As filed with the Securities and Exchange Commission
on June 23, 1998
Registration No.  2-96408 
811-4254

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM N-1A

REGISTRATION STATEMENT UNDER 
THE SECURITIES ACT OF 1933    

[ ] Pre-Effective Amendment No.

[X] Post-Effective Amendment No.    51    

REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended

Amendment No.     52    [X]

SMITH BARNEY INCOME FUNDS
(Exact name of Registrant as Specified in Charter)

388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)

(212)816-6474
(Registrant's telephone number, including Area Code)

Christina T. Sydor
Secretary

Smith Barney Income Funds
388 Greenwich Street
New York, New York 10013, 22nd Floor
(Name and address of agent for service)

(Approximate Date of Proposed Public Offering): Continuous


It is proposed that this filing becomes effective (check appropriate 
box):

   
[  ]  Immediately upon filing pursuant to paragraph b
[  ]   on June 15, 1998 pursuant to paragraph b
[X ]  60 days after filing pursuant to paragraph (a)(1)
[  ]  on (date) pursuant to paragraph (a)(1)
[  ]  75 days after filing pursuant to paragraph (a)(2)
[  ]  on (date) pursuant to paragraph (a) (2) of Rule 485
    

If appropriate, check the following box:

[X]  This post-effective amendment designates a new effective date 
for a previously filed post-effective amendment

Title of Securities Being Registered: Shares of Common Stock/Shares 
of Beneficial Interest 


SMITH BARNEY INCOME FUNDS

CONTENTS OF REGISTRATION STATEMENT

This Registration Statement contains the following pages and 
documents:

Front Cover

Contents Page

Cross-Reference Sheet

Part A - Prospectus

Part B - Statement of Additional Information

Part C - Other Information

Signature Page

Exhibits

	SMITH BARNEY INCOME FUNDS

	FORM  N-1A CROSS REFERENCE SHEET
	Pursuant to Rule 495(a) Under the Securities Act of 1933, as amended


Part A 
Item No. and Caption	Prospectus Caption

1.  Cover Page	Cover Page

2.  Synopsis	Prospectus Summary 

3.  Condensed Financial Information	Financial Highlights;

4.  General Description of Registrant	Cover Page; Prospectus 
	Summary;
	Investment Objective and 
	Policies;
	Distributor; Additional 
	Information

5.  Management of the Fund	Prospectus Summary; Management of 
	the Trust and the Fund; 
	Distributor; Additional Information

6.  Capital Stock and Other Securities	Investment Objective and 
	Policies; Dividends, 
	Distributions and Taxes;
	Additional Information

7. Purchase of Securities 	Valuation of Shares;
    Being Offered	Purchase of Shares;
	Exchange Privilege; Redemption of 
	shares; Purchase, Exchange and 
	Redemption of Shares; Minimum
	Account Size;  Distributor

8.  Redemption or Repurchase of Shares	Purchase of Shares; 
	Redemption of Shares; 
	Exchange Privilege;
	Purchase, Exchange and
	Redemption of Shares

9.  Pending Legal Proceedings	Not Applicable


Part B. 
Item No. and Caption	Statement of Additional 
	Information Caption

10.  Cover Page	Cover page

11.  Table of Contents	Contents

12.  General Information and History	Distributor; Additional 
	Information

13.  Investment Objectives and Policies	Investment Objectives and 
	Management Policies

14.  Management of the Fund	Management of the Trust and the
	Funds; Distributor

15. Control Persons and Principal	Holders of Securities
    Management of the Trust and the 
    Funds 

16. Investment Advisory and	Management of the Trust and
     Other Services	the Funds; Distributor

17.  Brokerage Allocation	Investment Objectives and 
	Management Policies; Distributor

18.  Capital Stock and Other Securities	Investment Objectives and 
	Management Policies; Purchase of 
	Shares; Redemption of Shares;
	Taxes

19.  Purchase, Redemption and Pricing	Purchase of Shares; Redemption of 
of Securities Being Offered  	Shares; Valuation of Shares; 
	Distributor; Exchange Privilege

20.  Tax Status	Taxes

21.  Underwriters	Distributor

22.  Calculation of Performance Data	Performance Data

23.  Financial Statements	Financial Statements


SMITH BARNEY INCOME FUNDS

PART A


<PAGE>
 
P R O S P E C T U S 
                                                                    SMITH BARNEY
                                                                      
                                                                   Balanced     
                                                                          
                                                                       Fund     
                                                                
                                                             August  , 1998     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
[LOGO] Smith Barney Mutual Funds
       INVESTING FOR YOUR FUTURE.
       EVERY DAY.
<PAGE>
 
PROSPECTUS                                                     
                                                            AUGUST  , 1998     
   
Smith Barney Balanced Fund     
388 Greenwich Street
New York, New York 10013
(800) 451-2010
   
  The Smith Barney Balanced Fund (the "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 objectives and policies, making up
the Smith Barney Income Funds (the "Trust"). The Trust is an open-end manage-
ment 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 Smith Barney Financial Consul-
tant.
   
  Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated August  , 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 Smith Barney Financial Consultant. The Statement of Additional
Information has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated by reference into this Prospectus in its entirety.
    
SMITH BARNEY INC.
Distributor
   
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   15
-------------------------------------------------
VALUATION OF SHARES                            28
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             29
-------------------------------------------------
PURCHASE OF SHARES                             31
-------------------------------------------------
EXCHANGE PRIVILEGE                             40
-------------------------------------------------
REDEMPTION OF SHARES                           43
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           46
-------------------------------------------------
PERFORMANCE                                    46
-------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND           47
-------------------------------------------------
DISTRIBUTOR                                    49
-------------------------------------------------
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 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 Smith Barney Inc. ("Smith Barney")
and its affiliates and (b) unit investment trusts ("UITs") sponsored by 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
distributions ("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%. 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.
The Class L shares' distribution fee may cause that Class to have higher
expenses and pay lower dividends than Class A shares. Purchases of Fund
shares, which when combined with current holdings of Class L shares of the
Fund equal or exceed $500,000 in the aggregate, should be made in Class A
shares at net asset value with no sales charge, and will be subject to a CDSC
of 1.00% on redemptions made within 12 months of purchase.     
   
  Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net
asset value with no initial sales charge or CDSC. They are not subject to any
service or distribution fees.     
 
  In deciding which Class of Fund shares to purchase, investors should
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 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, 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 funds sponsored by Smith Barney listed under "Exchange Privilege."
Class A share purchases may also be eligible for a reduced initial sales
charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares will be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.
   
  Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and Class L shares is the same as that of the
initial sales charge on the Class A and L 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 "Code"),
as well as other types of participant-directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without a
sales charge as investment alternatives under both of these programs. See
"Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
 
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith Bar-
ney on a fully disclosed basis (an "Introducing Broker") or an investment
dealer in the selling group. In addition, certain investors, including quali-
fied retirement plans and certain other institutional investors, may purchase
shares directly from the Fund through the Fund's transfer agent, First Data
Investor Services Group, Inc. ("First Data"). See "Purchase of Shares."
   
