<PAGE>

[LOGO] SMITH BARNEY MUTUAL FUNDS
       Investing for your future.
       Every day.(R)



       PROSPECTUS



       PREMIUM TOTAL 
       RETURN FUND

       Class A, B, L, O and Y Shares
       ----------------------------------------------------------------
       April 30, 1999.







       The Securities and Exchange Commission has not approved or disapproved
       these securities or determined whether this prospectus is accurate or
       complete. Any statement to the contrary is a crime.
<PAGE>
 
Premium Total Return Fund
 
                   Contents
 
<TABLE>   
<S>                                                                          <C>
Fund goal and main strategies...............................................   2
 
Risks, performance and expenses.............................................   3
 
More on the fund's investments..............................................   6
 
Management..................................................................   7
 
Choosing a class of shares to buy...........................................   9
 
Comparing the fund's classes................................................  10
 
Sales charges...............................................................  12
 
More about deferred sales charges...........................................  14
 
Buying shares...............................................................  15
 
Exchanging shares...........................................................  16
 
Redeeming shares............................................................  18
 
Other things to know about share transactions...............................  20
 
Smith Barney 401(k) and
ExecChoice(TM) programs.....................................................  22
 
Distributions, dividends and taxes..........................................  23
 
Share price.................................................................  24
 
Financial highlights........................................................  25
</TABLE>    
You should know: An investment in the fund is not a bank deposit and is not
insured or guaranteed by the FDIC or any other government agency.
 
                                                       Smith Barney Mutual Funds
 
                                                                              1
<PAGE>
 
    
 Fund goal and main strategies     
 
Investment objective
   
The fund seeks total return (that is, a combination of long-term capital appre-
ciation and income).     
 
Key investments
          
The fund invests in equity and fixed income securities of both U.S. and foreign
issuers. The fund seeks to generate appreciation at a higher than market rate
by allocating a portion of the fund's assets to equity and equity related secu-
rities, including common stocks, real estate investment trusts and convertible
securities. To generate income and enhance exposure to the equity markets, the
fund will purchase investment grade and high yield fixed income securities
along with options on securities indices. This combination seeks to produce a
pattern of total return that correlates with the S&P 500 Index. The fund may
also use options, futures and options on futures to hedge against adverse
changes in the market value of its securities.     
   
Until the shareholders approve a new sub-advisory agreement with Salomon Broth-
ers Asset Management Inc. ("SaBAM"), the fund will limit its investments in
fixed income securities to 35% of its assets. The fund will invest in fixed
income securities which may be rated below investment grade or be unrated secu-
rities of equivalent quality. Securities rated below investment grade are com-
monly referred to as junk bonds. Fixed income securities may be of any
maturity.     
 
Selection process
          
The manager employs fundamental research and due diligence to assess a
company's:     
   
 .Growth potential, stock price, potential appreciation and valuation     
   
 .Credit quality taking into account financial condition and profitability     
   
 .Future capital needs     
   
 .Potential for change in bond rating and industry outlook     
   
 .Competitive environment and management ability     
 
Premium Total Return Fund
 
 2
<PAGE>
 
 Risks, performance and expenses
 
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:
   
 .The stock market declines generally, thereby reducing the value of the fund's
  equity portfolio     
   
 .Companies in which the fund invests fail to meet earnings expectations, fall
  out of favor with investors, or other events depress their stock prices     
   
 .Interest rates increase, causing the prices of fixed income securities to de-
  cline, thereby reducing the value of the fund's fixed income portfolio     
   
 .The issuer of a security owned by the fund defaults on its obligation to pay
  principal and/or interest or has its credit rating downgraded     
   
 .The manager's judgment about interest rates or the attractiveness, value or
  income potential of a particular security proves incorrect     
   
Below investment grade securities, which are commonly known as "junk bonds,"
are speculative and their issuers may have diminished capacity to pay principal
and interest. These securities have a higher risk of default, tend to be less
liquid, and may be more difficult to value. Changes in economic conditions or
other circumstances are likely to weaken the capacity of issuers of these secu-
rities to make principal and interest payments.     
   
Who may want to invest     
   
The fund may be an appropriate investment if you:     
   
 .Are seeking to invest in a portfolio that includes both equity and fixed
  income securities     
   
 .Are willing to accept the risks of both the stock market and the bond markets
      
                                                       Smith Barney Mutual Funds
 
                                                                              3
<PAGE>
 
Total return
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not neces-
sarily indicate how the fund will perform in the future.
 
 
                        Total Return for Class B Shares

                                 [Bar Graph]

                            1989            17.36%
                            1990             2.06%
                            1991            28.88%
                            1992            12.60%
                            1993            11.19%
                            1994             2.92%
                            1995            21.84%
                            1996            20.09% 
                            1997            24.55%
                            1998             5.64%

The bar chart shows the performance of the fund's Class B shares for each of
the past 10 full calendar years. Class A, L, O and Y shares would have differ-
ent performance because of their different expenses. The performance informa-
tion in the chart does not reflect sales charges, which would reduce your
return.
 
