O shares of the Fund equal or exceed
$500,000 in the aggregate, should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions made
wihtin 12 months of purchase.

   Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
 

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


4
<PAGE>

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

 
   Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B shares are sold without any initial sales charge so the entire purchase price
is immediately invested in the Fund. Any investment return on these additional
invested amounts may partially or wholly offset the higher annual expenses of
this Class. Because the Fund's future return cannot be predicted, however, there
can be no assurance that this would be the case. Finally, Class L shares which
have a lower initial sales charge but are subject to higher distribution fees
than Class A shares, are suitable for investors who are investing or intending
to invest an amount which would receive a substantial sales charge discount and
who have a short-term or undetermined time frame.

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

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

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

   See "Purchase of Shares" and "Management of the Trust and 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 among the Classes of
shares.


                                                                               5
<PAGE>

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

 
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 L shares are available without a sales
charge as investment alternatives under both of these programs. See "Purchase of
Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs." 

DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. to
distribute the Fund's shares.

PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker that
clears securities through Salomon Smith Barney Inc. ("Salomon Smith Barney").
(An investment dealer in the selling group and a broker that clears securities
through Salomon Smith Barney are collectively referred to as "Dealer
Representatives.") In addition, certain investors, including qualified
retirement plans and investors purchasing through Dealer Representatives, may
purchase shares directly from the Fund through the Fund's transfer agent, First
Data Investor Services Group, Inc. ("First Data" or the "Transfer Agent"). See
"Purchase of Shares."

INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $15,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under Section 403(b)(7)
or Section 401(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class L shares and the minimum subsequent investment
requirement for all Classes is $25. The minimum investment requirements for
purchases of Fund shares through the Systematic Investment Plan are described
below. There is no minimum investment requirement in Class A for unitholders who
invest distributions from a unit investment trust ("UIT") sponsored by Salomon
Smith Barney. See "Purchase of Shares."

SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial investment
requirement for Class A, Class B and Class L shares and the minimum
 


6
<PAGE>

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

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 TRUST AND THE FUND Mutual Management Corp. ("MMC") (formerly
known as Smith Barney Mutual Funds Management Inc.) serves as the Fund's
investment adviser and administrator. MMC provides investment advisory and
management services to investment companies affiliated with Salomon Smith
Barney. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). Citigroup businesses produce a broad range of financial services
-- asset management, banking and consumer finance, credit and charge cards,
insurance, investments, investment banking and trading -- and use diverse
channels to make them available to consumer and corporate customers around the
world. Among these businesses are Citibank, Commercial Credit, Primerica
Financial Services, Salomon Smith Barney, SSBC Asset Management, Travelers Life
& Annuity, and Travelers Property Casualty. See "Management of the Trust and the
Fund."
 

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

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

DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and 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
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."


                                                                               7
<PAGE>

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

RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The market value of fixed-income
securities, which constitute a major part of the investments of the Fund, may
vary inversely in response to changes in prevailing interest rates. The foreign
securities in which the Fund may invest may be subject to certain risks in
addition to those inherent in domestic investments. The medium- or lower-rated
securities in which the Fund may invest, some of which have speculative
characteristics, may be subject to greater market fluctuations and greater risk
of loss of income or principal than higher-rated securities. The Fund may employ
investment techniques which involve certain other risks, including entering into
repurchase agreements, engaging in when-issued and delayed-delivery
transactions, lending portfolio securities, entering into options on securities
and short sales "against the box." See "Investment Objective and Management
Policies." 

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

 
<TABLE>
<CAPTION>
Smith Barney Convertible Fund            Class A  Class B  Class L  Class O* Class Y
------------------------------------------------------------------------------------
<S>                                      <C>      <C>      <C>      <C>      <C>  
Shareholder Transaction Expenses
  Maximum sales charge imposed on
    purchases (as a percentage of
    offering price)                      5.00%    None     1.00%    1.00%    None
  Maximum CDSC
    (as a percentage of original cost
    or redemption proceeds whichever
    is lower)                            None**   5.00%    1.00%    1.00%    None
------------------------------------------------------------------------------------
Annual Fund Operating Expenses
  (as a percentage of average net assets)
  Management fees                        0.70%    0.70%    0.70%    0.70%    0.70%
  12b-1 fees***                          0.25     0.75     1.00     0.70     None
  Other expenses                         0.30     0.29     0.28     0.30     0.13%
------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES            1.25%    1.74%    1.98%    1.70%    0.83%
====================================================================================
</TABLE>

  *   Class C shares were renamed Class O shares effective June 12, 1998.
 **   Purchases of Class A shares of $500,000 or more will be made at net asset
      value with no sales charge, but will be subject to a CDSC of 1.00% on
      redemptions made within 12 months of purchase.
***   Upon conversion of Class B shares to Class A shares, such shares will no
      longer be subject to a distribution fee. Class L shares and Class O shares
      do not have a conversion feature and, therefore, are subject to an ongoing
      distribution fee. As a result, long-term shareholders of Class L shares
      and Class O 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 "NASD").
 


8
<PAGE>

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

 
   Class A shares of the Fund purchased through the Salomon 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 Salomon Smith Barney Financial Consultant.

   The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class L, Class O and certain Class A shares, the length of time
the shares are held and whether the shares are held through the Smith Barney
401(k) and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Salomon Smith Barney receives an annual 12b-1 service fee of 0.25% of
the value of average daily net assets of Class A shares. Salomon 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 L shares, Salomon Smith
Barney receives an annual 12b-1 fee of 1.00% of the value of average daily net
assets, consisting of a 0.75% distribution fee and a 0.25% service fee. For
Class O shares, Salomon Smith Barney 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.
 


                                                                               9
<PAGE>

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

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

<TABLE>
<CAPTION>
Smith Barney Convertible Fund                      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                                       $62     $88     $115     $194
      Class B                                        68      85      105      193
      Class L                                        40      72      116      238
      Class O                                        37      63      101      209
      Class Y                                         8      26       46      103

An investor would pay the following expenses on the               
same investment, assuming the same annual return                  
and no redemption:                                                
      Class A                                       $62     $88     $115     $194
      Class B                                        18      55       95      193
      Class L                                        30      72      116      238
      Class O                                        27      63      101      209
      Class Y                                         8      26       46      103
======================================================================================
</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, the Fund'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.


10
<PAGE>

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

 
The following information for each of the years in the four-year period ended
July 31, 1998, has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal years ended July 31, 1989 through July
31, 1994 has been audited by other independent auditors. The information set out
below should be read in conjunction with the financial statements and related
notes that also appear in the Fund's 1998 Annual Report, which is incorporated
by reference into the Statement of Additional Information.
 

For a Class A share of beneficial interest outstanding throughout each year:


 
<TABLE>
<CAPTION>
Smith Barney Convertible Fund
Year Ended July 31,             1998      1997     1996(1)    1995      1994     1993(2)
============================================================================================
<S>                            <C>       <C>       <C>       <C>       <C>       <C>   
Net Asset Value,
  Beginning of Year            $18.61    $15.66    $15.27    $14.56    $14.99    $13.82
--------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income          0.73      0.78      0.74      0.74      0.72      0.49
  Net realized and
    unrealized gain (loss)
    on investments              (0.39)     3.28      0.38      0.70     (0.42)     1.22
--------------------------------------------------------------------------------------------
Total Income From
  Operations                     0.34      4.06      1.12      1.44      0.30      1.71
--------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income         (0.79)    (0.75)    (0.73)    (0.73)    (0.73)    (0.51)
  Net realized gains            (1.26)    (0.36)       --        --        --     (0.03)
--------------------------------------------------------------------------------------------
Total Distributions             (2.05)    (1.11)    (0.73)    (0.73)    (0.73)    (0.54)
--------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year                  $16.90    $18.61    $15.66    $15.27    $14.56    $14.99
--------------------------------------------------------------------------------------------
Total Return++                   1.97%    26.94%     7.41%    10.35%     1.99%    12.63%+++
--------------------------------------------------------------------------------------------
Net Assets,
  End of Year (millions)          $36       $39       $35       $35        $2        $2
--------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                       1.25%     1.27%     1.40%     1.40%     1.40%     1.37%+
  Net investment income          4.09      4.61      4.68      5.13      4.80      4.86+
--------------------------------------------------------------------------------------------
Portfolio Turnover Rate            49%       57%       59%       48%       54%       95%
============================================================================================
</TABLE>

    (1) Per share amounts have been calculated using the monthly average shares
        method, rather than the undistributed net investment income method,
        because it more accurately reflects the per share data for the period.
    (2) For the period from November 6, 1992 (inception date) to July 31, 1993.
    ++  Total return represents aggregate total return for the period indicated
        and does not reflect any applicable sales charge.
    +++ Total return is not annualized as it may not be representative of the
        total return for the year.
    +   Annualized.
 


                                                                              11
<PAGE>

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

For a Class B share of beneficial interest outstanding throughout each year:

 
<TABLE>
<CAPTION>
Smith Barney Convertible Fund
Year Ended July 31,                   1998      1997    1996(1)    1995      1994    1993      1992      1991      1990      1989  
================================================================================================================================== 
<S>                                  <C>       <C>      <C>       <C>       <C>     <C>       <C>       <C>       <C>       <C>    
Net Asset Value, Beginning of Year   $18.60    $15.66   $15.27    $14.56    $14.99  $13.84    $12.51    $12.21    $13.80    $13.04 
---------------------------------------------------------------------------------------------------------------------------------- 
Income (Loss) From Operations:                                          
  Net investment income                0.64      0.69     0.66      0.67      0.65    0.61      0.64      0.68      0.79      0.85 
  Net realized and unrealized                                           
    gain (loss) on investments        (0.38)     3.28     0.39      0.70     (0.42)   1.20      1.35      0.33     (1.40)     0.78 
---------------------------------------------------------------------------------------------------------------------------------- 
Total Income (Loss) From Operations    0.26      3.97     1.05      1.37      0.23    1.81      1.99      1.01     (0.61)     1.63 
---------------------------------------------------------------------------------------------------------------------------------- 
Less Distributions From:                                                
  Net investment income               (0.71)    (0.67)   (0.66)    (0.66)    (0.66)  (0.62)    (0.64)    (0.68)    (0.83)    (0.86)
  Net realized gains                  (1.26)    (0.36)      --        --        --   (0.04)       --        --     (0.11)    (0.01)
  Capital                                --        --       --        --        --      --     (0.02)    (0.03)     (0.4)       -- 
---------------------------------------------------------------------------------------------------------------------------------- 
Total Distributions                   (1.97)    (1.03)   (0.66)    (0.66)    (0.66)  (0.66)    (0.66)    (0.71)    (0.98)    (0.87)
---------------------------------------------------------------------------------------------------------------------------------- 
Net Asset Value, End of Year         $16.89    $18.60   $15.66    $15.27    $14.56  $14.99    $13.84    $12.51    $12.21    $13.80 
---------------------------------------------------------------------------------------------------------------------------------- 
Total Return++                         1.51%    26.29%    6.91%     9.80%     1.50%  13.40%    16.25%     8.86%    (4.53)%   13.09%
---------------------------------------------------------------------------------------------------------------------------------- 
Net Assets, End of Year (millions)      $36       $43      $42       $46       $85     $75       $57       $66       $97      $153 
---------------------------------------------------------------------------------------------------------------------------------- 
Ratios to Average Net Assets:                                            
  Expenses                             1.74%     1.77%    1.90%     1.90%     1.88%   2.00%     1.88%     1.92%     1.85%     1.74%
  Net investment income                3.60      4.12     4.18      4.63      4.32    4.20      4.76      5.81      6.10      6.41 
---------------------------------------------------------------------------------------------------------------------------------- 
Portfolio Turnover Rate                  49%       57%      59%       48%       54%     95%       77%       26%       24%       32%
================================================================================================================================== 
</TABLE>

    (1) Per share amounts have been calculated using the monthly average shares
        method, rather than the undistributed net investment income method,
        because it more accurately reflects the per share data for the period.
    ++  Total return represents aggregate total return for the period indicated
        and does not reflect any applicable sales charge.
 


                                    12 & 13
<PAGE>

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

 
For a Class L share of beneficial interest outstanding throughout each period:

Smith Barney Convertible Fund
Period Ended July 31,                                                 1998(1)
============================================================================
Net Asset Value, Beginning of Period                                  $17.14
----------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income                                                 0.05
  Net realized and unrealized loss                                     (0.17)
----------------------------------------------------------------------------
Total Loss From Operations                                             (0.12)
----------------------------------------------------------------------------
Less Distributions From:
  Net investment income                                                (0.12)
  Net realized gains                                                      --
----------------------------------------------------------------------------
Total Distributions                                                    (0.12)
----------------------------------------------------------------------------
Net Asset Value, End of Period                                        $16.90
----------------------------------------------------------------------------
Total Return                                                           (0.74)%++
----------------------------------------------------------------------------
Net Assets, End of Period (000s)                                        $210
----------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                                              1.98%+
  Net investment income                                                 2.51+
----------------------------------------------------------------------------
Portfolio Turnover Rate                                                   49%
============================================================================

    (1) For the period from June 15, 1998 (inception date) to July 31, 1998. 
    ++  Total return is not annualized, as it may not be representative of the
        total return for the year.
    +   Annualized.
 


14
<PAGE>

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

 
For a Class O(1) share of beneficial interest outstanding throughout each year:

Smith Barney Convertible Fund
Year Ended July 31,                     1998      1997      1996(2)   1995(3)(4)
===========================================================================
Net Asset Value, Beginning of Year     $18.58    $15.64    $15.27    $14.09
---------------------------------------------------------------------------
Income From Operations:
  Net investment income                  0.63      0.67      0.67      0.50
  Net realized and unrealized
    gain (loss) on investments          (0.37)     3.31      0.37      1.17
---------------------------------------------------------------------------
Total Income From Operations             0.26      3.98      1.04      1.67
---------------------------------------------------------------------------
Less Distributions From:
  Net investment income                 (0.71)    (0.68)    (0.67)    (0.49)
  Net realized gains (loss)             (1.26)    (0.36)       --        --
---------------------------------------------------------------------------
Total Distributions                     (1.97)    (1.04)    (0.67)    (0.49)
---------------------------------------------------------------------------
Net Asset Value, End of Year           $16.87    $18.58    $15.64    $15.27
---------------------------------------------------------------------------
Total Return++                           1.53%    26.37%     6.82%    12.17%++
---------------------------------------------------------------------------
Net Assets, End of Year (000s)         $1,557    $1,252      $641       $83
---------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                               1.70%     1.74%     1.86%     1.87%+
  Net investment income                  3.63      4.14      4.17      4.77+
---------------------------------------------------------------------------
Portfolio Turnover Rate                    49%       57%       59%       48%
===========================================================================

    (1) On June 12, 1998, Class C shares were renamed Class O shares.
    (2) Per share amounts have been calculated using the monthly average shares
        method, rather than the undistributed net investment income method,
        because it more accurately reflects the per share data for the period.
    (3) On November 7, 1994, the former Class D shares were renamed Class C
        shares.
    (4) For the period from November 7, 1994 (inception date) to July 31, 1995.
    ++  Total return is not annualized as it may not be representative of the
        total return for the year.
    +   Annualized.
    ++  Total return represents aggregate total return for the period indicated
        and does not reflect any applicable sales charge.
 


                                                                              15
<PAGE>

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

For a Class Y share of beneficial interest outstanding throughout each year:

 
Smith Barney Convertible Fund
Year Ended July 31,                          1998       1997      1996(1)(2)
========================================================================
Net Asset Value, Beginning of Year          $18.66     $15.68     $16.15
------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income                       0.77       0.83       0.38
  Net realized and unrealized gain (loss)
    on investments                           (0.35)      3.31      (0.46)
------------------------------------------------------------------------
Total Income (Loss) From Operations           0.42       4.14      (0.08)
------------------------------------------------------------------------
Less Distributions From:
  Net investment income                      (0.84)     (0.80)     (0.39)
  Net realized gains                         (1.26)     (0.36)        --
------------------------------------------------------------------------
Total Distributions                          (2.10)     (1.16)     (0.39)
------------------------------------------------------------------------
Net Asset Value, End of Year                $16.98     $18.66     $15.68
------------------------------------------------------------------------
Total Return                                  2.42%     27.44%     (0.56)%++
------------------------------------------------------------------------
Net Assets, End of Year (000s)             $72,870    $29,080     $9,189
------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                    0.83%      0.85%      1.00%+
  Net investment income                       4.49       5.04       4.98+
------------------------------------------------------------------------
Portfolio Turnover Rate                         49%        57%        59%
========================================================================

    (1) Per share amounts have been calculated using the monthly average shares
        method, rather than the undistributed net investment income method,
        because it more accurately reflects the per share data for the period.
    (2) For the period from February 7, 1996 (inception date) to July 31, 1996.
    ++  Total return is not annualized as it may not be representative of the
        total return for the year. 
    +   Annualized.
 


16
<PAGE>

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

 
   The Fund's investment objective is current income and capital appreciation.
The Fund's investment objective may be changed only with the approval of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund's investment objective will be achieved.

   The Fund seeks to achieve its objective by investing in convertible
securities and "synthetic convertible securities." Under normal circumstances,
the Fund will invest at least 65% of its assets in convertible securities. The
Fund is not required to sell securities to conform to this 65% limitation and
may retain on a temporary basis securities received upon conversion of
convertible securities or upon exercise of warrants or call options that are
components of synthetic convertible securities to permit their orderly
disposition, to establish long-term holding periods for tax purposes or for
other reasons. The Fund will not invest in fixed-income securities that are
rated lower than B by Moody's Investors Services, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("S&P"), or having an equivalent rating by any nationally
recognized statistical rating organization ("NRSRO") or, if unrated, deemed by
MMC to be comparable to securities rated lower than B. The Fund may invest up to
35% of its assets in synthetic convertible securities and in equity and debt
securities that are not convertible into common stock and, for temporary
defensive purposes when deemed appropriate by the Fund's investment adviser in
light of current market conditions, may invest in these securities without
limitation. In seeking to achieve its investment objective, the Fund may write
covered call options, lend portfolio securities and enter into short sales
"against the box." The Fund may utilize up to 10% of its assets to purchase put
options on securities for hedging purposes and may invest up to 10% of its
assets in foreign securities. Special considerations associated with the Fund
are described under "Risk Factors and Special Considerations."
 

   CERTAIN INVESTMENT STRATEGIES

   In attempting to achieve its investment objective, the Fund may employ, among
others, one or more of the strategies set forth below. More detailed information
concerning these strategies and their related risks is contained in the
Statement of Additional Information.

 
   Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund has the ability to lend portfolio securities to brokers,
dealers and other financial organizations. These loans, if and when made, may
not exceed 20% of the Fund's assets taken at value. Loans of portfolio
securities will be collateralized by cash, letters of credit or U.S. government
securities that are maintained at all times in an amount at least equal to the
current market value of the loaned securities. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund.
 

   Short Sales Against the Box. The Fund may make short sales of common


                                                                              17
<PAGE>

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

 
stock if, at all times when a short position is open, the Fund owns the stock or
owns preferred stocks or debt securities convertible or exchangeable, without
payment of further consideration, into the shares of common stock sold short.
Short sales of this kind are referred to as short sales "against the box." The
broker-dealer that executes a short sale generally invests cash proceeds of the
sale until they are paid to the Fund. Arrangements may be made with the
broker-dealer to obtain a portion of the interest earned by the broker on the
investment of short sale proceeds. The Fund will segregate the common stock or
convertible or exchangeable preferred stock or debt securities in a special
account with PNC Bank, National Association ("PNCBank"), the Trust's custodian.
The Fund may utilize up to 50% of its assets as collateral for short sales
against the box.

   Covered Option Writing. The Fund may write (sell) call options on securities.
The Fund realizes fees (referred to as "premiums") for granting the rights
evidenced by the options. A call option embodies the right of its purchaser to
compel the writer of the option to sell to the option holder an underlying
security at a specified price at any time during the option period. Thus, the
purchaser of a call option written by the Fund has the right to purchase from
the Fund the underlying security owned by the Fund at the agreed-upon price for
a specified time period.
 

   Upon the exercise of a call option written by the Fund, the Fund may suffer a
loss equal to the excess of the security's market value at the time of the
option exercise over the Fund's acquisition cost of the security, less the
premium received for writing the option. The Fund will write only covered
options. Accordingly, whenever the Fund writes a call option, it will continue
to own or have the present right to acquire the underlying security for as long
as it remains obligated as the writer of the option.

   The Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security from being called or put or to unfreeze an
underlying security (thereby permitting its sale or the writing of a new option
on the security prior to the outstanding option's expiration). To effect a
closing purchase transaction, the Fund would purchase, prior to the holder's
exercise of an option that the Fund has written, an option of the same series as
that on which the Fund desires to terminate its obligation. The obligation of
the Fund under an option that it has written would be terminated by a closing
purchase transaction, but the Fund would not be deemed to own an option as the
result of the transaction. There can be no assurance that the Fund will be able
to effect closing purchase transactions at a time when it wishes to do so. To
facilitate closing purchase transactions, however, the Fund will write options
only if a secondary market for the options exists on a domestic securities
exchange or in the over-the-counter market.

   Purchasing Put and Call Options on Securities. The Fund may purchase put and
call options that are traded on a domestic securities exchange. The Fund may
utilize up to 10% of its assets to purchase put options on portfolio securities
and


18
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

may do so at or about the same time that it purchases the underlying security or
at a later time. By buying a put, the Fund limits the risk of loss from a
decline in the market value of the security until the put expires. Any
appreciation in the value of the yield otherwise available from the underlying
security, however, will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. Call options may be
purchased by the Fund in order to acquire the underlying securities for the Fund
at a price that avoids any additional cost that would result from a substantial
increase in the market value of a security. The Fund also may purchase call
options to increase its return to investors at a time when the call is expected
to increase in value due to anticipated appreciation of the underlying security.

   Prior to expiration, put and call options may be sold in closing sale
transactions (sales by the Fund, prior to the exercise of options that it has
purchased, or options of the same series), and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the option plus the related transaction costs.

   Futures and Options on Futures. The Fund may enter into interest rate futures
contracts, stock index futures contracts and related options that are traded on
a domestic exchange or board of trade. These transactions will be made solely
for the purpose of hedging against the effects of changes in the value of
portfolio securities due to anticipated changes in interest rates and market
conditions, as the case may be. All futures and options contracts will be
entered into only when the transactions are economically appropriate for the
reduction of risks inherent in the management of the Fund.

   An interest rate futures contract provides for the future sale by the one
party and the purchase by the other party of a specified amount of a particular
financial instrument (debt security) at a specified price, date, time and place.
A stock index futures contract is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally entered into.
Stock index futures contracts are based on indexes that reflect the market value
of common stock of the companies included in the indexes. An option on an
interest rate or stock index contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (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 prior to the expiration date of the
option.

   If entering into transactions involving futures contracts and options on
futures contracts, the Fund will comply with applicable requirements of the
Commodities Futures Trading Commission (the "CFTC") which require that its
transactions in futures and options be engaged in for "bona fide hedging"
purposes or other


                                                                              19
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

permitted purposes, provided that aggregate initial margin deposits and premiums
required to establish positions, other than those considered by the CFTC to be
"bona fide hedging," will not exceed 5% of the Fund's net asset value, after
taking into account unrealized profits and unrealized losses on any such
contracts.

   The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities or index on the
one hand, and price movements in the securities that are the subject of the
hedge, on the other hand. Positions in futures contracts and options on futures
contracts may be closed out only on the exchange or board of trade on which they
were entered into, and there can be no assurance that an active market will
exist for a particular contract or option at any particular time.

   ADDITIONAL INVESTMENTS

 
   Money Market Instruments. When MMC believes that market conditions warrant,
the Fund may adopt a temporary defensive posture and may invest in short-term
instruments without limitation. Short-term instruments in which the Fund may
invest include: U.S. government securities; certain bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loan associations and similar institutions);
commercial paper rated no lower than A-2 by S&P or Prime-2 by Moody's or an
equivalent rating by any other NRSRO or, if unrated, of an issuer having an
outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements as described below.
 

   U.S. Government Securities. The U.S. government securities in which the Fund
may invest include: direct obligations of the United States Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds) and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association ("GNMA") certificates); securities that are
supported by the right of the issuer to borrow from the United States Treasury
(such as securities of Federal Home Loan Banks); and securities that are
supported by the credit of the instrumentality. Treasury Bills have maturities
of less than 1 year, Treasury Notes have maturities of 1 to 10 years and
Treasury Bonds generally have maturities of greater than 10 years at the date of
issuance. Certain U.S. government securities, such as those issued or guaranteed
by GNMA, Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC"), are mortgage-related securities. U.S. government
securities generally do not involve the credit risks associated with other types
of interest-bearing securities, although, as a result, the yields available from
U.S. government securities are generally lower than the yields available from
interest-bearing corporate securities.


20
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

 
   Repurchase Agreements. The Fund may engage in repurchase agreement
transactions with certain member banks of the Federal Reserve System and with
certain dealers on the Federal Reserve Bank of New York's list of reporting
dealers. Under the terms of a typical repurchase agreement, the Fund would
acquire an underlying debt obligation for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation, including
interest. Repurchase agreements could involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities,
the risk of a possible decline in the value of the underlying securities during
the period in which the Fund seeks to assert its rights to them, the risk of
incurring expenses associated with asserting those rights and the risk of losing
all or part of the income from the agreement. MMC, acting under the supervision
of the Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and dealers with which the
Fund may enter into repurchase agreements to evaluate potential risks.

   Real Estate Investment Trusts. The Fund may purchase real estate investment
trusts ("REITs"). REITs are investments vehicles that invest primarily in either
real estate or real estate loans. The value of a REIT is affected by changes in
the value of the properties owned by the REIT or security mortgage loans held by
the REIT. REITs are dependent upon cash flow from their investments to repay
financing costs and the management skill of the REIT's manager. REITs are also
subject to risks generally associated with investments in real estate.
 

   CERTAIN INVESTMENT GUIDELINES

   The Fund may invest up to 15% of its total assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) futures contracts and related options for which a liquid
secondary market does not exist and (c) time deposits maturing in more than
seven calender days. The above restriction does not apply to securities subject
to Rule 144A of the Securities Act of 1933, as amended (the "1933 Act") ("Rule
144A Securities"). In addition, the Fund may invest up to 5% of its assets in
the securities of issuers which have been in continuous operation for less than
three years. The Fund also may borrow from banks for temporary or emergency
purposes, but not for investment purposes, in an amount up to 10% of its total
assets, and may pledge its assets to the same extent in connection with such
borrowings. Whenever these borrowings exceed


                                                                              21
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

5% of the value of the Fund's total assets, the Fund will not make any
additional investments. Except for the limitations on borrowing, the investment
guidelines set forth in this paragraph may be changed at any time without
shareholder consent by vote of the Trust's Board of Trustees. A complete list of
investment restrictions that identifies additional restrictions that cannot be
changed without the approval of the majority of the Fund's outstanding shares is
contained in the Statement of Additional Information.

   RISK FACTORS AND SPECIAL CONSIDERATIONS

   Convertible Securities and Synthetic Convertible Securities. Convertible
securities are fixed-income securities that may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the underlying
common stocks and, therefore, also will react to variations in the general
market for equity securities. A unique feature of convertible securities is that
as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.

   As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. However,
there can be no assurance of capital appreciation because securities prices
fluctuate.

   Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and 


22
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

convertible preferred stock is senior to common stock of the same issuer.
Because of the subordination feature, however, convertible securities typically
have lower ratings than similar non-convertible securities.

   Unlike a convertible security which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotations System. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the Fund at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risks normally involved in holding the
securities comprising the synthetic convertible security.

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

   While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk.

   Issuers of medium- and low-rated and comparable unrated securities are often
highly leveraged and may not have more traditional methods of financing


                                                                              23
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

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

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

 
   Securities which are rated Ba by Moody's or BB by S&P or an equivalent rating
by any other NRSRO have speculative characteristics with respect to capacity to
pay interest and repay principal. Securities which are rated B generally lack
characteristics of the desirable investment and assurance of interest and
principal payments over any long period of time may be small.

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

   Options. Option writing for the Fund may be limited by position and exercise
limits established by the national securities exchanges and the National
Association 
 


24
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

 
of Securities Dealers, Inc. (the "NASD") and by requirements in the Code for
qualification as a regulated investment company (see "Dividends, Distributions
and Taxes"). The Fund may write covered call options to generate current income.
In addition, the Fund may enter into options transactions as hedges to reduce
investment risk, generally by making an investment expected to move in the
opposite direction of a portfolio position. A hedge is designed to offset a loss
on a portfolio position with a gain on the hedge position; at the same time,
however, a properly correlated hedge will result in a gain on the portfolio
position being offset by a loss on the hedge position. The Fund bears the risk
that the prices of the securities being hedged will not move in the same amount
as the hedge. The Fund will engage in hedging transactions only when deemed
advisable by MMC. Successful use by the Fund of options will depend on MMC's
ability to correctly predict movements in the direction of the securities
underlying the option used as a hedge. Losses incurred in hedging transactions
and the costs of these transactions will affect the Fund's performance.
 

   The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options only if there appears to be a liquid
secondary market for the options purchased or sold, for some options no such
secondary market may exist or the market may cease to exist.

   Securities of Unseasoned Issuers. Securities in which the Fund may invest may
have limited marketability and, therefore, may be subject to wide fluctuations
in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an
established market share.

   Foreign Securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The yield of the Fund may
be adversely affected by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign companies and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic companies. In addition, with respect to
certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Fund, including the withholding of dividends.
Foreign 


                                                                              25
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

securities may be subject to foreign government taxes that could reduce the
yield on such securities. Because the Fund may invest in securities denominated
or quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates may adversely affect the value of portfolio securities and the
appreciation or depreciation of investments. Investment in foreign securities
also may result in higher expenses due to the cost of converting foreign
currency to U.S. dollars, the payment of fixed brokerage commissions on foreign
exchanges, which generally are higher than commissions on domestic exchanges,
and the expense of maintaining securities with foreign custodians, and the
imposition of transfer taxes or transaction charges associated with foreign
exchanges.

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

 
   Corporate Securities. Corporate securities in which the Fund may invest
include corporate fixed-income securities of both domestic and foreign issuers,
such as bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, and preferred stock.
 

   Certain of the corporate fixed-income securities in which the Fund may invest
may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights
permitting their holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.

   Non-Publicly Traded and Illiquid Securities. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when its investment adviser
believes it desirable to do so. The Fund's investments in illiquid securities
are subject to the risk that 


26
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that the Fund deems representative of their value, the
value of the Fund's net assets could be adversely affected.

   Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities
are freely transferable among qualified institutional buyers, a liquid market
may exist among such buyers. The Board of Trustees has adopted guidelines and
delegated to management the daily function of determining and monitoring
liquidity of Rule 144A Securities. However, the Board of Trustees maintains
sufficient oversight and is ultimately responsible for the liquidity
determinations. Investments in restricted securities such as Rule 144A
Securities could have the effect of increasing the level of illiquidity in the
Fund to the extent that there is temporarily no market for these securities
among qualified institutional buyers.

 
   Year 2000. The investment management services provided to the Fund by MMC and
the services provided to shareholders by Salomon Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. MMC and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, MMC has been advised by the Fund's custodian, transfer agent,
distributor and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
that MMC, Salomon Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time.

   In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
 

   PORTFOLIO TRANSACTIONS AND TURNOVER

 
   All orders for transactions in securities and options on behalf of the Fund
are placed by MMC with broker-dealers that MMC selects, including Salomon Smith
Barney and other affiliated brokers. The Fund may utilize Salomon Smith Barney
 


                                                                              27
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

 
or a Salomon Smith Barney affiliated broker in connection with a purchase or
sale of securities when MMC believes that the broker's charge for the
transactions does not exceed usual and customary levels. In selecting a broker,
including Salomon Smith Barney, for a transaction, the primary consideration is
prompt and effective execution of orders at the most favorable prices. Subject
to that primary consideration, dealers may be selected for research, statistical
or other services to enable MMC to supplement its own research and analysis with
the views and information of other securities firms.
 

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

 
   The Fund'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 Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding. Net asset value is calculated separately for Class A,
B, L, O and Y.
 

   Generally, the Fund's investments are valued at market value, or in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Fund's Board of Trustees. Short-term
investments that mature in 60 days or less are valued at amortized cost whenever
the Trustees determine that amortized cost reflects fair value of those
instruments. Amortized cost valuation involves valuing an instrument at its cost
initially and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates or
the market value of the instrument. Further information regarding the Fund's
valuation policies is contained in the Statement of Additional Information.

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

   DIVIDENDS AND DISTRIBUTIONS

 
   The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gain payable to shareholders.

   The Fund declares dividends from its net investment income (that is, income
other than its net realized long- and short-term capital gains) monthly and pays
dividends generally on the last Friday of the month. Distributions of net
realized long- and short-term capital gains, if any, are declared and paid
annually after the end of the fiscal year in which they have been earned.
 


28
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Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

 
   If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In addition, in
order to avoid the application of a 4% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may make an
additional distribution shortly before December 31 of each year of any
undistributed ordinary income or capital gains and expects to make any other
distributions as are necessary to avoid the application of this tax.

   If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the Investment Company Act of 1940,
as amended ("1940 Act") and other applicable laws, a notice will accompany any
distribution paid from sources other than net investment income. In the event
the Fund distributes amounts in excess of its net investment income and net
realized capital gains, such distributions may have the effect of decreasing the
Fund's total assets, which may increase the Fund's expense ratio.

   The per share dividends on Class B, Class L and Class O shares of the Fund
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, Class L and Class O shares. The per share dividends on Class A shares of the
Fund 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 L,
Class O and Class Y shares.
 

   TAXES

 
   The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a regulated investment company under the Code. Dividends
paid from net investment income and distributions of net realized short-term
capital gains are taxable to shareholders as ordinary income, regardless of how
long shareholders have held their Fund shares and whether such dividends and
distributions are received in cash or reinvested in additional Fund shares.
Distributions of net realized long-term capital gains will be taxable to
shareholders as long-term capital gains, regardless of how long shareholders
have held their Fund shares and whether such distributions are received in cash
or are reinvested in additional Fund shares. Furthermore, as a general rule, a
shareholder's gain or loss on a sale or redemption of Fund shares 
 


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<PAGE>

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

will be a long-term capital gain or loss if the shareholder has held the shares
for more than one year and will be a short-term capital gain or loss if the
shareholder has held the shares for one year or less. Some of the Fund's
dividends declared from net investment income may qualify for the Federal
dividends-received deduction for corporations.

   Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Each shareholder also will receive, if
appropriate, various written notices after the close of the Fund's prior taxable
year as to the Federal income tax status of his or her dividends and
distributions which were received from the Fund during the Fund's prior taxable
year. Shareholders should consult their tax advisers about the status of the
Fund's dividends and distributions for state and local tax liabilities.

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

 
   SALES CHARGE ALTERNATIVES

   The following Classes of shares are available for purchase through this
Prospectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.

   Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:

<TABLE>
<CAPTION>
                                                                         Dealers
                        Sales Charge as a %   Sales Charge as a %     Reallowance as
Amount of Investment       of Transaction     of Amount Invested    % of Offering Price
=======================================================================================
<S>                             <C>                   <C>                    <C>  
Less than $25,000               5.00%                 5.26%                  4.50%
$ 25,000-$ 49,999               4.00                  4.17                   3.60
$ 50,000-$ 99,999               3.50                  3.63                   3.15
$100,000-$249,999               3.00                  3.09                   2.70
$250,000-$499,999               2.00                  2.04                   1.80
$500,000 and over               *                     *                      *
=======================================================================================
</TABLE>

*  Purchases of Class A shares of $500,000 or more will be made at net asset
   value without any initial sales charge, but will be subject to a CDSC of
   1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
   shares is payable to Salomon Smith Barney, which compensates Salomon Smith
   Barney Financial Consultants and other dealers whose clients make purchases
   of $500,000 or more. The CDSC is waived in the same circumstances in which
   the CDSC applicable to Class B, Class L and Class 0 shares is waived. See
   "Deferred Sales Charge Provisions" and "Waivers of CDSC."

   Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the 1933 Act. The
reduced sales charges shown above apply to the aggregate of purchases of Class A
shares of the Fund made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.
 


30
<PAGE>

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

 
   Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.

   Class L Shares. Class L shares are sold with an initial sales charge of 1.00%
(which is equal to 1.01% of the amount invested) and are subject to a CDSC
payable upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 22, 2001, purchases of Class L shares by investors who were holders
of Class C shares of the Fund on June 12, 1998 will not be subject to the 1.00%
initial sales charge.