INVESTMENT MINIMUMS Investors in Class A, Class B and Class 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     
 
                                                                              5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
investment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class L shares and the minimum subsequent
investment requirement for all Classes is $25. The minimum investment require-
ments for purchases of Fund shares through the Systematic Investment Plan are
described below. There is no minimum investment required in Class A for
unitholders who invest distributions from a UIT sponsored by 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 require-
ment for Class A, Class B and Class L shares and the minimum subsequent invest-
ment 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 "Re-
demption 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 man-
agement services to investment companies affiliated with Smith Barney. MMC is a
wholly owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a
diversified financial services holding company engaged, through its subsidiar-
ies, principally in four business segments: Investment Services, including
Asset Management, Consumer Finance Services, Life Insurance Services and Prop-
erty & Casualty Insurance Services. See "Management of the Trust and the Fund."
    
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
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 Smith Bar-
ney Financial Consultants. See "Valuation of Shares."
   
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid quar-
terly and distributions of net realized capital gains, if any, are paid annual-
ly. See "Dividends, Distributions and Taxes."     
 
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
   
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The 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 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 presenting 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 repurchase agree-
ments, 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."     
 
                                                                              7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
THE FUND'S EXPENSES The following expense table lists the costs and expenses
an investor will incur either directly or indirectly as a shareholder of the
Fund, based on the maximum sales charge or maximum CDSC that may be incurred
at the time of purchase or redemption and the Fund's 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%     None      None
    Maximum CDSC (as a percentage of
      original cost or redemption
      proceeds, whichever is lower)    None*   5.00%    1%     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***                0.16    0.12     .11      0.12      0.02
------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES      1.06%   1.52%   1.76%     1.47%     0.67%
------------------------------------------------------------------------------
</TABLE>    
   * Purchases of Class A shares of $500,000 or more will be made at net asset
     value with no sales charge, but will be subject to a CDSC of 1.00% on
     redemptions made within 12 months of purchase.
  ** Upon conversion of Class B shares to Class A shares, such shares will no
     longer be subject to a distribution fee. Class C shares do not have a
     conversion feature and, therefore, are subject to an ongoing distribution
     fee. As a result, long-term shareholders of Class C shares may pay more
     than the economic equivalent of the maximum front-end sales charge
     permitted by the National Association of Securities Dealers, Inc. (the
     "NASD").
   
 *** Class L shares "other expenses" have been estimated because no Class L
     shares were outstanding during the fiscal year ended December 31, 1997.
            
**** Class O shares were formerly designated Class C shares. Class O shares
     are available to purchase only by former Class C shareholders. Purchasers
     of Class O shares will be subject to a 1% sales charge after June 25,
     1999.     
 
  Class A shares of the Fund purchased through the Smith Barney AssetOne Pro-
gram 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%, depend-
ing on the amount of assets held through the Program. For more information,
please call your Smith Barney Financial Consultant.
   
  The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in
the case of Class B, Class L and certain Class A shares the length of time the
shares are held and whether the shares are held through the Smith Barney
401(k) and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption
of Shares." Smith Barney receives an annual 12b-1 service fee of 0.25% of the
value of aver-       
 
8
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
age daily net assets of Class A shares. 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, 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. "Other expenses" in the above table include fees for
shareholder services, custodial fees, legal and accounting fees, printing costs
and registration fees.     
 
 EXAMPLE
 
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
 
<TABLE>   
<CAPTION>
  SMITH BARNEY 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    $106     $173
    Class B                                     65      78      93      169
    Class L                                     29      58     101      218
    Class O                                     25      46      80      176
    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     106      173
    Class B                                     15      48      83      169
    Class L                                     19      58     101      218
    Class O                                     15      46      80      176
    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 three-year period
ended July 31, 1997 has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Fund's Annual Report dated July
31, 1997. The following information for the period ended January 31, 1998 is
unaudited. 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 1997 Annual Report,
which is incorporated by reference into the Statement of Additional Informa-
tion.     
 
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>   
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR ENDED                  1998(1)     1997    1996    1995    1994    1993(2)
---------------------------------------------------------------------------------
<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        0.37       0.80    0.83    0.85    0.56     0.66
 Net realized and
 unrealized gain (loss) on
  investments                 1.33       1.36    0.47    0.82   (1.92)    1.72
---------------------------------------------------------------------------------
Total Income (Loss) From
Operations                    1.70       2.16    1.30    1.67   (1.36)    2.38
---------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income       (0.41)     (0.82)  (0.82)  (0.82)  (0.83)   (0.64)
 Net realized gains          (0.60)     (0.32)     --   (0.08)  (0.50)   (0.13)
 Capital                        --         --      --   (0.02)     --       --
---------------------------------------------------------------------------------
Total Distributions          (1.01)     (1.14)  (0.82)  (0.92)  (1.33)   (0.77)
---------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR                        $16.22     $15.53  $14.51  $14.03  $13.28   $15.97
---------------------------------------------------------------------------------
TOTAL RETURN              11.18%++   15.48%   9.21%  13.24%  (8.99)%  17.01%++
---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS)                  $  261     $  248  $  266    $169     $41      $54
---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                   1.04%+     1.06%   1.04%   1.07%   1.07%    1.07%+
 Net investment income      4.54+      5.29    5.55    6.36    5.54     5.67+
---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE       24%        45%     58%     36%     28%      37%
---------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER
SHARE PAID ON EQUITY
TRANSACTIONS (3)            $ 0.06     $ 0.06  $ 0.06      --      --       --
---------------------------------------------------------------------------------
</TABLE>    
   
(1) For the six months ended January 31, 1998 (unaudited).     
   
(2) For the period from November 6, 1992 (inception date) to July 31, 1993.
           
(3) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.     
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
 
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                  1/31/98(1)  7/31/97  7/31/96  7/31/95  7/31/94   7/31/93  7/31/92(2)
-------------------------------------------------------------------------------------------------
<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          0.34      0.73     0.77     0.78     0.75      0.79       0.35
 Net realized and
  unrealized gain (loss)
  on investments                1.32      1.35     0.47     0.82    (2.19)     1.30       0.89
-------------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations                      1.66      2.08     1.24     1.60    (1.44)     2.09       1.24
-------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income         (0.37)    (0.75)   (0.75)   (0.76)   (0.75)    (0.80)     (0.35)
 Net realized gains            (0.60)    (0.32)      --    (0.08)   (0.50)    (0.15)        --
 Capital                          --        --       --    (0.02)      --        --      (0.01)
-------------------------------------------------------------------------------------------------
Total Distributions            (0.97)    (1.07)   (0.75)   (0.86)   (1.25)    (0.95)     (0.36)
-------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR                          $16.21    $15.52   $14.51   $14.02   $13.28    $15.97     $14.83
-------------------------------------------------------------------------------------------------
TOTAL RETURN                   10.95%++  14.88%    8.78%   12.62%   (9.52)%   14.69%      8.98%++
-------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS)                    $  841    $  951   $1,310   $1,573   $1,823    $2,766     $1,721
-------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                       1.51%+    1.52%    1.55%    1.56%    1.54%     1.56%      1.57%+
 Net investment income          4.10+     4.85     5.13     5.82     5.07      5.17       5.78+
-------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE           24%       45%      58%      36%      28%       37%        10%
-------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER
SHARE PAID ON EQUITY
TRANSACTIONS (3)              $ 0.06    $ 0.06   $ 0.06       --       --        --         --
-------------------------------------------------------------------------------------------------
</TABLE>    
   
(1) For the six months ended January 31, 1998 (unaudited).     
   
(2) For the period from March 1, 1992 to July 31, 1992.     
   
(3) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.     
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
 
                                                                             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 (LOSS) FROM OPERATIONS:
 Net investment income                     0.82     0.88     0.87       0.64
 Net realized and unrealized gain (loss)
  on investments                           0.94     0.40     1.08       0.17
-------------------------------------------------------------------------------
Total Income (Loss) 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%
-------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS (2)                      --       --       --         --
-------------------------------------------------------------------------------
</TABLE>    
(1) For the period from March 28, 1988 (inception date) to February 28, 1989.
(2) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
 
12
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
   
FOR A CLASS O (FORMERLY DESIGNATED CLASS C) SHARE OF BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT EACH YEAR:     
 
<TABLE>   
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR ENDED              1998(1)(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    0.33      0.73      0.77    0.78     0.73     0.35
 Net realized and
  unrealized gain (loss)
  on investments          1.34      1.36      0.47    0.82    (2.17)    0.86
-------------------------------------------------------------------------------------
Total Income (Loss) From
Operations                1.67      2.09      1.24    1.60    (1.44)    1.21
-------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income         (0.38)    (0.75)    (0.75)  (0.76)   (0.75)   (0.39)
 Net realized gains            (0.60)    (0.32)       --   (0.08)   (0.50)   (0.02)
 Capital                          --        --        --   (0.02)      --       --
-------------------------------------------------------------------------------------
Total Distributions            (0.98)    (1.07)    (0.75)  (0.86)   (1.25)   (0.41)
-------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR                          $16.22    $15.53   $ 14.51  $14.02   $13.28   $15.97
-------------------------------------------------------------------------------------
TOTAL RETURN                   10.97%++  15.01%     8.80%  12.62%   (9.52)%   8.08%++
-------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000'S)                       $9,272    $9,381   $11,441  $3,925   $1,894   $  252
-------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                       1.47%+    1.47%     1.50%   1.51%    1.48%    1.49%+
 Net investment income          4.13+     4.89      5.19    5.77     5.13     5.25+
-------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE           24%       45%       58%     36%      28%      37%
-------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER
SHARE PAID ON EQUITY
TRANSACTIONS(5)               $ 0.06    $ 0.06     $0.06      --       --       --
-------------------------------------------------------------------------------------
</TABLE>    
   
(1) For the six months ended January 31, 1998 (unaudited).     
   
(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.
           
(5) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.     
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
 
 
                                                                             13
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
FOR A CLASS Y SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>   
<CAPTION>
SMITH BARNEY BALANCED FUND
YEAR ENDED                                    1998(1)(2)   1997    1996(3)
----------------------------------------------------------------------------
<S>                                           <C>         <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR              $15.56    $ 14.52  $14.88
----------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income                            0.38       0.83    0.64
 Net realized and unrealized gain (loss) on
 investment                                       1.31       1.38   (0.29)
----------------------------------------------------------------------------
Total Income From Operations                      1.69       2.21    0.35
----------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                           (0.43)     (0.85)  (0.71)
 Net realized gains                              (0.60)     (0.32)     --
----------------------------------------------------------------------------
Total Distributions                              (1.03)     (1.17)  (0.71)
----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR                    $16.22    $ 15.56  $14.52
----------------------------------------------------------------------------
TOTAL RETURN                                     11.08%++   15.88%   2.28%++
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)                  $    1    $24,676  $7,617
----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                         0.68%+     0.67%   0.78%+
 Net investment income                            5.00+      5.58   5.54+
----------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                             24%        45%     58%
----------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY
TRANSACTIONS                                    $ 0.06      $0.06   $0.06
----------------------------------------------------------------------------
</TABLE>    
   
(1) For the six months ended January 31, 1998 (unaudited).     
   
(2) Per share amounts have been calculated using the monthly average share
    method, rather than the undistributed net investment income method,
    because it more accurately reflects the per share data for the period.
           
(3) 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.
 
14
<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 objectives 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     
 
                                                                              15
<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 a 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.     
 
16
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  Zero Coupon Securities. 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 con-
sists 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     
 
                                                                             17
<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 and later date at an agreed-upon price. The mortgage secu-
rities that are repurchased will bear the same interest rate as those sold, but
generally will be collateralized by different pools of mortgages with different
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 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     
 
18
<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     
 
                                                                             19
<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." Short sales
against the box are used to defer recognition of capital gains or losses.
   
  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     
 
20
<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-
 
                                                                              21
<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
 
22
<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 "protective puts" on secu-
rities. The purchase of call options on interest rate futures contracts is
intended to serve the same purpose as the actual purchase of the futures con-
tract, and the Fund will set aside cash and cash equivalents sufficient to pur-
chase the amount of portfolio securities represented by the underlying futures
contracts. See "Options Activities" and "Dividends, Distributions 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
 
                                                                              23
<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.
 
24
<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 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. 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 Trust Securities. 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 security mortgage loans held by the REIT. REITs are dependent upon cash
flow from its investments to repay financing costs and the ability of the REIT
manager. REITs are also subject to risks generally associated with investments
in real estate.     
 
                                                                             25
<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.
 
26
<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 any 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     
 
                                                                              27
<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 Smith Barney, the Fund's Distributor,
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.
That failure could have a negative impact on the Fund's operations, including
the handling of securities trades, pricing and account services. MMC and 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 and accounting service agent that they are also in the process
of modifying their systems with the same goal. There can, however, be no assur-
ance that MMC, 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.     
 
 PORTFOLIO TRANSACTIONS
   
  Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Smith Barney and certain of
its affiliated brokers. The Fund may use Smith Barney or a 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 custom-
ary levels. The Fund also may use Smith Barney as a commodities broker in con-
nection with entering into futures contracts and commodity options. Smith Bar-
ney has agreed to charge the Fund commodity commissions at rates comparable to
those charged by Smith Barney to its most favored clients for comparable trades
in comparable accounts. In selecting a broker for a transaction, including
Smith Barney or its affiliates, the primary consideration is prompt and effec-
tive execution of orders at the most favorable price. Subject to that primary
consideration, dealers may be selected for research, statistical or other serv-
ices 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.
 