   Class O Shares. Until June 22, 2001, purchases of Class O shares by investors
who were holders of Class C shares of the Fund on June 12, 1998 will not be
subject to the 1.00% initial sales charge, which will apply on and after that
date.

   Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).

   GENERAL

   Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a Dealer Representative. In addition, certain investors, including
qualified retirement plans purchasing through certain Dealer Representatives,
may purchase shares directly from the Fund. When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A, Class B, Class L or
Class Y shares. (Class O shares are available for purchase only by shareholders
who owned Class C shares of the Fund on June 12, 1998.) Salomon Smith Barney and
Dealer Representatives may charge their customers an annual account maintenance
fee in connection with a brokerage account through which an investor purchases
or holds shares. Accounts held directly at the Transfer Agent are not subject to
a maintenance fee.

   Investors in Class A, Class B and Class L shares may open an account in the
Fund 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 Fund. Investors in
Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
For participants in retirement plans qualified under Section 403(b)(7) or
Section 401(c) of the Code, the minimum initial investment requirement for Class
A, Class B and Class L shares and the subsequent investment requirement for all
Classes in the Fund is $25. For shareholders purchasing shares of the Fund
through the Systematic Investment Plan on a monthly basis, the minimum initial
investment requirement 
 


                                                                              31
<PAGE>

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

 
for Class A, Class B and Class L shares and subsequent investment requirement
for all Classes is $25. For shareholders purchasing shares of the Fund through
the Systematic Investment Plan on a quarterly basis, the minimum initial
investment required for Class A, Class B and Class L shares and the subsequent
investment requirement for all Classes is $50. There are no minimum investment
requirements for Class A shares for employees of Citigroup and its subsidiaries,
including Salomon Smith Barney, unitholders who invest distributions from a UIT
sponsored by Salomon Smith Barney, and Directors/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 Transfer Agent. Share certificates are
issued only upon a shareholder's written request to the Transfer Agent.

   Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant prior to the close of regular trading on the NYSE, on any day the
Fund calculates its net asset value, are priced according to the net asset value
determined on that day (the "trade date"). Orders received by a Dealer
Representative prior to the close of regular trading on the NYSE on any day the
Fund calculates its net asset value, are priced according to the net asset value
determined on that day, provided the order is received by the Fund or the Fund's
agent prior to its close of business. For shares purchased through Salomon Smith
Barney or a Dealer Representative purchasing through Salomon Smith Barney,
payment for Fund 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, Salomon Smith Barney or the Transfer Agent is
authorized through preauthorized transfers of at least $25 on a monthly basis or
at least $50 on a quarterly basis to charge the shareholder's account held with
a bank or other financial institution on a monthly or quarterly basis, as
indicated by the shareholder, to provide for systematic additions to the
shareholder's Fund account. A shareholder who has insufficient funds to complete
the transfer will be charged a fee of up to $25 by Salomon Smith Barney or the
Transfer Agent. The Systematic Investment Plan also authorizes Salomon Smith
Barney to apply cash held in the shareholder's Salomon Smith Barney brokerage 
account or redeem the shareholder's shares of a Smith Barney money market fund 
to make additions to the account. Additional information is available from the 
Fund or a Salomon Smith Barney Financial Consultant.
 


32
<PAGE>

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

 
   SALES CHARGE WAIVERS AND REDUCTIONS
   INITIAL SALES CHARGE WAIVERS

   Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-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 the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
Smith Barney), on the condition the purchase of Class A shares is made with the
proceeds of the redemption of shares of a mutual fund which (i) was sponsored by
the Financial Consultant's prior employer, (ii) was sold to the client by the
Financial Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Fund (or Class A shares of
another Smith Barney Mutual Fund that is offered with a sales charge) and who
wish to reinvest their redemption proceeds in the Fund, provided the
reinvestment is made within 60 calendar days of the redemption; (e) purchases by
accounts managed by registered investment advisory subsidiaries of Citigroup;
(f) direct rollovers by plan participants of distribution from a 401(k) plan
offered to employees of Citigroup or its subsidiaries or a 401(k) plan enrolled
in the Smith Barney 401(k) Program (Note: subsequent investments will be subject
to the applicable sales charge); (g) purchases by separate accounts used to fund
certain unregistered variable annuity contracts; (h) investments of
distributions from a UIT sponsored by Salomon Smith Barney; and (i) purchases by
investors participating in a Salomon 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 the Fund 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 the Fund and of other Smith Barney Mutual Funds that are offered
with a sales 
 


                                       33
<PAGE>

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

 
charge as currently listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient 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.

   LETTER OF INTENT

   Class A Shares. A Letter of Intent for an amount of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. Each investment made 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. The term of the Letter will commence upon the date the
Letter is signed, or at the option of the investor, up to 90 days before such
date. Please contact a Salomon Smith Barney Financial Consultant or the Transfer
Agent to obtain a Letter of Intent application.

   Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares (except purchases of
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Fund and agree to purchase a
total of $15,000,000 of Class Y shares of the Fund within 13 months from the
date of the Letter. If a total investment of $15,000,000 is not made within the
13 month period, all Class Y shares purchased to date will be transferred to
Class A shares, where they will be subject to all fees (including a service fee
of 0.25%) and expenses applicable to the Fund's Class A shares, which may
include a CDSC of 1.00%. Please contact a Salomon Smith Barney Financial
Consultant or the Transfer Agent for further information.

   DEFERRED SALES CHARGE PROVISIONS

   "CDSC Shares" are: (a) Class B shares; (b) Class L shares; (c) Class O
shares; and (d) Class A shares that were purchased without an initial sales
charge but are subject to a CDSC. A CDSC may be imposed on certain redemptions
of these shares.
 


34
<PAGE>

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

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

   Class L shares, Class O 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 Salomon Smith Barney statement month. The following table
sets forth the rates of the charge for redemptions of Class B shares by
shareholders, except in the case of Class B shares held under the Smith Barney
401(k) Program, as described below. See "Purchase of Shares -- Smith Barney
401(k) and ExecChoice(TM) Programs."

        Year Since Purchase
        Payment Was Made                      CDSC
================================================================================
        First                                 5.00%
        Second                                4.00
        Third                                 3.00
        Fourth                                2.00
        Fifth                                 1.00
        Sixth and thereafter                  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 shareholders 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."

   The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such other funds. For
 


                                       35
<PAGE>

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

 
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 Salomon Smith Barney.

   To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 additional
shares through dividend reinvestment. During the fifteenth month after the
purchase, the investor decided to redeem $500 of his or her 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 12
months following the death or disability of the shareholder; (d) redemptions of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 591 1/42; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a
shareholder who has redeemed shares from other Smith Barney Mutual Funds may,
under certain circumstances, reinvest all or part of the redemption proceeds
within 60 days and receive pro rata credit for any CDSC imposed on the prior
redemption.

   CDSC waivers will be granted subject to confirmation (by Salomon Smith Barney
in the case of shareholders who are also Salomon Smith Barney clients or by the
Transfer Agent in the case of all other shareholders) of the 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.


36
<PAGE>

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

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

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

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

   401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If 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, a
Participating Plan's total Class L and Class O holdings in all non-money market
Smith Barney Mutual Funds equal at least $1,000,000, the Participating Plan will
be offered the opportunity to exchange all of its Class L shares for Class A
shares of the Fund. For Participating Plans that were originally established
through a Salomon Smith Barney retail brokerage account, the five-year period
will be calculated from the date the retail brokerage account was opened. Such
Participating Plans will be notified of the pending exchange in writing within
30 days after the fifth anniversary of the 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 a
Participating Plan's total Class L and Class O holdings in all non-money market
Smith Barney Mutual Funds equal at least $500,000 as of the calendar year-end,
the Participating Plan will be offered the opportunity to exchange all of its
Class L shares and Class O shares for Class A shares of a Fund. Such Plans will
be notified in writing within 30 days after the last business day of the
calendar year and, unless the exchange offer has been rejected in writing, the
exchange will occur on or about the last business day of the following March.
 


                                                                              37
<PAGE>

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

 
   Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Programs,
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 L shares and Class O shares for Class A shares of a Fund,
regardless of asset size, at the end of the eighth year after the date the
Participating Plan enrolled in the Smith Barney 401(k) 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 L shares of
the Fund but instead may acquire Class A shares of the Fund. Any Class L shares
not converted will continue to be 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 Salomon Smith Barney Financial Consultant.
 

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

 
   Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
Smith Barney Mutual Funds, to the extent shares are offered for sale in the
shareholder's state of residence. Exchanges of Class A, Class B and Class L and
Class O 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
     Concert Peachtree Growth Fund
     Concert Social Awareness Fund
     Smith Barney Aggressive Growth Fund Inc.
     Smith Barney Appreciation Fund Inc.
     Smith Barney Balanced Fund
     Smith Barney Contrarian Fund
     Smith Barney Fundamental Value Fund Inc.
     Smith Barney Funds, Inc.-- Large Cap Value Fund
     Smith Barney Large Cap Blend Fund
     Smith Barney Large Capitalization Growth Fund
     Smith Barney Mid Cap Blend Fund
     Smith Barney Natural Resources Fund Inc.
     Smith Barney Premium Total Return Fund
 


38
<PAGE>

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

 
     Smith Barney Small Cap Blend Fund, Inc.
     Smith Barney Special Equities Fund
 

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

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

 
Global-International Funds
    Smith Barney Hansberger Global Small Cap Value Fund
    Smith Barney Hansberger Global Value Fund
    Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
    Smith Barney World Funds, Inc. -- European Portfolio
    Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
    Smith Barney World Funds, Inc. -- International Balanced Portfolio
    Smith Barney World Funds, Inc. -- International Equity Portfolio
    Smith Barney World Funds, inc. -- Pacific Portfolio
 

Smith Barney Concert Allocation Series Inc.
 
    Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
    Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
    Smith Barney Concert Allocation Series Inc. -- Global Portfolio
 


                                                                              39
<PAGE>

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

    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 and Class B shares of the Fund. 
 ** Available for exchange with Class A, Class L and Class Y shares of the Fund.
*** Available for exchange with Class A shares of the Fund.
  + Available for exchange with Class B and Class L shares of the Fund.
 ++ Available for exchange with Class A and Class Y shares of the Fund. In
    addition, Participating Plans opened prior to June 21, 1996 and investing in
    Class L shares may exchange Fund shares for Class L shares of this Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
 

   Class B Exchanges. In the event a Class B shareholder (unless such
shareholder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) 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 the Fund, the exchanged
Class B shares will be subject to the higher applicable CDSC. Upon an exchange,
the new Class B shares will be deemed to have been purchased on the same date as
the Class B shares of the Fund that have been exchanged.

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

   Class O Exchanges. Class O shares may be exchanged with Class L shares of
other Smith BarneyMutual Funds. The new Class L shares will be deemed to have
been purchased on the same date as the Class O shares of the Fund that have been
exchanged.
 

   Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without
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 Fund's performance and its shareholders. MMC may determine
 


40
<PAGE>

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

that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by a
shareholder. Upon such a determination, the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15-day period the shareholder will be required
to (a) redeem his or her shares in the Fund or (b) remain invested in the Fund
or exchange into any of the funds of the Smith Barney Mutual Funds listed above,
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. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.

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

   The Fund is required to redeem the shares of the Fund 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 First Data receives
further instructions from Salomon Smith Barney, or if the shareholder's account
is not with Salomon Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act, in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Salomon Smith Barney brokerage account, these funds
will not be invested for the 
 


                                                                              41
<PAGE>

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

 
shareholder's benefit without specific instruction and Salomon Smith Barney will
benefit from the use of temporarily uninvested funds. Redemption proceeds for
shares purchased by check, other than a certified or official bank check, will
be remitted upon clearance of the check, which may take up to ten days or more.

   Shares held by Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial Consultant.
Shares other than those held by Salomon Smith Barney as custodian may be
redeemed through an investor's Financial Consultant, Dealer Representative or by
submitting a written request for redemption to:

      Smith Barney Convertible Fund 
      Class A, B, L, O 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 share certificate, stock power or on a written
redemption request in excess of $10,000 must be guaranteed by an eligible
guarantor institution such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal Reserve System or member firm
of a national securities exchange. Written redemption requests of $10,000 or
less do not require a signature guarantee unless more than one such redemption
request is made in any 10-day period or the redemption proceeds are to be sent
to an address other than the address of record. Unless otherwise directed,
redemption proceeds will be mailed to an investor's address of record. First
Data may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees or guardians. A redemption
request will not be deemed properly received until First Data receives all
required documents in proper form.
 

   TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

 
   Shareholders who do not have a Salomon Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should 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
 


42
<PAGE>

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

investor may authorize telephone redemptions on the new account application with
the applicant's signature guarantee when making his or her initial investment in
the Fund.

 
   Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
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 or her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the case
may be, on the next business day following the redemption request. In order to
use the wire procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.

 
   Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(Eastern time) 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 days' prior notice to shareholders.


                                       43
<PAGE>

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

   AUTOMATIC CASH WITHDRAWAL PLAN

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

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

   The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, 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
--------------------------------------------------------------------------------

   YIELD

   From time to time, the Fund advertises the 30 day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30 day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last day
of the period. This income is "annualized" by assuming that the amount of income
is generated each month over a one-year period and is compounded semi-annually.
The annualized income is then shown as a percentage of the net asset value.

   TOTAL RETURN

   From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of sales


44
<PAGE>

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

 
literature. These figures are computed separately for Class A, Class B, Class L,
Class O and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a 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 Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution 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 Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.
 

--------------------------------------------------------------------------------
Management of the Trust and the Fund
--------------------------------------------------------------------------------

   BOARD OF TRUSTEES

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

   INVESTMENT ADVISER

 
   MMC, located at 388 Greenwich Street, New York, New York 10013, serves as the
Fund's investment adviser. MMC (through its predecessor entities) has been in
the investment counseling business since 1934 and is a registered investment
 


                                                                              45
<PAGE>

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

 
adviser. MMC renders investment advice to investment companies that had
aggregate assets under management as of September 30, 1998 in excess of $108
billion.

   Subject to the supervision and direction of the Fund's Board of Trustees, MMC
manages the Fund's portfolio in accordance with the Fund's stated investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. For advisory
services rendered to the Fund, the Fund pays MMC a fee at the annual rate of
0.50% of the value of the Fund's average daily net assets. This fee is computed
daily and paid monthly.
 

   PORTFOLIO MANAGEMENT

 
   Robert Swab, Vice President of Salomon Smith Barney has managed the
day-to-day operations of the Fund since 1995, including making all investment
decisions.

   Mr. Swab's management discussions and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1998 are
included in the Annual Report dated July 31, 1998. A copy of the Annual Report
may be obtained upon request and without charge from a Salomon Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
 

   ADMINISTRATOR

 
   MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays MMC a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. This fee is computed daily and paid monthly.

   On October 8, 1998, Travelers Group Inc. and Citicorp consummated their
merger, thereby creating a new entity called Citigroup. Citigroup is a bank 
Holding company subject to regulation under the Bank Holding Company Act of 
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain 
other laws and regulations. MMC does not believe that its compliance with the 
applicable law will have a material adverse effect on its ability to continue 
to provide the Fund with the same level of investment advisory services that 
it currently receives.
 
   
--------------------------------------------------------------------------------
Distribution
--------------------------------------------------------------------------------
    
 
   CFBDS, Inc., located at 21 Milk Street, Boston MA 02109-5408, distributes
shares of the Fund as principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS, Inc. to take
and pay 


46
<PAGE>
   
--------------------------------------------------------------------------------
Distribution (continued)
--------------------------------------------------------------------------------

for only such securities as may be sold to the public. Pursuant to a
plan of distribution adopted by the Fund under Rule 12b-1 under the 1940 Act
(the "Plan"), Salomon Smith Barney is paid an annual service fee with respect to
Class A, Class B, Class L and Class O shares of the Fund at the annual rate of
0.25% of the average daily net assets of the respective Class. Salomon Smith
Barney is also paid an annual distribution fee with respect to Class B Class L
and Class O shares at the annual rate of 0.50%, 0.75% and 0.45%, respectively,
of the average daily net assets attributable to those Classes. Class B shares
which automatically convert to Class A shares eight years after the date of
original purchase will no longer be subject to distribution fees. The fees are
used by Salomon Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B, Class L and Class O 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 Salomon Smith
Barney Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Salomon Smith Barney associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses.
    

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

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

--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------
   
   The Trust was organized on March 12, 1985, under the laws of the 
Commonwealth of Massachusetts and is an entity commonly known as a 
"Massachusetts business trust." The Trust offers shares of beneficial interest
of separate series having a $.001 per share par value. When matters are
submitted for shareholder vote, shareholders of each Class of each Fund will
have one vote for 
    

                                                                              47
<PAGE>

--------------------------------------------------------------------------------
Additional Information (continued)
--------------------------------------------------------------------------------
   
each full share owned and a proportionate, fractional vote for
any fractional share held of that Class.
    
   Each Class represents identical interests in the Fund's investment portfolio.
As a result, the Classes have the same rights, privileges and preferences,
except with respect to: (a) the designation of each Class; (b) the effect of the
respective sales charges for each Class; (c) the distribution and/or service
fees borne by each Class; (d) the expenses allocable exclusively to each Class;
(e) voting rights on matters exclusively affecting a single Class; (f) the
exchange privilege of each Class; and (g) the conversion feature of the Class B
shares. The Board of Trustees does not anticipate that there will be any
conflicts among the interests of the holders of the different Classes of shares
of the Fund. The Trustees, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.

   The Trust does not hold annual shareholder meetings. There normally will be
no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees will call a meeting for any purpose for
voting on the written request of shareholders holding at least 10% of the
Trust's outstanding shares and the Fund will assist shareholders in calling such
a meeting as required by the 1940 Act.

   When matters are submitted for shareholder vote, shareholders of each Class
of each fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Shares of the Trust
will be voted generally on a Trust-wide basis on all matters, except matters
affecting the interests of one Fund or one Class of shares.

   PNC Bank, located at 17th and Chestnut Streets, Philadelphia, PA 19103,
serves as custodian of the Trust's investments.

 
   First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Trust'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 Trust plans to consolidate the mailing of the Fund's
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 accounts should contact their Salomon Smith
Barney Financial Consultants or First Data.
 


48
<PAGE>
 
                                                            SALOMON SMITH BARNEY
                                                   -----------------------------
                                                   A memeber of citigroup [LOGO]

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

                                                                    Smith Barney
                                                                     Convertible
                                                                            Fund

                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                    FD1210 11/98
 


<PAGE>

P R O S P E C T U S
 
 
                                                                    SMITH BARNEY
                                                                     Diversified
                                                                       Strategic
                                                                          Income
                                                                            Fund

                                                               NOVEMBER 27, 1998
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
[LOGO] Smith Barney Mutual Funds
       Investing for your future.
       Every day.(R)
<PAGE>
 
PROSPECTUS                                                NOVEMBER 27, 1998
 
Smith Barney Diversified Strategic Income Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
 
  Smith Barney Diversified Strategic Income Fund (the "Fund"), a diversified
fund, seeks high current income primarily through investment in fixed-income
securities. The Fund attempts to achieve this objective by allocating and real-
locating its assets primarily among various types of fixed-income securities
selected by its investment adviser on the basis of an analysis of economic and
market conditions and the relative risks and opportunities of those types of
fixed-income securities. The Fund is one of a number of funds, each having dis-
tinct investment objectives and policies, making up the Smith Barney Income
Funds (the "Trust"). The Trust is an open-end, management investment company
commonly referred to as a mutual fund.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Trust, 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. Shares of other funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the tele-
phone number set forth above or by contacting a Salomon Smith Barney Financial
Consultant.
 
  Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated November 27, 1998, as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth above
or by contacting a Salomon Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.
 
CFBDS, INC.  
Distributor
 
MUTUAL MANAGEMENT CORP.  
Investment Adviser and Administrator
 
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Sub-Investment Adviser
 
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                           10
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   14
-------------------------------------------------
VALUATION OF SHARES                            29
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             30
-------------------------------------------------
PURCHASE OF SHARES                             32
-------------------------------------------------
EXCHANGE PRIVILEGE                             39
-------------------------------------------------
REDEMPTION OF SHARES                           42
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           45
-------------------------------------------------
PERFORMANCE                                    45
-------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND           46
-------------------------------------------------
DISTRIBUTION                                   48
-------------------------------------------------
ADDITIONAL INFORMATION                         49
-------------------------------------------------
    
</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 or
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 Fund is an open-end, diversified management invest-
ment company that seeks high current income primarily through investment in
fixed-income securities. The Fund attempts to achieve this objective by allo-
cating and reallocating its assets primarily among various types of fixed-
income securities selected by its investment adviser on the basis of an analy-
sis of economic and market conditions and the relative risks and opportunities
of those types of fixed-income securities. See "Investment Objective and Man-
agement Policies."
 
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and 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
$15,000,000. In addition, a fifth Class, Class Z shares, which is offered pur-
suant to a separate prospectus, is offered exclusively to (a) tax-exempt
employee benefit and retirement plans of Salomon Smith Barney Inc. ("Salomon
Smith Barney") and its affiliates and (b) unit investment trusts ("UITs")
sponsored by Salomon 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 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 4.50% of redemption proceeds, declining by 0.50% the first
year after purchase and 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual serv-
ice 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
 
                                                                              3
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
been acquired through the reinvestment of dividends and distributions ("Class
B Dividend Shares") will be converted at that time. See "Purchase of Shares--
Deferred Sales Charge Alternatives."
 
  Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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, and investors pay a CDSC of 1.00% if they
redeem Class L shares within 12 months of purchase. This CDSC may be waived
for certain redemptions. Until June 22, 2001, purchases of Class L shares by
investors who were holders of Class C shares of the Fund on June 12, 1998 will
not be subject to the 1.00% initial sales charge. The Class L shares' distri-
bution fee may cause that Class to have higher expenses and pay lower divi-
dends than Class A and Class B shares. Purchases of Fund shares, which when
combined with current holdings of Class L shares of the Fund equal or exceed
$500,000 in the aggregate, should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase.  
 
  Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net
asset value with no initial sales charge or CDSC. They are not subject to any
service or distribution fees.
 
  In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
 
  Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Fund. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of these Classes. Because the Fund's future return can-
not be predicted, however, there can be no assurance that this would be the
case. Finally, Class L shares which have a lower initial sales charge but are
subject to higher distribution fees than Class A shares, are suitable for
investors who are not investing or intending to invest an amount which would
receive a substantial sales charge discount and who have a short-term or unde-
termined time frame.  
 
  Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class L shares have a shorter CDSC period than Class
B shares they do not have a conversion feature and therefore are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than
Class L shares to investors with longer-term investment outlooks.
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
  Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
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 pur-
chase to the net asset value of all Class A shares offered with a sales charge
held in other Smith Barney Mutual Funds listed under "Exchange Privilege."
Class A share purchases may also be eligible for a reduced initial sales
charge. See "Purchase of Shares."  
 
  Salomon Smith Barney Financial Consultants may receive different compensa-
tion for selling different Classes of shares. Investors should understand that
the purpose of the CDSC on the Class B and Class L shares is the same as that
of the initial sales charge on the Class A shares.
 
  See "Purchase of Shares" and "Management of the Trust and 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 L shares are available without a
sales charge as investment alternatives under both of these programs. See
"Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
 
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. ("CFBDS")
to distribute the Fund's shares.  
 
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker
that clears securities through Salomon Smith Barney. (An investment dealer in
the selling group and a broker that clears securities through Salomon Smith
Barney are collectively referred to as "Dealer Representatives.") In addition,
certain investors, including qualified retirement plans and investors purchas-
ing through certain Dealer Representatives, may purchase shares directly from
the Fund through the Fund's transfer agent, First Data Investors Services
Group, Inc. (the "Transfer Agent"). See "Purchase of Shares."  
  
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open
an account by making an initial investment of at least $1,000 for each
account, or $250 for an individual retirement account ("IRA") or a Self-
Employed Retirement Plan. Investors in Class Y shares may open an account for
an
 
                                                                              5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
initial investment of $15,000,000. Subsequent investments of at least $50 may
be made for all Classes. For participants in retirement plans qualified under
Section 403(b)(7) or Section 401(a) of the Code, the minimum initial invest-
ment requirement for Class A, Class B and Class L shares and the minimum sub-
sequent investment requirement for all Classes is $25. The minimum investment
requirements for purchases of Fund shares through the Systematic Investment
Plan are described below. There is no minimum investment required in Class A
shares for unitholders who invest distributions from a UIT sponsored by Salo-
mon Smith Barney. See "Purchase of Shares." See "Purchases of Shares."  
 
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for Fund shares. The minimum initial investment
requirement for Class A, Class B and Class L shares and the minimum subsequent
investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
 
MANAGEMENT OF THE FUND Mutual Management Corp. (the "Manager") (formerly Smith
Barney Mutual Funds Management Inc.), serves as the Fund's investment adviser
and administrator. The Manager provides investment advisory and management
services to investment companies affiliated with Smith Barney. The Manager is
a wholly owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of Citigroup Inc. ("Citigroup").
Citigroup businesses produce a broad range of financial services--asset man-
agement, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading--and use diverse channels to make
them available to consumer and corporate customers around the world. Among
these businesses are Citibank, Commercial Credit, Primerica Financial Servic-
es, Salomon Smith Barney, SSBC Asset Management, Travelers Life & Annuity, and
Travelers Property Casualty.  
 
  Smith Barney Global Capital Management Inc. ("Global Capital Management")
serves as a sub-investment adviser to the Fund. Global Capital Management is a
wholly owned subsidiary of Holdings. See "Management of the Trust and the
Fund."
 
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respec-
tive net asset values next determined. See "Exchange Privilege."
 
VALUATION OF SHARES Net asset value of the Fund for the prior day is generally
quoted daily in the financial section of most newspapers and is also available
from Salomon Smith Barney Financial Consultants. See "Valuation of Shares."
 
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and 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 dis-
tribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
 
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. General changes in interest
rates will result in increases or decreases in the market value of the obliga-
tions held by the Fund. The Fund may invest up to 35% of its assets in corpo-
rate fixed-income securities of domestic issuers rated by a nationally recog-
nized statistical rating organization ("NRSRO") such as securities rated Ba or
lower by Moody's Investors Service, Inc. ("Moody's") or BB or lower by Stan-
dard & Poor's Ratings Group ("S&P") or in nonrated securities deemed by the
Manager to be of comparable quality. The Fund may invest in securities which
are medium and low-rated by NRSROs. For example, the Fund may invest in fixed-
income securities rated as low as Caa by Moody's or CCC by S&P. Securities
that are rated Ba by Moody's or BB by S&P have speculative characteristics
with respect to capacity to pay interest and repay principal. Securities that
are rated B generally lack characteristics of a desirable investment and
assurance of interest and principal payments over any long period of time may
be small. Securities that are rated Caa or CCC are of poor standing. These
issues may be in default or present elements of danger may exist with respect
to principal or interest. Although medium- or low-rated securities offer a
higher current yield than the yield offered by higher rated securities, they
involve greater volatility of price and risk of loss of income and principal,
including the probability of default by or bankruptcy of the issuers of such
securities. Medium- and low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment
of the rating organization, are outweighed by large uncertainties of major
risk exposures to adverse conditions and (b) are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The Fund's investing in the secu-
rities of foreign issuers involves special risks and considerations not typi-
cally associated with investing in domestic issuers. These risks include dif-
ferences in accounting, auditing and financial reporting standards, generally
higher commission rates on foreign portfolio transactions, the possibility of
expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations, political instability that could affect domestic
investments in foreign countries and potential restrictions on the flow of
international capital. Foreign securities often trade with less frequency and
volume than domestic securities and therefore may exhibit greater price vola-
tility and changes in foreign exchange rates will affect the  
 
                                                                              7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
value of those securities held by the Fund that are denominated or quoted in
currencies other than the U.S. dollar. Certain of the investments held by the
Fund and certain of the investment strategies that the Fund may employ might
expose it to certain risks. The investments presenting the Fund with risks are
mortgage-related securities, medium- or low-rated securities, as described
above, foreign securities, as described above, and securities of unseasoned
issuers. The investment strategies presenting the Fund with risks are entering
in repurchase agreements and reverse repurchase agreements, entering into for-
ward roll transactions, purchasing or selling securities on a when-issued or
delayed-delivery basis, lending portfolio securities, entering into transac-
tions involving options and futures contracts and entering into currency trans-
actions. See "Investment Objective and Management Policies."
 
THE FUND'S EXPENSES  The following expense table lists the costs and expenses
an investor will incur either directly or indirectly as a shareholder of the
Fund, based on the maximum sales charge or maximum CDSC that may be incurred at
the time of purchase or redemption and the Fund's operating expenses for its
most recent fiscal year:
 
<TABLE> 
<CAPTION>
  SMITH BARNEY DIVERSIFIED STRATEGIC INCOME
  FUND                                        CLASS A  CLASS B CLASS L* CLASS Y
-------------------------------------------------------------------------------
  <S>                                         <C>      <C>     <C>      <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Maximum sales charge imposed on
      purchases
      (as a percentage of offering price)      4.50%    None     1.00%   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                            0.65%    0.65%    0.65%   0.65%
    12b-1 fees***                              0.25     0.75     0.70    None
    Other expenses                             0.11     0.10     0.10    0.01
-------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES                1.01%    1.50%    1.45%   0.66%
-------------------------------------------------------------------------------
</TABLE> 
 
   * Class C shares were renamed Class L shares.  
 
  ** Purchases of Class A shares of $500,000 or more will be made at net asset
     value with no sales charge, but will be subject to a CDSC of 1.00% on
     redemptions made within 12 months of purchase.  
 
 *** Upon conversion of Class B shares to Class A shares, such shares will no
     longer be subject to a distribution fee. Class L shares do not have a
     conversion feature and, therefore, are subject to an ongoing distribution
     fee. As a result, long-term shareholders of Class L shares may pay more
     than the economic equivalent of the maximum front-end sales charge
     permitted by the National Association of Securities Dealers, Inc. (the
     "NASD").  
 
  Class A shares of the Fund purchased through the Salomon Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable quarter-
ly, in lieu of the initial sales charge. The fee will vary to a maximum of
1.50%, depending on the amount of assets held through the Program. For more
information, please call your Salomon Smith Barney Financial Consultant.  
 
 
8
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
  The sales charge and CDSC set forth in the above table are the maximum
charges imposed upon purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class L and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Salomon Smith Barney receives an annual 12b-1 service fee of 0.25% of
the value of average daily net assets of Class A shares. Salomon Smith Barney
also receives, with respect to Class B shares, an annual 12b-1 fee of 0.75% of
the value of the average daily net assets of that Class, consisting of a 0.50%
distribution fee and a 0.25% service fee. For Class L shares, Salomon Smith
Barney receives an annual 12b-1 fee of .70% of the value of average daily net
assets of this Class, consisting of a 0.45% distribution fee and a 0.25% serv-
ice fee. "Other expenses" in the above table include fees for shareholder serv-
ices, custodial fees, legal and accounting fees, printing costs and registra-
tion fees.
 
 EXAMPLE
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
 
<TABLE> 
<CAPTION>
  SMITH BARNEY DIVERSIFIED STRATEGIC INCOME
  FUND                                        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..................................  $55     $76     $99     $165
    Class B..................................   60      78      92      167
    Class L..................................   35      55      88      182
    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..................................   55      76      99      165
    Class B..................................   15      48      82      167
    Class L..................................   25      55      88      182
    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, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                               9
<PAGE>
 
FINANCIAL HIGHLIGHTS
 
  The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal years ended July 31, 1990 through July
31, 1994 has been audited by other independent auditors. The information set
out below should be read in conjunction with the financial statements and
related notes that also appear in the Fund's 1998 Annual Report, which is
incorporated by reference into the Statement of Additional Information.  
 
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE> 
<CAPTION>
SMITH BARNEY DIVERSIFIED
STRATEGIC INCOME FUND
YEAR ENDED JULY 31,         1998(1)   1997    1996    1995    1994   1993(2)
------------------------------------------------------------------------------
<S>                         <C>      <C>     <C>     <C>     <C>     <C>
NET ASSET VALUE, BEGINNING
OF YEAR                     $ 8.01   $ 7.82  $ 7.85  $ 7.76  $ 8.41  $ 8.24
------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income(3)     0.53     0.62    0.61    0.94    0.63    0.47
 Net realized and
 unrealized gain (loss)       0.05     0.24    0.03   (0.18)  (0.52)   0.27
------------------------------------------------------------------------------
Total Income From
Operations                    0.58     0.86    0.64    0.76    0.11    0.74
------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income       (0.58)   (0.67)  (0.62)  (0.48)  (0.62)  (0.45)
 Net realized gains          (0.05)      --      --      --   (0.10)  (0.12)
 Capital                        --       --   (0.05)  (0.19)  (0.04)     --
------------------------------------------------------------------------------
Total Distributions         (0.63)    (0.67)  (0.67)  (0.67)  (0.76)  (0.57)
------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR                        $ 7.96   $ 8.01  $ 7.82  $ 7.85  $ 7.76  $ 8.41
------------------------------------------------------------------------------
TOTAL RETURN                  7.47%   11.36%   8.39%  10.35%   1.16%   9.30%++
------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS)                  $  397     $267    $203    $177  $   76  $   48
------------------------------------------------------------------------------
RATIO TO AVERAGE NET
ASSETS:
 Expenses(3)                  1.01%    1.03%   1.04%   1.09%   1.10%   1.10%+
 Interest expense             0.06     0.06    0.01      --      --      --
 Net investment income        6.51     7.75    7.85    8.15    7.67%   8.26+
------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE        128%      85%     90%     83%     93%    116%
------------------------------------------------------------------------------
</TABLE> 
 (1) Per share amounts have been calculated using the monthly average shares
     method, rather than the undistributed net investment income method,
     because it more accurately reflects the per share data for the period.
 (2) For the period from November 6, 1992 (inception date) to July 31, 1993.
 (3) The investment adviser waived part of its fees for the years ended July
     31,1995 and 1994. If such fees had not been waived, the per share effect
     on net investment income and the ratios of expenses to average net assets
     would have been as follows:
<TABLE>
<CAPTION>
              PER SHARE DECREASES    EXPENSE RATIOS WITHOUT
            IN NET INVESTMENT INCOME       FEE WAIVERS
------------------------------------------------------------
               1995         1994        1995        1994
            ------------------------ ----------- -----------
   <S>      <C>         <C>          <C>         <C>
   Class A        $0.01       $0.00*       1.14%       1.12%
</TABLE>
 
  ++Total return is not annualized as it may not be representative of the
    total return for the year.
  + Annualized.
  * Amount represents less than $0.01 per share.
 
10
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
SMITH BARNEY
DIVERSIFIED STRATEGIC
INCOME FUND
YEAR ENDED JULY 31,        1998 (1)  1997    1996    1995    1994    1993    1992    1991   1990(2)
-----------------------------------------------------------------------------------------------------
<S>                        <C>      <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
NET ASSET VALUE,
BEGINNING OF YEAR           $ 8.03  $ 7.83  $ 7.86  $ 7.76  $ 8.41  $ 8.55  $ 7.98  $ 8.06  $ 8.00
-----------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income (3)    0.49    0.59    0.58    0.70    0.59    0.65    0.68    0.71    0.41
 Net realized and
 unrealized gain (loss)       0.05    0.23    0.01    0.02   (0.51)  (0.07)   0.64    0.07    0.05
-----------------------------------------------------------------------------------------------------
Total Income From
Operations                    0.54    0.82    0.59    0.72    0.08    0.58    1.32    0.78    0.46
-----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income       (0.54)  (0.62)  (0.57)  (0.44)  (0.60)  (0.58)  (0.68)  (0.71)  (0.40)
 Net realized gains          (0.05)     --      --      --   (0.10)  (0.14)     --   (0.06)     --
 Capital                        --      --   (0.05)  (0.18)  (0.03)     --   (0.07)  (0.09)     --
-----------------------------------------------------------------------------------------------------
Total Distributions          (0.59)  (0.62)  (0.62)  (0.62)  (0.73)  (0.72)  (0.75)  (0.86)  (0.40)
-----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR                        $ 7.98  $ 8.03  $ 7.83  $ 7.86  $ 7.76  $ 8.41  $ 8.55  $ 7.98  $ 8.06
-----------------------------------------------------------------------------------------------------
TOTAL RETURN                  6.93%  10.89%   7.80%  10.00%   0.66%   7.28%  17.12%  10.42%   6.00%++
-----------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS)                  $2,280  $2,440  $2,380  $2,367  $2,469  $2,105  $1,465  $  503  $  179
-----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses (3)                 1.50%   1.51%   1.52%   1.56%   1.57%   1.59%   1.62%   1.63%   1.74%+
 Interest expense             0.06    0.06    0.01      --      --      --      --      --      --
 Net investment income        6.12    7.34    7.36    6.82    7.20    7.77    7.99    9.21    9.59+
-----------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE       128%      85%     90%     83%     93%    116%    125%    131%     56%
-----------------------------------------------------------------------------------------------------
</TABLE>
 (1) Per share amounts have been calculated using the monthly average shares
     method, rather than the undistributed net investment income method,
     because it more accurately reflects the per share data for the period.
  