28
<PAGE>
 
   
VALUATION OF SHARES (CONTINUED)     
 
 
  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 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. Dis-
tributions of short-term capital gains may be paid more frequently with divi-
dends from net investment income. In     
 
                                                                              29
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
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 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 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 and Class L shares may be lower than the
per share dividends on Class A and Y shares principally as a result of the dis-
tribution 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 applica-
ble 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. To meet
those requirements, the Fund may need to restrict the degree to which it
engages in short-term trading, short sales of securities and transactions in
options. If the Fund qualifies as a regulated investment company and meets cer-
tain 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 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, dividends of investment income (to the extent
derived from most types of dividends
 
30
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
from domestic corporations) from the Fund will qualify for the Federal divi-
dends-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 distrib-
uted to the shareholder by the Fund with respect to the prior calendar year
and the portions of the distributions that qualify for the dividends-received
deduction or the 20% maximum capital gains tax rate for individuals.
 
  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
 
 
 GENERAL
   
  The Fund offers five Classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B shares are sold without an initial
sales charge but are subject to a CDSC payable upon certain redemptions. Class
L shares are sold at net asset value plus an initial sales charge of 1% and
are subject to a 1% CDSC if Class L shares are redeemed within 12 months of
purchase. 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 for
purchases of Class Y shares by the Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount). Class Z shares are
offered without a sales charge, CDSC, or service or distribution fee, exclu-
sively to: (a) tax-exempt employee benefit and retirement plans of Smith Bar-
ney and its affiliates and (b) certain UITs sponsored by Smith Barney and its
affiliates. Investors meeting either of these criteria who are interested in
acquiring Class Z shares should contact a Smith Barney Financial Consultant
for a Class Z Prospectus. See "Prospectus Summary--Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.     
   
  Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the sell-
ing group, except for investors purchasing shares of the Fund through a quali-
fied retirement plan who may do so directly through First Data. When purchas-
ing shares of the Fund, investors must specify whether the purchase is for
Class A, Class B, Class L or Class Y shares. Smith Barney and other broker-
dealers may charge their customers an annual account maintenance fee in con-
nection with a brokerage account through which an investor purchases or holds
shares. Accounts held directly at First Data are not subject to a maintenance
fee.     
   
  Investors in Class A, Class B and Class L shares may open an account by mak-
ing an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan, in the Fund. Investors in Class Y
shares may open an account by making an initial investment of $15,000,000.
Subsequent invest-     
 
                                                                             31
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
ments of at least $50 may be made for all Classes. For participants in retire-
ment plans qualified under Section 403(b)(7) or Section 401(a) of the Code, the
minimum initial investment requirement for Class A, Class B and Class L shares
and the subsequent investment requirement for all Classes in the Fund is $25.
For shareholders purchasing shares of the Fund through the Systematic Invest-
ment Plan on a monthly basis, the minimum initial investment requirement for
Class A, Class B and Class L shares and the minimum subsequent investment 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
requirement for Class A, Class B and Class L shares and the minimum subsequent
investment requirement for all Classes is $50. There are no minimum investment
requirements for Class A shares for employees of Travelers and its subsidiar-
ies, including Smith Barney, Trustees of the Trust and their spouses and chil-
dren and unitholders who invest distributions from a UIT sponsored by Smith
Barney. The Fund reserves the right to waive or change minimums, to decline any
order to purchase its shares and to suspend the offering of shares from time to
time. Shares purchased will be held in the shareholder's account by the Fund's
transfer agent, First Data. Share certificates are issued only upon a share-
holder's written request to First Data.     
       
  Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Fund calculates its net asset value
are priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular trad-
ing on the NYSE on any day the Fund calculates its net asset value are priced
according to the net asset value determined on that day, provided the order is
received by the Fund or Smith Barney prior to Smith Barney's close of business
(the "trade date"). For shares purchased through Smith Barney or Introducing
Brokers purchasing through 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, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial institu-
tion indicated by the shareholder to provide systematic additions to the share-
holder's Fund account. A shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Smith Barney or First Data. The
Systematic Investment Plan
also authorizes Smith Barney to apply cash held in the shareholder's Smith Bar-
ney brokerage account or redeem the shareholder's shares of a Smith Barney
money market fund to make additions to the account. Additional information is
available from the Fund or a Smith Barney Financial Consultant.
 
32
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
 INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
 
  The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
                                  SALES CHARGE
                         ------------------------------
                                                              DEALERS
                              % OF           % OF       REALLOWANCE AS % OF
  AMOUNT OF INVESTMENT   OFFERING PRICE AMOUNT INVESTED   OFFERING PRICE
---------------------------------------------------------------------------
  <S>                    <C>            <C>             <C>
  Less than $25,000           5.00%          5.26%             4.50%
  $ 25,000 - $ 49,999         4.00%          4.21%             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 more            *               *                 *
---------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
  value without any initial sales charge, but will be subject to a CDSC of
  1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
  shares is payable to Smith Barney, which compensates Smith Barney Financial
  Consultants and other dealers whose clients make purchases of $500,000 or
  more. The CDSC is waived in the same circumstances in which the CDSC
  applicable to Class B and Class C shares is waived. See "Deferred Sales
  Charge Alternatives" and "Waivers of CDSC."
 
  Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the 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.
 
 INITIAL SALES CHARGE WAIVERS
 
  Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and of 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 NASD, provided such sales are
made upon the assurance of the purchaser that the purchase is made for invest-
ment purposes and that the securities will not be resold except through
redemption or repurchase; (b) offers of Class A shares to any other investment
company to effect the combination of such company with the Fund by merger,
acquisition of assets or otherwise; (c) purchases of Class A shares by any
client of a newly employed Smith Barney Financial Consultant (for a period up
to 90 days from the commencement of the Financial Consultant's employment with
Smith Barney), on the condition the purchase of Class A shares is made with
the proceeds of the redemption of shares of a mutual fund which (i) was spon-
sored by the Financial Consultant's prior employer, (ii) was sold to the cli-
ent by the Financial Consultant and (iii) was subject to a sales charge;
 
                                                                             33
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
(d) purchases by shareholders who have redeemed Class A shares in the Fund (or
Class A shares of another fund of the Smith Barney Mutual Funds that are
offered with a sales charge) and who wish to reinvest their redemption 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 Travelers; (f) investments of distributions from a UIT spon-
sored by Smith Barney, (g) direct rollovers by plan participants of distribu-
tions from a 401(k) plan offered to employees of Travelers or its subsidiaries
or a 401(k) plan enrolled in the Smith Barney 401(k) Program (Note: subsequent
investments will be subject to the applicable sales charge); (h) purchases by
separate accounts used to fund certain unregistered variable annuity contracts;
(i) purchases by investors participating in a Smith Barney fee-based arrange-
ment; and (j) purchases of Class A shares of the Fund by Section 403(b) or Sec-
tion 401(a) or (k) accounts associated with Copeland Retirement Programs. In
order to obtain such discounts, the purchaser must provide sufficient informa-
tion at the time of purchase to permit verification that the purchase would
qualify for the elimination of the sales charge.
 
 RIGHT OF ACCUMULATION
 
  Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total asset value of all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
offered with a sales charge listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
 
 GROUP PURCHASES
 
  Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares" and will be based upon
the aggregate sales of Class A shares of Smith Barney Mutual Funds offered with
a sales charge to, and share holdings of, all members of the group. To be eli-
gible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan meet-
ing certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retire-
 
34
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
ment plans under Sections 401 or 408 of the Code. Smith Barney may also offer a
reduced sales charge or net asset value purchase for aggregating related fidu-
ciary accounts under such conditions that Smith Barney will realize economies
of sales efforts and sales-related expenses. An individual who is a member of a
qualified group may also purchase Class A shares at the reduced sales charge
applicable to the group as a whole. The sales charge is based upon the aggre-
gate dollar value of Class A shares offered with a sales charge that have been
previously purchased and are still owned by the group, plus the amount of the
current purchase. A "qualified group" is one which (a) has been in existence
for more than six months, (b) has a purpose other than acquiring Fund shares at
a discount and (c) satisfies uniform criteria which enable Smith Barney to
realize economies of scale in its costs of distributing shares. A qualified
group must have more than 10 members, must be available to arrange for group
meetings between representatives of the Fund and the members, and must agree to
include sales and other materials related to the Fund in its publications and
mailings to members at no cost to Smith Barney. In order to obtain such reduced
sales charge or to purchase at net asset value, the purchaser must provide suf-
ficient information at the time of purchase to permit verification that the
purchase qualifies for the reduced sales charge. Approval of group purchase
reduced sales charge plans is subject to the discretion of Smith Barney.
 
 LETTER OF INTENT
 
  Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13-month period, provided that the investor refers to such
Letter of Intent when placing orders. For purposes of a Letter of Intent, the
"Amount of Investment" as referred to in the preceding sales charge table
includes purchases of all Class A shares of the Fund and other funds of the
Smith Barney Mutual Funds offered with a sales charge over the 13-month period
based on the total amount of intended purchases plus the value of all Class A
shares previously purchased and still owned. An alternative is to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay the difference between
the sales charges applicable to the purchases made and the charges previously
paid, or an appropriate number of escrowed shares will be redeemed. Please con-
tact a Smith Barney Financial Consultant or First Data to obtain a Letter of
Intent application.
   
  Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
make an initial minimum purchase of $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 same Fund
within 13 months from the date of the Letter of Intent. If a total investment
of     
 
                                                                              35
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
$15,000,000 is not made within the 13-month period, all Class Y shares pur-
chased to date will be transferred to Class A shares, where they will be sub-
ject to all fees (including a service fee of 0.25%) and expenses applicable to
the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund expects
that such transfer will not be subject to Federal income taxes. Please contact
a Smith Barney Financial Consultant or First Data for further information.     
 
 DEFERRED SALES CHARGE ALTERNATIVES
   
  "CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class L
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.     
   
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
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 proceeding
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.     
 
<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>
 
 
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 also will be converted at that time such pro-
portion of Class B Dividend Shares owned by the shareholder as the total number
of his or her Class B shares converting at the time bears to the total number
of outstanding Class B shares (other than Class B Dividend shares) owned by the
shareholder. See "Prospectus Summary--Alternative Purchase Arrangements--Class
B Shares Conversion Feature."
 
  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 applicable Smith Barney Mutual Funds, and Fund
shares being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will
reduce the gain or increase the loss, as the case may be, on the amount real-
ized on redemption. The amount of any CDSC will be paid to Smith Barney.
 
  To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired five addi-
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
 
 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 assets or otherwise. In addition, a share-
holder who has redeemed shares from other funds of the Smith Barney Mutual
Funds may, under certain circumstances, rein-
 
                                                                              37
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
vest all or part of the redemption proceeds within 60 days and receive pro rata
credit for any CDSC imposed on the prior redemption.
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
 
 SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
 
  Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below are offered to all plans partic-
ipating ("Participating Plans") in these 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 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 C 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 C shares of one or more funds of the Smith Barney Mutual Funds.     
   
  401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. 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 C 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 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.     
 
38
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
  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 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 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 sub-
ject to the distribution fee.     
 
  Participating Plan 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 Smith Barney Financial Consultant.
 
  Existing 401(k) Plans Investing Class B Shares. Class B shares of the Fund
are not available for purchase by Participating Plans opened on or after June
21, 1996, but may continue to be purchased by any Participating Plan opened
prior to such date and originally investing in such Class. Class B shares
acquired are subject to a CDSC of 3.00% of redemption proceeds, if the Partici-
pating Plan terminates within eight years of the date the Participating Plan
first enrolled in the Smith Barney 401(k) Program.
 
  At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, the Participating Plan will be offered the
opportunity to exchange all of its Class B shares for Class A shares of the
Fund. Such Plans will be notified of the pending exchange in writing approxi-
mately 60 days before the eighth anniversary of the enrollment date and, unless
the exchange has been rejected in writing, the exchange will occur on or about
the eighth anniversary date. Once the exchange has occurred, a Participating
Plan will not be eligible to acquire additional Class B shares of the Fund but
instead may acquire Class A shares of the Fund. If the Participating Plan
elects not to exchange all of its Class B
 
                                                                              39
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
shares at that time, each Class B share held by the Participating Plan will
have the same conversion feature as Class B shares held by other investors. See
"Purchase of Shares--Deferred Sales Charge Alternatives".
 
  No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
 
  The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee in the Participating Plan; (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemptions of shares in connection with a loan made by the Par-
ticipating Plan to an employee.
 
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 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 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 U.S. Treasury Securities 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
 
                                                                              41
<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 C shares of the Fund through the
    Smith Barney 401(k) Program may exchange those shares for Class C shares
    of this fund.
 ** Available for exchange with Class A, Class C 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 C 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 C shares may exchange Fund shares for Class C 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.
 
42
<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. MMC may deter-
mine 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 share-
holder. 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 main-
tain 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 Smith Barney, or if the shareholder's account is not with
Smith Barney, from the shareholder directly. The redemption proceeds will be
remitted on or before the third business day following receipt of proper ten-
der, except on any days on which
 
                                                                              43
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
the NYSE is closed or as permitted under the 1940 Act in extraordinary circum-
stances. Generally, if the redemption proceeds are remitted to a Smith Barney
brokerage account, these funds will not be invested for the shareholder's bene-
fit without specific instruction and Smith Barney will benefit from the use of
temporarily uninvested funds. Redemption proceeds for shares purchased by
check, other than a certified or official bank check, will be remitted upon
clearance of the check, which may take up to ten days or more.
 