 (2) For the period from December 28, 1989 (commencement of operations) to
     July 31, 1990.  
 (3) The investment adviser waived part of its fees for the years ended July
     31,1995 and 1994. If such fees had not been waived, the per share effect
     on net investment income and the ratios of expenses to average net assets
     would have been as follows:
<TABLE>
<CAPTION>
               PER SHARE DECREASES    EXPENSE RATIOS WITHOUT
            IN NET INVESTMENT INCOME        FEE WAIVERS
-------------------------------------------------------------
                1995         1994        1995        1994
            ------------ ------------ ----------- -----------
   <S>      <C>          <C>          <C>         <C>
   Class B        $0.00*       $0.00*       1.61%       1.59%
</TABLE>
  ++Total return is not annualized as it may not be representative of the
 total return for the year.
  + Annualized.
  * Amount represents less than $0.01 per share.
 
                                                                              11
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
FOR A CLASS L SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
SMITH BARNEY DIVERSIFIED
STRATEGIC INCOME FUND
YEAR ENDED JULY 31,       1998(1)(2)  1997    1996   1995(3)   1994   1993(4)
-------------------------------------------------------------------------------
<S>                       <C>        <C>     <C>     <C>      <C>     <C>
NET ASSET VALUE,
BEGINNING OF YEAR           $ 8.01   $ 7.81  $ 7.84  $ 7.76   $ 8.41  $ 8.36
-------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income
 (5)                          0.49     0.58    0.52    1.16     0.55    0.22
 Net realized and
 unrealized gain (loss)       0.06     0.24    0.07   (0.46)   (0.47)   0.06
-------------------------------------------------------------------------------
Total Income From
Operations                    0.55     0.82    0.59    0.70     0.08    0.28
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income       (0.54)   (0.62)  (0.57)  (0.44)   (0.60)  (0.20)
 Net realized gains          (0.05)      --      --      --    (0.10)  (0.03)
 Capital                        --       --   (0.05)  (0.18)   (0.03)     --
-------------------------------------------------------------------------------
Total Distributions          (0.59)   (0.62)  (0.62)  (0.62)   (0.73)  (0.23)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR                        $ 7.97   $ 8.01  $ 7.81  $ 7.84   $ 7.76  $ 8.41
-------------------------------------------------------------------------------
TOTAL RETURN                  7.08%   10.92%   7.82%   9.73%    0.66%   3.41%++
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS)                  $  135   $   84  $   42  $   13   $    1  $   11
-------------------------------------------------------------------------------
RATIO TO AVERAGE NET
ASSETS
 Expenses (5)                 1.45%    1.46%   1.47%   1.46%    1.57%   1.50%+
 Interest expense             0.06     0.06    0.01      --       --      --
 Net investment income        6.09     7.19    7.61   10.23     7.20    7.87+
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE        128%      85%     90%     83%      93%    116%
-------------------------------------------------------------------------------
</TABLE>
 (1) Per share amounts have been calculated using the monthly average shares
     method, rather than the undistributed net investment income method,
     because it more accurately reflects per share data for the period.
 (2) Class L shares were called Class C shares until June 12, 1998.
 (3) On November 7, 1994, the former Class D shares were renamed Class C
     shares.
 (4) For the period from March 19, 1993 (inception date) to July 31, 1993.
 (5) The investment adviser waived part of its fees for the years ended July
     31,1995 and 1994. If such fees had not been waived, the per share effect
     on net investment income and the ratios of expenses to average net assets
     would have been as follows:
<TABLE>
<CAPTION>
               PER SHARE DECREASES    EXPENSE RATIOS WITHOUT
            IN NET INVESTMENT INCOME        FEE WAIVERS
-------------------------------------------------------------
                1995         1994        1995        1994
            ------------ ------------ ----------- -----------
   <S>      <C>          <C>          <C>         <C>
   Class L        $0.00*       $0.00*       1.51%       1.58%
</TABLE>
  ++Total return is not annualized as it may not be representative of the
    total return for the year.
  + Annualized.
  * Amount represents less than $0.01 per share.
 
12
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
FOR A CLASS Y SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
SMITH BARNEY DIVERSIFIED STRATEGIC
INCOME FUND
YEAR ENDED JULY 31,                   1998     1997    1996(1)
-----------------------------------------------------------------
<S>                                 <C>       <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR    $ 8.00   $ 7.82   $ 7.89
-----------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income                  0.55     0.64     0.50
 Net realized and unrealized gain       0.06     0.24     0.01
-----------------------------------------------------------------
Total Income From Operations            0.61     0.88     0.51
-----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                 (0.60)   (0.70)   (0.53)
 Net realized gains                    (0.05)      --       --
 Capital                                  --       --    (0.05)
-----------------------------------------------------------------
Total Distributions                    (0.65)   (0.70)   (0.58)
-----------------------------------------------------------------
NET ASSET VALUE, END OF YEAR          $ 7.96   $ 8.00   $ 7.82
-----------------------------------------------------------------
TOTAL RETURN                            7.96%   11.64%    6.65%++
-----------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)      $124,559  $80,479  $26,940
-----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                               0.66%    0.70%    0.69%+
 Interest expense                       0.06     0.06     0.01
 Net investment income                  6.88     7.84     8.54+
-----------------------------------------------------------------
PORTFOLIO TURNOVER RATE                  128%      85%      90%
-----------------------------------------------------------------
</TABLE>
 (1) Per share amounts have been calculated using the monthly average shares
     method, rather than the undistributed net investment income method,
     because it more accurately reflects per share data for the period.
 (2) For the period from October 10, 1995 (inception date) to July 31, 1996.
  ++Total return is not annualized, as it may not be representative of the
    total return for the year.
  + Annualized.
 
                                                                              13
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
  The Fund's investment objective is high current income primarily through
investment in fixed-income securities. In attempting to achieve its objective,
the Fund allocates and reallocates its assets primarily among various types of
fixed-income securities selected by the Manager. The types of fixed-income
securities among which the Fund's assets will be primarily allocated are:
obligations issued or guaranteed as to principal and interest by the United
States government ("U.S. government securities"); mortgage-related securities
issued by various governmental and non-governmental entities; domestic and
foreign corporate securities; and foreign government securities. The Fund's
investment objective may be changed only with the approval of the holders of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund will achieve its investment objective.  
 
  The allocation and reallocation of the Fund's assets will be undertaken by
the Manager on the basis of its analysis of economic and market conditions and
the relative risks and opportunities of particular types of fixed-income secu-
rities. In general, the particular types of fixed-income securities selected
for investment by the Fund at any given time will be those that, in the view
of the Manager, offer the highest income available at the time. The Fund typi-
cally would not invest in fixed-income securities offering the highest income
potential if the Manager determined that the income potential is not suffi-
cient to justify the higher risks associated with the securities.  
 
  At any given time, the Fund may be entirely or only partially invested in a
particular type of fixed-income security. Under normal conditions, at least
65% of the Fund's assets will be invested in fixed-income securities, which
for this purpose will include non-convertible preferred stocks. The Fund gen-
erally will invest in intermediate- and long-term fixed-income securities with
the result that, under normal market conditions, the weighted average maturity
of the Fund's securities is expected to be between five and 12 years. Up to
20% of the Fund's assets may be invested in common stock or other equity-
related securities, including convertible securities, preferred stock, war-
rants and rights.
 
  Mortgage-related securities in which the Fund may invest include mortgage
obligations collateralized by mortgage loans or mortgage pass-through certifi-
cates. Under current market conditions, the Fund's holdings of mortgage-
related securities may be expected to consist primarily of securities issued
or guaranteed by Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corpora-
tion ("FHLMC"). The composition of the Fund's investments in mortgage-related
securities, however, will vary from time to time based upon the determination
of the Manager as to how best to achieve the Fund's investment objective tak-
ing into account factors such as the liquidity and yield of various mortgage-
related securities. Mortgage-related securities held by the Fund generally
will be rated no lower than Aa by Moody's or AA by S&P or an equivalent rating
by any other NRSRO or, if not rated, will be of  
 
14
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
equivalent investment quality as determined by the Manager. The Manager also
may consider the ratings, if any, assigned to mortgage-related securities by
NRSROs other than Moody's and S&P.  
 
  The Fund typically will purchase a corporate debt security if the Manager
believes that the yield and, to a lesser extent, the potential for capital
appreciation of the security are sufficiently attractive in light of the risks
of ownership of the security. In determining whether the Fund should invest in
particular debt securities, the Manager will consider factors such as: the
price, coupon and yield to maturity; the credit quality of the issuer; the
issuer's available cash flow and the related coverage ratios; the property, if
any, securing the obligation; and the terms of the debt securities, including
the subordination, default, sinking fund and early redemption provisions. The
Manager also will review the ratings, if any, assigned to the securities by
Moody's, S&P or other NRSROs. The Manager's judgment as to credit quality of a
debt security may differ, however, from that suggested by the ratings pub-
lished by a rating service.  
 
  The Fund may invest up to 35% of its assets in corporate fixed-income secu-
rities of domestic issuers rated an equivalent rating by NRSROs, such as Ba or
lower by Moody's or BB or lower by S&P or in nonrated securities deemed by the
Manager to be of comparable quality. The Fund may invest in fixed-income secu-
rities rated as low as Caa by Moody's or CCC by S&P or of an equivalent qual-
ity by any other NRSRO.  
 
  Corporate fixed-income securities of foreign issuers in which the Fund may
invest will include securities of companies, wherever organized, that have
their principal business activities and interests outside the United States.
Foreign government securities in which the Fund may invest consist of fixed-
income securities issued by foreign governments. In general, the Fund may
invest in debt securities issued by foreign governments or any of their polit-
ical subdivisions that are considered stable by Global Capital Management. Up
to 5% of the Fund's assets, however, may be invested in foreign securities
issued by countries with developing economies.
 
  The Fund may invest in fixed-income securities issued by supranational orga-
nizations, which are entities designated or supported by a government or gov-
ernmental entity to promote economic development, and include, among others,
the Asian Development Bank, the European Coal and Steel Community, the Euro-
pean Economic Community and the World Bank. These organizations have no taxing
authority and are dependent upon their members for payments of interest and
principal. Moreover, the lending activities of supranational entities are lim-
ited to a percentage of their total capital (including "callable capital" con-
tributed by members at an entity's call), reserves and net income.
 
  The Fund may also invest in zero coupon securities and payment-in-kind
bonds.
 
                                                                             15
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
 ADDITIONAL INVESTMENTS
 
  Money Market Instruments. Up to 20% of the Fund's assets may be invested in
cash and money market instruments at any time. In addition, when the Manager
believes that market conditions warrant, the Fund may invest in short-term
instruments without limitation for temporary defensive purposes. Short-term
instruments in which the Fund may invest include: U.S. government securities;
certain bank obligations (including certificates of deposit, time deposits and
bankers' acceptances of domestic or foreign banks, domestic savings and loan
associations and similar institutions); commercial paper rated no lower than
Prime-2 by Moody's or A-2 by S&P or the equivalent from another NRSRO or, if
unrated, of an issuer having an outstanding, unsecured debt issue then rated
within the three highest rating categories; and repurchase agreements with
respect to the securities in which the Fund may invest. The Fund will invest in
obligations of a foreign bank or foreign branch of a domestic bank only if the
Manager determines that the obligations present minimum credit risks. These
obligations may be traded in the United States or outside the United States,
but will be denominated in U.S. dollars.  
 
  U.S. Government Securities. The U.S. government securities in which the Fund
may invest include direct obligations of the United States Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds) and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as GNMA cer-
tificates); securities that are supported by the right of the issuer to borrow
from the United States Treasury (such as securities of Federal Home Loan
Banks); and securities that are supported by the credit of the instrumentality
(such as FNMA and FHLMC bonds). Treasury Bills have maturities of less than one
year, Treasury Notes have maturities of one to 10 years and Treasury Bonds gen-
erally have maturities of greater than 10 years at the date of issuance. Cer-
tain U.S. government securities, such as those issued or guaranteed by GNMA,
FNMA and FHLMC, are mortgage-related securities. U.S. government securities
generally do not involve the credit risks associated with other types of inter-
est-bearing securities, although, as a result, the yields available from U.S.
government securities are generally lower than the yields available from inter-
est-bearing corporate securities.
 
  Zero Coupon Securities. A zero coupon bond pays no interest in cash to its
holder during its life, although interest is accrued during that period. Its
value to an investor consists of the difference between its face value at the
time of maturity and the price for which it was acquired, which is generally an
amount significantly less than its face value (sometimes referred to as a "deep
discount" price). Because such securities usually trade at a deep discount,
they will be subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities which
make periodic distributions of interest. On the other hand, because there are
no periodic interest payments to be reinvested prior to maturity, zero coupon
securities eliminate reinvestment risk and lock in a rate of return to maturi-
ty.
 
16
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
  Real Estate Investment Trusts. The Fund may purchase real estate investment
trusts ("REITs"). REITs are investment vehicles that invest primarily in either
real estate or real estate loans. The value of a REIT is affected by changes in
the value of the properties owned by the REIT or securing mortgage loans held
by the REIT. REITs are dependent upon cash flow from their investments to repay
financing costs and the management skill of the REIT's manager. REITs are also
subject to risks generally associated with investments in real estate.  
 
  Asset-Backed Securities. The Fund may invest in asset backed securities
("ABSs"). An ABS represents an interest in a pool of assets such as receivables
from credit card loans, automobile loans and other trade receivables. Changes
in the market's perception of the asset backing the security, the creditworthi-
ness of the servicing agent for the loan pool, the originator of the loans, or
the financial institution providing any credit enhancement will all affect the
value of the ABS, as will the exhaustion of any credit enhancement. The risks
of investing in ABSs ultimately will depend upon the payment of the consumer
loans by the individual borrowers. In its capacity as purchaser of the ABS, the
Fund will generally have no recourse to the entity that originated the loans in
the event of default by the borrower. In addition, the loans underlying the
ABSs are subject to prepayments, which may shorten the weighted average life of
such securities and may lower their return.  
 
 CERTAIN INVESTMENT STRATEGIES
  In attempting to achieve its investment objective, the Fund may employ, among
others, one or more of the strategies set forth below. More detailed informa-
tion concerning these strategies and their related risks is contained in the
Statement of Additional Information.
 
  Repurchase Agreements. The Fund may engage in repurchase agreement transac-
tions with certain member banks of the Federal Reserve System and with certain
dealers on the Federal Reserve Bank of New York's list of reporting dealers.
Under the terms of a typical repurchase agreement, the Fund would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining
the yield during the Fund's holding period. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during the Fund's
holding period. The value of the underlying securities will be at least equal
at all times to the total amount of the repurchase obligation, including inter-
est. Repurchase agreements could involve certain risks in the event of default
or insolvency of the other party, including possible delays or restrictions
upon the Fund's ability to dispose of the underlying securities, the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of
 
                                                                              17
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
the income from the agreement. The Manager or Global Capital Management, acting
under the supervision of the Trust's Board of Trustees, reviews on an ongoing
basis the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund may enter into repurchase agreements to evaluate
potential risks.  
 
  Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreement transactions with member banks of the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is con-
sidered a borrowing by the Fund, involves a sale by the Fund of securities that
it holds concurrently with an agreement by the Fund to repurchase the same
securities at an agreed-upon price and date. The Fund typically will invest the
proceeds of a reverse repurchase agreement in money market instruments or
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as leverage. The Fund
will enter into a reverse repurchase agreement for leverage purposes only when
the interest income to be earned from the investment of the proceeds is greater
than the interest expense of the transaction. The Fund also may use the pro-
ceeds of reverse repurchase agreements to provide liquidity to meet redemp-
tion requests when the sale of the Fund's securities is considered to be dis-
advantageous.
 
  Forward Roll Transactions. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage-related securi-
ties issued by GNMA, FNMA and FHLMC. In a forward roll transaction, the Fund
sells a mortgage security to a financial institution, such as a bank or broker-
dealer, and simultaneously agrees to repurchase a similar security from the
institution at a later date at an agreed-upon price. The mortgage securities
that are repurchased will bear the same interest rate as those sold, but gener-
ally will be collateralized by different pools of mortgages with different pre-
payment histories than those sold. During the period between the sale and
repurchase, the Fund will not be entitled to receive interest and principal
payments on the securities sold. Proceeds of the sale will be invested in
short-term instruments, particularly repurchase agreements, and the income from
these investments, together with any additional fee income received on the sale
will generate income for the Fund exceeding the yield on the securities sold.
Forward roll transactions involve the risk that the market value of the securi-
ties sold by the Fund may decline below the repurchase price of those securi-
ties. At the time the Fund enters into forward roll transactions, it will place
in a segregated account with the Fund's custodian cash, U.S. government securi-
ties, equity securities or debt securities of any grade having a value equal to
or greater than the Fund's purchase commitments, provided such securities have
been determined by the Manager to be liquid and unencumbered and are marked to
market daily pursuant to guidelines established by the Trustees. The Fund will
subsequently monitor the account to insure that such equivalent value is main-
tained.  
 
18
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
  When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
securities on a when-issued or delayed-delivery basis. The Fund will enter into
a when-issued transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage. In such transactions delivery of the securi-
ties occurs beyond the normal settlement periods, but no payment or delivery is
made by the Fund prior to the actual delivery or payment by the other party to
the transaction. Due to fluctuations in the value of securities purchased or
sold on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers. The Fund
will establish with its custodian a segregated account consisting of cash, U.S.
government securities, equity securities or debt securities of any grade having
a value equal to or greater than the Fund's purchase commitments, provided such
securities have been determined by the Manager to be liquid and unencumbered
and are marked to market daily pursuant to guidelines established by the Trust-
ees. Placing securities rather than cash in the segregated account may have a
leveraging effect on the Fund's net assets.  
 
  Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund has the ability to lend portfolio securities to brokers,
dealers and other financial organizations. Loans of portfolio securities by the
Fund will be collateralized by cash, letters of credit or U.S. government secu-
rities that are maintained at all times in an amount at least equal to the cur-
rent market value of the loaned securities. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund. The Fund will segregate common stock or
convertible or exchangeable preferred stock or debt securities in a special
account with its custodian.
 
  Covered Option Writing. The Fund may purchase and sell put, call and other
types of option securities that are traded on domestic or foreign exchanges or
the over-the-counter market including, but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options. The Fund may realize fees (referred to as "premiums") for granting the
rights evidenced by the options. A put option embodies the right of its pur-
chaser to compel the writer of the option to purchase from the option holder an
underlying security at a specified price at any time during the option period.
In contrast, a call option embodies the right of its purchaser to compel the
writer of the option to sell to the option holder an underlying security at a
specified price at any time during the option period. Thus, the purchaser of a
put option written by the Fund has the right to compel the Fund to purchase
from it the underlying security at the agreed-upon price for a specified time
period, while the purchaser of a call option written by the Fund has the right
to purchase from the Fund the underlying security owned by the Fund at the
agreed-upon price for a specified time period.
 
                                                                              19
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  Upon the exercise of a call option written by the Fund, the Fund may suffer
a loss equal to the excess of the security's market value at the time of the
option exercise over the option's exercise price, less the premium received
for writing the option.
 
  The Fund will write (sell) only covered options. Thus, whenever the Fund
writes (sells) a call option, it will continue to own or have the present
right to acquire the underlying security for as long as it remains obligated
as the writer of the option. To support its obligation to purchase the under-
lying security if a put option is exercised, the Fund will either (a) deposit
with its custodian in a segregated account cash or other eligible assets hav-
ing a value at least equal to the exercise price of the underlying securities
or (b) continue to own an equivalent number of puts of the same "series" (that
is, puts on the same underlying security having the same exercise prices and
expiration dates as those written by the Fund), or an equivalent number of
puts of the same "class" (that is, puts on the same underlying security) with
exercise prices greater than those that it has written (or, if the exercise
prices of the puts that it holds are less than the exercise prices of those
that it has written, it will deposit the difference with its custodian in a
segregated account).
 
  Purchasing Put and Call Options on Securities. The Fund may utilize up to
15% of its assets to purchase options and may do so at or about the same time
that it purchases the underlying security or at a later time. In purchasing
option securities, the Fund will trade only with counterparties of high stand-
ing in terms of credit quality and commitment to the market. Risks associated
with options transactions and foreign futures contracts are described below
under "Special Considerations."
 
  Futures Contracts and Options on Futures Contracts. The Fund may enter into
futures contracts or related options that are traded on domestic and foreign
exchanges or boards of trade as well as the over-the-counter market with
respect to options on such futures contracts. A futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified debt security at a specified price, date, time and
place. The Fund may enter into futures contracts to sell debt securities when
the Manager believes that the value of the Fund's debt securities will
decrease. The Fund may enter into futures contracts to purchase debt securi-
ties when the Manager anticipates purchasing the underlying debt securities on
behalf of the Fund and believes that prices will rise before the purchases
will be made. When the Fund enters into a futures contract to purchase an
underlying security, an amount of cash or other eligible segregated assets,
equal to the market value of the contract, will be deposited in a segregated
account with the Fund's custodian to collateralize the position, thereby
insuring that the use of the contract is unleveraged. The Fund will not enter
into futures contracts for speculation and will enter into futures contracts
that are traded on a domestic or foreign exchange or board of trade as well as
the over-the-counter market.  
 
20
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  An option on a futures contact, as contrasted with the direct investment in a
futures contract, gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract at a specified exercise price
at any time prior to the expiration date of the option. A call option gives the
purchaser of the option the right to enter into a futures contract to buy and
obliges the writer to enter into a futures contract to sell the underlying debt
securities. A put option gives the purchaser the right to sell and obliges the
writer to buy the underlying contract.
 
  The Fund may purchase put options on futures contracts to hedge its portfolio
of debt securities against the risk of rising interest rates, and may purchase
call options on futures contracts to hedge against a decline in interest rates.
The Fund may write put and call options on futures contracts in entering into
closing sale transactions and to increase its ability to hedge against changes
in interest rates. The Fund will write put and call options on futures con-
tracts that are traded on a domestic or foreign exchange or board of trade as
well as the over-the-counter market.
 
  Currency Exchange Transactions and Options on Foreign Currencies. The Fund
will conduct its currency exchange transactions either on a spot (that is,
cash) basis at the rate prevailing in the currency exchange market or through
entering into forward contracts to purchase or sell currencies. The Fund's
dealings in forward currency exchange and options on foreign currencies are
limited to hedging involving either specific transactions or portfolio posi-
tions.
 
  A forward currency contract involves an obligation to purchase or sell a spe-
cific currency for an agreed-upon price at an agreed-upon date which may be any
fixed number of days from the date of the contract agreed upon by the parties.
These contracts are entered into in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Although these contracts are intended to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might result should the value of the currency
increase.
 
  The Fund may purchase and sell put, call and other types of options on for-
eign currencies that are traded on domestic or foreign exchanges or in the
over-the-counter market, including but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options.
 
  The Fund may purchase put options on a foreign currency in which securities
held by the Fund are denominated to protect against a decline in the value of
the currency in relation to the currency in which the exercise price is denomi-
nated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the pur-
chaser, in return for a premium, the
 
                                                                              21
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
right to sell, in the case of a put, and buy, in the case of a call, the under-
lying currency at a specified price during the term of the option. Although the
purchase of an option on a foreign currency may constitute an effective hedge
by the Fund against fluctuations in the exchange rates, in the event of rate
movements adverse to the Fund's position, the Fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign cur-
rencies purchased by the Fund may be traded on domestic and foreign exchanges
or over-the-counter.
 
 CERTAIN INVESTMENT GUIDELINES
 
  The Fund may invest up to 15% of its total assets in securities with contrac-
tual or other restrictions on resale and other instruments that are not readily
marketable, including (a) repurchase agreements with maturities greater than
seven days, (b) futures contracts and related options for which a liquid sec-
ondary market does not exist and (c) time deposits maturing in more than seven
calendar days. The above restriction does not apply to securities subject to
Rule 144A under the Securities Act of 1933, as amended (the "1933 Act") ("Rule
144A Securities"). In addition, the Fund may invest up to 5% of its assets in
the securities of issuers that have been in continuous operation for less than
three years. The Fund also may borrow from banks for temporary or emergency
purposes, but not for investment purposes, in an amount up to 10% of its total
assets, and may pledge its assets to the same extent in connection with such
borrowings. Whenever these borrowings exceed 5% of the value of the Fund's
total assets, the Fund will not make any additional investments. Immediately
after any borrowing (including reverse repurchase agreements and forward roll
transactions) by the Fund, the Fund will maintain an asset coverage of at least
300% with respect to all of its borrowings. Except for the limitations on bor-
rowing, the investment guidelines set forth in this paragraph may be changed at
any time without shareholder consent by vote of the Trust's Board of Trustees.
A complete list of investment restrictions that identifies additional restric-
tions that cannot be changed without the approval of a majority of the Fund's
outstanding shares is contained in the Statement of Additional Information.
 
 RISK FACTORS AND SPECIAL CONSIDERATIONS
  Medium-, Low- and Unrated Securities. The Fund may invest in medium- or low-
rated securities and unrated securities of comparable quality. Generally, these
securities offer a higher current yield than the yield offered by higher-rated
securities but involve greater volatility of price and risk of loss of income
and principal, including the probability of default by or bankruptcy of the
issuers of such securities. Medium- and low-rated and comparable unrated secu-
rities (a) will likely have some quality and protective characteristics that,
in the judgment of the rating organization, are outweighed by large uncertain-
ties or major risk exposures to adverse conditions and (b) are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. Thus, it is possible
that these types of factors could, in certain instances,
 
22
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
reduce the value of securities held by the Fund with a commensurate effect on
the value of the Fund's shares. Therefore, an investment in the Fund should
not be considered as a complete investment program and may not be appropriate
for all investors.
 
  While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these secu-
rities also tend to be more sensitive to individual corporate developments and
changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more tradi-
tional methods of financing available to them so that their ability to service
their debt obligations during an economic downturn or during sustained periods
of rising interest rates may be impaired. The risk of loss due to default by
such issuers is significantly greater because medium- and low-rated and compa-
rable unrated securities generally are unsecured and frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund may incur addi-
tional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings. In
addition, the markets in which medium- and low-rated or comparable unrated
securities are traded generally are more limited than those in which higher-
rated securities are traded. The existence of limited markets for these secu-
rities may restrict the availability of securities for the Fund to purchase
and also may have the effect of limiting the ability of the Fund to (a) obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value and (b) sell securities at their fair value either to meet
redemption requests or to respond to changes in the economy or the financial
markets. The market for medium- and low-rated and comparable unrated securi-
ties is relatively new and has not fully weathered a major economic recession.
Any such recession, however, could likely disrupt severely the market for such
securities and adversely affect the value of such securities. Any such eco-
nomic downturn also could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
 
  Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower yield-
ing security, resulting in a decreased return to the Fund.
 
  Securities that are rated Ba by Moody's or BB by S&P or an equivalent rating
by other NRSROs have speculative characteristics with respect to capacity to
pay interest and repay principal. Securities that are rated B generally lack
characteristics of a desirable investment and assurance of interest and prin-
cipal payments over any  
 
                                                                             23
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
long period of time may be small. Low-rated securities, for example, that are
rated Caa or CCC by Moody's or S&P, respectively are of poor standing. These
issues may be in default or may present elements of danger may exist with
respect to principal or interest.  
 
  In light of the risks described above, the Manager, in evaluating the cred-
itworthiness of an issue, whether rated or unrated, will take various factors
into consideration, which may include, as applicable, the issuer's financial
resources, its sensitivity to economic conditions and trends, the operating
history of and the community support for the facility financed by the issue,
the ability of the issuer's management and regulatory matters.  
 
  Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide fluctua-
tions in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an estab-
lished market share.
 
  Foreign Securities. There are certain risks involved in investing in securi-
ties of companies and governments of foreign nations that are in addition to
the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and eco-
nomic developments and the possible imposition of limitations on the repatria-
tion of currencies or other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers and the lack of uniform
accounting, auditing and financial reporting standards or of other regulatory
practices and requirements comparable to those applicable to domestic compa-
nies. The yield of the Fund may be adversely affected by fluctuations in value
of one or more foreign currencies relative to the U.S. dollar. Moreover, secu-
rities of many foreign companies and their markets may be less liquid and
their prices more volatile than those of securities of comparable domestic
companies. In addition, with respect to certain foreign countries, the possi-
bility exists of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Fund,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that could reduce the yield on such securities.
Because the Fund will invest in securities denominated or quoted in currencies
other than the U.S. dollar, changes in foreign currency exchange rates may
adversely affect the value of portfolio securities and the appreciation or
depreciation of investments. Investment in foreign securities also may result
in higher expenses due to the cost of converting foreign currency to U.S. dol-
lars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on domestic exchanges, the expense of
maintaining securities with foreign custodians, and the imposition of transfer
taxes or transaction charges associated with foreign exchanges.
  
  The Fund may also purchase American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or
 
24
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
other securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of
the depositary's transaction fees, whereas under an unsponsored arrangement,
the foreign issuer assumes no obligation and the depositary's transaction fees
are paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR, and the
financial information about a company may not be as reliable for an
unsponsored ADR as it is for a sponsored ADR. The Fund may invest in ADRs
through both sponsored and unsponsored arrangements.
 
  Corporate Securities. Corporate securities in which the Fund may invest
include corporate fixed-income securities of both domestic and foreign
issuers, such as bonds, debentures, notes, equipment lease certificates,
equipment trust certificates, and preferred stock. The Fund's investments in
each of equipment lease or equipment trust certificates will not exceed 5% of
its assets.
 
  Certain of the corporate fixed-income securities in which the Fund may
invest may involve equity characteristics. The Fund may, for example, invest
in warrants for the acquisition of stock of the same or of a different issuer
or in corporate fixed-income securities that have conversion or exchange
rights permitting their holder to convert or exchange the securities at a
stated price within a specified period of time into a specified number of
shares of common stock. In addition, the Fund may invest in participations
that are based on revenues, sales or profits of an issuer or in common stock
offered as a unit with corporate fixed-income securities.
 
  Mortgage-Related Securities. Mortgage-related securities provide a monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees
or costs that may be incurred. Prepayments of principal on mortgage-related
securities may tend to increase due to refinancing of mortgages as interest
rates decline. Mortgage pools created by private organizations generally offer
a higher rate of interest than government and government-related pools because
no direct or indirect guarantees of payments are applicable with respect to
the former pools. Timely payment of interest and principal in these pools,
however, may be supported by various forms of private insurance or guarantees,
including individual loan, title, pool and hazard insurance. There can be no
assurance that the private insurers can meet their obligations under the poli-
cies. Prompt payment of principal and interest on GNMA mortgage pass-through
certificates is backed by the full faith and credit of the United States. FNMA
guaranteed mortgage pass-through certificates and FHLMC participation certifi-
cates are solely the obligations of those entities but are supported by the
discretionary authority of the United States government to purchase the agen-
cies'
 
                                                                             25
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
obligations. Collateralized mortgage obligations are a type of bond secured by
an underlying pool of mortgages or mortgage pass-through certificates that are
structured to direct payments on underlying collateral to different series or
classes of the obligations.
 
  To the extent that the Fund purchases mortgage-related securities at a pre-
mium, mortgage foreclosures and prepayments of principal by mortgagors (which
may be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The Fund's yield may
be affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related mort-
gage pools, generally will fluctuate in response to market interest rates.
 
  Securities of Developing Countries. A developing country generally is con-
sidered to be a country that is in the initial stages of its industrialization
cycle. Investing in the equity and fixed-income markets of developing coun-
tries involves exposure to economic structures that are generally less diverse
and mature, and to political systems that can be expected to have less stabil-
ity, than those of developed countries. Historical experience indicates that
the markets of developing countries have been more volatile than the markets
of the more mature economies of developed countries; however, such markets
often have provided higher rates of return to investors.
 
  Non-Publicly Traded and Illiquid Securities. The Fund's sale of securities
that are not publicly traded is typically restricted under the Federal securi-
ties laws. As a result, the Fund may be forced to sell these securities at
less than fair market value or may not be able to sell them when the Manager
believes it desirable to do so. The Fund's investments in illiquid securities
are subject to the risk that should the Fund desire to sell any of these secu-
rities when a ready buyer is not available at a price that the Fund deems rep-
resentative of their value, the value of the Fund's net assets could be
adversely affected.  
 
  Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities
are freely transferable among qualified institutional buyers, a liquid market
may exist among such buyers. The Board of Trustees has adopted guidelines and
delegated to the Manager the daily function of determining and monitoring
liquidity of Rule 144A Securities. However, the Board of Trustees maintains
sufficient oversight and is ultimately responsible for the liquidity determi-
nations. Investments in restricted securities such as Rule 144A Securities
could have the effect of increasing the level of illiquidity in the Fund to
the extent that there is temporarily no market for these securities among
qualified institutional buyers.  
 
  Options. Because option premiums paid or received by the Fund are small in
relation to the market value of the investments underlying the options, buying
and
 
26
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
selling options can result in large amounts of leverage. The leverage offered
by trading in options may cause the Fund's net asset value to be subject to
more frequent and wider fluctuation than would be the case if the Fund did not
invest in options.
 
  Upon the exercise of a put option written by the Fund, the Fund may suffer a
loss equal to the difference between the price at which the Fund is required to
purchase the underlying security and its market value at the time of the option
exercise, less the premium received for writing the option. Upon the exercise
of a call option written by the Fund, the Fund may suffer a loss equal to the
excess of the security's market value at the time of the option exercise over
the exercise price of the option less the premium received for writing the
option.
 
  The Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option that the Fund has written, an
option of the same series as that on which the Fund desired to terminate its
obligation. The obligation of the Fund under an option that it has written
would be terminated by a closing purchase transaction, but the Fund would not
be deemed to own an option as a result of the transaction. No assurance can be
given that the Fund will be able to effect closing transactions at a time when
it wishes to do so. If the Fund cannot enter into a closing transaction, the
Fund may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security and could
face higher transaction costs, including brokerage commissions.
 
  The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options on financial futures only if there
appears to be a liquid secondary market for the options or futures sold or pur-
chased, for some options or futures, no such secondary market may exist or the
market may cease to exist.
 
  Futures and Options on Futures. Investments in futures and options on futures
made by the Fund will be made solely for the purpose of hedging against the
effects of changes in the value of its portfolio securities due to anticipated
changes in interest rates and when the transactions are economically appropri-
ate to the reduction of risks inherent in the management of the Fund. In enter-
ing into transactions involving futures contracts and options on futures con-
tracts, the Fund will comply with applicable requirements of the Commodities
Futures Trading Commission (the "CFTC") which require that its transactions in
futures and options be engaged in for "bona fide hedging" purposes or other
permitted purposes, provided that aggregate initial margin deposits and premi-
ums required to establish positions, other than those considered by the CFTC to
be "bona fide hedging," will not exceed 5% of
 
                                                                              27
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
the Fund's net asset value, after taking into account unrealized profits and
unrealized losses on any such contracts.
 
  The use of futures contracts and options on futures contracts as a hedging
device involves several risks. No assurance can be given that a correlation
will exist between price movements in the underlying securities on the one
hand, and price movements in the securities which are the subject of the hedge,
on the other hand. Positions in futures contracts and options on futures con-
tracts may be closed out only on the exchange or board of trade on which they
were entered into, and no assurance can be given that an active market will
exist for a particular contract or option at any particular time. Losses
incurred in hedging transactions and the costs of these transactions will
affect the Fund's performance.
 
  Foreign Commodity Exchanges. Unlike trading on domestic commodity exchanges,
trading on foreign commodity exchanges is not regulated by the CFTC and may be
subject to greater risks than trading on domestic exchanges. For example, some
foreign exchanges may be principal markets so that no common clearing facility
exists and a trader may look only to the broker for performance of the con-
tract. In addition, unless the Fund hedges against fluctuations in the exchange
rate between the U.S. dollar and the currencies in which trading is done on
foreign exchanges, any profits that the Fund might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Fund could incur
losses as a result of those changes.  
 
  Foreign Currency. Although the foreign currency market may not necessarily be
more volatile than the market in other commodities, the foreign currency market
offers less protection against defaults in the forward trading of currencies
than is available when trading in currencies occurs on an exchange. Because a
forward currency contract is not guaranteed by an exchange or clearing house, a
default on the contract would deprive the Fund of unrealized profits or force
the Fund to cover its commitments for purchase or resale, if any, at the cur-
rent market price.
 
  Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Salomon Smith Barney
depend on the smooth functioning of their computer systems. Many computer soft-
ware systems in use today cannot recognize the year 2000, but revert to 1900 or
some other date, due to the manner in which dates were encoded and calculated.
The failure could have a negative impact on the Fund's operations, including
the handling of securities trades, pricing and account services. The Manager
and Salomon Smith Barney have advised the Fund that they have been reviewing
all of their computer systems and actively working on necessary changes to
their systems to prepare for the year 2000 and expect that their systems will
be compliant before that date. In addition, the Manager has been advised by the
Fund's custodian, transfer agent, distributor and accounting services agent
that they are also in the process  
 
28
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
of modifying their systems with the same goal. There can, however, be no assur-
ance that the Manager, Salomon Smith Barney or any other service provider will
be successful, or that interaction with other non-complying computer systems
will not impair Fund services at that time.  
 
  In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
 
 PORTFOLIO TRANSACTIONS
 
  Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Salomon Smith Barney and
certain of its affiliated brokers. The Fund may use Salomon Smith Barney or a
Salomon Smith Barney affiliated broker in connection with a purchase or sale of
securities when the Manager believes that the charge for the transaction does
not exceed usual and customary levels. The Fund also may use Salomon Smith Bar-
ney as a commodities broker in connection with entering into futures contracts
and commodity options. Salomon Smith Barney has agreed to charge the Fund com-
modity commissions at rates comparable to those charged by Salomon Smith Barney
to its most favored clients for comparable trades in comparable accounts.  
 
  In selecting a broker for a transaction, including Salomon Smith Barney or
its affiliates, the primary consideration is prompt and effective execution of
orders at the most favorable price. Subject to that primary consideration,
dealers may be selected for research, statistical or other services to enable
the Manager to supplement its own research and analysis with the views and
information of other securities firms.  
 
VALUATION OF SHARES
 
 
  The Fund'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 Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
 
  Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfo-
lio securities which are traded primarily on foreign exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then
 
                                                                              29
<PAGE>
 
VALUATION OF SHARES (CONTINUED)
 
the fair market value of those securities will be determined by consideration
of other factors by or under the direction of the Board of Trustees or its
delegates. A security that is traded primarily on a domestic or foreign stock
exchange is valued at the last sale price on that exchange or, if there were
no sales during the day, at the current quoted bid price. Over-the-counter
securities are valued on the basis of the bid price at the close of business
on each day. Investments in U.S. government securities (other than short-term
securities) are valued at the average of the quoted bid and asked prices in
the over-the-counter market. Short-term investments that mature in 60 days or
less are valued at amortized cost whenever the Trustees determine that amor-
tized cost reflects fair value of those investments. An option generally is
valued at the last sale price or, in the absence of the last sale price, the
last offer price. The value of a futures contract equals the unrealized gain
or loss on the contract, which is determined by marking the contract to the
current settlement price for a like contract acquired on the day on which the
futures contract is being valued. A settlement price may not be used if the
market makes a limit move with respect to a particular commodity or if the
underlying securities market experiences significant price fluctuations after
the determination of the settlement price. In such event, the futures contract
will be valued at a fair market price to be determined by or under the direc-
tion of the Board of Trustees. Further information regarding the Trust's valu-
ation policies with respect to the Fund is contained in the Statement of Addi-
tional Information.
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
  The Fund will be treated separately from the Trust's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
 
  If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. Dividends
and distributions are treated the same for tax purposes whether taken in cash
or reinvested in additional shares. The Fund declares and pays dividends
monthly, consisting of estimated daily net investment income. Any net realized
gains, after utilization of capital loss carryforwards, will be distributed at
least annually, with the distribution of dividends from net investment income,
and net realized short-term capital gains (including short-term capital gains
from options transactions, if any) may be paid more frequently.
 
  The per share dividends on Class B and Class L shares of the Fund 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 L shares. The per share dividends on Class A shares of the Fund may be
lower than the per
 
30
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
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 L and Class Y shares.
 
  In addition, as determined by the Board of Trustees, distributions of the
Fund may include a return of capital. Shareholders will be notified of the
amount of any distribution that represents a return of capital. In order to
comply with a calendar year distribution requirement under the Code, it may be
necessary for the Fund to make distributions at times other than those set
forth above.
 
 TAXES
 
  The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined on a fund by fund basis, rather than on a
Trust wide basis. The Fund has qualified and intends to qualify each year as a
regulated investment company under Subchapter M of the Code. If the Fund quali-
fies as a regulated investment company and meets certain distribution require-
ments, the Fund will not be subject to Federal income tax on its net investment
income and net capital gains that it distributes to its shareholders.  
 
  Dividends paid by the Fund from investment income and distributions of short-
term capital gain will be taxable to shareholders as ordinary income for Fed-
eral income tax purposes, whether received in cash or reinvested in additional
shares. Distributions of long-term capital gain will be taxable to shareholders
as long-term capital gain, whether paid in cash or reinvested in additional
shares, and regardless of the length of time the investor has held his or her
shares of the Fund. Dividends and distributions paid by the Fund will not qual-
ify for the Federal dividends-received deduction for corporate shareholders.
 
  Income received by the Fund from sources within foreign countries may be sub-
ject to withholding and other foreign taxes. The payment of these taxes will
reduce the amount of dividends and distributions paid to the Fund's sharehold-
ers.
 
  Each shareholder of the Fund will receive a statement annually from the
Trust, which will set forth separately the aggregate dollar amount of dividends
and capital gains distributed to the shareholder by the Fund with respect to
the prior calendar year.  
 
  Shareholders should consult their tax advisers about the status of the Fund's
dividends and distributions for Federal, state and local tax liabilities.
 
                                                                              31
<PAGE>
 
PURCHASE OF SHARES
 
 
 SALES CHARGE ALTERNATIVES
 
  The following Classes of shares are available for purchase through this Pro-
spectus. See "Prospectus Summary--Alternative Purchase Arrangements" for a dis-
cussion of factors to consider in selecting which Class of shares to purchase.
 
  Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charge as follows:
 
<TABLE>
<CAPTION>
                               SALES CHARGE
                      ------------------------------
                                                          DEALERS'
  AMOUNT OF                % OF           % OF       REALLOWANCE AS % OF
  INVESTMENT          OFFERING PRICE AMOUNT INVESTED   OFFERING PRICE
------------------------------------------------------------------------
  <S>                 <C>            <C>             <C>
  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           *              *                 *
------------------------------------------------------------------------
</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 Salomon Smith Barney
  Financial Consultants and other dealers whose clients make purchases of
  $500,000 or more. The CDSC is waived in the same circumstances in which the
  CDSC applicable to Class B and Class L shares is waived. See "Deferred Sales
  Charge Provisions" and "Waivers of CDSC."  
 
  Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended (the "1933 Act"). The reduced sales charges shown above
apply to the aggregate of purchases of Class A shares of the Fund made at one
time by "any person," which includes an individual and his or her immediate
family, or a trustee or other fiduciary of a single trust estate or single
fiduciary account.
 
  Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.
 
  Class L Shares. Class L shares are sold with an initial sales charge of 1%
(which is equal to 1.01% of the amount invested) and are subject to a CDSC pay-
able upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 22, 2001, purchases of Class L shares by investors who were holders
of Class C shares of the Fund on June 12, 1998 will not be subject to the 1.00%
initial sales charge.  
 
  Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).  
 
32
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
 GENERAL
 
  Investors may purchase shares from a Salomon Smith Barney Financial Consul-
tant or a Dealer Representative. In addition, certain investors, including
qualified retirement plans purchasing through certain Dealer Representatives,
may purchase shares directly from the Fund. When purchasing shares of the
Fund, investors must specify whether the purchase is for Class A, Class B,
Class L or Class Y shares. Salomon Smith Barney and Dealer Representatives may
charge their customers an annual account maintenance fee in connection with a
brokerage account through which an investor purchases or holds shares.
Accounts held directly at the Transfer Agent are not subject to a maintenance
fee.  
 
  Investors in Class A, Class B and Class L shares may open an account in the
Fund 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 Fund. Investors in
Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Clas-
ses. For participants in retirement plans qualified under Section 403(b)(7) or
Section 401(c) of the Code, the minimum initial investment requirement for
Class A, Class B and Class L shares and the subsequent investment requirement
for all Classes in the Fund is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a monthly basis, the minimum
initial investment requirement for Class A, Class B and Class L shares and
subsequent investment requirement for all Classes is $25. For shareholders
purchasing shares of the Fund through the Systematic Investment Plan on a
quarterly basis, the minimum initial investment required for Class A, Class B
and Class L shares and the subsequent investment requirement for all Classes
is $50. There are no minimum investment requirements for Class A shares for
employees of Citigroup and its subsidiaries, including Salomon Smith Barney,
unitholders who invest distributions from a UIT sponsored by Salomon Smith
Barney, and Directors/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 Transfer Agent. Share certificates are issued
only upon a shareholder's written request to the Transfer Agent.  
 
  Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant prior to the close of regular trading on the NYSE, on any day the
Fund calculates its net asset value, are priced according to the net asset
value determined on that day (the "trade date"). Orders received by Dealer
Representatives prior to the close of regular trading on the NYSE on any day
the Fund calculates its net asset value, are priced according to the net asset
value determined on that day, provided the order is received by the Fund or
the Fund's agent prior to its close of business. For shares purchased through
Salomon Smith Barney or a Dealer Representative purchasing  
 
                                                                             33
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
through Salomon Smith Barney, payment for Fund shares is due on the third busi-
ness 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, Salomon Smith Barney or the Transfer Agent is
authorized through preauthorized transfers of at least $25 on a monthly basis
or at least $50 on a quarterly basis to charge the shareholder's account held
with a bank or other financial institution on a monthly or quarterly basis as
indicated by the shareholder to provide for systematic additions to the share-
holder's Fund account. A shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Salomon Smith Barney or the
Transfer Agent. The Systematic Investment Plan also authorizes Salomon Smith
Barney to apply cash held in the shareholder's Salomon Smith Barney brokerage
account or redeem the shareholder's shares of a Salomon Smith Barney money mar-
ket fund to make additions to the account. Additional information is available
from the Fund or a Salomon Smith Barney Financial Consultant.  
 
 SALES CHARGE WAIVERS AND REDUCTIONS
 
 INITIAL SALES CHARGE WAIVERS
 
  Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-shar-
ing or other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption
or repurchase, (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
Smith Barney), on the condition the purchase of Class A shares is made with the
proceeds of the redemption of shares of a mutual fund which (i) was sponsored
by the Financial Consultant's prior employer, (ii) was sold to the client by
the Financial Consultant and (iii) was subject to a sales charge; (d) purchases
by shareholders who have redeemed Class A shares in the Fund (or Class A shares
of another Smith Barney Mutual Fund that is  
 
34
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
offered with a sales charge) and who wish to reinvest their redemption proceeds
in the Fund, provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered investment advisory
subsidiaries of Citigroup; (f) direct rollovers by plan participants of distri-
butions from a 401(k) plan offered to employees of Citigroup or its subsidiar-
ies or a 401(k) plan enrolled in the Smith Barney 401(k) Program (Note: subse-
quent investments will be subject to the applicable sales charge); (g) pur-
chases by separate accounts used to fund certain unregistered variable annuity
contracts; (h) investments of distributions from a UIT sponsored by Salomon
Smith Barney; and (i) purchases by investors participating in a Salomon Smith
Barney fee-based arrangement. In order to obtain such discounts, the purchaser
must provide sufficient information at the time of purchase to permit verifica-
tion that the purchase would qualify for the elimination of the sales charge.
 
 RIGHT OF ACCUMULATION
 
  Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of other Smith Barney Mutual Funds which are
offered with a sales charge as currently listed under "Exchange Privilege" then
held by such person and applying the sales charge applicable to such aggregate.
In order to obtain such discount, the purchaser must provide sufficient infor-
mation at the time of purchase to permit verification that the purchase quali-
fies for the reduced sales charge. The right of accumulation is subject to mod-
ification or discontinuance at any time with respect to all shares purchased
thereafter.  
  
 LETTER OF INTENT
 
  Class A Shares. A Letter of Intent for an amount of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. Each investment made dur-
ing the period receives the reduced sales charge applicable to the total amount
of the investment goal. If the goal is not achieved within the period, the
investor must pay the difference between the sales charges applicable to the
purchases made and the charges previously paid, or an appropriate number of
escrowed shares will be redeemed. The term of the Letter will commence upon the
date the Letter is signed, or at the option of the investor, up to 90 days
before such date. Please contact a Salomon Smith Barney Financial Consultant or
the Transfer Agent to obtain a Letter of Intent application.  
 
  Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares (except purchases of
 
                                                                              35
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Fund and agree to purchase a
total of $15,000,000 of Class Y shares of the Fund within 13 months from the
date of the Letter. If a total investment of $15,000,000 is not made within the
13 month period, all Class Y shares purchased to date will be transferred to
Class A shares, where they will be subject to all fees (including a service fee
of 0.25%) and expenses
 
applicable to the Fund's Class A shares, which may include a CDSC of 1.00%.
Please contact a Salomon Smith Barney Financial Consultant or the Transfer
Agent for further information.  
 
 DEFERRED SALES CHARGE PROVISIONS
  "CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.
 
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class L shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
 
  Class A shares and Class L shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Salomon Smith Barney statement month. The following table sets forth the rates
of the charge for redemptions of Class B shares by shareholders, except in the
case of Class B shares held under the Smith Barney 401(k) Program, as described
below. See "Purchase of Shares Smith Barney 401(k) and ExecChoice(TM) Pro-
grams."  
 
<TABLE>
<CAPTION>
      YEAR SINCE PURCHASE
      PAYMENT WAS MADE      CDSC
---------------------------------
      <S>                   <C>
      First                 4.50%
      Second                4.00
      Third                 3.00
      Fourth                2.00
      Fifth                 1.00
      Sixth and thereafter  0.00
---------------------------------
</TABLE>
 
 
36
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
  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 Pur-
chase Arrangements--Class B Shares Conversion Feature."  
 
  The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gain distribution reinvestments in such other funds.
For Federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount realized on redemp-
tion. The amount of any CDSC will be paid to Salomon Smith Barney.  
 
  To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated to $12 per share, the value of the investor's shares would be $1,260 (105
shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
 
 WAIVERS OF CDSC
  The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic cash withdrawals in amounts equal to or less than 2.00% per month of the
value of the shareholder's shares will be permitted for withdrawal plans that
were established prior to November 7, 1994); (c) redemptions of shares within
12 months following the death or disability of the shareholder; (d) redemp-
tions of shares made in connection with qualified distributions from retire-
ment plans or IRAs upon the attainment of age 59 1/2; (e) involuntary redemp-
tions; and (f) redemptions of shares to effect a combination of the Fund with
any investment company by merger, acquisition of assets or otherwise. In addi-
tion, a shareholder who has redeemed shares from other Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part
 
                                                                             37
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
of the redemption proceeds within 60 days and receive pro rata credit for any
CDSC imposed on the prior redemption.
 
  CDSC waivers will be granted subject to confirmation (by Salomon Smith Barney
in the case of shareholders who are also Salomon Smith Barney clients or by the
Transfer Agent in the case of all other shareholders) of the shareholder's sta-
tus 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 partic-
ipating ("Participating Plans") in the Programs.
 
  The Fund offers to Participating Plans Class A and Class L shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class L shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class L shares
acquired by other investors; however, they are not subject to any initial sales
charge or CDSC. Once a Participating Plan has made an initial investment in a
Fund, all of its subsequent investments in the Fund must be in the same Class
of shares, except as otherwise described below.
 
  Class A Shares. Class A shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
 
  Class L Shares. Class L shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class L shares of one or more funds of the Smith Barney Mutual Funds.  
 
  401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, 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, a Par-
ticipating Plan's total Class L holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class L shares for Class A shares of the
Fund. For Participating Plans that were originally established through a Salo-
mon Smith Barney retail brokerage account, the five-year period will be calcu-
lated 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.  
 
38
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
  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 L holdings in all non-money market Smith Barney Mutual Funds equal at
least $500,000 as of the calendar year-end, the Participating Plan will be
offered the opportunity to exchange all of its Class L shares for Class A
shares of the Fund. Such Plans will be notified in writing within 30 days
after the last business day of the calendar year and, unless the exchange
offer has been rejected in writing, the exchange will occur on or about the
last business day of the following March.
 
  Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Pro-
grams, 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 L shares for Class A shares of the Fund, regard-
less of asset size, at the end of the eighth year after the date the Partici-
pating 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 L shares of the Fund but
instead may acquire Class A shares of the Fund. Any Class L shares not con-
verted 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
such shares directly from the Transfer Agent. For further information regard-
ing these Programs, investors should contact a Salomon Smith Barney Financial
Consultant.  
  
EXCHANGE PRIVILEGE
 
 
  Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the fol-
lowing 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 L 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
    Concert Peachtree Growth Fund
    Concert Social Awareness Fund
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Balanced Fund
 
                                                                             39
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
    Smith Barney Contrarian Fund
    Smith Barney Convertible Fund
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Funds, Inc.--Large Cap Value Fund
    Smith Barney Large Cap Blend Fund
    Smith Barney Large Capitalization Growth Fund
    Smith Barney Mid Cap Blend Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Premium Total Return Fund
    Smith Barney Small Cap Blend Fund, Inc.
    Smith Barney Special Equities Fund
 
  Taxable Fixed--Income Funds
    *Smith Barney Adjustable Rate Government Income Fund
   +Smith Barney Funds, Inc.--Short-Term High Grade Bond Fund
    Smith Barney Funds, Inc.--U.S. Government Securities Fund
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
    Smith Barney Total Return Bond Fund
 
  Tax-Exempt Funds
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
   **Smith Barney Intermediate Maturity California Municipals Fund
   **Smith Barney Intermediate Maturity New York Municipals Fund
    Smith Barney Managed Municipals Fund Inc.
    Smith Barney Massachusetts Municipals Fund
    Smith Barney Municipal High Income Fund
    Smith Barney Muni Funds--Florida Portfolio
    Smith Barney Muni Funds--Georgia Portfolio
   **Smith Barney Muni Funds--Limited Term Portfolio
    Smith Barney Muni Funds--National Portfolio
    Smith Barney Muni Funds--New York Portfolio
    Smith Barney Muni Funds--Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund
 
  Global-International Funds
    Smith Barney Hansberger Global Small Cap Value Fund
    Smith Barney Hansberger Global Value Fund
    Smith Barney World Funds, Inc.--Emerging Markets Portfolio
    Smith Barney World Funds, Inc.--European Portfolio
 
40
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
    Smith Barney World Funds, Inc.--Global Government Bond Portfolio
    Smith Barney World Funds, Inc.--International Balanced Portfolio
    Smith Barney World Funds, Inc.--International Equity Portfolio
    Smith Barney World Funds, Inc.--Pacific Portfolio
 
  Smith Barney Concert Allocation Series Inc.
    Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
    Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
    Smith Barney Concert Allocation Series Inc.--Global Portfolio
    Smith Barney Concert Allocation Series Inc.--Growth Portfolio
    Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
    Smith Barney Concert Allocation Series Inc.--Income Portfolio
 
  Money Market Funds
   ++Smith Barney Exchange Reserve Fund
  +++Smith Barney Money Funds, Inc.--Cash Portfolio
  +++Smith Barney Money Funds, Inc.--Government Portfolio
  ***Smith Barney Money Funds, Inc.--Retirement Portfolio
    +Smith Barney Municipal Money Market Fund, Inc.
    +Smith Barney Muni Funds--California Money Market Portfolio
    +Smith Barney Muni Funds--New York Money Market Portfolio
-------------------------------------------------------------------------------
  * Available for exchange with Class A and Class B shares of the Fund. In
    addition, shareholders who own Class L shares of the Fund through the
    Smith Barney 401(k) Program may exchange those shares for Class L shares
    of this fund.
 ** Available for exchange with Class A, Class L and Class Y shares of the
    Fund.
*** Available for exchange with Class A shares of the Fund.
  + Available for exchange with Class A and Class Y shares of the Fund.
 ++ Available for exchange with Class B and Class L shares of the Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund. In
    addition, Participating Plans opened prior to June 21, 1996 and investing
    in Class L shares may exchange Fund shares for Class L shares of this
    fund.
 
  Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Fund that have been exchanged.
 
  Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Fund that
have been exchanged.
 
  Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without impo-
sition of any charge.
 
                                                                             41
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary
to the best interests of the Fund's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by a shareholder. Upon such a determination, the Fund will provide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege and during the 15-day period the shareholder
will be required to (a) redeem his or her shares in the Fund or (b) remain
invested in the Fund or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.  
 
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will
be made upon receipt of all supporting documents in proper form. If the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged, no signature guarantee
is required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
 
REDEMPTION OF SHARES
 
 
  The Fund is required to redeem the shares of the Fund 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 Transfer Agent
receives further instructions from Salomon Smith Barney, or if the
shareholder's account is not with Salomon Smith Barney, from the shareholder
directly. The redemption proceeds will be remitted on or before the third
business day following receipt of proper tender, except on any days on which
the NYSE is closed or as permitted under the  
 
42
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
1940 Act in extraordinary circumstances. Generally, if the redemption proceeds
are remitted to a Salomon Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and
Salomon Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other than a
certified or official bank check, will be remitted upon clearance of the
check, which may take up to ten days or more.
 
  Shares held by Salomon Smith Barney as custodian must be redeemed by submit-
ting a written request to a Salomon Smith Barney Financial Consultant. Shares
other than those held by Salomon Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, Dealer Representative or by sub-
mitting a written request for redemption to:  
 
  Smith Barney Diversified Strategic Income Fund
   
  Class A, B, L or Y (please specify)  
  c/o First Data Investor Services Group, Inc.
  P.O. Box 5128
  Westborough, Massachusetts 01581-5128
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed
stock power) and must be submitted to the Transfer Agent together with the
redemption request. Any signature appearing on a share certificate, stock
power or a written redemption request in excess of $10,000 must be guaranteed
by an eligible guarantor institution such as a domestic bank, savings and loan
institution, domestic credit union, member bank of the Federal Reserve System
or member firm of a national securities exchange. Written redemption requests
of $10,000 or less do not require a signature guarantee unless more than one
such redemption request is made in any 10-day period or the redemption pro-
ceeds are to be sent to an address other than the address of record. Unless
otherwise directed, redemption proceeds will be mailed to an investor's
address of record. The Transfer Agent may require additional supporting docu-
ments for redemptions made by corporations, executors, administrators, trust-
ees or guardians. A redemption request will not be deemed properly received
until the Transfer Agent receives all required documents in proper form.  
 
 AUTOMATIC CASH WITHDRAWAL PLAN
  The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible
 
                                                                             43
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
to receive qualified distributions and has an account value of at least $5,000.
The withdrawal plan will be carried over on exchanges between funds or Classes
of the Fund. Any applicable CDSC will not be waived on amounts withdrawn by a
shareholder that exceed 1.00% per month of the value of the shareholder's
shares subject to the CDSC at the time the withdrawal plan commences. For fur-
ther information regarding the automatic cash withdrawal plan, shareholders
should contact a Salomon Smith Barney Financial Consultant.
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
 
  Shareholders who do not have a Salomon Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should con-
tact the Transfer Agent 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 the Transfer Agent upon
request. Alternatively, an investor may authorize telephone redemption on the
new account application with the applicant's signature guarantee when making
his or her initial investment in the Fund.  
 
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling the Transfer
Agent at 1-800-451-2010. Such requests may be made between 9:00 a.m. and
4:00 p.m. (Eastern Time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this pro-
gram.  
 
  A shareholder will have the option of having the redemption proceeds mailed
to his or 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 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 the Transfer Agent at 1-800-451-2010 between 9:00 a.m.
and
 
44
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
4:00 p.m. (Eastern 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 days' prior notice to shareholders.
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
 
PERFORMANCE
 
 
 YIELD
  From time to time, the Fund advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last
day of the period. This income is "annualized" by assuming the amount of
income is generated each month over a one-year period and is compounded semi-
annually. The annualized income is then shown as a percentage of the net asset
value.
 
 TOTAL RETURN
  From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types
of sales literature. These figures are computed separately for Class A, Class
B, Class L and Class Y shares of the Fund. These figures are based on histori-
cal earnings and are not intended to indicate future performance. Total return
is computed for a speci-
 
                                                                             45
<PAGE>
 
PERFORMANCE (CONTINUED)
 
fied period of time assuming deduction of the maximum sales charge, if any,
from the initial amount invested and reinvestment of all income dividends and
capital gain distributions on the reinvestment dates at prices calculated as
stated in this Prospectus, then dividing the value of the investment at the
end of the period so calculated by the initial amount invested and subtracting
100%. The standard average annual total return, as prescribed by the SEC, is
derived from this total return, which provides the ending redeemable value.
Such standard total return information may also be accompanied with nonstan-
dard total return information for differing periods computed in the same man-
ner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution 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 calcu-
lating current dividend return should be considered when comparing a Class'
current return to yields published for other investment companies and other
investment vehicles. The Fund may also include comparative performance infor-
mation in advertising or marketing its shares. Such performance information
may include data from Lipper Analytical Services, Inc. and other financial
publications.
 
MANAGEMENT OF THE TRUST AND THE FUND
 
 
 BOARD OF TRUSTEES
  Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
sub-investment adviser, administrator, custodian and transfer agent. The day-
to-day operations of the Fund are delegated to the Fund's investment adviser
and Administrator and sub-investment adviser. The Statement of Additional
Information contains background information regarding each Trustee and execu-
tive officer of the Fund.
 
 INVESTMENT ADVISER
 
  The Manager, located at 388 Greenwich Street, New York, New York 10013,
serves as the Fund's investment adviser. The Manager (through its predeces-
sors) has been in the investment counseling business since 1968 and is a reg-
istered investment adviser. The Manager renders investment advice to invest-
ment companies that had aggregate assets under management as of September 30,
1998 in excess of $108 billion.  
 
46
<PAGE>
 
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
 
  Subject to the supervision and direction of the Trust's Board of Trustees,
the Manager manages the Fund's portfolio in accordance with the Fund's invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research service to the Fund. For
advisory services rendered to the Fund, the Fund pays the Manager a fee at the
annual rate of 0.45% of the value of the Fund's average daily net assets. From
its fee, the Manager pays Global Capital Management a fee of 0.10% of the
value of the Fund's average daily net assets for its services as sub-invest-
ment adviser.  
 
 SUB-INVESTMENT ADVISER
 
  Global Capital Management, located at 10 Piccadilly, London W1V 9LA, United
Kingdom, serves as the Fund's sub-investment adviser pursuant to a sub-
investment advisory agreement dated August 31, 1995. Global Capital Management
has been in the investment counseling business since 1988 and renders advice
to client companies with aggregate assets under management, as of September 30
1998 in excess of $1 billion.  
 
  In its capacity as a sub-investment adviser, Global Capital Management is
responsible for, and selects, the Fund's investments in foreign securities and
selects the brokers and dealers that execute the Fund's investments in foreign
securities.
 
 PORTFOLIO MANAGEMENT
 
  John C. Bianchi and James E. Conroy, both Managing Directors of Salomon
Smith Barney, have served as Vice Presidents and Investment Officers of the
Fund since it commenced operations. Along with Simon R. Hildreth, an Invest-
ment Officer of the Fund, they manage the day-to-day operations of the Fund,
including making all investment decisions.  
 
  Simon R. Hildreth, Managing Director of Salomon Smith Barney and a member of
the Investment Policy Committee of Global Capital Management, serves as an
Investment Officer of the Fund. Mr. Hildreth is responsible for managing the
day-to-day operations of the Fund's investments in foreign securities. Prior
to joining Salomon Smith Barney in 1994, Mr. Hildreth was a director of Mer-
cury Asset Management Ltd., a fund manager located in the United Kingdom.  
 
  Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1998 are included in
the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request and without charge from a Salomon Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
 
                                                                             47
<PAGE>
 
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
 
 
 ADMINISTRATOR
 
  The Manager also serves as the Fund's administrator and oversees all aspects
of the Fund's administration and operation. For administration services ren-
dered to the Fund, the Fund pays the Manager a fee at the annual rate of 0.20%
of the value of the Fund's average daily net assets.  
   
  On October 8, 1998 Travelers Group Inc. and Citicorp consum-
mated their merger, thereby creating a new entity to be called Citigroup.
Citigroup is a bank holding company subject to regulation under the Bank Hold-
ing Company Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall
Act and certain other laws and regulations. The Manager does not believe that
its compliance with the applicable law will have a material adverse effect on
its ability to continue to provide the Fund with the same level of investment
advisory services that it currently receives.  
 
DISTRIBUTION
 
  CFBDS, located at 21 Milk Street, Boston, MA 02109-5408 distributes shares of
the Fund as principal underwriter and as such conducts a continuous offering
pursuant to a "best efforts" arrangement requiring CFBDS to take and pay for
only such securities as may be sold to the public. The Fund has adopted a plan
of distribution under Rule 12b-1 under the 1940 Act (the "Plan"), pursuant to
which Salomon Smith Barney is paid a service fee with respect to Class A, Class
B and Class L shares of the Fund at the annual rate of 0.25% of the average
daily net assets of the respective Class. Salomon Smith Barney is also paid a
distribution fee with respect to Class B and Class L shares at the annual rate
of 0.50% and 0.45%, respectively, of the average daily net assets attributable
to those Classes. Class B shares which automatically convert to Class A shares
eight years after the date of original purchase will no longer be subject to
distribution fees. The fees are used by Salomon Smith Barney to pay its Finan-
cial Consultants for servicing shareholder accounts and, in the case of Class B
and Class L shares, to cover expenses primarily intended to result in the sale
of those shares. These expenses include: advertising expenses; the cost of
printing and mailing prospectuses to potential investors; payments to and
expenses of Salomon Smith Barney Financial Consultants and other persons who
provide support services in connection with the distribution of shares; inter-
est and/or carrying charges; and indirect and overhead costs of Salomon Smith
Barney associated with the sale of Fund shares, including lease, utility, com-
munications and sales promotion expenses.  
 
  The payments to Salomon Smith Barney Financial Consultants for selling shares
of a Class include a commission or fee paid by the investor or Salomon Smith
Barney at the time of sale and, with respect to Class A, Class B and Class L
shares,
 
48
<PAGE>
 
DISTRIBUTION (CONTINUED)
 
a continuing fee for servicing shareholder accounts for as long as a share-
holder remains a holder of that Class. Salomon Smith Barney Financial Consul-
tants may receive different levels of compensation for selling different Clas-
ses of shares.
 
  Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Salomon Smith Barney and the
payments may exceed distribution expenses actually incurred. The Trust's Board
of Trustees will evaluate the appropriateness of the Plan and its payment terms
on a continuing basis and in so doing will consider all relevant factors,
including expenses borne by Salomon Smith Barney, amounts received under the
Plan and proceeds of the CDSC.
 
ADDITIONAL INFORMATION
 
 
  The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." The Trust may issue an unlimited number of shares of benefi-
cial interest, of separate series with a par value of $.001 per share. The Fund
offers shares of beneficial interest currently classified into five Classes--A,
B, L, Y and Z.
 
  Each Class of shares represents identical interests in the Fund's investment
portfolio. As a result, the Classes have the same rights, privileges and pref-
erences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees, if any, borne by each Class pursuant to the Plan; (d) the
expenses allocable exclusively to each Class; (e) voting rights on matters
exclusively affecting a single Class; (f) the exchange privilege of each Class;
and (g) the conversion feature of the Class B shares. The Trust's Board of
Trustees does not anticipate that there will be any conflicts among the inter-
ests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any such conflict exists and, if so, take appro-
priate action.
 
  When matters are submitted for shareholder vote, shareholders of each Class
of each Fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Shares of the
Trust will be voted generally on a Trust-wide basis on all matters except mat-
ters affecting the interests of one Fund or one Class of shares.
 
  Normally there will be no meetings of shareholders for the purpose of elect-
ing Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a
Trustee through a declaration in writing or by vote cast in person or by proxy
at a meeting called for that purpose. The Trustees will call a meeting for any
purpose upon written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Fund will assist shareholders in calling such a
meeting as required by the 1940 Act.
 
                                                                              49
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
 
 
  The Chase Manhattan Bank, located at Chase MetroTech Center, Brooklyn, New
York 11245, serves as custodian of the Fund's investments.
 
  The Transfer Agent is located at Exchange Place, Boston, Massachusetts 02109.
  
  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 reporting period. In an effort to reduce the Fund's printing and
mailing costs, the Trust plans to consolidate the mailing of the Fund's 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 consolidation
to apply to their accounts should contact a Salomon Smith Barney Financial Con-
sultant or the Transfer Agent.  
 
50
<PAGE>
 
 
 
 
                      [This page intentionally left blank]
<PAGE>
 
 
 
 
                      [This page intentionally left blank]
<PAGE>
 
 
 
 
                                                 SalomonSmithBarney
                                                 -------------------------------
                                                     A Member of citigroup[LOGO]

             Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
       
 
 
                                  SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND
 
                                                          388 Greenwich Street 
                                                      New York, New York 10013
 
                                                                   FD 1209 11/98

<PAGE>
 

                                   PROSPECTUS
                                             
                                                                    SMITH BARNEY

                                                                            High
                                                                          Income
                                                                            Fund

 
                                                               November 27, 1998
 

                                                   Prospectus begins on page one

<PAGE>

 
--------------------------------------------------------------------------------
Prospectus                                                     November 27, 1998
--------------------------------------------------------------------------------
 

      Smith Barney High Income Fund
      388 Greenwich Street
      New York, New York 10013
      (800) 451-2010

      Smith Barney High Income Fund (the "Fund") seeks to provide shareholders
with high current income by investing in a diversified portfolio of
high-yielding corporate bonds, debentures and notes.

      The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up the Smith Barney Income Funds (the "Trust").
The Trust is an open-end management investment company commonly referred to as a
mutual fund.

      The Fund invests primarily in lower-rated bonds, commonly known as "junk
bonds." Bonds of this type are subject to a greater risk of loss of principal
and interest. Purchasers should carefully assess the risks associated with an
investment in the Fund. See "Risk Factors and Special Considerations."

 
      This Prospectus sets forth concisely certain information about the Fund
and the Trust, 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. Shares of other investment funds offered by the Trust
are described in separate prospectuses that may be obtained by calling the Trust
at the telephone number set forth above or by contacting a Salomon Smith Barney
Financial Consultant.

      Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 27, 1998, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Salomon 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.

CFBDS, INC.
Distributor

MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
 

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                                  15
--------------------------------------------------------------------------------
Valuation of Shares                                                           27
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                            28
--------------------------------------------------------------------------------
Purchase of Shares                                                            30
--------------------------------------------------------------------------------
Exchange Privilege                                                            38
--------------------------------------------------------------------------------
Redemption of Shares                                                          41
--------------------------------------------------------------------------------
Minimum Account Size                                                          44
--------------------------------------------------------------------------------
Performance                                                                   44
--------------------------------------------------------------------------------
Management of the Trust and the Fund                                          45
--------------------------------------------------------------------------------
Distribution                                                                  46
--------------------------------------------------------------------------------
Additional Information                                                        46
--------------------------------------------------------------------------------
     


--------------------------------------------------------------------------------
      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 this
Prospectus. See "Table of Contents."

 
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks high current income by investing primarily in a diversified
portfolio of high-yielding corporate bonds, debentures and notes denominated in
U.S. dollars and foreign currencies. Although growth of capital is not an
investment objective of the Fund, Mutual Management Corp. ("MMC") (formerly
known as Smith Barney Mutual Funds Management Inc.) may consider potential for
growth as one factor, among others, in selecting investments for the Fund. Up to
40% of the Fund's assets may be invested in fixed-income obligations of foreign
issuers, and up to 20% of its assets may be invested in common stock or other
equity or equity-related securities, including convertible securities, preferred
stock, warrants and rights. Securities purchased by the Fund generally will be
rated in the lower rating categories by a nationally recognized statistical
rating organization ("NRSRO"), as low as Caa by Moody's Investors Service, Inc.
("Moody's") or D by Standard & Poor's Ratings Group ("S&P"), or in unrated
securities of comparable quality. See "Investment Objective and Management
Policies."

ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and 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 $15,000,000. A fifth
Class, Class Z shares, is offered pursuant to a separate prospectus exclusively
to (a) tax-exempt employee benefit and retirement plans of Salomon Smith Barney
Inc. ("Salomon Smith Barney") and its affiliates and (b) unit investment trusts
("UITs") sponsored by Salomon 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 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


                                                                               3
<PAGE>

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

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

 
      Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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, and investors pay a CDSC of 1.00% if they redeem
Class L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. Until June 22, 2001 purchasers of Class L shares by investors who
were holders of Class C shares of the Fund on June 12, 1998 will not be subject
to the 1.00% initial sales charge. The Class L shares' distribution fee may 
cause that Class to have higher expenses and pay lower dividends than Class A
and Class B shares. Purchases of Fund shares, which when combined with current
holdings of Class L shares of the Fund equal or exceed $500,000 in the
aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.

      Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fee.
 

      In deciding which Class of Fund 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 duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates


4
<PAGE>

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

 
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an investment
alternative, Class B and Class L shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional invested amounts may partially or wholly
offset the higher annual expenses of these Classes. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case. Finally, Class L shares which have a lower initial sales charge but
are subject to higher distribution fees than Class A shares, are suitable for
investors who are not investing or intending to invest an amount which would
receive a substantial sales charge discount and who have a short-term or
undetermined time frame.

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

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

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

      See "Purchase of Shares" and "Management of the Trust and 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 among 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


                                                                               5
<PAGE>

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

 
"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 L shares are available without a sales
charge as investment alternatives for both of these programs. See "Purchase of
Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs."

DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. to
distribute the Fund's shares.

PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker that
clears securities through Salomon Smith Barney. (An investment dealer in the
selling group and a broker that clears securities through Salomon Smith Barney
are collectively referred to as "Dealer Representatives.") In addition, certain
investors, including qualified retirement plans and investors purchasing through
certain Dealer Representatives, may purchase shares directly from the Fund
through the Fund's transfer agent, First Data Investors Service Group, Inc.
("First Data" or the "Transfer Agent"). See "Purchase of Shares."

INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $15,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under Section 403(b)(7)
or Section 401(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class L shares and the minimum subsequent investment
requirement for all Classes is $25. The minimum investment requirements for
purchases of Fund shares through the Systematic Investment Plan are described
below. There is no minimum investment requirement for Class A for unitholders
who invest distributions from a UIT sponsored by Salomon Smith Barney. See
"Purchase of Shares."

SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial investment
requirement for Class A, Class B and Class L shares and the minimum 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."


6
<PAGE>

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

 
MANAGEMENT OF THE TRUST AND THE FUND MMC serves as the Fund's investment
adviser and administrator. MMC provides investment advisory and management 
services to investment companies affiliated with Salomon Smith Barney. MMC is a
wholly owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"). 
Holdings is a wholly owned subsidiary of Citigroup Inc. ("Citigroup").
Citigroup businesses produce a broad range of financial services -- asset 
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading -- and use diverse channels to make
them available to consumer and corporate customers around the world. Among
these businesses are Citibank, Commercial Credit, Primerica Financial Services,
Salomon Smith Barney, SSBC Asset Management, Travelers Life & Annuity, and 
Travelers Property Casualty. See "Management of the Trust and the Fund."
 

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

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

DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and 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
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."

RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The market value of fixed-income
securities, which constitute a major part of the investments of the Fund, may
vary inversely in response to changes in prevailing interest rates. The foreign
securities in which the Fund may invest may be subject to certain risks in
addition to those inherent in domestic investments. The medium- or lower-rated
securities in which the Fund may invest, some of which have speculative
characteristics, may be subject to greater market fluctuations and greater risk
of loss of income or principal than higher-rated securities. The Fund may employ
investment techniques which involve certain other risks, including entering into
repurchase agreements, engaging


                                                                               7
<PAGE>

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

in when-issued and delayed-delivery transactions, lending portfolio securities
and entering into options on futures contracts and currencies. See "Investment
Objective and Management Policies."

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

 
<TABLE>
<CAPTION>
Smith Barney High Income Fund                       Class A   Class B  Class L*   Class Y
-----------------------------------------------------------------------------------------
<S>                                                    <C>       <C>       <C>       <C>  
Shareholder Transaction Expenses
     Maximum sales charge imposed on purchases
     (as a percentage of offering price)               4.50%     None      1.00%     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                                   0.70%     0.70%     0.70%     0.70%
     12b-1 fees***                                     0.25      0.75      0.70      None
     Other expenses                                    0.10      0.10      0.08      0.02
-----------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES                          1.05%     1.55%     1.48%     0.72%
=========================================================================================
</TABLE>

  * Class C shares were renamed Class L shares effective June 12, 1998.
 ** Purchases of Class A shares of $500,000 or more will be made at net asset
    value with no sales charge, but will be subject to a CDSC of 1.00% on
    redemptions made within 12 months of purchase.
*** Upon conversion of Class B shares to Class A shares, such shares will no
    longer be subject to a distribution fee. Class L shares do not have a
    conversion feature and, therefore, are subject to an ongoing distribution
    fee. As a result, long-term shareholders of Class L shares may pay more
    than the economic equivalent of the maximum front-end sales charge
    permitted by the National Association of Securities Dealers, Inc. (the
    "NASD").

      Class A shares of the Fund purchased through the Salomon 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 Salomon Smith Barney Financial Consultant.

      The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges depending on the amount purchased and, in the
case of Class B, Class L and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Salomon Smith Barney receives an annual 12b-1 service fee of 0.25% of
the value of average daily net assets of Class A shares. Salomon Smith Barney
also receives,
 


8
<PAGE>

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

 
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 L shares, Salomon Smith Barney 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.

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

Smith Barney High Income 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:

   Class A                                   $55       $77      $100       $167
   Class B                                    61        79        94        171
   Class L                                    35        56        90        185
   Class Y                                     7        23        40         89

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

   Class A                                   $55       $77      $100       $167
   Class B                                    16        49        84        171
   Class L                                    25        56        90        185
   Class Y                                     7        23        40         89
================================================================================
 

* 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 Fund'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 for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal years ended July 31, 1989through July
31, 1994 has been audited by other independent auditors. The information set out
below should be read in conjunction with the financial statements and related
notes that also appear in the Fund's 1998 Annual Report, which is incorporated
by reference into the Statement of Additional Information.
 

For a Class A share of beneficial interest outstanding throughout each year:

 
<TABLE>
<CAPTION>
Smith Barney High Income Fund
Year Ended July 31,                     1998        1997        1996        1995        1994     1993(1)
========================================================================================================
<S>                                   <C>         <C>         <C>         <C>         <C>         <C>   
Net Asset Value, Beginning of Year    $11.82      $10.98      $11.10      $11.16      $12.01      $11.03
--------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income                 1.02        1.09        1.08        1.08        1.08        0.75
  Net realized and unrealized
    gain (loss) on investments         (0.01)       0.83       (0.12)      (0.02)      (0.81)       1.09
--------------------------------------------------------------------------------------------------------
Total Income From Operations            1.01        1.92        0.96        1.06        0.27        1.84
--------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                (1.09)      (1.08)      (1.08)      (1.05)      (1.12)      (0.86)
  Capital                                 --          --          --       (0.07)         --          --
--------------------------------------------------------------------------------------------------------
Total Distributions                    (1.09)      (1.08)      (1.08)      (1.12)      (1.12)      (0.86)
--------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year          $11.74      $11.82      $10.98      $11.10      $11.16      $12.01
--------------------------------------------------------------------------------------------------------
Total Return                            8.85%      18.31%       8.95%      10.28%       2.11%      17.29%++
--------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)    $  512      $  424      $  341      $  317      $  234      $  242
--------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                              1.05%       1.06%       1.10%       1.11%       1.11%       1.16%+
  Net investment income                 8.61        9.57        9.65       10.03        9.27        9.52+
--------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                  102%         78%         72%         60%         98%         95%
========================================================================================================
</TABLE>
 

(1) For the period from November 6, 1992 (inception date) to July 31, 1993.
++  Total return is not annualized as it may not be representative of the total
    return for the year.
+   Annualized.


10
<PAGE>

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

For a Class B share of beneficial interest outstanding throughout each year:

 
<TABLE>
<CAPTION>
Smith Barney High Income Fund
Year Ended July 31,                           1998        1997        1996        1995        1994        1993
==============================================================================================================
<S>                                         <C>         <C>         <C>         <C>         <C>         <C>   
Net Asset Value,
  Beginning of Year                         $11.83      $10.99      $11.11      $11.16      $12.01      $11.15
--------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income                       0.96        1.03        1.02        1.03        1.02        1.08
  Net realized and unrealized
    gain (loss) on investments               (0.01)       0.83       (0.12)      (0.02)      (0.81)       0.88
--------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations           0.95        1.86        0.90        1.01        0.21        1.96
--------------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                      (1.03)      (1.02)      (1.02)      (0.99)      (1.06)      (1.10)
  Capital                                       --          --          --       (0.07)         --          --
--------------------------------------------------------------------------------------------------------------
Total Distributions                          (1.03)      (1.02)      (1.02)      (1.06)      (1.06)      (1.10)
--------------------------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year                               $11.75      $11.83      $10.99      $11.11      $11.16      $12.01
--------------------------------------------------------------------------------------------------------------
Total Return                                  8.34%      17.72%       8.41%       9.77%       1.60%      18.55%
--------------------------------------------------------------------------------------------------------------
Net Assets,
  End of Year (millions)                    $  859      $  681      $  560      $  478      $  510      $  449
--------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                    1.55%       1.55%       1.59%       1.61%       1.60%       1.66%
  Net investment income                       8.11        9.07        9.16        9.52        8.77        9.02
--------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                        102%         78%         72%         60%         98%         95%
==============================================================================================================
</TABLE>
 


                                                                              11
<PAGE>

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

For a Class B share of beneficial interest outstanding throughout each year:

 
<TABLE>
<CAPTION>
Smith Barney High Income Fund
Year Ended July 31,                      1992        1991        1990        1989
<S>                                    <C>         <C>         <C>         <C>   
Net Asset Value, Beginning of Year     $10.05      $10.59      $13.36      $14.01
---------------------------------------------------------------------------------
Income From Operations:
  Net investment income                  1.11        1.27        1.53        1.61
  Net realized and unrealized
    gain (loss) on investments           1.16       (0.52)      (2.68)      (0.73)
---------------------------------------------------------------------------------
Total Income (Loss) From Operations      2.27        0.75       (1.15)       0.88
---------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                 (1.11)      (1.27)      (1.61)      (1.53)
  Capital                               (0.06)      (0.02)      (0.01)         --
---------------------------------------------------------------------------------
Total Distributions                     (1.17)      (1.29)      (1.62)      (1.53)
---------------------------------------------------------------------------------
Net Asset Value, End of Year           $11.15      $10.05      $10.59      $13.36
---------------------------------------------------------------------------------
Total Return                            23.86%       8.82%      (8.66)%      6.60%
---------------------------------------------------------------------------------
Net Assets, End of Year (millions)       $304        $239        $323        $610
---------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                             1.65%#        1.75%       1.68%       1.63%
  Net investment income                 10.52       13.30       12.93       11.93
---------------------------------------------------------------------------------
Portfolio Turnover Rate                   137%        112%         43%         74%
=================================================================================
</TABLE>
 

# The annualized operating expense ratio excludes interest expense. The
  annualized operating expense ratio including interest expense was 1.66% for 
  the year ended July 31, 1992.


12
<PAGE>

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

 
For a Class L(1) share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>
Smith Barney High Income Fund
Year Ended July 31,                     1998        1997       1996  1995(2)(3)
==============================================================================
<S>                                   <C>         <C>        <C>        <C>   
Net Asset Value, Beginning of Year    $11.84      $11.00     $11.11     $10.90
------------------------------------------------------------------------------
Income From Operations:
  Net investment income                 0.97        1.04       1.03       0.95
  Net realized and unrealized
    gain (loss) on investments         (0.01)       0.83      (0.11)      0.23
------------------------------------------------------------------------------
Total Income From Operations            0.96        1.87       0.92       1.18
------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                (1.04)      (1.03)     (1.03)     (0.90)
  Capital                                 --          --         --      (0.07)
------------------------------------------------------------------------------
Total Distributions                    (1.04)      (1.03)     (1.03)     (0.97)
------------------------------------------------------------------------------
Net Asset Value, End of Year          $11.76      $11.84     $11.00     $11.11
------------------------------------------------------------------------------
Total Return                            8.38%      17.77%      8.56%     11.50%++
------------------------------------------------------------------------------
Net Assets, End of Year (millions)       $93         $44        $21         $6
------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                              1.48%       1.48%      1.51%      1.56%+
  Net investment income                 8.15        9.14       9.23       9.58+
------------------------------------------------------------------------------
Portfolio Turnover Rate                  102%         78%        72%        60%
==============================================================================
</TABLE>

(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) On November 7, 1994 the former Class D shares were renamed Class C shares.
(3) For the period from August 24, 1994 (inception date) to July 31, 1995.
++  Total return is not annualized as it may not be representative of the total
    return for the year.
+   Annualized.
 


                                                                              13
<PAGE>

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

 
For a Class Y share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>
Smith Barney High Income Fund
Year Ended July 31,                     1998        1997        1996    1995(1)
===============================================================================
<S>                                   <C>         <C>         <C>        <C>   
Net Asset Value, Beginning of Year    $11.84      $10.99      $11.10     $10.88
-------------------------------------------------------------------------------
Income From Operations:
  Net investment income                 1.05        1.12        0.92       0.09
  Net realized and unrealized
    gain (loss) on investments         (0.01)       0.84       (0.11)      0.23
-------------------------------------------------------------------------------
Total Income From Operations            1.04        1.96        0.81       0.32
-------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                (1.11)      (1.11)      (0.92)     (0.03)
  Capital                                 --          --          --      (0.07)
-------------------------------------------------------------------------------
Total Distributions                    (1.11)      (1.11)      (0.92)     (0.10)
-------------------------------------------------------------------------------
Net Asset Value, End of Year          $11.77      $11.84      $10.99     $11.10
-------------------------------------------------------------------------------
Total Return                            9.18%      18.68%       9.32%      2.91%++
-------------------------------------------------------------------------------
Net Assets, End of Year (millions)      $212        $139         $35        $10
-------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                              0.72%       0.73%       0.76%      0.86%+
  Net investment income                 8.83        9.90        9.98      10.28+
-------------------------------------------------------------------------------
Portfolio Turnover Rate                  102%         78%         72%        60%
===============================================================================
</TABLE>

(1) For the period from April 28, 1995 (inception date) to July 31, 1995.
++  Total return is not annualized as it may not be representative of the total
    return for the year.
+   Annualized.
 


14
<PAGE>

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

 
      The Fund's investment objective is high current income. The Fund's 
investment objective may be changed only with the approval of the holders of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund will achieve its objective. Although growth of capital is not an investment
objective of the Fund, MMC may consider potential for growth as one factor,
among others, in selecting investments for the Fund. The Fund will seek high
current income by investing, under normal circumstances, at least 65% of its
assets in high-yielding corporate bonds, debentures and notes denominated in
U.S. dollars or foreign currencies. Up to 40% of the Fund's assets may be
invested in fixed-income obligations of foreign issuers, and up to 20% of its
assets may be invested in common stock or other equity or equity-related
securities, including convertible securities, preferred stock, warrants and
rights. Securities purchased by the Fund generally will be rated in the lower
rating categories, as low as Caa by Moody's or D by S&P or an equivalent rating
by any NRSRO, or in unrated securities that MMC deems of comparable quality.
However, the Fund will not purchase securities rated lower than B by both
Moody's and S&P unless, immediately after such purchase, no more than 10% of its
total assets are invested in such securities. The Fund may hold securities with
higher ratings when the yield differential between low-rated and higher-rated
securities narrows and the risk of loss may be reduced substantially with only
a relatively small reduction in yield. The Fund may also invest in zero coupon
bonds and payment-in-kind bonds. The Fund also may invest in higher-rated
securities when MMC believes that a more defensive investment strategy is
appropriate in light of market or economic conditions. The Fund also may lend
its portfolio securities, purchase or sell securities on a when-issued or
delayed-delivery basis and write covered call options on securities. In order to
mitigate the effects of uncertainty in future exchange rates, the Fund may
engage in currency exchange transactions and purchase options on foreign
currencies. The Fund also may hedge against the effects of changes in the value
of its investments by purchasing put and call options on interest rate futures
contracts. Special considerations associated with the Fund's investments are
described below.
 

      CERTAIN INVESTMENT STRATEGIES

      In attempting to achieve its investment objective, the Fund may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained in
the Statement of Additional Information.

 
      Covered Option Writing. The Fund may write (sell) call options on
securities. The Fund realizes fees (referred to as "premiums") for granting the
rights evidenced by the options. A call option embodies the right of its
purchaser to compel the writer of the option to sell to the option holder an
underlying security at a specified price at any time during the option period.
Thus, the purchaser of a call option
 


                                                                              15
<PAGE>

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

written by the Fund has the right to purchase from the Fund the underlying
security owned by the Fund at the agreed-upon price for a specified time period.

      Upon the exercise of a call option written by the Fund, the Fund may
suffer a loss equal to the excess of the security's market value at the time of
the option exercise over the Fund's acquisition cost of the security, less the
premium received for writing the option.

      The Fund will write only covered options. Accordingly, whenever the Fund
writes a call option, it will continue to own or have the present right to
acquire the underlying security for as long as it remains obligated as the
writer of the option.

      The Fund may engage in a closing purchase transaction to realize a profit
or to unfreeze an underlying security (thereby permitting its sale or the
writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option the Fund has written, an option of
the same series as that on which the Fund desires to terminate its obligation.
The obligation of the Fund under an option it has written would be terminated by
a closing purchase transaction, but the Fund would not be deemed to own an
option as the result of the transaction. There can be no assurance the Fund will
be able to effect closing purchase transactions at a time when it wishes to do
so. To facilitate closing purchase transactions, however, the Fund ordinarily
will write options only if a secondary market for the options exists on a
domestic securities exchange or in the over-the-counter market.

      Convertible Securities and Synthetic Convertible Securities. Convertible
securities are fixed-income securities that may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities
generally, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stocks and, therefore, also will react to variations in
the general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.


16
<PAGE>

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

      As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. However,
there can be no assurance of capital appreciation because securities prices
fluctuate.

      Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.

      Unlike a convertible security which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotation System. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the Fund at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risk normally involved in holding the
securities comprising the synthetic convertible security.

      ADDITIONAL INVESTMENTS

 
      Money Market Instruments. When MMC believes that market conditions
warrant, the Fund may adopt a temporary defensive posture and may invest in
short-term instruments without limitation. Short-term instruments in which the
Fund may invest include: U.S. government securities; certain bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loan associations and similar
institutions); commercial paper rated no lower than A-2 by S&P or Prime-2 by
Moody's or the equivalent rating by any NRSRO or, if unrated, of an issuer
having
 


                                                                              17
<PAGE>

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

an outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements as described below.

      United States Government Securities. U.S. government securities are
obligations of, or guaranteed by, the United States government, its agencies or
instrumentalities. The U.S. government securities in which the Fund may invest
include: direct obligations of the United States Treasury (such as Treasury
Bills, Treasury Notes and Treasury Bonds) and obligations issued by U.S.
government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association ("GNMA") certificates); securities that are
supported by the right of the issuer to borrow from the United States Treasury
(such as securities of Federal Home Loan Banks); and securities that are
supported by the credit of the instrumentality (such as Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC") bonds). Treasury Bills have maturities of less than 1 year, Treasury
Notes have maturities of 1 to 10 years and Treasury Bonds generally have
maturities of greater than 10 years at the date of issuance. Certain U.S.
government securities, such as those issued or guaranteed by GNMA, FNMA and
FHLMC, are mortgage-related securities. U.S. government securities generally do
not involve the credit risks associated with other types of interest-bearing
securities, although, as a result, the yields available from U.S. government
securities are generally lower than the yields available from interest-bearing
corporate securities.

 
      Zero Coupon Bonds. The Fund may also invest in zero coupon bonds. A zero
coupon bond pays no interest in cash to its holder during its life, although
interest is accrued during that period. Its value to an investor consists of the
difference between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount significantly less than its
face value (sometimes referred to as a "deep discount" price). Because such
securities usually trade at a deep discount, they will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, zero coupon securities eliminate reinvestment
risk and lock in a rate of return to maturity.
 

      Repurchase Agreements. The Fund may engage in repurchase agreement
transactions with banks which are the issuers of instruments acceptable for
purchase by the Fund and with certain dealers on the Federal Reserve Bank of New
York's list of reporting dealers. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than one week), subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Fund's holding period.
This arrangement


18
<PAGE>

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

 
results in a fixed rate of return that is not subject to market fluctuations
during the Fund's holding period. The value of the underlying securities will be
at least equal at all times to the total amount of the repurchase obligation,
including interest. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays in
or restrictions upon the Fund's ability to dispose of the underlying securities,
the risk of a possible decline in the value of the underlying securities during
the period in which the Fund seeks to assert its rights to them, the risk of
incurring expenses associated with asserting those rights and the risk of losing
all or part of the income from the agreement. MMC, acting under the supervision
of the Trust's Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and dealers with which the
Fund may enter into repurchase agreements to evaluate potential risks.

      Futures Contracts and Options on Futures Contracts. When deemed advisable
by MMC, the Fund may enter into futures contracts or related options that are
traded on a domestic exchange or board of trade. Such investments, if any, by
the Fund will be made solely for the purpose of hedging against the effects of
changes in the value of the portfolio securities due to anticipated changes in
interest rates, currency values and market conditions and when the transactions
are economically appropriate to the reduction of risks inherent in the
management of the Fund. The Fund may not enter into futures and options
contracts for which aggregate initial margin deposits and premiums paid for
unexpired options to establish such positions that are not bona fide hedging
positions (as defined by the Commodity Futures Trading Commission), exceed 5% of
the fair market value of the Fund's assets after taking into account unrealized
profits and unrealized losses on futures contracts into which it has entered.
With respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract always will be covered by cash, U.S.
government securities, equity securities or debt securities of any grade,
provided such securities have been determined by MMC to be liquid and
unencumbered and are marked to market daily pursuant to guidelines established
by the Trustees ("eligible segregated assets"), plus accrued profits held in a
segregated account.
 

      The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities on the one
hand, and price movements in the securities which are the subject of the hedge,
on the other hand. Positions in futures contracts and options on futures
contracts may be closed out only on the exchange or board of trade on which they
were entered into, and there can be no assurance that an active market will
exist for a particular contract or option at any particular time. Losses
incurred in hedging transactions and the costs of these transactions will affect
the Fund's performance.


                                                                              19
<PAGE>

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

      Foreign Securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The yield of the Fund may
be adversely affected by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign companies and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic companies. In addition, with respect to
certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Fund, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that could reduce
the yield on such securities. Because the Fund will invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may adversely affect the value of portfolio
securities and the appreciation or depreciation of investments. Investments in
foreign securities also may result in higher expenses due to the cost of
converting foreign currency to U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions on
domestic exchanges, and the expense of maintaining securities with foreign
custodians, and the imposition of transfer taxes or transaction charges
associated with foreign exchanges.

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

 
      Corporate Securities. Corporate securities in which the Fund may invest
include corporate fixed-income securities of both domestic and foreign issuers,
 


20
<PAGE>

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

such as bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, and preferred stock. The Fund's investments in each of equipment
leases or equipment trust certificates will not exceed 5% of its assets.

      Certain of the corporate fixed-income securities in which the Fund may
invest may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights
permitting the holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.

      Currency Exchange Transactions and Options on Foreign Currencies. In order
to protect against uncertainty in the level of future exchange rates, the Fund
may engage in currency exchange transactions and purchase exchange-traded put
and call options on foreign currencies. The Fund will conduct its currency
exchange transactions either on a spot (i.e., cash) basis at the rate prevailing
in the currency exchange market or through entering into forward contracts to
purchase or sell currencies. The Fund's dealings in forward currency exchange
and options on foreign currencies are limited to hedging involving either
specific transactions or portfolio positions.

      A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might result should the value of the currency
increase.

      The Fund may purchase put options on a foreign currency in which
securities held by the Fund are denominated to protect against a decline in the
value of the currency in relation to the currency in which the exercise price is
denominated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the
purchaser, in return for a premium, the right to sell, in the case of a put, and
buy, in the case of a call, the underlying currency at a specified price during
the term of the option. Although the purchase of an option on a foreign currency
may constitute an effective hedge by the Fund against fluctuations in the
exchange rates, in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus


                                                                              21
<PAGE>

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

related transaction costs. Options on foreign currencies purchased by the Fund
may be traded on domestic and foreign exchanges or traded over-the-counter.

      Although the foreign currency market may not necessarily be more volatile
than the market in other commodities, the foreign currency market offers less
protection against defaults in the forward trading of currencies than is
available when trading in currencies occurs on an exchange. Because a forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits or force the Fund
to cover its commitments for purchase or resale, if any, at the current market
price.

 
      When-Issued Securities and Delayed-Delivery Transactions. In order to
secure yields or prices deemed advantageous at the time, the Fund may purchase
or sell any portfolio securities on a when-issued or delayed-delivery basis. The
Fund will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage. In such transactions,
delivery of the securities occurs beyond the normal settlement period, but no
payment or delivery is made by the Fund prior to the actual delivery or payment
by the other party to the transaction. Due to fluctuations in the value of
securities purchased or sold on a when-issued or delayed-delivery basis, the
yields obtained on such securities may be higher or lower than the yields
available in the market on the dates when the investments are actually delivered
to the buyers. The Fund will establish a segregated account consisting of cash,
U.S. government securities, equity securities or debt securities of any grade
having a value equal to or greater than the Fund's purchase commitments,
provided such securities have been determined by MMC to be liquid and
unencumbered and are marked to market daily pursuant to guidelines established
by the Trustees. Placing securities rather than cash in the segregated account
may have a leveraging effect on the Fund's net assets. The Fund will not accrue
income with respect to a when-issued security prior to its stated delivery date.

      Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund has the ability to lend portfolio securities to brokers,
dealers and other financial organizations. These loans, if and when made, may
not exceed 20% of the Fund's assets taken at value. Loans of portfolio
securities will be collateralized by cash, letters of credit or U.S. government 
securities that are maintained at all times in an amount at least equal to
the current market value of the loaned securities.

      Non-Publicly Traded and Illiquid Securities. The sale of securities that
are not publicly traded is typically restricted under the Federal securities
laws. As a result, the Fund may be forced to sell these securities at less than
fair market value or may not be able to sell them when MMC believes it desirable
to do so. The Fund's investments in illiquid securities are subject to the risk
that should the Fund
 


22
<PAGE>

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

desire to sell any of these securities when a ready buyer is not available at a
price that the Fund deems representative of its value, the value of the Fund's
net assets could be adversely affected.

      Securities of Developing Countries. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems that can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.

      CERTAIN INVESTMENT GUIDELINES

      The Fund may invest up to 15% of its total assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) futures contracts and related options for which a liquid
secondary market does not exist and (c) time deposits maturing in more than
seven calendar days. The above restriction does not apply to securities subject
to Rule 144A of the Securities Act of 1933, as amended ("the 1933 Act") ("Rule
144A Securities").

      In addition, the Fund may invest up to 5% of its assets in the securities
of issuers which have been in continuous operation for less than three years.
The Fund also may borrow from banks for temporary or emergency purposes, but not
for investment purposes, in an amount up to 10% of its total assets, and may
pledge its assets to the same extent in connection with such borrowings.
Whenever these borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any additional investments. Except for the limitations on
borrowing, the investment guidelines set forth in this paragraph may be changed
at any time without shareholder consent by vote of the Trust's Board of
Trustees. A complete list of investment restrictions that identifies additional
restrictions that cannot be changed without the approval of the majority of the
Fund's outstanding shares is contained in the Statement of Additional
Information.

      RISK FACTORS AND SPECIAL CONSIDERATIONS

      Options. The Fund may enter into options transactions primarily as hedges
to reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio position being offset by a loss on the hedge position. The Fund bears
the risk that the prices of the


                                                                              23
<PAGE>

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

 
securities being hedged will not move in the same amount as the hedge. The Fund
will engage in hedging transactions only when deemed advisable by MMC.
Successful use by the Fund of options will depend on MMC's ability to correctly
predict movements in the direction of the stock underlying the option used as a
hedge. Losses incurred in hedging transactions and the costs of these
transactions will affect the Fund's performance.
 

      The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase options only if there appears to be a liquid secondary
market for the options purchased or sold, for some options no such secondary
market may exist or the market may cease to exist.

      Medium-, Low- and Unrated Securities. The Fund may invest up to 10% of its
assets in medium- or low-rated securities and unrated securities of comparable
quality. Generally, these securities offer a higher return potential than
higher-rated securities but involve greater volatility of price and risk of loss
of income and principal. Generally, these securities offer a higher current
yield than the yield offered by higher-rated securities, but involve greater
volatility of price and risk of loss of income and principal, including the
probability of default or bankruptcy of the issuers of such securities. Medium-
and low-rated and comparable unrated securities will likely have large
uncertainties or major risk exposures to adverse conditions and are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held by the Fund, with a commensurate effect on the
value of the Fund's shares.

      The markets in which medium- and low-rated or comparable unrated
securities are traded generally are more limited than those in which
higher-rated securities are traded. The existence of limited markets for these
securities may restrict the availability of securities for the Fund to purchase
and also may have the effect of limiting the ability of the Fund to (a) obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value and (b) sell securities at their fair value either to meet
redemption requests or to respond to changes in the economy or the financial
markets. The market for medium- and low-rated and comparable unrated securities
has not fully weathered a major economic recession. Any such economic downturn
could adversely affect the value of such securities and the ability of the
issuers of these securities to repay principal and pay interest thereon.

      While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic


24
<PAGE>

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

conditions than higher-rated securities. In addition, medium- and low-rated and
comparable unrated securities generally present a higher degree of credit risk.
Issuers of medium- and low-rated and comparable unrated securities are often
highly leveraged and may not have more traditional methods of financing
available to them so that their ability to service their debt obligations during
an economic downturn or during sustained periods of rising interest rates may be
impaired. The risk of loss due to default by such issuers is significantly
greater because medium- and low-rated and comparable unrated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness. The Fund may incur additional expenses to the extent that
it is required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings.

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

 
      Securities which are rated Ba by Moody's or BB by S&P or an equivalent
rating by any NRSRO have speculative characteristics with respect to capacity to
pay interest and repay principal. Securities which are rated B generally lack
characteristics of a desirable investment and assurance of interest and
principal payments over any long period of time may be small. Securities which
are rated Caa or CCC or below are of poor standing. Those issues may be in
default or present elements of danger with respect to principal or interest.
Securities rated C by Moody's and D by S&P are in the lowest rating class and
indicate that payments are in default or that a bankruptcy petition has been
filed with respect to the issuer or that the issuer is regarded as having
extremely poor prospects. See the Appendix in the Trust's Statement of
Additional Information on bond ratings by Moody's and S&P.

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

      Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, certain securities may lack a
significant operating history and be dependent on products or services without
an established market share.
 

      Rule 144A Securities. The Fund may purchase Rule 144A Securities, which
are unregistered securities restricted to purchase by "qualified institutional
buyers"


                                                                              25
<PAGE>

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

pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities are
freely transferable among qualified institutional buyers, a liquid market may
exist among such buyers. The Board of Trustees has adopted guidelines and
delegated to management the daily function of determining and monitoring
liquidity of Rule 144A Securities. However, the Board of Trustees maintains
sufficient oversight and is ultimately responsible for the liquidity
determinations. Investments in restricted securities such as Rule 144A
Securities could have the effect of increasing the level of illiquidity in the
Fund to the extent that there is temporarily no market for these securities
among qualified institutional buyers.

 
      Real Estate Investment Trusts. The Fund may purchase real estate
investment trusts ("REITs"). REITs are investment vehicles that invest primarily
in either real estate or real estate loans. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or security mortgage
loans held by the REIT. REITs are dependent upon cash flow from their
investments to repay financing costs and the management skill of the REIT's
manager. REITs are also subject to risks generally associated with investments
in real estate.

      Asset-Backed Securities. The Fund may invest in asset-backed securities
("ABSs"). An ABS represents an interest in a pool of assets such as receivables
from credit card loans, automobile loans and other trade receivables. Changes in
the market's perception of the asset backing the security, the credit worthiness
of the servicing agent for the loan pool, the originator of the loans, or the
financial institution providing any credit enhancement will all affect the value
of the ABS, as will the exhaustion of any credit enhancement. The risks of
investing in ABSs ultimately will depend upon the payment of the consumer loans
by the individual borrowers. In its capacity as purchaser of the ABS, the Fund
will generally have no recourse to the entity that originated the loans in the
event of default by the borrower. In addition, the loans underlying the ABSs are
subject to prepayments, which may shorten the weighted average life of such
securities and may lower their return.

      Year 2000. The investment management services provided to the Fund by MMC
and the services provided to shareholders by Salomon Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. MMC and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, MMC has been advised by the Fund's custodian, transfer
 


26

<PAGE>

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

 
agent, distributor and accounting service agent that they are also in the
process of modifying their systems with the same goal. There can, however, be no
assurance that MMC, Salomon Smith Barney or any other service provider will be
successful, or that interaction with other non-complying computer systems will
not impair Fund services at that time.

      In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
 

      PORTFOLIO TRANSACTIONS

 
      All orders for transactions in securities and options on behalf of the
Fund are placed by MMC with brokers and dealers (including Salomon Smith Barney)
that MMC selects. The Fund may utilize Salomon Smith Barney or a Salomon Smith
Barney-affiliated broker in connection with a purchase or sale of securities
when MMC believes that the broker's charge for the transactions does not exceed
usual and customary levels. The same standard applies to the use of Salomon
Smith Barney as a commodities broker in connection with entering into options
and futures contracts.
 

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

 
      The Fund'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 Fund's net assets attributable to each Class by the total number of
shares of the Class outstanding. Net asset value is calculated separately for
Class A, B, L and Y shares.

      Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Trust's Board of Trustees or delegates. A security that is
traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at
 


                                                                              27
<PAGE>

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

the current quoted bid price. Over-the-counter securities are valued on the
basis of the bid price at the close of business on each day. Investments in U.S.
government securities (other than short-term securities) are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Trustees determine that amortized cost reflects fair value of
those investments. An option generally is valued at the last sale price or, in
the absence of the last sale price, the last offer price. Further information
regarding the Fund's valuation policies is contained in the Statement of
Additional Information.

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

      DIVIDENDS AND DISTRIBUTIONS

      The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders.

      If a shareholder does not otherwise instruct, dividends and distributions
will be reinvested automatically in additional shares of the same Class at net
asset value, subject to no sales charge or CDSC. Dividends from net investment
income, if any, of the Fund will be paid monthly. The Fund's final distribution
for each calendar year will include any remaining net investment income and net
realized long- and short-term capital gains realized during the year and deemed
undistributed during the year for Federal income tax purposes. In order to avoid
the application of a 4% nondeductible excise tax measured with respect to
certain undistributed amounts of ordinary income and capital gains, the Fund may
make any additional distributions as may be necessary to avoid the application
of this tax.

      If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the Investment Company Act of 1940,
as amended (the "1940 Act") and other applicable laws, a notice will accompany
any distribution paid from sources other than net investment income. In the
event the Fund distributes amounts in excess of its net investment income and
net realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.

 
      The per share dividends on Class B and Class L shares of the Fund may be
lower than the per share dividends on Class A and Y shares principally as a
result
 


28
<PAGE>

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

 
of the distribution fee applicable with respect to Class B and Class L shares.
The per share dividends on Class A shares of the Fund 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 L and Class Y shares.
 

      TAXES

 
      The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Code. If the
Fund qualifies as a regulated investment company and meets certain distribution
requirements, the Fund will not be subject to Federal income tax on its net
investment income and net capital gains that it distributes to its shareholders.
 

      Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Furthermore, as a general rule, distributions of long-term
capital gain will be taxable to shareholders as long-term capital gain, whether
paid in cash or reinvested in additional shares, and regardless of the length of
time that the investor has held his or her shares of the Fund.

 
      Each shareholder will receive a statement annually from the Trust, which
will set forth separately the aggregate dollar amount of dividends and capital
gains distributed to the shareholder by the Fund with respect to the prior
calendar year.
 

      Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.

      Shareholders are urged to consult their tax advisers regarding the
application of Federal, state and local tax laws to their specific situation
before investing in the Fund.


                                                                              29
<PAGE>

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

 
      SALES CHARGE ALTERNATIVES

      The following Classes of shares are available for purchase through this
Prospectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.

      Class A Shares. Class A shares are sold to investors at the public
offering price, which is the net asset value plus an initial sales charge as
follows:

                         Sales Charge   Sales Charge         Dealer's
                           as a % of      as a % of     Reallowance as %
  Amount of Investment   Transaction  Amount Invested   of Offering Price
================================================================================
  Less than $25,000          4.50%          4.71%             4.05%
  $ 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 Salomon Smith Barney, which compensates Salomon
  Smith Barney Financial Consultants and other dealers whose clients make
  purchases of $500,000 or more. The CDSC is waived in the same
  circumstances in which the CDSC applicable to Class B and Class L shares
  is waived. See "Deferred Sales Charge Provisions" and "Waivers of CDSC."

      Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the 1933 Act. The
reduced sales charges shown above apply to the aggregate of purchases of Class A
shares of the Fund made at one time by "any person," which includes an
individual and his or her intermediate family, or a trustee or other fiduciary
of a single trust estate or single fiduciary account.

      Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.

      Class L Shares. Class L shares are sold with an initial sales charge of
1.00% (which is equal to 1.01% of the amount invested) and are subject to a CDSC
payable upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 22, 2001, purchases of Class L shares by investors who were holders
of Class C shares of the Fund on June 12, 1998 will not be subject to the 1.00%
initial sales charge.

      Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).
 


30
<PAGE>

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

 
      GENERAL

      Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a Dealer Representative. In addition, certain investors, including
qualified retirement plans purchasing through certain Dealer Representatives,
may purchase shares directly from the Fund. When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A, Class B, Class L or
Class Y shares. Salmon Smith Barney and Dealer Representatives may charge their
customers an annual account maintenance fee in connection with a brokerage
account through which an investor purchases or holds shares. Accounts held
directly at the Transfer Agent are not subject to a maintenance fee.

      Investors in Class A, Class B and Class L shares may open an account in
the Fund 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 Fund. Investors in
Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under Section 403(b)(7)
or Section 401(c) of the Code, the minimum initial investment requirement for
Class A, Class B and Class L shares and the subsequent investment requirement
for all Classes in the Fund is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a monthly basis, the minimum
initial investment requirement for Class A, Class B and Class L shares and
subsequent investment requirement for all Classes is $25. For shareholders
purchasing shares of the Fund through the Systematic Investment Plan on a
quarterly basis, the minimum initial investment required for Class A, Class B
and Class L shares and the subsequent investment requirement for all Classes is
$50. There are no minimum investment requirements for Class A shares for
employees of Citigroup and its subsidiaries, including Salomon Smith Barney,
unitholders who invest distributions from a UIT sponsored by Salomon Smith
Barney and Directors/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 Transfer Agent. Share certificates are issued only upon a 
shareholder's written request to the Transfer Agent.

      Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant prior to the close of regular trading on the NYSE, on any day the
Fund calculates its net asset value, are priced according to the net asset value
determined on that day (the "trade date"). Orders received by a Dealer
Representative prior to the close of regular trading on the NYSE on any day the
Fund calculates its net asset value, are priced according to the net asset value
determined on that day, provided the order is received by the Fund or the Fund's
agent prior to it's close of business. For shares purchased through Salomon
Smith Barney or a Dealer
 


                                                                              31
<PAGE>

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

 
Representative purchasing through Salomon Smith Barney, payment for Fund 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, Salomon Smith Barney or the Transfer
Agent is authorized through preauthorized transfers of at least $25 on a
monthly basis or at least $50 on a quarterly basis to charge the shareholder's
account held with a bank or other financial institution on a monthly or
quarterly basis, as indicated by the shareholder, to provide for systematic
additions to the shareholder's Fund account. A shareholder who has insufficient
funds to complete the transfer will be charged a fee of up to $25 by Salomon
Smith Barney or the Transfer Agent. The Systematic Investment Plan also
authorizes Salomon Smith Barney to apply cash held in the share holder's Salomon
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 Salomon Smith Barney Financial
Consultant.

      SALES CHARGE WAIVERS AND REDUCTIONS

      INITIAL SALES CHARGE WAIVERS

      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and 
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-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 the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
Smith Barney), on the condition the purchase of Class A shares is made with the
proceeds of the redemption of shares of a mutual fund which (i) was sponsored by
the Financial Consultant's prior employer, (ii) was sold to the client by the
Financial Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Fund (or
 


32
<PAGE>

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

 
Class A shares of another Smith Barney Mutual Fund that is offered with a sales
charge) and who wish to reinvest their redemption proceeds in the Fund, provided
the reinvestment is made within 60 calendar days of the redemption; (e)
purchases by accounts managed by registered investment advisory subsidiaries of
Citigroup; (f) direct rollovers by plan participants of distributions from a
401(k) plan offered to employees of Citigroup or its subsidiaries or a 401(k)
plan enrolled in the Smith Barney 401(k) Program (Note: subsequent investments
will be subject to the applicable sales charge); (g) purchases by separate
accounts used to fund certain unregistered variable annuity contracts; (h)
investments of distributions from a UIT sponsored by Salomon Smith Barney; and
(i) purchases by investors participating in a Salomon 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 the Fund 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 the Fund and of other Smith Barney Mutual Funds that 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.

      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 (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. Each investment made
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. The term of the Letter will commence upon the
date the Letter is signed, or at the option of the investor, up to 90 days
before such date.  Please contact a Salomon Smith Barney Financial Consultant 
or the Transfer Agent to obtain a Letter of Intent application.
 


                                                                              33
<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 (except purchases
of Class Y shares by Smith Barney Concert Allocation Series Inc., for which
there is no minimum purchase amount). Such investors must make an initial
minimum purchase of $5,000,000 in Class Y shares of the Fund and agree to
purchase a total of $15,000,000 of Class Y shares of the Fund within 13 months
from the date of the Letter. If a total investment of $15,000,000 is not made
within the 13 month period, all Class Y shares purchased to date will be
transferred to Class A shares, where they will be subject to all fees (including
a service fee of 0.25%) and expenses applicable to the Fund's Class A shares,
which may include a CDSC of 1.00%. Please contact a Salomon Smith Barney
Financial Consultant or the Transfer Agent for further information.

      DEFERRED SALES CHARGE ALTERNATIVES

      "CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.

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

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

  Year Since Purchase
  Payment Was Made                                                         CDSC
================================================================================
  First                                                                    4.50%
  Second                                                                   4.00%
  Third                                                                    3.00%
  Fourth                                                                   2.00%
 


34
<PAGE>

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

 
  Fifth                                                                    1.00%
  Sixth and thereafter                                                     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."

      The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such other funds. For
Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Salomon Smith Barney.

      To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
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 12
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 Fund with any investment
company by merger, acquisition of
 


                                                                              35
<PAGE>

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

 
assets or otherwise. In addition, a shareholder who has redeemed shares from
other Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption.

      CDSC waivers will be granted subject to confirmation (by Salomon Smith
Barney in the case of shareholders who are also Salomon Smith Barney clients or
by the Transfer Agent in the case of all other shareholders) of the
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 Fund offers to Participating Plans Class A and Class L shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM)
Programs. Class A and Class L shares acquired through the Participating Plans
are subject to the same service and/or distribution fees as the Class A and
Class L shares acquired by other investors; however, they are not subject to any
initial sales charge or CDSC. Once a Participating Plan has made an initial
investment in a Fund, all of its subsequent investments in the Fund must be in
the same Class of shares, except as otherwise described below.
 

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

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

      401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If 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, a
Participating Plan's total Class L holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class L shares for Class A shares of the
Fund. For Participating Plans that were originally established through a Salomon
Smith Barney retail brokerage account, the five-year period will be calculated
from the date the retail brokerage account was opened. Such Participating Plans
will be notified of the pending exchange in writing within 30 days after the
fifth anniversary of the 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 Participa-
 


36
<PAGE>

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

ting 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 a
Participating Plan's total Class L holdings in all non-money market Smith Barney
Mutual Funds equal at least $500,000 as of the calendar year-end, the
Participating Plan will be offered the opportunity to exchange all of its Class
L shares for Class A shares of the Fund. Such Plans will be notified in writing
within 30 days after the last business day of the calendar year and, unless the
exchange offer has been rejected in writing, the exchange will occur on or about
the last business day of the following March.

      Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM)
Programs, 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 L shares for Class A shares of the Fund, regardless of
asset size, at the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) 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 L shares of the Fund but instead may acquire Class A
shares of the Fund. Any Class L shares not converted will continue to be 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 such shares directly from First Data. For further information regarding
these Programs, investors should contact a Salomon Smith Barney Financial
Consultant.
 

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

 
      Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following 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 L shares are subject to minimum investment requirements and
all shares are subject to the other requirements of the fund into which
exchanges are made.
 


                                                                              37
<PAGE>

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

FUND NAME
--------------------------------------------------------------------------------

 
Growth Funds
    Concert Peachtree Growth Fund
    Concert Social Awareness Fund
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Balanced Fund
    Smith Barney Contrarian Fund
    Smith Barney Convertible Fund
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Funds, Inc. -- Large Cap Value Fund
    Smith Barney Large Cap Blend Fund
    Smith Barney Large Capitalization Growth Fund
    Smith Barney Mid Cap Blend Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Premium Total Return Fund
    Smith Barney Small Cap Blend Fund, Inc.
    Smith Barney Special Equities Fund
 

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

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


38
<PAGE>

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

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

 
Global-International Funds
    Smith Barney Hansberger Global Small Cap Value Fund
    Smith Barney Hansberger Global Value Fund
 
    Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
    Smith Barney World Funds, Inc. -- European Portfolio
    Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
    Smith Barney World Funds, Inc. -- International Balanced Portfolio
    Smith Barney World Funds, Inc. -- International Equity Portfolio
    Smith Barney World Funds, Inc. -- Pacific Portfolio

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

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

-----------
 
  * Available for exchange with Class A and Class B shares of the Fund.
 ** Available for exchange with Class A, Class L and Class Y shares of the Fund.
*** Available for exchange with Class A shares of the Fund.
  + Available for exchange with Class B and Class L shares of the Fund.
 ++ Available for exchange with Class A and Class Y shares of the Fund. In
    addition, Participating Plans opened prior to June 21, 1996 and investing in
    Class L shares may exchange Fund shares for Class L shares of this fund.
 
+++ Available for exchange with Class A and Class Y shares of the Fund.

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


                                                                              39
<PAGE>

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

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

      Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Fund who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without
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 Fund's performance and its shareholders. MMC may determine
that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by a
shareholder. Upon such a determination, the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15-day period the shareholder will be required
to (a) redeem his or her shares in the Fund or (b) remain invested in the Fund
or exchange into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
 

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

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

      The Fund is required to redeem the shares of the Fund 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


40
<PAGE>

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

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 First Data receives
further instructions from Salomon Smith Barney, or if the shareholder's account
is not with Salomon Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Salomon Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruction
and Salomon Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other than a
certified or official bank check, will be remitted upon clearance of the check,
which may take up to ten days or more.

      Shares held by Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial Consultant.
Shares other than those held by Salomon Smith Barney as custodian may be
redeemed through an investor's Financial Consultant, Dealer Representative or
by submitting a written request for redemption to:

      Smith Barney High Income Fund 
      Class A, B, L or Y (please specify) 
      c/o First Data Investor Services Group, Inc.
      P.O. Box 5128
      Westborough, Massachusetts 01581-51288

      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 share certificate, stock power or written redemption
request in excess of $10,000, must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corpora-
 


                                                                              41
<PAGE>

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

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

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

 
      Shareholders who do not have a Salomon Smith Barney brokerage account may
be eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should 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 or
her initial investment in the Fund.

      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares, may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
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 or 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


42
<PAGE>

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

from which shares were redeemed. In order to change the bank account designated
to receive redemption proceeds, a shareholder must complete a new Telephone/
Wire Authorization Form and, for the protection of the shareholder's assets,
will be required to provide a signature guarantee and certain other
documentation.

 
      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day 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 days' prior notice to shareholders.

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

      The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, 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
--------------------------------------------------------------------------------

      YIELD

      From time to time, the Fund advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last day
of the period. This


                                                                              43
<PAGE>

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

income is "annualized" by assuming the amount of income is generated each month
over a one-year period and is compounded semi-annually. The annualized income is
then shown as a percentage of the net asset value.

      TOTAL RETURN

 
      From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class L and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a 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 Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution 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 Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.
 

--------------------------------------------------------------------------------
Management of the Trust and the Fund
--------------------------------------------------------------------------------

      BOARD OF TRUSTEES

      Overall responsibility for management and supervision of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the companies that furnish services to the
Trust and the Fund, including agreements with the Fund's distributor, investment
adviser and administrator, custodian and transfer agent. The day-to-day
operations of the Fund


44
<PAGE>

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

are delegated to the Fund's investment adviser and administrator. The Statement
of Additional Information contains background information regarding each Trustee
and executive officer of the Trust.

      INVESTMENT ADVISER

 
      MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. MMC (through its predecessor entities) has been
in the investment counseling business since 1934 and is a registered investment
adviser. MMC renders investment advice to investment companies that had 
aggregate assets under management as of September 30, 1998 in excess of $108 
billion.

      Subject to the supervision and direction of the Trust's Board of Trustees,
MMC manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. Under an
investment advisory agreement, the Fund pays MMC a fee at the annual rate of
0.50% of the value of the Fund's average daily net assets. For the fiscal year
ended July 31, 1998, the Fund paid investment advisory fees to MMC in an amount
equal to 0.50% of the value of its average daily net assets. This fee is
computed daily and paid monthly.
 

      PORTFOLIO MANAGEMENT

 
      John C. Bianchi, a Managing Director of Salomon Smith Barney, has served
as Investment Officer of the Fund since 1988 and is responsible for managing its
day-to-day operations, including the making of investment decisions.

      Management's discussion and analysis and additional performance
information regarding the Fund during the fiscal year ended July 31, 1998 is
included in the Annual Report dated July 31, 1998. A copy of the Annual Report
may be obtained upon request without charge from a Salomon Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
 

      ADMINISTRATOR

 
      MMC also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. Pursuant to an administration agreement with the
Fund, MMC is paid a fee at the annual rate of 0.20% of the Fund's average daily
net assets. This fee is computed daily and paid monthly.
   
      On October 8, 1998, Travelers Group Inc. and Citicorp consummated their 
merger, thereby creating a new entity called Citigroup. Citigroup is a bank 
holding company subject to regulation under the Bank Holding Company Act of 
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain other
laws and regulations. MMC does not believe that its compliance with the 
applicable laws will
have a material adverse effect on its ability to continue to provide the Fund
with the same level of investment advisory services that it currently receives.
    
 

                                                                            45
<PAGE>

   
--------------------------------------------------------------------------------
Distribution
--------------------------------------------------------------------------------
    
 
      CFBDS, Inc., located at 21 Milk Street, Boston, MA 02109-5408, distributes
shares of the Fund as principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS, Inc. to take
and pay for only such securities as may be sold to the public. Pursuant to a
plan of distribution adopted by the Fund under Rule 12b-1 under the 1940 Act
(the "Plan"), Salomon Smith Barney is paid an annual service fee with respect to
Class A, Class B and Class L shares of the Fund at the annual rate of 0.25% of
the average daily net assets of the respective Class. Salomon Smith Barney is
also paid an annual distribution fee with respect to Class B and Class L shares
at the annual rate of 0.50% and 0.45%, respectively, of the average daily net
assets attributable to those Classes. Class B shares which automatically convert
to Class A shares eight years after the date of original purchase will no longer
be subject to distribution fees. The fees are used by Salomon Smith Barney to
pay its Financial Consultants for servicing shareholder accounts and, in the
case of Class B and Class L shares, to cover expenses primarily intended to
result in the sale of those shares. These expenses include: advertising
expenses; the cost of printing and mailing prospectuses to potential investors;
payments to and expenses of Salomon Smith Barney Financial Consultants and other
persons who provide support services in connection with the distribution of
shares; interest and/or carrying charges; and indirect and overhead costs of
Salomon Smith Barney associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses.

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

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

      The Trust was organized on March 12, 1985, under the laws of the
Commonwealth of Massachusetts and is an entity commonly known as a
"Massachusetts business trust." The Trust offers shares of beneficial interest
of 
    

46
<PAGE>

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

separate series having a $.001 per share par value. When matters are submitted
for shareholder vote, shareholders of each Class will have one vote for each
full share owned and a proportionate, fractional vote for any fractional share
held of that Class. Shares of the Trust will be voted generally on a Trust-wide
basis on all matters, except matters affecting the interests of one Fund or one
Class of shares.

      Each Class of Fund shares represents identical interests in the Fund's
investment portfolio. As such, they have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees, if any, borne by each Class; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The Trust's Board of Trustees does not anticipate
that there will be any conflicts among the interests of the holders of the
different Classes. The Trustees, on an ongoing basis, will consider whether any
such conflict exists and, if so, take appropriate action.

      The Trust does not hold annual shareholder meetings. There normally will
be no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees will call a meeting for any purpose upon
written request of shareholders holding at least 10% of the Trust's outstanding
shares and the Trust will assist shareholders in calling such a meeting as
required by the 1940 Act.

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

 
      First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Trust's Transfer Agent.

      The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Trust plans to consolidate the mailing of the
Fund's 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 accounts should contact their Salomon Smith
Barney Financial Consultants or the Fund's Transfer Agent.
 


                                                                            47
<PAGE>
 
                                                           Salomon Smith Barney
                                                         ----------------------
                                                   A member of citigroup [LOGO]

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



   
                                                                   Smith Barney
                                                                           High
                                                                         Income
                                                                           Fund
    

                                                           388 Greenwich Street
                                                       New York, New York 10013



                                                                   FD0220 11/98
 


PROSPECTUS

                                                                    SMITH BARNEY
                                                                            High
                                                                          Income
                                                                            Fund

                                                             Class Z Shares Only

 
                                                               November 27, 1998
 

                                                   Prospectus begins on page one


[LOGO] Smith Barney Mutual Funds
       Investing for your future.
       Every day.(Registered)
<PAGE>

 
--------------------------------------------------------------------------------
Prospectus                                                     November 27, 1998
--------------------------------------------------------------------------------
 

   Smith Barney High Income Fund -- Class Z Shares
   388 Greenwich Street
   New York, New York 10013
   (800) 451-2010

 
      Smith Barney High Income Fund (the "Fund") is a diversified fund that
seeks to provide shareholders with high current income by investing in
high-yielding corporate bonds, debentures and notes.
 

      The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up the Smith Barney Income Funds (the "Trust").
The Trust is an open-end management investment company commonly referred to as a
mutual fund.

      The Funds invests primarily in lower-rated bonds, commonly known as "junk
bonds." Bonds of this type are subject to a greater risk of loss of principal
and interest. Purchasers should carefully assess the risks associated with an
investment in the Fund. See "Risk Factors and Special Considerations."

      This Prospectus sets forth concisely certain information about the Fund
and the Trust, 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 (previously designated as
Class C shares) are currently offered exclusively for sale to tax-exempt
employee benefit and retirement plans of Salomon Smith Barney Inc. ("Salomon
Smith Barney") or any of its affiliates ("Qualified Plans") and to certain unit
investment trusts sponsored by Salomon Smith Barney or any of its affiliates
("Salomon Smith Barney UITs").

      Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 27, 1998, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Salomon 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.

CFBDS, INC.
 

Distributor

 
MUTUAL MANAGEMENT CORP.
 

Investment Adviser and Administrator

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 Fund's Expenses                                                            3
--------------------------------------------------------------------------------
Financial Highlights                                                           4
--------------------------------------------------------------------------------
Investment Objective and Policies                                              5
--------------------------------------------------------------------------------
Valuation of Shares                                                           17
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                            18
--------------------------------------------------------------------------------
Purchase, Exchange and Redemption of Shares                                   19
--------------------------------------------------------------------------------
Performance                                                                   20
--------------------------------------------------------------------------------
Management of the Trust and the Fund                                          21
--------------------------------------------------------------------------------
Additional Information                                                        23
--------------------------------------------------------------------------------
 



--------------------------------------------------------------------------------
   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 Fund's Expenses
--------------------------------------------------------------------------------

      The following expense table lists the costs and expenses that an investor
will incur either directly or indirectly as a shareholder of Class Z shares of
the Fund, based upon the Fund's operating expenses for its most recent fiscal
year:

 
Annual Fund Operating Expenses 
(as a percentage of average net assets)
--------------------------------------------------------------------------------
    Management fees                                                  0.70%
    Other expenses                                                   0.15%
================================================================================
TOTAL FUND OPERATING EXPENSES                                        0.85%
================================================================================
 

      The nature of the services for which the Fund pays management fees is
described under "Management of the Trust and 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 Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase, Exchange and Redemption of Shares" and
"Management of the Trust and 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 Fund, assuming 
    (1) 5.00% annual return and (2) 
    redemption at the end of each time period:   $9      $27      $47     $105
================================================================================
 

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


                                                                               3
<PAGE>

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

 
The following information for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMGPeat Marwick LLP, independent auditors and
appears in the Fund's Annual Report dated July 31, 1998. The following
information for the fiscal years ended July 31, 1993 and July 31, 1994 has been
audited by other independent auditors. The information set forth below should be
read in conjunction with the financial statements and related notes that also
appear in the Fund's 1998 Annual Report, which is incorporated by reference into
the Statement of Additional Information.
 

For a Class Z share of beneficial interest outstanding throughout each year

 
<TABLE>
<CAPTION>
Smith Barney High Income Fund --
Year Ended July 31,                      1998(1)        1997(1)        1996           1995(2)        1994           1993(3)
========================================================================================================================
<S>                                    <C>            <C>            <C>            <C>           <C>            <C>   
Net Asset Value,
  Beginning of Year                    $11.80         $10.99         $11.09         $11.16         $12.01         $11.03
------------------------------------------------------------------------------------------------------------------------
Income From Operations:
    Net investment income                1.04           1.12           1.11           1.11           1.10           0.79
    Net realized and unrealized
      gain (loss) on investments         0.01           0.80          (0.10)         (0.03)         (0.80)          1.07
------------------------------------------------------------------------------------------------------------------------
Total Income from Operations             1.05           1.92           1.01           1.08           0.30           1.86
------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
    Net investment income               (1.11)         (1.11)         (1.11)         (1.08)         (1.15)         (0.88)
    Capital                                --             --             --          (0.07)            --             --
------------------------------------------------------------------------------------------------------------------------
Total Distributions                     (1.11)         (1.11)         (1.11)         (1.15)         (1.15)         (0.88)
------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year           $11.74         $11.80         $10.99         $11.09         $11.16         $12.01
------------------------------------------------------------------------------------------------------------------------
Total Return                             9.33%         18.29%          9.42%         10.55%          2.37%         17.47%++
------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000's)          $107           $104         $7,158         $9,917        $11,370        $26,112
------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
    Expenses                             0.85%          0.75%          0.77%          0.86%          0.77%          0.81%+
    Net investment income                8.82           9.88           9.98          10.28           9.61           9.88+
------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                   102%            78%            72%            60%            98%            95%
========================================================================================================================
</TABLE>
 

(1) Per share amounts have been calculated using the monthly average shares
    method rather than the undistributed net investment income method, because
    it more accurately reflects the per share data for the period.
(2) On November 7, 1994, the former Class C shares were renamed Class Z shares.
(3) For the period from November 6, 1992 (inception date) to July 31, 1993.
++  Total return is not annualized as it may not be representative of the
    total return for the year.
+   Annualized.


4
<PAGE>

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

 
      The Fund's investment objective is high current income. The Fund's
investment objective may be changed only with the approval of the holders of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund will achieve its investment objective. Although growth of capital is not an
investment objective of the Fund, Mutual Management Corp. ("MMC") (formerly
known as Smith Barney Mutual Funds Management Inc.) may consider potential for
growth as one factor, among others, in selecting investments for the Fund. The
Fund will seek high current income by investing, under normal circumstances, at
least 65% of its assets in high-yielding corporate bonds, debentures and notes
denominated in U.S. dollars or foreign currencies. Up to 40% of the Fund's
assets may be invested in fixed-income obligations of foreign issuers, and up to
20% of its assets may be invested in common stock or other equity or
equity-related securities, including convertible securities, preferred stock,
warrants and rights. Securities purchased by the Fund generally will be rated in
the lower rating categories of recognized rating agencies, as low as Caa by
Moody's Investors Service, Inc. ("Moody's") or D by Standard & Poor's Ratings
Group ("S&P") or an equivalent rating by any nationally recognized statistical
rating organization ("NRSRO"), or unrated securities that MMC deems of
comparable quality. However, the Fund will not purchase securities rated lower
than B by both Moody's and S&P unless, immedi ately after such purchase, no more
than 10% of its total assets are invested in such securities.The Fund may hold
securities with higher ratings when the yield differ ential between low-rated
and higher-rated securities narrows and the risk of loss may be reduced
substantially with only a relatively small reduction in yield. The Fund may also
invest in zero coupon bonds and payment-in-kind bonds. The Fund also may invest
in higher-rated securities when MMC believes that a more defen sive investment
strategy is appropriate in light of market or economic conditions. The Fund also
may lend its portfolio securities, purchase or sell securities on a when-issued
or delayed-delivery basis and write covered call options on securities. In order
to mitigate the effects of uncertainty in future exchange rates, the Fund may
engage in currency exchange transactions and purchase options on foreign
currencies. The Fund also may hedge against the effects of changes in the value
of its investments by purchasing put and call options on interest rate futures
contracts. Special considerations associated with the Fund's investments are
described below.
 

      CERTAIN INVESTMENT STRATEGIES

      In attempting to achieve its investment objective, the Fund may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained in
the Statement of Additional Information.

 
      Covered Option Writing. The Fund may write (sell) call options on
securities.
 


                                                                               5
<PAGE>

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

The Fund realizes fees (referred to as "premiums") for granting the rights
evidenced by the options. A call option embodies the right of its purchaser to
compel the writer of the option to sell to the option holder an underlying
security at a specified price at any time during the option period. Thus, the
purchaser of a call option written by the Fund has the right to purchase from
the Fund the underlying security owned by the Fund at the agreed-upon price for
a specified time period.

      Upon the exercise of a call option written by the Fund, the Fund may
suffer a loss equal to the excess of the security's market value at the time of
the option exercise over the Fund's acquisition cost of the security, less the
premium received for writing the option.

      The Fund will write only covered options. Accordingly, whenever the Fund
writes a call option, it will continue to own or have the present right to
acquire the underlying security for as long as it remains obligated as the
writer of the option.

      The Fund may engage in a closing purchase transaction to realize a profit
or to unfreeze an underlying security (thereby permitting its sale or the
writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option the Fund has written, an option of
the same series as that on which the Fund desires to terminate its obligation.
The obligation of the Fund under an option it has written would be terminated by
a closing purchase transaction, but the Fund would not be deemed to own an
option as the result of the transaction. There can be no assurance the Fund will
be able to effect closing purchase transactions at a time when it wishes to do
so. To facilitate closing purchase transactions, however, the Fund ordinarily
will write options only if a secondary market for the options exists on a
domestic securities exchange or in the over-the-counter market.

      Convertible Securities and Synthetic Convertible Securities. Convertible
securities are fixed-income securities that may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities
generally, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stocks and, therefore, also will react to variations in
the general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases,


6
<PAGE>

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

the prices of the convertible securities tend to rise as a reflection of the
value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.

 
      As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. However,
there can be no assurance of capital appreciation because securities prices
fluctuate.
 

      Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.

      Unlike a convertible security which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotation System. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the Fund at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risk normally involved in holding the
securities comprising the synthetic convertible security.

      ADDITIONAL INVESTMENTS

 
      Money Market Instruments. When MMC believes that market conditions
warrant, the Fund may adopt a temporary defensive posture and may invest in
short-term instruments without limitation. Short-term instruments in which the
Fund may invest include: United States government securities; certain bank
 


                                                                               7
<PAGE>

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

 
obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loan associations
and similar institutions); commercial paper rated no lower than A-2 by S&P or
Prime-2 by Moody's or the equivalent rating by any NRSRO or, if unrated, of an
issuer having an outstanding unsecured debt issue then rated within the three
highest rating categories; and repurchase agreements as described below.
 

      U. S. Government Securities. United States government securities are
obligations of, or guaranteed by, the United States government, its agencies or
instrumentalities ("U.S. government securities"). The U.S. government securities
in which the Fund may invest include: direct obligations of the United States
Treasury (such as Treasury Bills, Treasury Notes and Treasury Bonds) and
obligations issued by U.S. government agencies and instrumentalities, including
securities that are supported by the full faith and credit of the United States
(such as Government National Mortgage Association ("GNMA") certificates);
securities that are supported by the right of the issuer to borrow from the
United States Treasury (such as securities of Federal Home Loan Banks); and
securities that are supported by the credit of the instrumentality (such as
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") bonds). Treasury Bills have maturities of less than one
year, Treasury Notes have maturities of one to ten years and Treasury Bonds
generally have maturities of greater than ten years at the date of issuance.
Certain U.S. government securities, such as those issued or guaranteed by GNMA,
FNMA and FHLMC, are mortgage-related securities. U.S. government securities
generally do not involve the credit risks associated with other types of
interest-bearing securities, although, as a result, the yields available from
U.S. government securities are generally lower than the yields available from
interest-bearing corporate securities.

 
      Zero Coupon Bonds. The Fund may also invest in zero coupon bonds. A zero
coupon bond pays no interest in cash to its holder during its life, although
interest is accrued during that period. Its value to an investor consists of the
difference between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount significantly less than its
face value (sometimes referred to as a "deep discount" price). Because such
securities usually trade at a deep discount, they will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, zero coupon securities eliminate reinvestment
risk and lock in a rate of return to maturity.
 

      Repurchase Agreements. The Fund may engage in repurchase agreement
transactions with banks which are the issuers of instruments acceptable for
purchase by the Fund and with certain dealers on the Federal Reserve Bank of New
York's list


8
<PAGE>

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

 
of reporting dealers. Under the terms of a typical repurchase agreement, the
Fund would acquire an underlying debt obligation for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including interest. Repurchase agreements could involve
certain risks in the event of default or insolvency of the other party,
including possible delays in or restrictions upon the Fund's ability to dispose
of the underlying securities, the risk of a possible decline in the value of the
underlying securities during the period in which the Fund seeks to assert its
rights to them, the risk of incurring expenses associated with asserting those
rights and the risk of losing all or part of the income from the agreement. MMC,
acting under the supervision of the Trust's Board of Trustees, reviews on an
ongoing basis the value of the collateral and the creditworthiness of those
banks and dealers with which the Fund may enter into repurchase agreements to
evaluate potential risks.

      Futures Contracts and Options on Futures Contracts. When deemed advisable
by MMC, the Fund may enter into futures contracts or related options that are
traded on a domestic exchange or board of trade. Such investments, if any, by
the Fund will be made solely for the purpose of hedging against the effects of
changes in the value of the portfolio securities due to anticipated changes in
interest rates, currency values and market conditions and when the transactions
are economically appropriate to the reduction of risks inherent in the
management of the Fund. The Fund may not enter into futures and options
contracts for which aggregate initial margin deposits and premiums paid for
unexpired options to establish such positions that are not bona fide hedging
positions (as defined by the Commodity Futures Trading Commission) exceed 5% of
the fair market value of the Fund's assets after taking into account unrealized
profits and unrealized losses on futures contracts into which it has entered.
With respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract always will be covered by cash, U.S.
government securities, equity securities or debt securities of any grade,
provided such securities have been determined by MMC to be liquid and
unencumbered and are marked to market daily pursuant to guidelines established
by the Trustees ("eligible segregated assets"), plus accrued profits held in a
segregated account.
 

      The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities on the one
hand, and price movements in the securities which are the subject of the hedge,
on the other hand. Positions in futures contracts and options on futures
contracts may be


                                                                               9
<PAGE>

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

closed out only on the exchange or board of trade on which they were entered
into, and there can be no assurance that an active market will exist for a
particular contract or option at any particular time. Losses incurred in hedging
transactions and the costs of these transactions will affect the Fund's
performance.

      Foreign Securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The yield of the Fund may
be adversely affected by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign companies and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic companies. In addition, with respect to
certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Fund, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that could reduce
the yield on such securities. Because the Fund will invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may adversely affect the value of portfolio
securities and the appreciation or depreciation of investments. Investments in
foreign securities also may result in higher expenses due to the cost of
converting foreign currency to U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions on
domestic exchanges, and the expense of maintaining securities with foreign
custodians, and the imposition of transfer taxes or transaction charges
associated with foreign exchanges.

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


10
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--------------------------------------------------------------------------------
Investment Objective and Policies (continued)
--------------------------------------------------------------------------------

for a sponsored ADR. The Fund may invest in ADRs through both sponsored and
unsponsored arrrangements.

 
      Corporate Securities. Corporate securities in which the Fund may invest
include corporate fixed-income securities of both domestic and foreign issuers,
such as bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, and preferred stock. The Fund's investments in each of equipment
leases or equipment trust certificates will not exceed 5% of its assets.
 

      Certain of the corporate fixed-income securities in which the Fund may
invest may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights
permitting the holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.

      Currency Exchange Transactions and Options on Foreign Currencies. In order
to protect against uncertainty in the level of future exchange rates, the Fund
may engage in currency exchange transactions and purchase exchange-traded put
and call options on foreign currencies. The Fund will conduct its currency
exchange transactions either on a spot (i.e., cash) basis at the rate prevailing
in the currency exchange market or through entering into forward contracts to
purchase or sell currencies. The Fund's dealings in forward currency exchange
and options on foreign currencies are limited to hedging involving either
specific transactions or portfolio positions.

      A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might result should the value of the currency
increase.

      The Fund may purchase put options on a foreign currency in which
securities held by the Fund are denominated to protect against a decline in the
value of the currency in relation to the currency in which the exercise price is
denominated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the
purchaser, in return for a premium, the right to sell, in the case of a put, and
buy, in the case of a call, the underlying


                                                                              11
<PAGE>

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

currency at a specified price during the term of the option. Although the
purchase of an option on a foreign currency may constitute an effective hedge by
the Fund against fluctuations in the exchange rates, in the event of rate
movements adverse to the Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. Options on foreign currencies
purchased by the Fund may be traded on domestic and foreign exchanges or traded
over-the-counter.

      Although the foreign currency market may not necessarily be more volatile
than the market in other commodities, the foreign currency market offers less
protection against defaults in the forward trading of currencies than is
available when trading in currencies occurs on an exchange. Because a forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits or force the Fund
to cover its commitments for purchase or resale, if any, at the current market
price.

 
      When-Issued Securities and Delayed-Delivery Transactions. In order to
secure yields or prices deemed advantageous at the time, the Fund may purchase
or sell any portfolio securities on a when-issued or delayed-delivery basis. The
Fund will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage. In such transactions
delivery of the securities occurs beyond the normal settlement periods, but no
payment or delivery is made by the Fund prior to the actual delivery or payment
by the other party to the transaction. Due to fluctuations in the value of
securities purchased or sold on a when-issued or delayed-delivery basis, the
yields obtained on such securities may be higher or lower than the yields
available in the market on the dates when the investments are actually delivered
to the buyers. The Fund will establish a segregated account consisting of cash,
U.S. government securities, equity securities or debt securities of any grade
having a value equal to or greater than the Fund's purchase commitments,
provided such securities have been determined by MMC to be liquid and
unencumbered and are marked to market daily pursuant to guidelines established
by the Trustees. Placing securities rather than cash in the segregated account
may have a leveraging effect on the Fund's net assets. The Fund will not accrue
income with respect to a when-issued security prior to its stated delivery date.

      Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund has the ability to lend portfolio securities to brokers,
dealers and other financial organizations. These loans, if and when made, may
not exceed 20% of the Fund's assets taken at value. Loans of portfolio
securities will be collateralized by cash, letters of credit or U.S. government
securities that are maintained at all times in an amount at least equal to the
current market value of the loaned securities.
 

      Non-Publicly Traded and Illiquid Securities. The sale of securities that
are not publicly traded is typically restricted under the Federal securities
laws. As a


12
<PAGE>

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

 
result, the Fund may be forced to sell these securities at less than fair market
value or may not be able to sell them when MMC believes it desirable to do so.
The Fund's investments in illiquid securities are subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that the Fund deems representative of its value, the value
of the Fund's net assets could be adversely affected.
 

      Securities of Developing Countries. A developing country generally is
consid ered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems that can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.

      CERTAIN INVESTMENT GUIDELINES

      The Fund may invest up to 15% of its total assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) futures contracts and related options for which a liquid
secondary market does not exist and (c) time deposits maturing in more than
seven calendar days. The above restriction does not apply to securities subject
to Rule 144A of the Securities Act of 1933, as amended ("the 1933 Act") ("Rule
144A Securities"). In addition, the Fund may invest up to 5% of its assets in
the securities of issuers which have been in continuous operation for less than
three years. The Fund also may borrow from banks for temporary or emergency
purposes, but not for investment purposes, in an amount up to 10% of its total
assets, and may pledge its assets to the same extent in con nec tion with such
borrowings. Whenever these borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any additional investments. Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the Trust's
Board of Trustees. A complete list of investment restrictions that identifies
additional restrictions that cannot be changed without the approval of the
majority of the Fund's outstanding shares is contained in the Statement of
Additional Information.