  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
     
  Smith Barney 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
 
44
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
Fund. Any applicable CDSC will not be waived on amounts withdrawn by a share-
holder that exceed 1.00% per month of the value of the shareholder's shares
subject to the CDSC at the time the withdrawal plan commences. For further
information regarding the automatic cash withdrawal plan, shareholders should
contact a Smith Barney Financial Consultant.
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
 
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange 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 guaran-
tee, 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 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
 
  A shareholder will have the option of having the redemption proceeds mailed
to his 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 5:00
p.m. (New York City time) on any day on which the NYSE is open. Exchange
requests received after the close of regular trading on the NYSE are processed
at the net asset value next determined.
 
                                                                              45
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
 
  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.
 
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 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     
 
46
<PAGE>
 
PERFORMANCE (CONTINUED)
 
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 com-
position 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 is a wholly owned subsidiary of Holdings). 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
April 30, 1998 in excess of $99 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
    
                                                                              47
<PAGE>
 
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
   
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.     
 
 PORTFOLIO MANAGEMENT
   
  The equity portion of the Fund will be managed by Jack Levande and Chad
Graves. Mr. Levande, a Managing Director of Smith Barney, has been responsible
for making all investment decisions since the Fund commenced operations in
1988. Mr. Graves is also a Managing Director of Smith Barney.     
   
  The fixed-income portion of the Fund will be managed by James Conroy and John
Bianchi. Both Mr. Conroy and Mr. Bianchi are Managing Directors of Smith Bar-
ney. Prior to joining Smith Barney in 1993, both Mr. Conroy and Mr. Bianchi
were Managing Directors of Shearson Lehman Advisors.     
       
  Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1997 is included in
the Annual Report dated July 31, 1997. A copy of the Annual Report may be
obtained upon request without charge from a Smith Barney Financial Consultant
or by writing or calling the Fund at the address or phone number listed on page
one of this Prospectus.
   
  On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also sub-
ject to approval by the stockholders of each of Travelers and Citicorp. Upon
consummation of the merger, the surviving corporation would be a bank holding
company subject to regulation under the Bank Holding Company Act of 1956 (the
"BHCA"), the requirements of the Glass-Steagall Act and certain other laws and
regulations. Although the effects of the merger of Travelers and Citicorp and
compliance with the requirements of the BHCA and the Glass-Steagall Act are
still under review, MMC does not believe that its compliance with applicable
law following the merger of Travelers and Citicorp will have a material adverse
effect on its ability to continue to provide the Fund with the same level of
investment advisory services that it currently receives.     
 
 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.     
 
48
<PAGE>
 
   
DISTRIBUTOR     
   
  Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an annual
service fee with respect to Class A, Class B and Class L shares of the Fund at
the annual rate of 0.25% of the average daily net assets of the respective
Class. Smith Barney is also paid an annual distribution fee with respect to
Class B and Class L shares at the annual rate of 0.50% and 0.75%, 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 Smith Barney to pay its Financial Consultants for servicing shareholder
accounts and, in the case of Class B and Class L shares, to cover expenses pri-
marily intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to poten-
tial investors; payments to and expenses of Smith Barney Financial Consultants
and other persons who provide support services in connection with the distribu-
tion of shares; interest and/or carrying charges; and indirect and overhead
costs of Smith Barney associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses.     
   
  The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class L shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.     
 
  Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Trust's Board of Trust-
ees will evaluate the appropriateness of the Plan and its payment terms on a
continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
 
ADDITIONAL INFORMATION
   
  The 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 five Classes: A, B, L, Y and Z.     
 
                                                                              49
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
 
 
  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.
 
  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 Smith Barney
Financial Consultants or the Fund's transfer agent.
 
50
<PAGE>
 
                      
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<PAGE>
 
                      
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<PAGE>


                                              SMITH BARNEY
                                              ----------------------------------
                                              A Member of TravelersGroup [LOGO] 
 
                                                    
                                                 SMITH BARNEY BALANCED FUND     
 
                                                           388 Greenwich Street
                                                       New York, New York 10013
                                                                  
                                                               FD 0229 8/98     


   
The Prospectuses of the Convertible Fund, Diversified Strategic Income Fund, 
Exchange Reserve Fund, High Income Fund, Municipal High Income Fund, which are 
part of the series of the Smith Barney Income Funds, filed on November 25, 1997 
with Post-Effective Amendment No. 47 to the Fund's Registration Statement
on form N-1A (Accession No. 0000091155-97-000516) is incorporated
by reference in its entirety.

The Prospectus of the Premium Total Return Fund, a Series of
the Smith Barney Income Funds, filed on April 24, 1998 with
Post-Effective Amendment No. 48 to the Fund's Registration Statement
on form N-1A (Accession No. 0000091155-98-000282) is incorporated
by reference in its entirety.
    

SMITH BARNEY INCOME FUNDS

Part B

The Statement of Additional Information filed on November 25, 1997 with
Post-Effective Amendment No. 47 to the Fund's Registration 
Statement on form N-1A (Accession No. 0000091155-97-000516)
is incorporated by reference in its entirety.

The Statement of Additional Information of the Premium Total
Return Fund, a Series of the Smith Barney Income Funds,
filed on April 24, 1998 with Post-Effective Amendment No. 48 to the
Fund's Registration Statement on form N-1A (Accession No.
0000091155-98-000282) is incorporated by reference in its entirety.


SMITH BARNEY INCOME FUNDS

PART C

Item 24.	Financial Statements and Exhibits

(a)	Financial Statements:

Included in Part A:

Financial Highlights

	Included in Part B:

The Registrant's Annual Reports for the fiscal year ended July 
31, 1997 and the Report of Independent Auditors dated September 
15, 1997 are incorporated by reference to the Definitive 30b2-1 
filed on September 30, 1997 as Accession #0000091155-97-000435.

The Registrant's Semi-Annual Reports for the period ended January  
31, 1998 are incorporated by reference to the Definitive 30b2-1 
filed on April 14, 1998 as Accession #0000091155-98-000263

The Registrant's Annual Report (Smith Barney Premium Total 
Return Fund) for the fiscal year ended December 31, 1997 and the 
Report of Independent Auditors dated February 10, 1998 are 
incorporated by reference to the Definitive 30b2-1 filed on 
March 26, 1998 as Accession #0000091155-98-000200.


Included in Part C:

(b)	Exhibits:

All references are to the Registrant's registration statement on 
Form N-1A (the "Registration Statement") as filed with the 
Securities and Exchange Commission (the "SEC") on March 13, 1985 
(File Nos. 2-96408 and 811-4254).

(1)	Registrant's First Amended and Restated Master Trust 
Agreement dated November 5, 1993 and Amendment No. 1 to 
the Master Trust Agreement dated July 30, 1993 are 
incorporated by reference to Post-Effective Amendment No. 
36.

(2)	Registrant's By-Laws are incorporated by reference to the 
Registration Statement.

(3)	Not Applicable.

(4)	Registrant's form of stock certificate for Smith Barney 
Total Return Bond Fund Class A, Class B, Class C and Class 
Y shares of beneficial interest is filed herewith.