      RISK FACTORS AND SPECIAL CONSIDERATIONS

      Options. The Fund may enter into options transactions primarily as hedges
to reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio position being offset


                                                                              13
<PAGE>

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

 
by a loss on the hedge position. The Fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedge. The Fund
will engage in hedging transactions only when deemed advisable by MMC.
Successful use by the Fund of options will depend on MMC's ability to correctly
predict movements in the direction of the stock underlying the option used as a
hedge. Losses incurred in hedging transactions and the costs of these
transactions will affect the Fund's performance.
 

      The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase options only if there appears to be a liquid secondary
market for the options purchased or sold, for some options no such secondary
market may exist or the market may cease to exist.

      Medium-, Low- and Unrated Securities. The Fund may invest up to 10% of its
assets in medium- or low-rated securities and unrated securities of comparable
quality. Generally, these securities offer a higher current yield than the yield
offered by higher-rated securities, but involve greater volatility of price and
risk of loss of income and principal, including the probability of future
default or bankruptcy of the issuers of such securities. Medium- and low-rated
and comparable unrated securities will likely have large uncertainties or major
risk exposures to adverse conditions and are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. Accordingly, it is possible that
these types of factors could, in certain instances, reduce the value of
securities held by the Fund, with a commensurate effect on the value of the
Fund's shares.

      The markets in which medium- and low-rated or comparable unrated
securities are traded generally are more limited than those in which
higher-rated securities are traded. The existence of limited markets for these
securities may restrict the availability of securities for the Fund to purchase
and also may have the effect of limiting the ability of the Fund to (a) obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value and (b) sell securities at their fair value either to meet
redemption requests or to respond to changes in the economy or the financial
markets. The market for certain medium- and low-rated and comparable unrated
securities has not fully weathered a major economic recession. Any such economic
downturn could adversely affect the value of such securities and the ability of
the issuers of these securities to repay principal and pay interest thereon.

      While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic


14
<PAGE>

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

conditions than higher-rated securities. In addition, medium- and low-rated and
comparable unrated securities generally present a higher degree of credit risk.
Issuers of medium- and low-rated and comparable unrated securities are often
highly leveraged and may not have more traditional methods of financing
available to them so that their ability to service their debt obligations during
an economic downturn or during sustained periods of rising interest rates may be
impaired. The risk of loss due to default by such issuers is significantly
greater because medium- and low-rated and comparable unrated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness. The Fund may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings.

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

 
      Securities which are rated Ba by Moody's or BB by S&P or an equivalent
rating by any NRSRO have speculative characteristics with respect to capacity to
pay interest and repay principal. Securities which are rated B generally lack
characteristics of the desirable investment and assurance of interest and
principal payments over any long period of time may be small. Securities which
are rated Caa or CCC or below are of poor standing. Those issues may be in
default or present elements of danger with respect to principal or interest.
Securities rated C by Moody's and D by S&P are in the lowest rating class and
indicate that payments are in default or that a bankruptcy petition has been
filed with respect to the issuer or that the issuer is regarded as having
extremely poor prospects. See the Appendix in the Trust's Statement of
Additional Information on bond ratings by Moody's and S&P.

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

      Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, certain securities may lack a
significant operating history and be dependent on products or services without
an established market share.
 


                                                                              15
<PAGE>

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

      Rule 144A Securities. The Fund may purchase Rule 144A Securities, which
are unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities
are freely transferable among qualified institutional buyers, a liquid market
may exist among such buyers. The Board of Trustees has adopted guidelines and
delegated to management the daily function of determining and monitoring
liquidity of Rule 144A Securities. However, the Board of Trustees maintains
sufficient oversight and is ultimately responsible for the liquidity
determinations. Investments in restricted securities such as Rule 144A
Securities could have the effect of increasing the level of illiquidity in the
Fund to the extent that there is temporarily no market for these securities
among qualified institutional buyers.

 
      Real Estate Investment Trusts. The Fund may purchase real estate invest
ment trusts ("REITs"). REITs are investment vehicles that invest primarily in
either real estate or real estate loans. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or security mortgage
loans held by the REIT. REITs are dependent upon cash flow from their
investments to repay financing costs and the management skill of the REIT's
manager. REITs are also subject to risks generally associated with investments
in real estate.

      Asset-Backed Securities. The Fund may invest in asset-backed securities
("ABSs"). An ABS represents an interest in a pool of assets such as
receivables from credit card loans, automobile loans and other trade
receivables. Changes in the market's perception of the asset backing the
security, the credit worthiness of the servicing agent for the loan pool, the
originator of the loans, or the financial institution providing any credit
enhancement will all affect the value of the ABS, as will the exhaustion of any
credit enhancement. The risks of investing in ABSs ultimately will depend upon
the payment of the consumer loans by the individual borrowers. In its capacity
as purchaser of the ABS, the Fund will generally have no recourse to the entity
that originated the loans in the event of default by the borrower. In addition,
the loans underlying the ABSs are subject to prepayments, which may shorten the
weighted average life of such securities and may lower their return.

      Year 2000. The investment management services provided to the Fund by MMC
and the services provided to shareholders by Salomon Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. MMC and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to
 


16
<PAGE>

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

 
prepare for the year 2000 and expect that their systems will be compliant before
that date. In addition, MMC has been advised by the Fund's custodian, transfer
agent, distributor and accounting service agent that they are also in the
process of modifying their systems with the same goal. There can, however, be no
assurance that MMC, Salomon Smith Barney or any other service provider will be
successful, or that interaction with other non-complying computer systems will
not impair Fund services at that time.

      In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
 

      PORTFOLIO TRANSACTIONS

 
      All orders for transactions in securities and options on behalf of the
Fund are placed by MMC with broker-dealers that MMC selects, including Salomon
Smith Barney. The Fund may utilize Salomon Smith Barney or a Salomon Smith
Barney-affiliated broker in connection with a purchase or sale of securities
when MMC believes that the broker's charge for the transactions does not exceed
usual and customary levels. The same standard applies to the use of Salomon
Smith Barney as a commodities broker in connection with entering into options
and futures contracts.
 

--------------------------------------------------------------------------------
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. (the "NYSE"), on
each day that the NYSE is open by dividing the value of the Fund's net assets
attributable to Class Z by the 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.

 
      Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Trust's Board of
 


                                                                              17
<PAGE>

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

Trustees or delegates. A security that is traded primarily on an exchange is
valued at the last sale price on that exchange or, if there were no sales during
the day, at the current quoted bid price. Over-the-counter securities are valued
on the basis of the bid price at the close of business on each day. Investments
in U.S. government securities (other than short-term securities) are valued at
the average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Trust's Board of Trustees determines that amortized cost
reflects fair value of those investments. An option generally is valued at the
last sale price or, in the absence of the last sale price, the last offer price.
Further information regarding the Fund's valuation policies is contained in the
Statement of Additional Information.

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

      DIVIDENDS AND DISTRIBUTIONS

      The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders.

      If a shareholder does not otherwise instruct, dividends and distributions
will be reinvested automatically in additional shares of the same Class at net
asset value, subject to no sales charge or CDSC. Dividends from net investment
income, if any, of the Fund will be declared monthly and paid on the last Friday
of the month. The Fund's final distribution for each calendar year will include
any remaining net investment income and net realized long- and short-term
capital gains realized during the year and deemed undistributed during the year
for Federal income tax purposes. In order to avoid the application of a 4%
nondeductible excise tax measured with respect to certain undistributed amounts
of ordinary income and capital gains, the Fund may make any additional
distributions shortly before December 31 in each year as may be necessary to
avoid the application of this tax.

      If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the require ments of the Investment Company Act of 1940,
as amended (the "1940 Act") and other applicable laws, a notice will accompany
any distribution paid from sources other than net investment income. In the
event the Fund distributes amounts in excess of its net investment income and
net realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.


18
<PAGE>

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

      TAXES

 
      The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended. If the Fund qualifies as a regulated
investment company and meets certain distribution requirements, the Fund will
not be subject to Federal income tax on its net invest ment income and net
capital gains that it distributes to its shareholders.
 

      Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Furthermore, as a general rule, distributions of long-term
capital gain will be taxable to shareholders as long-term capital gain, whether
paid in cash or reinvested in additional shares, and regardless of the length of
time that the investor has held his or her shares of the Fund.

 
      Each shareholder will receive a statement annually from the Trust, which
will set forth separately the aggregate dollar amount of dividends and capital
gains distributed to the share holder by the Fund with respect to the prior
calendar year.
 

      Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.

      Shareholders are urged to consult their tax advisers regarding the
application of Federal, state and local tax laws to their specific situation
before investing in the Fund.

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

 
      Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Solomon Smith Barney UIT. Purchases are effected at
the net asset value next determined after a purchase order is received by
Salomon Smith Barney (the "trade date"). Payment is due to Salomon 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 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 offering of shares for a period of
time. There are no minimum investment requirements for Class Z shares; however,
the Fund reserves the right
 


                                                                              19
<PAGE>

--------------------------------------------------------------------------------
Purchase, Exchange and Redemption of Shares (continued)
--------------------------------------------------------------------------------

to vary this policy at any time.

 
      Purchase orders received by the Fund or Salomon Smith Barney prior to the
close of regular trading on the NYSE, currently 4:00 p.m. (Eastern time), on any
day that the Fund's net asset value is calculated, are priced according to the
net asset value determined on that day. See "Valuation of Shares." Certificates
for Fund shares are issued upon request to the Trust's transfer agent.

      Qualified Plans may redeem their shares on any day the Fund 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
as next determined. Shareholders acquiring Class Z shares through a Qualified
Plan or a Salomon Smith Barney UIT should consult the terms of their respective
plans for redemption provisions.
 

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

--------------------------------------------------------------------------------
Peformance
--------------------------------------------------------------------------------

      YIELD

      From time to time, the Fund advertises the 30-day "yield" of its Class Z
shares. The yield refers to the income generated by an investment in Class Z
shares over the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by the Class Z shares during
the period by the maximum public offering price per share on the last day of the
period. This income is "annualized" by assuming the amount of income is
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.

      TOTAL RETURN

      From time to time the Fund may include its total return, average annual
total return and current dividend return for Class Z shares in advertisements.
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 pre-


20
<PAGE>

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

scribed by the SEC, is derived from this total return, which provides the ending
redeemable value. Such standard total return information may also be accompanied
with nonstandard total return information for differing periods computed in the
same manner but without annualizing the total return or taking sales charges
into account. The Fund calculates current dividend return by annualizing the
most recent monthly distribution and dividing by the net asset value on the last
day of the period for which current dividend return is presented. The current
dividend return for Class Z shares may vary from time to time depending on
market conditions, the composition of its investment portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating current dividend return should be considered when comparing the
Class Z share's current return to yields published for other investment
companies and other investment vehicles. The Fund may also include comparative
performance information in advertising or marketing the Class Z shares. Such
performance information may include data from Lipper Analytical Services, Inc.
and other financial publications.

--------------------------------------------------------------------------------
Management of the Trust and the Fund
--------------------------------------------------------------------------------

      BOARD OF TRUSTEES

      Overall responsibility for management and supervision of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the persons and companies that furnish services
to the Trust and the Fund, including agreements with its distributor, investment
adviser and administrator, custodian and transfer agent. The day-to-day
operations of the Fund are delegated to the Fund's investment adviser and
administrator. The Statement of Additional Information contains background
information regarding the Trustees and executive officers of the Trust.

      INVESTMENT ADVISER

 
      MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. MMC is a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of
Citigroup Inc. ("Citigroup"). Citigroup businesses produce a broad range of
financial services -- asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading -- and use
diverse channels to make them available to consumer and corporate customers
around the world. Among these businesses are Citibank, Commercial Credit,
Primerica Financial Services, Salomon Smith Barney, SSBC Asset Management,
Travelers Life & Annuity, and Travelers Property Casualty. MMC (through its
predecessor entities) has been in the investment counseling business since 1934
and
 


                                                                              21
<PAGE>

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

 
is a registered investment adviser. MMC renders investment advice to investment
companies that had aggregate assets under management as of September 30, 1998 in
excess of $108 billion.

      Subject to the supervision and direction of the Trust's Board of Trustees,
MMC manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. For investment
advisory services rendered to the Fund, the Fund pays MMC a fee at the annual
rate of 0.50% of the value of the Fund's average daily net assets. This fee is
computed daily and paid monthly.
 

      PORTFOLIO MANAGEMENT

 
      John C. Bianchi, a Managing Director of Salomon Smith Barney, has served
as Vice President and Investment Officer of the Fund since 1988 and is
responsible for managing its day-to-day operations, including the making of
investment decisions.

      Management's discussion and analysis, and additional performance informa
tion regarding the Fund during the fiscal year ended July 31, 1998, is included
in the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request without charge from a Salomon Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
 

      ADMINISTRATOR

 
      MMC also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. Pursuant to an administration agreement with the
Fund, MMC is paid a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. This fee is computed daily and paid monthly.

      On October 8, 1998, Travelers Group Inc. and Citicorp consummated their 
merger, thereby creating a new entity called Citigroup. Citigroup is a bank 
holding company subject to regulation under the Bank Holding Company Act of 
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain other 
laws and regulations. MMC does not believe that its compliance with the 
applicable laws will have a material adverse effect on its ability to continue 
to provide the Fund with the same level of investment advisory services that it 
currently receives.
 
   
      DISTRIBUTION
    
 
      CFBDS, Inc., located at 21 Milk Street, Boston, MA 02109-5408, serves as
the Fund's distributor.
 


22
<PAGE>

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

 
      The Trust was organized on March 12, 1985, in the Commonwealth of
Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest of separate series having
a $.001 per share par value. Shares of beneficial interest of the Fund are
currently classified into five Classes: A, B, L, Y and Z. When matters are
submitted for shareholder vote, shareholders of each Class of the Fund will have
one vote for each full share owned and a proportionate, fractional vote for any
fractional share held of that Class. Shares of the Trust will be voted generally
on a Trust-wide basis on all matters, except matters affecting the interests of
one Fund or one Class of shares.
 

      Each Class of Fund shares represents an identical pro rata interest in the
Fund's investment portfolio. As such, they have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges, if any, for each Class; (c) the
distribution and/or service fees, if any, borne by each Class; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; (f) the exchange privileges of each Class; and (g) the
conversion feature of a Class of shares. The Trust's Board of Trustees does not
anticipate that there will be any conflicts among the interests of the holders
of the different Classes of shares of the Fund. The Trustees, on an ongoing
basis, will consider whether any such conflict exists and, if so, take
appropriate action.

      The Trust does not hold annual shareholder meetings. There normally will
be no meeting of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees will call a meeting for any purpose upon
the written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Trust will assist shareholders in calling such a
meeting as required by the 1940 Act.

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

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

 
      The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a listing of the investment securities held by
the Fund at the end of the reporting period. Shareholders may seek information
regarding the Fund from their Salomon Smith Barney Financial Consultant.
 


                                                                              23
<PAGE>

   
                   [This page left blank intentionally]
    

<PAGE>

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

                                                                    Smith Barney
                                                                            High
                                                                          Income
                                                                            Fund

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

                                                            388 Greenwich Street
                                                        New York, New York 10013


                                                                    FD0792 11/98
 


PROSPECTUS

                                                                    SMITH BARNEY
                                                                       Municipal
                                                                     High Income
                                                                            Fund

                                                               November 27, 1998

                                                   Prospectus begins on page one

[LOGO] Smith Barney Mutual Funds
       Investing for your future.
       Every day.(Registered)
<PAGE>

--------------------------------------------------------------------------------
Prospectus                                                     November 27, 1998
--------------------------------------------------------------------------------

      Smith Barney Municipal High Income Fund
      388 Greenwich Street
      New York, New York 10013
      (800) 451-2010

      Smith Barney Municipal High Income Fund (the "Fund") is a diversified fund
that seeks to maximize current income exempt from Federal income taxes by
investing primarily in municipal bonds and notes. The Fund is one of a number of
funds, each having distinct investment objectives and policies, making up Smith
Barney Income Funds (the "Trust"). The Trust is an open-end management
investment company commonly referred to as a mutual fund.

      This Prospectus sets forth concisely certain information about the Fund
and the Trust, 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. Shares of other funds offered by the Trust are
described in separate prospectuses that may be obtained by calling the Trust at
the telephone number set forth above or by contacting a Salomon Smith Barney
Financial Consultant.

      Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 27, 1998, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Salomon 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.

CFBDS, INC.

Distributor


MUTUAL MANAGEMENT CORP.

Investment Adviser and Administrator

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                                 14
--------------------------------------------------------------------------------
Municipal Securities                                                         24
--------------------------------------------------------------------------------
Valuation of Shares                                                          25
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                           25
--------------------------------------------------------------------------------
Purchase of Shares                                                           28
--------------------------------------------------------------------------------
Exchange Privilege                                                           34
--------------------------------------------------------------------------------
Redemption of Shares                                                         37
--------------------------------------------------------------------------------
Minimum Account Size                                                         39
--------------------------------------------------------------------------------
Performance                                                                  39
--------------------------------------------------------------------------------
Management of the Trust and the Fund                                         41
--------------------------------------------------------------------------------
Distribution                                                                 42
--------------------------------------------------------------------------------
Additional Information                                                       43
--------------------------------------------------------------------------------
    
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 or 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 an offer or solicitation in any 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, diversified management investment
company that seeks maximum current income exempt from Federal income taxes by
investing primarily in intermediate- and long-term municipal bonds and notes
rated A, Baa or Ba by Moody's Investors Service, Inc. ("Moody's") or A, BBB or B
by Standard & Poor's Ratings Group ("S&P") or having an equivalent rating by any
nationally recognized statistical rating organization ("NRSRO").
Intermediate-term bonds have remaining maturities at the time of purchase of
between five and fifteen years. Long-term bonds have remaining maturities at the
time of purchase of between fifteen and thirty years. It is anticipated that the
average remaining maturity of bonds purchased by the Fund will be between three
and twenty-five years. See "Investment Objective and Management Policies."

ALTERNATIVE PURCHASE ARRANGEMENTS  The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and 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 $15,000,000. See
"Purchase of Shares" and "Redemption of Shares."

      Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15% 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 4.50% of redemption proceeds, declining by 0.50% the first year
after the date of 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 0.15% 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.


                                                                               3
<PAGE>

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

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

      Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.55% of the average
daily net assets of the Class, and investors pay a CDSC of 1.00% if they redeem
Class L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. Until June 22, 2001, purchases of Class L shares by investors who
were holders of Class C shares of the Fund on June 12, 1998 will not be subject
to the 1.00% initial sales charge. The Class L shares' distribution fee may
cause that Class to have higher expenses and pay lower dividends than Class A
and Class B shares. Purchases of Fund shares, which when combined with current
holdings of Class L shares of the Fund equal or exceed $500,000 in the
aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.

      Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.

      In deciding which Class of Fund shares to purchase, investors should
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 duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for a reduced sales charge and the shares are subject
to lower ongoing expenses over the term of the investment. As an alternative,
Class B and Class L shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Fund. Any investment return
on these additional invested amounts may partially or wholly offset the higher
annual expenses of these Classes. Because the Fund's future return cannot be
predicted, however, there can be no assurance that this would be the case.
Finally, Class L shares which have a lower initial sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a
substantial sales charge discount and who have a short-term or undetermined time
frame.


4
<PAGE>

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

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

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

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

      See "Purchase of Shares" and "Management of the Trust and 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 among the Classes of
shares.

DISTRIBUTOR  The Fund has entered into an agreement with CFBDS, Inc. to
distribute the Fund's shares.

PURCHASE OF SHARES  Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker that
clears securities through Salomon Smith Barney Inc. ("Salomon Smith Barney").
(An investment dealer in the selling group and a broker that clears securities
through Salomon Smith Barney are collectively referred to as "Dealer
Representatives.") In addition, certain investors, including qualified
retirement plans and investors purchasing through certain Dealer
Representatives, may purchase shares directly from the Fund through the Fund's
transfer agent, First Data Investors Services Group, Inc. ("First Data" or the
"Transfer Agent"). See "Purchase of Shares."


                                                                               5
<PAGE>

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

INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $15,000,000. Subsequent investments of at least $50 may be made for all
Classes. The minimum investment requirements for purchases of Portfolio shares
through the Systematic Investment Plan are described below. There is no minimum
investment requirement in Class A for unitholders who invest distributions from
a unit investment trust ("UIT") sponsored by Salomon Smith Barney. It is not
recommended that the Fund be used as a vehicle for Keogh, IRA or other qualified
retirement plans. See "Purchase of Shares."

SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial investment
requirement for Class A, Class B and Class L shares and the minimum 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 TRUST AND THE FUND Mutual Management Corp. ("MMC") (formerly
known as Smith Barney Mutual Funds Management Inc.) serves as the Fund's
investment adviser and administrator. MMC provides investment advisory and
management services to investment companies affiliated with Salomon Smith
Barney. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). Citigroup businesses produce a broad range of financial services
-- asset management, banking and consumer finance, credit and charge cards,
insurance, investments, investment banking and trading -- and use diverse
channels to make them available to consumer and corporate customers around the
world. Among these businesses are Citibank, Commercial Credit, Primerica
Financial Services, Salomon Smith Barney, SSBC Asset Management, Travelers Life
& Annuity, and Travelers Property Casualty. See "Management of the Trust and the
Fund."

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

VALUATION OF SHARES Net asset value of the Fund for the prior day is generally
quoted daily in the financial section of most newspapers and is also 


6
<PAGE>

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

available from Salomon Smith Barney Financial Consultants. See "Valuation of
Shares."

DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and 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
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."

RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the Fund
will achieve its investment objective. General changes in interest rates will
result in increases or decreases in the market value of the obligations held by
the Fund. The Fund may invest up to 50% of its assets in obligations rated Ba or
below by Moody's or BB or below by S&P or having an equivalent rating by any
NRSRO or in nonrated securities deemed by MMC to be of comparable quality,
commonly known as "junk bonds." In addition, the Fund may invest in obligations
rated as low as Caa by Moody's or CCC by S&P or having an equivalent rating by
any NRSRO. Securities that are rated B generally lack characteristics of the
desirable investment and assurance of interest and principal payments over any
long period of time may be small. Securities that are rated Caa or CCC are of
poor standing. These issues may be in default or present elements of danger may
exist with respect to principal or interest. Although medium- or low-rated
securities of the type in which the Fund may invest offer a higher current yield
than the yield offered by higher rated securities, they involve greater
volatility of price and risk of loss of income and principal, including the
probability of default by or bankruptcy of the issuers of such securities.
Medium- and low-rated and comparable unrated securities (a) will likely have
some quality and protective characteristics that, in the judgment of the rating
organizations, are outweighed by large uncertainties of major risk exposures to
adverse conditions and (b) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. The Fund has the right to invest its net assets in
state and local obligations that are "private activity bonds," the income for
which may be taxable as a specific preference item for purposes of the Federal
alternative minimum tax. Certain of the investments held by the Fund and certain
of the investment strategies that the Fund may employ might expose it to certain
risks. See "Investment Objective and Management Policies -- Certain Portfolio
Strategies."


                                                                               7
<PAGE>

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

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

Smith Barney Municipal High Income Fund      Class A  Class B  Class L*  Class Y
--------------------------------------------------------------------------------
Shareholder Transaction Expenses
  Maximum sales charge imposed on 
   purchases (as a percentage of 
   offering price)                           4.00%     None     1.00%    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                            0.60%     0.60%    0.60%    0.60%
  12b-1 fees***                              0.15%     0.65%    0.70%    None
  Other expenses****                         0.08%     0.07%    0.12%    0.09%
--------------------------------------------------------------------------------
Total Fund Operating Expenses                0.83%     1.32%    1.42%    0.69%
================================================================================

*     Class C shares were renamed Class L shares effective June 12, 1998.
**    Purchases of Class A shares of $500,000 or more will be made at net asset
      value with no sales charge, but will be subject to a CDSC of 1.00% on
      redemptions made within 12 months of purchase.
***   Upon conversion of Class B shares to Class A shares, such shares will no
      longer be subject to a distribution fee. Class L shares do not have a
      conversion feature and, therefore, are subject to an ongoing distribution
      fee. As a result, long-term shareholders of Class L shares may pay more
      than the economic equivalent of the maximum front-end sales charge
      permitted by the National Association of Securities Dealers, Inc. (the
      "NASD").
****  For Class Y shares, "Other expenses" have been estimated based on expenses
      incurred by Class A shares because as of July 31, 1998, no Class Y shares
      were outstanding.

      Class A shares of the Portfolio purchased through the Salomon 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 Salomon Smith Barney Financial Consultant.

      The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class L and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Salomon
Smith Barney receives an annual 12b-1 service fee of 0.15% of the value of
average daily net assets of Class A shares. Salomon Smith Barney also receives,
with respect to Class B shares, an annual 12b-1 fee of 0.65% of the value of
average daily net assets of that Class, consisting of a 0.50% distribution fee
and a 0.15% service fee. For Class L shares, Salomon Smith Barney receives an
annual 12b-1 fee of 0.70% 


8
<PAGE>

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

of the value of average daily net assets, consisting of a 0.55% 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 Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares", "Redemption of Shares" and
"Management of the Trust and the Fund."

Smith Barney Municipal High Income 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:                                                    
      Class A                               $48     $65      $84       $138
      Class B                                58      72       82        146
      Class L                                34      54       87        178
      Class Y                                 7      22       38         86
An investor would pay the following                                  
expenses on the same investment,                                     
assuming the same annual return                                      
and no redemption:                                                   
      Class A                               $48     $65      $84       $138
      Class B                                13      42       72        146
      Class L                                24      54       87        178
      Class Y                                 7      22       38         86
================================================================================

*     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 Fund'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 for each of the years in the four-year period ended
July 31, 1998 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1998.
The following information for the fiscal years ended July 31, 1989 through July
31, 1994 has been audited by other independent auditors. 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, which is incorporated by
reference into the Statement of Additional Information. No information is
presented for Class Y shares, because no Class Y shares were outstanding for the
periods shown.

For a Class A share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>
Smith Barney Municipal High Income Fund
Year Ended July 31,                          1998         1997         1996         1995           1994        1993(1)
======================================================================================================================
<S>                                       <C>          <C>          <C>          <C>            <C>          <C>     
Net Asset Value, Beginning of Year        $  18.07     $  17.31     $  17.25     $  17.26       $  18.24     $  17.45
----------------------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income                       0.95         0.97         1.00         1.04           1.06         0.78
  Net realized and unrealized gain
      (loss) on investments                   0.19         0.77         0.06         0.01(2)       (0.85)        1.00
----------------------------------------------------------------------------------------------------------------------
Total Income From Operations                  1.14         1.74         1.06         1.05           0.21         1.78
----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                      (0.98)       (0.98)       (1.00)       (1.00)         (1.06)       (0.83)
  Net realized gains                         (0.27)          --           --        (0.02)         (0.13)       (0.16)
  Capital                                       --           --           --        (0.04)            --           --
----------------------------------------------------------------------------------------------------------------------
Total Distributions                          (1.25)       (0.98)       (1.00)       (1.06)         (1.19)       (0.99)
----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year              $  17.96     $  18.07     $  17.31     $  17.25       $  17.26     $  18.24
----------------------------------------------------------------------------------------------------------------------
Total Return                                  6.54%       10.40%        6.28%        6.42%          1.14%       10.24%++
----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)        $    268     $    254     $    232     $    238       $     18     $     14
----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                    0.83%        0.83%        0.84%        0.84%          0.84%        0.86%+
  Net investment income                       5.24         5.52         5.74         6.04           5.83         6.03+
----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                         84%          51%          44%          38%            39%          34%
======================================================================================================================
</TABLE>

(1)   For the period from November 6, 1992 (inception date) to July 31, 1993.
(2)   Includes the net per share effect of shareholder sales and redemption
      activity during the period, most of which occurred at net asset values
      less than the beginning of the period.
++    Total return is not annualized as it may not be representative of the
      total return for the year.
+     Annualized.


10
<PAGE>

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

For a Class B share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>
Smith Barney Municipal High Income Fund
Year Ended July 31,                     1998         1997         1996         1995           1994          1993
===================================================================================================================
<S>                                  <C>          <C>          <C>          <C>            <C>           <C>      
Net Asset Value,
  Beginning of Year                  $   18.09    $   17.32    $   17.26    $   17.26      $   18.24     $   18.00
-------------------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income                   0.86         0.89         0.92         0.95           0.96          0.98
  Net realized and unrealized
    gain (loss) on investments            0.19         0.77         0.06         0.02(1)       (0.85)         0.45
-------------------------------------------------------------------------------------------------------------------
Total Income From Operations              1.05         1.66         0.98         0.97           0.11          1.43
-------------------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                  (0.89)       (0.89)       (0.92)       (0.91)         (0.96)        (1.02)
  Net realized gains                     (0.27)          --           --        (0.02)         (0.13)        (0.17)
  Capital                                   --           --           --        (0.04)            --            --
-------------------------------------------------------------------------------------------------------------------
Total Distributions                      (1.16)       (0.89)       (0.92)       (0.97)         (1.09)        (1.19)
-------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year         $   17.98    $   18.09    $   17.32    $   17.26      $   17.26     $   18.24
-------------------------------------------------------------------------------------------------------------------
Total Return                              6.01%        9.89%        5.74%        5.91%          0.60%         8.28%
-------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)   $     471    $     562    $     653    $     737      $   1,069     $   1,108
-------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                1.32%        1.32%        1.33%        1.35%          1.33%         1.38%
  Net investment income                   4.75         5.04         5.23         5.61           5.34          5.52
-------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                     84%          51%          44%          38%            39%           34%
===================================================================================================================
</TABLE>

(1)   Includes the net per share effect of shareholder sales and redemption
      activity during the period, most of which occurred at net asset values
      less than the net asset value at the beginning of the period.


                                                                              11
<PAGE>

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

For a Class B share of beneficial interest outstanding throughout each period:

<TABLE>
<CAPTION>
Smith Barney Municipal High Income Fund
Year Ended July 31,                            1992         1991         1990         1989
===========================================================================================
<S>                                         <C>          <C>          <C>          <C>     
Net Asset Value, Beginning of Year          $  16.97     $  16.98     $  17.31     $  16.44
-------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income                         1.04         1.10         1.12         1.13
  Net realized and unrealized gain (loss)
   on investments                               1.17         0.10        (0.30)        0.88
-------------------------------------------------------------------------------------------
Total Income From Operations                    2.21         1.20         0.82         2.01
-------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                        (1.04)       (1.10)       (1.12)       (1.13)
  Net realized gains                           (0.14)       (0.11)       (0.03)       (0.01)
-------------------------------------------------------------------------------------------
Total Distributions                            (1.18)       (1.21)       (1.15)       (1.14)
-------------------------------------------------------------------------------------------
Net Asset Value, End of Year                $  18.00     $  16.97     $  16.98     $  17.31
-------------------------------------------------------------------------------------------
Total Return                                   13.50%        7.40%        4.95%       12.68%
-------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)          $    871     $    639     $    574     $    558
-------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                      1.45%#       1.45%        1.47%        1.44%
  Net investment income                         5.96         6.48         6.57         6.70
-------------------------------------------------------------------------------------------
Portfolio Turnover Rate                           61%          44%          29%          21%
===========================================================================================
</TABLE>

#     The annualized operating expense ratio excludes interest expense. The
      annualized operating expense ratio including interest expense was 1.48%
      for the year ended July 31, 1992.


12
<PAGE>

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

For a Class L(1) share of beneficial interest outstanding throughout each
period:

<TABLE>
<CAPTION>
Smith Barney Municipal High Income Fund
Year Ended July 31,                      1998          1997         1996        1995(2)
=========================================================================================
<S>                                  <C>           <C>          <C>          <C>      
Net Asset Value, Beginning of Year   $   18.07     $   17.31    $   17.25    $   15.83
-----------------------------------------------------------------------------------------
Income From Operations:
  Net investment income                   0.87          0.88         0.89         0.60
  Net realized and unrealized
  gain on investments                     0.16          0.77         0.08         1.50(3)
-----------------------------------------------------------------------------------------
Total Income From Operations              1.03          1.65         0.97         2.10
-----------------------------------------------------------------------------------------
Less Distributions:
  Net investment income                  (0.88)        (0.89)       (0.91)       (0.62)
  Net realized gains                     (0.27)           --           --        (0.02)
  Capital                                   --            --           --        (0.04)
-----------------------------------------------------------------------------------------
Total Distributions                      (1.15)        (0.89)       (0.91)       (0.68)
-----------------------------------------------------------------------------------------
Net Asset Value, End of Year         $   17.95     $   18.07    $   17.31    $   17.25
-----------------------------------------------------------------------------------------
Total Return                              5.91%         9.79%        5.69        13.45%++
-----------------------------------------------------------------------------------------
Net Assets, End of Year (000s)       $   1,869     $     752    $     546    $     211
-----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                1.42%         1.40%        1.39%        1.18%+
  Net investment income                   4.64          4.94         5.18         5.56+
-----------------------------------------------------------------------------------------
Portfolio Turnover Rate                     84%           51%          44%          38%
=========================================================================================
</TABLE>

(1)   On June 12, 1998, Class C shares were renamed Class L shares.
(2)   For the period from November 17, 1994 (inception date) to July 31, 1995.
(3)   Includes the net per share effect of shareholder sales and redemption
      activity during the period, most of which occurred at net asset values
      less than the net asset value at the beginning of the period.
++    Total return is not annualized as it may not be representative of the
      total return for the year.
+     Annualized.


                                                                              13
<PAGE>

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

      The Fund's investment objective is the maximization of current income
exempt from Federal income taxes. Under normal market conditions, the Fund will
invest at least 80% of its net assets in (a) "Municipal Bonds," which generally
are intermediate- and long-term debt obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, or
multistate agencies or authorities and (b) Municipal Leases, which generally are
participations in intermediate- and short-term debt obligations issued by
municipalities consisting of leases or installment purchase contracts for
property or equipment. Under normal market conditions, the Fund's assets will be
invested primarily in Municipal Bonds and municipal leases (collectively,
"Municipal Securities") rated A, Baa or Ba by Moody's, or A, BBB or BB by S&P,
or having an equivalent rating by any NRSRO, or in unrated Municipal Securities
that are deemed to be of comparable quality by MMC. Up to 50% of the Fund's
assets may be invested in Municipal Securities rated Ba or below by Moody's or
BB or below by S&P or having an equivalent rating by any NRSRO or, if unrated,
judged by MMC, to be of comparable quality. The Fund's investment objective may
be changed only with the approval of the holders of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund will achieve its
investment objective.

      The Fund may invest without limit in "municipal leases," which generally
are participations in intermediate- and short-term debt obligations issued by
municipalities consisting of leases or installment purchase contracts for
property or equipment. Municipal leases may take the form of a lease or an
installment purchase contract issued by state and local government authorities
to obtain funds to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, computer equipment and other capital assets.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in municipal lease obligations. In evaluating municipal lease
obligations, MMC will consider such factors as it deems appropriate, which may
include: (a) whether the lease can be canceled; (b) the ability of the lease
obligee to direct the sale of the underlying assets; (c) the general


14
<PAGE>

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

creditworthiness of the lease obligor; (d) the likelihood that the municipality
will discontinue appropriating funding for the leased property in the event such
property is no longer considered essential by the municipality; (e) the legal
recourse of the lease obligee in the event of such a failure to appropriate
funding; (f) whether the security is backed by a credit enhancement such as
insurance; and (g) any limitations which are imposed on the lease obligor's
ability to utilize substitute property or services rather than those covered by
the lease obligation.

      Under normal circumstances, the Fund may invest in "private activity
bonds." Interest income on certain types of private activity bonds issued after
August 7, 1986 to finance nongovernmental activities is a specific tax
preference item for purposes of Federal individual and corporate alternative
minimum taxes. Individual and corporate shareholders may be subject to a Federal
alternative minimum tax to the extent that the Fund's dividends are derived from
interest on these bonds. These private activity bonds are included in the term
"Municipal Securities" for purposes of determining compliance with the 80% test
described above. Dividends derived from interest income on all Municipal
Securities are a component of the "adjusted current earnings" item for purposes
of the Federal corporate alternative minimum tax.

      The Fund may invest in short-term obligations ("Temporary Investments"),
some of which may not be tax-exempt. Included among the Temporary Investments
are tax-exempt notes rated within the four highest grades by any NRSRO,
including Moody's or S&P; tax-exempt commercial paper rated no lower than A-2 by
S&P or Prime-2 by Moody's; and taxable money market instruments. At no time will
more than 20% of the Fund's assets be invested in Temporary Investments unless
MMC temporarily has adopted a defensive investment posture. In addition, the
Fund may enter into municipal bond index futures contracts and options on
interest rate futures contracts for hedging purposes. The Fund also may acquire
variable rate demand notes, purchase securities on a when-issued basis and enter
into stand-by commitments with respect to portfolio securities.

      ADDITIONAL INVESTMENTS

      Money Market Instruments. Under normal conditions, the Fund may invest up
to 20% of its assets in Temporary Investments, including taxable money market
instruments. In addition, when MMC believes that market conditions warrant, the
Fund may invest in Temporary Investments without limitation for defensive
purposes. Short-term instruments in which the Fund may invest include
obligations issued or guaranteed as to principal and interest by the United
States government ("U.S. government securities"), certain bank obligations
including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loan associations and similar
institutions); commercial paper rated no lower than Prime-2 by Moody's or A-2 by
S&P or the equivalent rating 


                                                                              15
<PAGE>

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

from another NRSRO or, if unrated, of an issuer having an outstanding, unsecured
debt issue then rated within the three highest rating categories; and repurchase
agreements with respect to the securities in which the Fund may invest. The Fund
will invest in obligations of a foreign bank or foreign branch of a domestic
bank only if MMC determines that the obligations present minimum credit risks.
These obligations may be traded in the United States or outside the United
States, but will be denominated in U.S. dollars.

      U.S. Government Securities. The U.S. government securities in which the
Fund may invest include direct obligations of the United States Treasury (such
as Treasury Bills, Treasury Notes and Treasury Bonds) and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States; securities that are
supported by the right of the issuer to borrow from the United States Treasury;
and securities that are supported by the credit of the instrumentality. Treasury
Bills have maturities of less than one year, Treasury Notes have maturities of
one to 10 years and Treasury Bonds generally have maturities of greater than 10
years at the date of issuance. U.S. government securities generally do not
involve the credit risks associated with other types of interest-bearing
securities, although, as a result, the yields available from U.S. government
securities are generally lower than the yields available from interest-bearing
corporate securities.

      Zero Coupon Bonds. The Fund may also invest in zero coupon bonds. A zero
coupon bond pays no interest in cash to its holder during its life, although
interest is accrued during that period. Its value to an investor consists of the
difference between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount significantly less than its
face value (sometimes referred to as a "deep discount" price). Because such
securities usually trade at a deep discount, they will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, zero coupon securities eliminate reinvestment
risk and lock in a rate of return to maturity.

      CERTAIN INVESTMENT STRATEGIES

      In attempting to achieve its investment objective, the Fund may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained in
the Statement of Additional Information.

      Repurchase Agreements. The Fund may engage in repurchase agreement
transactions with certain member banks of the Federal Reserve System and with
certain dealers on the Federal Reserve Bank of New York's list of reporting
dealers. Under the terms of a typical repurchase agreement, the Fund would
acquire an 


16
<PAGE>

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

underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities, the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. MMC, acting under the supervision of the
Trust's Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and dealers with which the
Fund may enter into repurchase agreements to evaluate potential risks.
Investments by the Fund in repurchase agreements, if any, may be limited by the
restrictions on the Fund's investment in taxable investments.

      When-Issued, Delayed Delivery, and Forward Commitment Transactions. The
Fund may purchase or sell securities on a when-issued, delayed delivery or
forward commitment basis. These transactions involve a commitment by the Fund to
purchase or sell securities for a predetermined price or yield, with payment or
delivery taking place more than seven days in the future, or after a period
longer than the customary settlement period for that type of security. The Fund
will establish a segregated account with the Trust's custodian, PNC Bank,
National Association ("PNC Bank") consisting of cash, U.S. government
securities, equity securities or debt securities of any grade having a value
equal to or greater than the Fund's purchase commitments provided that such
securities have been determined by MMC to be liquid and unencumbered and are
marked to market daily pursuant to guidelines established by the Trustees.
Placing securities rather than cash in the segregated account may have a
leveraging effect on the Fund's net asset value per share. Typically, no income
accrues on securities a Fund has committed to purchase prior to the time
delivery of the securities is made, although the Fund may earn income on
securities it has segregated.

      When purchasing a security on a when-issued, delayed delivery, or forward
commitment basis, the Fund assumes the rights and risks of ownership of the
security, including the risk of price and yield fluctuations, and takes such
fluctuations into account when determining its net asset value. Because the Fund
is not required to pay for the security until the delivery date, these risks are
in addition to the risks associated with the Fund's other investments. If the
Fund remains substantially fully invested at a time when when-issued, delayed
delivery or 


                                                                              17
<PAGE>

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

forward commitment purchases are outstanding, the purchases may result in a form
of leverage.

      When the Fund has sold a security on a when-issued, delayed delivery, or
forward commitment basis, the Fund does not participate in future gains or
losses with respect to the security. If the other party to a transaction fails
to deliver or pay for the securities, the Fund could miss a favorable price or
yield opportunity or could suffer a loss. The Fund may close out of or
renegotiate a transaction after it is entered into, and may sell when-issued or
forward commitment securities before they are delivered, which may result in a
capital gain or loss. Purchasing these securities can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.

      Futures Contracts and Options on Futures Contracts. A municipal bond index
futures contract of the type in which the Fund may trade is based on an index of
long-term, tax-exempt municipal bonds. The contract is an agreement under which
two parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. An option on an interest rate futures contract, as contrasted with the
direct investment in a futures contract, gives the purchaser the right, in
return for the premium paid, to assume a position in an interest rate futures
contract at a specified exercise price at any time prior to the expiration date
of the option. A call option gives the purchaser of the option the right to
enter into a futures contract to buy and obliges the writer to enter into a
futures contract to sell the underlying debt securities. A put option gives the
purchaser the right to sell and obliges the writer to buy the underlying
contract. The Fund may purchase put options on interest rate futures contracts
to hedge its portfolio securities against the risk of rising interest rates, and
may purchase call options on interest rate futures contracts to hedge against a
decline in interest rates. The Fund may write put and call options on interest
rate futures contracts in entering into closing sale transactions and to
increase ability to hedge against changes in interest rates. The Fund will write
put and call options only on interest rate futures contracts that are traded on
a domestic exchange or board of trade.

      Variable-Rate Demand Notes. Municipal Securities purchased by the Fund may
include variable-rate demand notes issued by industrial development authorities
and other governmental entities. Although variable-rate demand notes are
frequently not rated by credit rating agencies, unrated notes purchased by the
Fund will be determined by MMC to be of comparable quality at the time of
purchase to instruments rated "high quality" (that is, within the two highest
ratings) by any NRSRO. In addition, while no active secondary market may exist
with respect to a particular variable-rate demand note purchased by the Fund,
the Fund may, upon the notice specified in the note, demand payment of the
principal of and accrued interest on the note at any time and may resell the
note at any time to a 


18
<PAGE>

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

third party. The absence of such an active secondary market, however, could make
it difficult for the Fund to dispose of the variable-rate demand note involved
in the event that the issuer of the note defaulted on its payment obligations,
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default.

      Stand-by Commitments. The Fund may acquire "stand-by commitments" with
respect to Municipal Securities held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase, at the Fund's option, specified
Municipal Securities at a specified price. The Fund may pay for stand-by
commitments either separately in cash or by paying a higher price for the
securities acquired with the commitment, thus increasing the cost of the
securities and reducing the yield otherwise available for them. The Fund intends
to enter into stand-by commitments only with brokers, dealers and banks that, in
the view of MMC, present minimal credit risks. In evaluating the
creditworthiness of the issuer of a stand-by commitment, MMC will periodically
review relevant financial information concerning the issuer's assets,
liabilities and contingent claims. The Fund will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes.

      CERTAIN INVESTMENT GUIDELINES

      The Fund may invest up to 10% of its total assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) time deposits maturing from two business days through seven
calendar days and (c) futures contracts and options on them and certain variable
rate demand notes, to the extent that a liquid secondary market does not exist
for these instruments. In addition, the Fund may invest up to 5% of its assets
in the securities of issuers that have been in continuous operation for less
than three years. The Fund also may borrow from banks for temporary or emergency
purposes, but not for investment purposes, in an amount up to 10% of its total
assets, and may pledge its assets to the same extent in connection with such
borrowings. Whenever these borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any additional investments. Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of a majority of
the Trust's Board of Trustees. A complete list of investment restrictions that
identifies additional restrictions that cannot be changed without the approval
of a majority of the Fund's outstanding shares is contained in the Statement of
Additional Information.


                                                                              19
<PAGE>

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

      RISK FACTORS AND SPECIAL CONSIDERATIONS

      Investment in the Fund involves risk factors and special considerations,
such as those described below:

      Municipal Securities. Even though Municipal Securities are
interest-bearing investments that promise a stable stream of income, their
prices are inversely affected by changes in interest rates and, therefore, are
subject to the risk of market price fluctuations. The values of Municipal
Securities with longer remaining maturities typically fluctuate more than those
of similarly rated Municipal Securities with shorter remaining maturities. The
values of fixed-income securities also may be affected by changes in the credit
rating or financial condition of the issuing entities.

      Opinions relating to the validity of Municipal Securities and to the
exemption of interest on them from Federal income taxes are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
MMC will review the proceedings relating to the issuance of Municipal Securities
or the basis for opinions of counsel. The Fund may invest without limit in debt
obligations that are repayable out of revenues generated from economically
related projects or facilities or debt obligations whose issuers are located in
the same state. Sizable investments in these obligations could involve an
increased risk to the Fund should any of such related projects or facilities
experience financial difficulties.

      Municipal Leases. Municipal leases, like other municipal debt obligations,
are subject to the risk of non-payment. The ability of issuers of municipal
leases to make timely lease payments may be adversely impacted in general
economic downturns and as relative governmental cost burdens are allocated and
reallocated among Federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal lease experiencing non-payment and a
potential decrease in the net asset value of the Fund. Issuers of municipal
leases might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, the Fund could experience delays and limitations
with respect to the collection of principal and interest on such municipal
leases and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its right in the
event of a default in lease payments, the Fund may take possession of and manage
the assets securing the issuer's obligations on such securities, which may
increase the Fund's operating expenses and adversely affect the net asset value
of the Fund. Any income derived from the Fund's ownership or operation of such
assets may not be tax-exempt.

      Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax exemption
on various types of Municipal Securities and may enact other similar laws in the


20
<PAGE>

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

future. If any such laws are enacted that would reduce the availability of
Municipal Securities for investment by the Fund so as to affect the Fund's
shareholders adversely, the Trustees will reevaluate the Fund's investment
objective and policies and might submit possible changes in the Fund's structure
to Fund shareholders for their consideration. If legislation were enacted that
would treat a type of Municipal Securities as taxable for Federal income tax
purposes, the Fund would treat the security as a permissible taxable Temporary
Investment within the applicable limits set forth in this Prospectus.

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

      While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium- and low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Fund may incur additional expenses
to the extent that it is required to seek recovery upon a default in the payment
of principal or interest on its portfolio holdings. In addition, the markets in
which medium- and low-rated securities are traded are generally more limited
than those in which higher-rated securities are traded. The existence of limited
markets for these securities may restrict the availability of securities for the
Fund to 


                                                                              21
<PAGE>

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

purchase and also may have the effect of limiting the ability of the Fund (a) to
obtain accurate market quotations for purposes of valuing securities and
calculating net asset value and (b) to sell securities at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets. The market for medium- and low-rated and comparable
unrated securities is relatively new and has not fully weathered a major
economic recession. Any such recession, however, could likely disrupt severely
the market for such securities, adversely affect the value of such securities
and also could adversely affect the ability of the issuers of such securities to
repay principal and pay interest thereon.

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

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

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

      Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, certain securities may lack a
significant operating history and be dependent on products or services without
an established market share.

      Non-Publicly Traded and Illiquid Securities. The Fund's sale of securities
that are not publicly traded is typically restricted under the Federal
securities laws. As a result, the Fund may be forced to sell these securities at
less than fair market value or may not be able to sell them when MMC believes it
desirable to do so. The Fund's investments in illiquid securities are subject to
the risk that should the Fund desire to sell any of these securities when a
ready buyer is not available at a price that the Fund deems representative of
their value, the value of the Fund's net assets could be adversely affected.


22
<PAGE>

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

      Futures and Options on Futures. When deemed advisable by MMC, the Fund may
enter into futures contracts or related options that are traded on a domestic
exchange or board of trade. Such investments, if any, by the Fund will be made
solely for the purpose of hedging against the effects of changes in the value of
its portfolio securities due to anticipated changes in interest rates and market
conditions and when the transactions are economically appropriate to the
reduction of risks inherent in the management of the Fund. The Fund may not
enter into futures and options contracts for which aggregate initial margin
deposits and premiums paid for unexpired options to establish such positions
that are not bona fide hedging positions (as defined by the Commodity Futures
Trading Commission), exceed 5% of the fair market value of the Fund's assets
after taking into account unrealized profits and unrealized losses on futures
contracts into which it has entered. With respect to each long position in a
futures contract or option thereon, the underlying commodity value of such
contract always will be covered by cash and cash equivalents plus accrued
profits held in a segregated account.

      The use of futures contracts and options on those contracts as a hedging
device involves several risks. No assurance can be given that a correlation will
exist between price movements in the underlying securities or index, on the one
hand, and price movements in the securities that are the subject of the hedge,
on the other hand. Positions in futures contracts and options on those contracts
may be closed out only on the exchange or board of trade on which they were
entered into, and no assurance can be given that an active market will exist for
a particular contract or option at any particular time. Losses incurred in
hedging transactions and the costs of these transactions will affect the Fund's
performance. Furthermore, because any interest earned from transactions in
municipal bond index futures contracts and options on interest rate futures
contracts will be taxable, it is anticipated that the Fund will invest in these
instruments only in unusual circumstances, such as when MMC anticipates an
extreme change in interest rates or market conditions.

      Year 2000. The investment management services provided to the Fund by MMC
and the services provided to shareholders by Salomon Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. MMC and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, MMC has been advised by the Fund's custodian, transfer agent,
distributor and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance


                                                                              23
<PAGE>

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

that MMC, Salomon Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time.

      In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.

      PORTFOLIO TRANSACTIONS

      The Fund's portfolio securities are ordinarily purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be maintained.

      Usually no brokerage commissions, as such, are paid by the Fund for
purchases and sales undertaken through principal transactions, although the
price paid usually includes an undisclosed compensation to the dealer acting as
agent. The prices paid to underwriters of newly issued securities usually
include a concession paid by the issuer to the underwriter, and purchases of
after-market securities from dealers ordinarily are executed at a price between
the bid and asked price.

      Transactions on behalf of the Fund are allocated to various dealers,
including Salomon Smith Barney and other affiliated brokers, by MMC in its best
judgment. The primary consideration is prompt and effective execution of orders
at the most favorable price. Subject to that primary consideration, dealers may
be selected for research, statistical or other services to enable MMC to
supplement its own research and analysis with the views and information of other
securities firms.

--------------------------------------------------------------------------------
Municipal Securities
--------------------------------------------------------------------------------

      The term "Municipal Securities" generally is understood to include debt
obligations issued to obtain funds for various public purposes, the interest on
which qualifies, in the opinion of bond counsel to the issuer, as excluded from
gross income for Federal income tax purposes. In addition, Municipal Securities
may include "private activity bonds" if the proceeds from such bonds are used
for the construction, equipment, repair or improvement of privately operated
industrial or commercial facilities, and the interest paid on such bonds may be
excluded from gross income for Federal income tax purposes. Current Federal tax
laws place 


24
<PAGE>

--------------------------------------------------------------------------------
Municipal Securities (continued)
--------------------------------------------------------------------------------

substantial limitations on the aggregate amount of such bonds that any given
state may issue.

      CLASSIFICATIONS

      The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source, but not from the
general taxing power. Sizeable investments in such obligations could involve an
increased risk to the Fund should any of such related facilities experience
financial difficulties. Private activity bonds are in most cases revenue bonds
and generally do not carry the pledge of the credit of the issuing municipality.
There are, of course, variations in the security of Municipal Securities, both
within a particular classification and between classifications.

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

      The Fund'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 Fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.

      Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Trust's Board of Trustees determines that amortized cost
reflects fair value of those investments. Amortized cost valuation involves
valuing an instrument at its cost initially and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. Further
information regarding the Fund's valuation policies is contained in the
Statement of Additional Information.

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

      DIVIDENDS AND DISTRIBUTIONS

      The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders.


                                                                              25
<PAGE>

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

      The Fund declares dividends from its net investment income (that is,
income other than its net realized long- and short-term capital gains) monthly
and pays dividends on the last Friday of the month. Distributions of net
realized long- and short-term capital gains, if any, are declared and paid
annually after the end of the fiscal year in which they have been earned.

      If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In addition, in
order to avoid the application of a 4% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may make an
additional distribution shortly before December 31 of each year of any
undistributed ordinary income or capital gains and expects to make any other
distributions as are necessary to avoid the application of this tax.

      If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a taxable dividend or tax-free return of capital
(up to the amount of the shareholder's tax basis in his or her shares). The
amount treated as a tax-free return of capital will reduce a shareholder's
adjusted basis in his or her shares. Pursuant to the requirements of the
Investment Company Act of 1940, as amended ("1940 Act") and other applicable
laws, a notice will accompany any distribution paid from sources other than net
investment income. In the event the Fund distributes amounts in excess of its
net investment income and net realized capital gains, such distributions may
have the effect of decreasing the Fund's total assets, which may increase the
Fund's expense ratio.

      The per share dividends on Class B shares and Class L shares may be lower
than the per share dividends on Class A and Y shares principally as a result of
the distribution fee applicable with respect to Class B and Class L shares. The
per share dividends on Class A shares of the Fund may be lower than the per
share dividends on Class Y 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 Classes A, B, L and Y.

      TAXES

      The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Internal Revenue
Code of 1986, as amended. Dividends paid from the Fund's net investment income
(other than dividends derived from interest earned on qualifying tax-exempt
obligations as 


26
<PAGE>

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

described below) and distributions of the Fund's net realized short-term capital
gains are taxable to shareholders as ordinary income, regardless of how long
shareholders in the Fund have held their shares and whether the dividends or
distributions are received in cash or reinvested in additional shares of the
Fund. Distributions of the Fund's net realized long-term capital gains will be
taxable to shareholders as long-term capital gains, regardless of how long
shareholders have held their shares of the Fund and whether the distributions
are received in cash or are reinvested in additional Fund shares. In addition,
as a general rule, a shareholder's gain or loss on a sale or redemption of
shares of the Fund will be a long-term capital gain or loss if the shareholder
has held the shares for more than one year and will be a short-term capital gain
or loss if the shareholder has held the shares for one year or less. The per
share dividends and distributions on Class A shares will be higher than the per
share dividends and distributions on Class B shares as a result of lower
distribution and transfer agency fees applicable to Class A shares.

      Dividends paid by the Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest" dividends
that shareholders may exclude from their gross incomes for Federal income tax
purposes if the Fund satisfies certain asset percentage requirements. Any
exempt-interest dividends of a Fund derived from interest on Municipal
Securities, the interest on which is a specific tax preference item for Federal
income tax purposes, will be a specific tax preference item for purposes of the
Federal individual and corporate alternative minimum taxes. In addition, all
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum income
tax.

      Statements as to the tax status of the dividends and distributions
received by shareholders of the Fund are mailed annually. These statements set
forth the dollar amount of income excluded from Federal income taxes and the
dollar amount, if any, subject to Federal income taxes. These statements will
also designate the amount of exempt-interest dividends that is a specific
preference item for purposes of the Federal individual and corporate alternative
minimum taxes. The Fund notifies its shareholders annually as to the interest
excluded from Federal income taxes earned by the Fund with respect to those
states and possessions in which the Fund has or had investments.

      Shareholders should consult their tax advisers with specific reference to
their own tax situations. Shareholders of the Fund should in particular consult
their tax advisers about the status of the Fund's dividends and distributions
for state and local tax purposes in order to assess the consequences of
investing in the Fund under state and local laws generally and to determine
whether dividends paid by the Fund are exempt from any otherwise applicable
state or local income taxes.


                                                                              27
<PAGE>

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

      SALES CHARGE ALTERNATIVES

      The following Classes of shares are available for purchase through this
Prospectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.

      Class A Shares. Class A shares are sold to investors at the public
offering price, which is the net asset value plus an initial sales charge as
follows:

                                                                    Dealer's
                              Sales Charge      Sales Charge       Reallowance
                                as a % of         as a % of         as a % of
  Amount of Investment         Transaction     Amount Invested   Offering Price
--------------------------------------------------------------------------------
Less than $25,000                  4.00%             4.17%            3.60%
$25,000 - $49,999                  3.50              3.63             3.15
$50,000 - $99,999                  3.00              3.09             2.70
$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 Salomon Smith Barney, which compensates Salomon
      Smith Barney Financial Consultants and other dealers whose clients make
      purchases of $500,000 or more. The CDSC is waived in the same
      circumstances in which the CDSC applicable to Class B and Class L shares
      is waived. See "Deferred Sales Charge Provisions" and "Waivers of CDSC."

      Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended (the "1933 Act"). The reduced sales charges shown above apply
to the aggregate of purchases of Class A shares of the Fund made at one time by
"any person," which includes an individual and his or her immediate family, or a
trustee or other fiduciary of a single trust estate or single fiduciary account.

      Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.

      Class L Shares. Class L shares are sold with an initial sales charge of
1.00% (which is equal to 1.01% of the amount invested) and are subject to a CDSC
payable upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 22, 2001 purchases of Class L shares by investors who were holders of
Class C shares of the Fund on June 12, 1998 will not be subject to the 1.00%
initial sales charge.

      Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).


28
<PAGE>

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

      GENERAL

      Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a Dealer Representative. In addition, certain investors, including
qualified retirement plans purchasing through certain Dealer Representatives,
may purchase shares directly from the Fund. When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A, Class B, Class L or
Class Y shares. Salomon Smith Barney and Dealer Representatives may charge their
customers an annual account maintenance fee in connection with a brokerage
account through which an investor purchases or holds shares. Accounts held
directly at the Transfer Agent are not subject to a maintenance fee.

      Investors in Class A, Class B and Class L shares may open an account in
the Fund by making an initial investment of at least $1,000. Investors in Class
Y shares may open an account by making an initial investment of $15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For
shareholders purchasing shares of the Fund through the Systematic Investment
Plan on a monthly basis, the minimum initial investment requirement for Class A,
Class B and Class L shares and subsequent investment requirement for all Classes
is $25. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment required
for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment requirements
for Class A shares for employees of Citigroup and its subsidiaries, including
Salomon Smith Barney, unitholders who invest distributions from a UIT sponsored
by Salomon Smith Barney, and Directors/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 Transfer Agent. Share certificates are
issued only upon a shareholder's written request to the Transfer Agent. It is
not recommended that the Fund be used as a vehicle for Keogh, IRA or other
qualified retirement plans.

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


                                                                              29
<PAGE>

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

      SYSTEMATIC INVESTMENT PLAN

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

      SALES CHARGE WAIVERS AND REDUCTIONS

      INITIAL SALES CHARGE WAIVERS

      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-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 the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
Smith Barney), on the condition the purchase of Class A shares is made with the
proceeds of the redemption of shares of a mutual fund which (i) was sponsored by
the Financial Consultant's prior employer, (ii) was sold to the client by the
Financial Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Fund (or Class A shares of
another Smith Barney Mutual Fund that is offered with a sales charge) and who
wish to reinvest their redemption proceeds in the Fund, provided the
reinvestment is made within 60 calendar days of the redemption; (e) purchases by
accounts managed by registered 


30
<PAGE>

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

investment advisory subsidiaries of Citigroup; (f) purchases by separate
accounts used to fund certain unregistered variable annuity contracts; (g)
investments of distributions from a UIT sponsored by Salomon Smith Barney; and
(h) purchases by investors participating in a Salomon 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 the Fund 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 the Fund and of other Smith Barney Mutual Funds that are offered
with a sales charge as currently listed under "Exchange Privilege" then held by
such person and applying the sales charge applicable to such aggregate. In order
to obtain such discount, the purchaser must provide sufficient 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.

      LETTER OF INTENT

      Class A Shares. A Letter of Intent for an amount of $50,000 or more
provides an opportunity for an investor to obtain a reduced sales charge by
aggregating investments over a 13 month period, provided that the investor
refers to such Letter when placing orders. For purposes of a Letter of Intent,
the "Amount of Investment" as referred to in the preceding sales charge table
includes (i) all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge acquired during the term of the Letter plus (ii) the
value of all Class A shares previously purchased and still owned. Each
investment made 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. The term of the Letter
will commence upon the date the Letter is signed, or at the option of the
investor, up to 90 days before such date. Please contact a Salomon Smith Barney
Financial Consultant or the Transfer Agent to obtain a Letter of Intent
application.

      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares (except purchases
of Class Y shares by Smith Barney Concert Allocation Series Inc., for which
there is no minimum purchase amount). Such investors must make an initial
minimum purchase of $5,000,000 in Class Y shares of the Fund and agree to
purchase a total


                                                                              31
<PAGE>

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

of $15,000,000 of Class Y shares of the Fund within 13 months from the date of
the Letter. If a total investment of $15,000,000 is not made within the 13 month
period, all Class Y shares purchased to date will be transferred to Class A
shares, where they will be subject to all fees (including a service fee of
0.15%) and expenses applicable to the Fund's Class A shares, which may include a
CDSC of 1.00%. Please contact a Salomon Smith Barney Financial Consultant or the
Transfer Agent for further information.

      DEFERRED SALES CHARGE PROVISIONS

      "CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.

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

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

        Year Since Purchase
        Payment was Made                                         CDSC  
--------------------------------------------------------------------------------
        First                                                    4.50%
        Second                                                   4.00
        Third                                                    3.00
        Fourth                                                   2.00
        Fifth                                                    1.00
        Sixth and thereafter                                     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 


32
<PAGE>

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

Class B Dividend Shares owned by the shareholders 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."

      The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such other funds. For
Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Salomon Smith Barney.

      To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
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 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the Fund
with any investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.

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


                                                                              33
<PAGE>

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

      Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following 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 L 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
      Concert Peachtree Growth Fund
      Concert Social Awareness Fund
      Smith Barney Aggressive Growth Fund Inc.
      Smith Barney Appreciation Fund Inc.
      Smith Barney Balanced Fund
      Smith Barney Contrarian Fund
      Smith Barney Convertible Fund
      Smith Barney Fundamental Value Fund Inc.
      Smith Barney Funds, Inc.-- Large Cap Value Fund
      Smith Barney Large Cap Blend Fund
      Smith Barney Large Capitalization Growth Fund
      Smith Barney Mid Cap Blend Fund
      Smith Barney Natural Resources Fund Inc.
      Smith Barney Premium Total Return Fund
      Smith Barney Small Cap Blend Fund, Inc.
      Smith Barney Special Equities Fund

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

Tax-Exempt Funds
      Smith Barney Arizona Municipals Fund Inc.
      Smith Barney California Municipals Fund Inc.
   ** Smith Barney Intermediate Maturity California Municipals Fund
   ** Smith Barney Intermediate Maturity New York Municipals Fund


34
<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 -- Pennsylvania Portfolio
      Smith Barney New Jersey Municipals Fund Inc.
      Smith Barney Oregon Municipals Fund

Global-International Funds
      Smith Barney Hansberger Global Small Cap Value Fund
      Smith Barney Hansberger Global Value Fund
      Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
      Smith Barney World Funds, Inc. -- European Portfolio
      Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
      Smith Barney World Funds, Inc. -- International Balanced Portfolio
      Smith Barney World Funds, Inc. -- International Equity Portfolio
      Smith Barney World Funds, Inc. -- Pacific Portfolio

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

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

------------
*     Available for exchange with Class A and Class B shares of the Fund.
**    Available for exchange with Class A, Class L and Class Y shares of the
      Fund.
***   Available for exchange with Class A shares of the Fund.
+     Available for exchange with Class B and Class L shares of the Fund.
++    Available for exchange with Class A and Class Y shares of the Fund.


                                                                              35
<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 the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the Fund
that have been exchanged.

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

      Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Fund who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without
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 Fund's performance and its shareholders. MMC may determine
that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by a
shareholder. Upon such a determination, the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15-day period the shareholder will be required
to (a) redeem his or her shares in the Fund or (b) remain invested in the Fund
or exchange into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.

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


36
<PAGE>

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

      The Fund is required to redeem the shares of the Fund 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 First Data receives
further instructions from Salomon Smith Barney, or if the shareholder's account
is not with Salomon Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Salomon Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruction
and Salomon Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other than a certified
or official bank check, will be remitted upon clearance of the check, which may
take up to ten days or more.

      Shares held by Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial Consultant.
Shares other than those held by Salomon Smith Barney as custodian may be
redeemed through an investor's Financial Consultant, Dealer Representative or by
submitting a written request for redemption to:

      Smith Barney Municipal High Income Fund
      Class A, B, L or Y (please specify)
      c/o First Data Investor Services Group, Inc.
      P.O. Box 5128
      Westborough, Massachusetts 01581-5128

      A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are 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 share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. 


                                                                              37
<PAGE>

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

Written redemption requests of $10,000 or less do not require a signature
guarantee unless more than one such redemption request is made in any 10-day
period. 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 Fund offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Fund. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. For further information
regarding the automatic cash withdrawal plan, shareholders should contact a
Salomon Smith Barney Financial Consultant.

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

      Shareholders who do not have a Salomon Smith Barney brokerage account may
be eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should 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 or
her initial investment in the Fund.

      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
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 or 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 


38
<PAGE>

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

Federal Reserve System or have a correspondent relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/ Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.

      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day 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 days' prior notice to shareholders.

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

      The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, 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
--------------------------------------------------------------------------------

      YIELD

      From time to time, the Fund may advertise the 30-day "yield" and
"equivalent taxable yield" of each Class of shares. The yield refers to the
income generated by 


                                                                              39
<PAGE>

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

an investment in those shares over the 30-day period identified in the
advertisement and is computed by dividing the net investment income per share
earned by the Class during the period by the maximum offering price per share on
the last day of the period. This income is "annualized" by assuming that the
amount of income is generated each month over a one-year period and is
compounded semi-annually. The annualized income is then shown as a percentage of
the net asset value.

      The equivalent taxable yield demonstrates the yield on a taxable
investment necessary to produce an after-tax yield equal to the Fund's
tax-exempt yield for each Class. It is calculated by increasing the yield shown
to the extent necessary to reflect the payment of taxes at specified tax rates.
Thus, the equivalent taxable yield always will exceed the Fund's yield. For more
information on equivalent taxable yields, refer to the table under "Dividends,
Distributions and Taxes."

      TOTAL RETURN

      From time to time the Fund may include the Fund's total return, average
annual total return and current dividend return in advertisements and/or other
types of sales literature. These figures are computed separately for Class A,
Class B, Class L and Class Y shares of the Fund. These figures are based on
historical earnings and are not intended to indicate future performance. Total
return is computed for a 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 gains distributions on the reinvestment
dates at prices calculated as stated in this Prospectus, then dividing the value
of the investment at the end of the period so calculated by the initial amount
invested and subtracting 100%. The standard average annual total return, as
prescribed by the SEC, is derived from this total return, which provides the
ending redeemable value. Such standard total return information may also be
accompanied with nonstandard total return information for differing periods
computed in the same manner but without annualizing the total return or taking
sales charges into account. The Fund calculates current dividend return for each
Class by annualizing the most recent monthly distribution 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 Fund may also include comparative performance
information in advertising or marketing its shares. Such performance information
may include data from Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds or other industry
publications. 


40
<PAGE>

--------------------------------------------------------------------------------
Management of the Trust and the Fund
--------------------------------------------------------------------------------

      BOARD OF TRUSTEES

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

      INVESTMENT ADVISER

      MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. MMC (through predecessor entities) has been in
the investment counseling business since 1934 and is a registered investment
adviser. MMC renders investment advice to investment companies that had
aggregate assets under management as of September 30, 1998 in excess of $108
billion.

      Subject to the supervision and direction of the Fund's Board of Trustees,
MMC manages the Fund's portfolio in accordance with the Fund's stated investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. For investment
advisory services rendered, the Fund pays MMC a fee at the annual rate of 0.40%
of the value of its average daily net assets. This fee is computed daily and
paid monthly.

      PORTFOLIO MANAGEMENT

      Lawrence T. McDermott, a Managing Director of Salomon Smith Barney, has
served as Vice President and Investment Officer of the Fund since it commenced
operations and manages the day to day operations of the Fund, including making
all investment decisions.

      Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1998 is
included in the Annual Report dated July 31, 1998. A copy of the Annual Report
may be obtained upon request and without charge from a Salomon Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.

      ADMINISTRATOR

      MMC also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered, the Fund pays
MMC a 


                                                                              41
<PAGE>

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

fee at the annual rate of 0.20% of the value of its average daily net assets.
This fee is computed daily and paid monthly.

      On October 8, 1998, Travelers Group Inc. and Citicorp consummated their 
merger, thereby creating a new entity called Citigroup. Citigroup is a
bank holding company subject to regulation under the Bank Holding Company Act 
of 1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain 
other laws and regulations. MMC does not believe that its compliance with the 
applicable law will have a material adverse effect on its ability to continue 
to provide the Fund with the same level of investment advisory services that it
currently receives.

   
--------------------------------------------------------------------------------
Distribution
--------------------------------------------------------------------------------
<R/>

      CFBDS, Inc., located at 21 Milk Street, Boston MA 02109-5408, distributes
shares of the Fund as principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS, Inc. to take
and pay for only such securities as may be sold to the public. Pursuant to a
plan of distribution adopted by the Fund under Rule 12b-1 under the 1940 Act
(the "Plan"), Salomon Smith Barney is paid a service fee with respect to Class
A, Class B and Class L shares of the Fund at the annual rate of 0.15% of the
average daily net assets of the respective Class. Salomon Smith Barney is also
paid a distribution fee with respect to Class B and Class L shares at the annual
rate of 0.50% and 0.55%, respectively, of the average daily net assets
attributable to those Classes. Class B shares which automatically convert to
Class A shares eight years after the date of original purchase will no longer be
subject to a distribution fee. The fees are used by Salomon Smith Barney to pay
its Financial Consultants for servicing shareholder accounts and, in the case of
Class B and Class L shares, to cover expenses primarily intended to result in
the sale of those shares. These expenses include: advertising expenses; the cost
of printing and mailing prospectuses to potential investors; payments to and
expenses of Salomon Smith Barney Financial Consultants and other persons who
provide support services in connection with the distribution of shares; interest
and/or carrying charges; and indirect and overhead costs of Salomon Smith Barney
associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.

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


42
<PAGE>

--------------------------------------------------------------------------------
Distribution (continued)
--------------------------------------------------------------------------------

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

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

      The Trust was organized on March 12, 1985 under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts Business Trust." Each Class of the Fund represents identical
interests in the Fund's investment portfolio. As a result, the Classes have the
same rights, privileges and preferences, except with respect to: (a) the
designation of each Class; (b) the impact of the respective sales charges, if
any, for each Class; (c) the distribution and/or service fees, if any, borne by
each Class pursuant to the Plan; (d) the expenses allocable exclusively to each
Class; (e) voting rights on matters exclusively affecting a single Class; (f)
the exchange privileges of each Class; and (g) the conversion feature of the
Class B shares.

      The Trust's Board of Trustees does not anticipate that there will be any
conflicts among the interests of the holders of the different Classes of shares
of the Fund. The Trustees, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.

      When matters are submitted for shareholder vote, shareholders of each
Class of each Fund will have one vote for each full share owned and a
proportionate, fractional vote for any fractional share held of that Class.
Shares of the Trust will be voted generally on a Trust-wide basis on all
matters, except matters affecting the interests of one Fund or one Class of
shares.

      The Trust does not hold annual shareholder meetings. There normally will
be no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees will call a meeting for any purpose upon
the written request of holders of at least 10% of the Fund's outstanding shares
and the Fund will assist shareholders in calling such a meeting as required by
the 1940 Act.

      PNC Bank, located at 17th and Chestnut Streets, Philadelphia, PA 19103,
serves as custodian of the Trust's investments.

      First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Trust's Transfer Agent.


                                                                              43
<PAGE>

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

      The Fund sends its shareholders a semi-annual report and an audited annual
report, which includes a listing of the investment securities held by the Fund
at the end of the reporting period. In an effort to reduce the Fund's printing
and mailing costs, the Trust plans to consolidate the mailing of the Fund's
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 Salomon Smith
Barney Financial Consultant or the Trust's Transfer Agent.


44
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<PAGE>
 
                                                            SALOMON SMITH BARNEY
                                                    ----------------------------
                                                    A member of citigroup [LOGO]

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

                                                                    Smith Barney
                                                                       Municipal
                                                                     High Income
                                                                            Fund

                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                    FD0214 11/98