(5)(a)    Transfer of Investment Advisory Agreements between the 
Registrant and Smith Barney Mutual Funds Management with 
respect to Smith Barney Diversified Strategic Income Fund, 
Smith Barney Utilities Fund, Smith Barney Convertible 
Securities Fund, Smith Barney High Income Fund, Smith 
Barney Tax-Exempt Income Fund and Smith Barney Exchange 
Reserve Fund are incorporated by reference to Post-
Effective Amendment No. 40. 

(b)	Investment Advisory Agreement between Registrant and Smith 
Barney Strategy Advisers Inc. with respect to Smith Barney 
Premium Total Return Fund is incorporated by reference to 
Post-Effective Amendment No. 41 to the Registration 
Statement.


(c)	Form of Investment Management Agreement between Registrant 
and Mutual Management Corp. with respect to Smith Barney 
Total Return Bond Fund is filed herewith.


(d)	Sub-Investment Advisory Agreement among the Registrant, 
Smith Barney Strategy Advisers, Inc. and Boston Partners 
Asset Management, L.P. with respect to Smith Barney Premium 
Total Return Fund is incorporated by reference to Post-
Effective Amendment No. 41 to the Registration Statement.

(e)	Sub-Investment Advisory Agreement between the Registrant 
and Smith Barney Global Capital Management Inc. with 
respect to Smith Barney Diversified Strategic Income Fund 
is incorporated by reference to Post-Effective Amendment 
No. 40.

(6)(a)	Distribution Agreement between the Registrant and Smith 
Barney Inc. is incorporated by reference to the Post-
Effective Amendment No. 40.

(b)	Distribution Agreement between the Registrant and PFS 
Distributors, Inc. is incorporated by reference to Post-
Effective Amendment No. 43 to the Registration Statement.

(7)	Not Applicable.

(8)(a)	Custodian Agreement between the Registrant and PNC Bank, 
National Association ("PNC Bank") is incorporated by 
reference to Post-Effective Amendment No. 41 to the 
Registration Statement.

(b)	A form of Custodian Agreement between the Registrant and 
Chase Manhattan Bank is incorporated by reference to Post-
Effective Amendment No. 43 to the Registration Statement.

(9)(a)	Administration Agreement between the Registrant and MMC is 
incorporated by reference to Post-Effective Amendment No. 
40.

(b)	Transfer Agency and Registrar Agreement between the 
Registrant and First Data Investor Services Group, Inc., 
(formerly The Shareholder Services Group, Inc.) is 
incorporated by reference to Post-Effective Amendment No. 
40 to the Registration Statement.

(10)	Opinion of Counsel was filed with Registrant's 24f-2 
Notice on February 25, 1997 as accession number 
0000091155-97-000095.
   
(11)	Not applicable.
    
(12)	Not applicable.

(13)	Not applicable.

(14)	Not applicable.

(15)(a)	Services and Distribution Plans pursuant to Rule 
12b-1 between the Registrant on behalf of Smith Barney 
Diversified Strategic Income Fund, Smith Barney Utilities 
Fund, Smith Barney Convertible Securities Fund, Smith 
Barney High Income Fund, Smith Barney Premium Total Return 
Fund, Smith Barney Tax-Exempt Income Fund and Smith Barney 
Exchange Reserve Fund are incorporated by reference to 
Post-Effective Amendment No. 40.

(16)	Performance Data for Registrant is incorporated by 
reference to Post-Effective Amendments No. 14, 15 and 30 
to the Registration Statement filed on September 30, 1988, 
December 30, 1988 and January 29, 1992, respectively.

(17)	Not applicable.

(18)	Plan pursuant to Rule 18f-3 is incorporated by reference 
to Post-Effective Amendment No. 41 to the Registration 
Statement.

Item 25.  Persons Controlled by or Under Common Control with 
Registrant

None.

Item 26.  Number of Holders of Securities

   
(1) Title of Class			(2) 	Number of Record Holders
			 			by Class as of June 8, 1998

Beneficial Interest par value
$.001 per share


Fund		Class A	Class B	Class C	Class Y	Class Z

Balanced 
Fund 		21,135	54,090	588		3		10

Convertible
Fund		 3,179	2,997		107		8		N/A

Diversified
Strategic
Income Fund	   17,469	98,928	5,043		9		7

Exchange 
Reserve
Fund		N/A		4,835		861		N/A		N/A

High Income
Fund		23,344	35,108	3,065		15		6

Municipal
High Income
Fund		7,311		12,431	46		3		N/A

Premium 
Total
Return 
Fund		47,404	160,350	8,622		10		N/A


Total Return
Bond Fund	1,673		4,250		847		0		N/A

    


Item 27.  Indemnification

The response to this item is incorporated by reference to Registrant's 
Post-Effective Amendment No. 2 to the Registration Statement.

Item 28.  (a)  Business and Other Connections of Investment Adviser

   
Investment Adviser - Mutual Management Corp. ("MMC")

MMC, formerly known as Smith Barney Mutual Funds Management 
Inc., was incorporated in December 1968 under the laws of the 
State of Delaware. MMC is a wholly owned subsidiary of Salomon 
Smith Barney Holdings Inc. ("Holdings") (formerly known as Smith 
Barney Holdings Inc.), which in turn is a wholly owned 
subsidiary of Travelers Group Inc. ("Travelers"), formerly known 
as Primerica Corporation. MMC is registered as an investment 
adviser under the Investment Advisers Act of 1940 (the "Advisers 
Act").

The list required by this Item 28 of officers and directors of 
MMC together with information as to any other business, 
profession, vocation or employment of a substantial nature 
engaged in by such officers and directors during the past two 
fiscal years, is incorporated by reference to Schedules A and D 
of FORM ADV filed by MMC pursuant to the Advisers Act (SEC File 
No. 801-14437).
    

Investment Adviser - Smith Barney Strategy Advisers Inc. ("Strategy 
Advisers")


Strategy Advisers was incorporated on October 22, 1986 under the 
laws of the State of Delaware. On June 1, 1994, Strategy 
Advisers changed its name from Smith Barney-Shearson Strategy 
Advisers Inc. to its current name. Strategy Advisers is a wholly 
owned subsidiary of MMC. Strategy Advisers is registered as an 
investment adviser under the Investment Advisers Act of 1940 
(the "Advisers Act"). Strategy Advisers is also registered with 
the Commodity Futures Trading Commission (the "CFTC") as a 
commodity pool operator under the Commodity Exchange Act (the 
"CEA"), and is a member of the National Futures Association (the 
"NFA").

The list required by this Item 28 of officers and directors of 
MMC and Strategy Advisers, together with information as to any 
other business, profession, vocation or employment of a 
substantial nature engaged in by such officers and directors 
during the past two years, in incorporated b reference to 
Schedules A and D of FORM ADV filed by MMC on behalf of Strategy 
Advisers pursuant to the Advisers Act (SEC File No. 801-8314).


Sub-Investment Adviser - Boston Partners Asset Management, L.P. 
("Boston Partners")

Boston Partners was organized in April, 1995 under the laws of 
the State of Delaware as a Limited Partnership and provides a 
comprehensive range of financial products and services in 
domestic and selected international markets. Boston Partners is 
an investment adviser registered under the Investment Advisers 
Act of 1940 (the "Advisers Act") and provides investment advice 
to endowment plans, Taft Hartley Health and Welfare Plans, VEBAS 
and institutional clients. It also serves as investment adviser 
and sub-investment adviser to other investment companies.

The list required by this Item 28 of officers and directors of 
Boston Partners, together with information as to any other 
business profession, vocation or employment of a substantial 
nature engaged in by such officers and directors during the past 
two years, is incorporated by reference to Schedules A and D of 
FORM ADV filed by Boston Partners pursuant to the Advisers Act 
(SEC File No. 801-49059).

Sub-Investment Adviser - Smith Barney Global Capital Management 
Inc. ("SBGCM")

SBGCM was incorporated on January 22, 1988 under the laws of the 
State of Delaware. SBGCM is an indirect wholly owned subsidiary 
of Holdings. SBGCM is an investment adviser registered with the 
Securities and Exchange Commission in the United States and with 
the Investment Management Regulatory  Organization Limited in 
the United Kingdom. SBGCM conducts its operations primarily in 
the United Kingdom.

The list required by this Item 28 of officers and directors of 
SBGCM, together with information as to any other business, 
profession, vocation or employment of a substantial nature 
engaged in by such officers and directors during the past two 
years, is incorporated by reference to Schedules A and D of FORM 
ADV filed by SBGCM pursuant to the Advisers Act (SEC File No. 
801-31824).

Item 29.  Principal Underwriters

Smith Barney Inc. ("Smith Barney") currently acts as a 
distributor for Concert Investment Series;
Consulting Group Capital Markets Funds; Global Horizons
Investment Series (Cayman Islands); Greenwich Street
California Municipal Fund Inc.; Greenwich Street
Municipal Fund Inc.; Greenwich Street Series 
Fund; High Income Opportunity Fund Inc.; The Italy 
Fund Inc.; Managed High Income Portfolio Inc.; 
Managed Municipals Portfolio II Inc.; Managed Municipals 
Portfolio Inc.; Municipal High Income Fund Inc.; Puerto 
Rico Daily Liquidity Fund Inc.; Smith Barney Adjustable 
Rate Government Income Fund; Smith Barney Aggressive 
Growth Fund Inc.; Smith Barney Appreciation Fund Inc.; 
Smith Barney Arizona Municipals Fund Inc.; Smith Barney 
California Municipals Fund Inc.; Smith Barney Concert 
Allocation Series Inc.; Fund, Inc.; Smith Barney
Equity Funds; Smith Barney Fundamental Value Fund Inc.;
Smith Barney Funds, Inc.; Smith Barney Income Funds; 
Smith Barney Institutional Cash Management Fund, Inc.;
Smith Barney Intermediate Municipal Fund, Inc.; 
Smith Barney Investment Funds Inc.; Smith Barney 
Investment Trust; Smith Barney Managed
Governments Fund Inc.; Smith Barney Managed Municipals 
Fund Inc.; Smith Barney Massachusetts Municipals Fund;
Smith Barney Money Funds, Inc.; Smith Barney Muni Funds;
Smith Barney Municipal Fund, Inc.; Smith Barney Municipal
Money Market Fund, Inc.; Smith Barney Natural Resources 
Fund Inc.; Smith Barney New Jersey Municipals Fund Inc.; 
Smith Barney Oregon Municipals Fund Inc.; Smith Barney Principal
Return Fund; Smith Barney Small Cap Blend Fund, Inc. 
Smith Barney Telecommunications Trust; Smith Barney 
Variable Account Funds; Smith Barney World Funds, 
Inc.; Smith Barney Worldwide Special Fund N.V. 
(Netherlands Antilles); Travelers Series Fund Inc.; The 
USA High Yield Fund N.V.; Worldwide Securities Limited  
(Bermuda); Zenix Income Fund Inc. and various series of 
unit investment trusts.

Smith Barney is a wholly owned subsidiary of Holdings. The information
required by this Item 29 with respect to each director, officer and
partner of Smith Barney is incorporated by reference to Schedule A 
of FORM BD filed by Smith Barney pursuant to the Securities Exchange
Act of 1934 (SEC File No. 812-8510).

Item 30.  Location of Accounts and Records

(1)	Smith Barney Inc.
388 Greenwich Street
New York, New York  10013

(2)	Smith Barney Income Funds
388 Greenwich Street
New York, New York  10013

   
(3)	Mutual Management Corp.
388 Greenwich Street
New York, New York  10013
    

(4)	Boston Partners Asset Management, L.P.
One Financial Center
43rd floor
Boston, Massachusetts  02111

(5)	Smith Barney Global Capital Management Inc.
10 Piccadilly
London W1V 9LA
England

(6)	PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA  19103

(7)	First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts  02109

Item 31.  Management Services

Not Applicable.

Item 32.  Undertakings
   
(a) Not applicable. 

(b) Registrant undertakes, if requested to do so by the holders of 
at least 10% of Registrant's outstanding shares, to call a 
meeting of shareholders for the purpose of voting upon the 
questions of removal of a trustee or trustees and to assist in 
communications with other shareholders as required by Section 
16(c). 

(c)	Registrant undertakes to furnish each person to whom a 
prospectus is delivered with a copy of Registrant's latest 
report to shareholders, upon request and without charge. 
    

SIGNATURES
   
	Pursuant to the requirements of the Securities Act of 1933, as amended, 
and the Investment Company Act of 1940, as amended, the Registrant, SMITH
BARNEY INCOME FUNDS, has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, State of New York on the
23rd day of June, 1998. 

	SMITH BARNEY INCOME FUNDS

	By:/s/ Heath B. McLendon 
	Heath B. McLendon, Chairman of 
	the Board, President and 
	Chief Executive Officer

	Pursuant to the requirements of the Securities Act of 1933, as amended, 
this Post-Effective Amendment to the Registration Statement has been signed 
below by the following persons in the capacities and on the dates indicated.



Signature	                   Title                           Date


    
   
/s/Heath B. McLendon         Chairman of the Board,             6/23/98
Heath B. McLendon            President and Chief 
                             Executive Officer

/s/Lewis E. Daidone          Senior Vice President,            6/23/98
Lewis E. Daidone             Treasurer, Chief Financial
                             and Accounting Officer

/s/Lee Abraham*               Trustee                          6/23/98
Lee Abraham

/s/ Allan J. Bloostein*        Trustee                         6/23/98
Allan J. Bloostein

/s/ Richard E. Hanson*         Trustee                          6/23/98
Richard E. Hanson
    
* Signed by Heath B. McLendon, their duly authorized attorney-in-fact, 
pursuant to power of attorney dated September 4, 1996.


/s/Heath B. McLendon
Heath B. McLendon