Quarterly returns:
   
Highest: 14.90% in 1st quarter 1991; Lowest: (12.83)% in 3rd quarter 1990     
 
Comparative performance
This table indicates the risks of investing in the fund by comparing the aver-
age annual total return of each class for the periods shown with that of the
Standard & Poor's 500 Composite Stock Index (the "Index"), a broad-based unman-
aged index of common stocks. This table assumes imposition of the maximum sales
charge applicable to the class, redemption of shares at the end of the period,
and reinvestment of distributions and dividends.
 
                          Average Annual Total Returns
                     Calendar Years Ended December 31, 1998
<TABLE>   
<CAPTION>
Class  1 year  5 years  10 years Since Inception Inception Date
<S>    <C>     <C>      <C>      <C>             <C>
 A      0.88%   14.05%    N/A         13.94%        11/6/92
 B      0.84%   14.54%   14.37%       13.60%        9/16/85
 L      N/A      N/A      N/A        (1.55)%        6/15/98
 O      4.73%   14.70%    N/A         14.51%         6/1/93
 Y      6.56%    N/A      N/A         16.84%         2/7/96
 Index 28.60%   24.05%   19.19%       18.86%           *
</TABLE>    
   
*Index comparison begins on September 30, 1985.     
 
Premium Total Return Fund
 
 4
<PAGE>
 
Fees and expenses
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
 
                                Shareholder fees
<TABLE>   
<CAPTION>
(fees paid directly from
your investment)                        Class A Class B Class L Class O Class Y
<S>                                     <C>     <C>     <C>     <C>     <C>
Maximum sales charge (load) imposed on
purchases
(as a % of offering price)               5.00%    None   1.00%   1.00%   None
Maximum deferred sales charge (load)
(as a % of the lower of net asset
value at purchase or redemption)         None*   5.00%   1.00%   1.00%   None
 
</TABLE>    
                         Annual fund operating expenses
<TABLE>   
<CAPTION>
(Expenses deducted from
fund assets)                          Class A Class B Class L Class O Class Y
<S>                                   <C>     <C>     <C>     <C>     <C>
Management fee                         0.75%   0.75%   0.75%   0.75%   0.75%
Distribution and service
(12b-1) fees                           0.25%   0.75%   1.00%   0.70%    None
Other expenses                          .12%    .11%    .07%    .14%    .01%
                                       -----   -----   -----   -----   -----
Total annual fund operating expenses   1.12%   1.61%   1.82%   1.59%   0.76%
</TABLE>    
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial charge) but if you redeem those shares within 12 months of
their purchase, you will pay a deferred sales charge of 1.00%.
Example
This example helps you compare the costs of investing in the fund with the
costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
 
 .You invest $10,000 in the fund for the period shown
 .Your investment has a 5% return each year
 .You reinvest all distributions and dividends without a sales charge
 .The fund's operating expenses remain the same
 
                      Number of years you own your shares
<TABLE>   
<CAPTION>
                                       1 year 3 years 5 years 10 years
<S>                                    <C>    <C>     <C>     <C>
Class A (with or without redemption)    $608   $838   $1,086   $1,795
Class B (redemption at end of period)   $663   $808   $  976   $1,780
Class B (no redemption)                 $164   $508   $  876   $1,780
Class L (redemption at end of period)   $383   $667   $1,075   $2,216
Class L (no redemption)                 $283   $667   $1,075   $2,216
Class O (redemption at end of period)   $360   $597   $  957   $1,970
Class O (no redemption)                 $260   $597   $  957   $1,970
Class Y (with or without redemption)    $ 78   $243   $  422   $  942
</TABLE>    
 
                                                       Smith Barney Mutual Funds
 
                                                                              5
<PAGE>
 
 More on the fund's investments
          
The fund's investments in equity securities may include common stocks traded on
an exchange or in the over-the-counter market, preferred stocks, warrants,
rights, convertible securities, trust certificates, limited partnership inter-
ests, equity-linked debt securities, depositary receipts, real estate invest-
ment trusts and other equity participations.     
   
The fund's investments in fixed income securities may include bonds, notes (in-
cluding structured notes), mortgage-related and asset-backed securities, con-
vertible securities, preferred stocks and money market instruments. Fixed
income securities may have all types of interest rate, payment and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred, pay-
ment in kind and auction rate features.     
   
The price of fixed income securities will go down if interest rates go up, or
the credit rating of the security is downgraded or the issuer defaults on its
obligation to pay principal or interest.     
 
Foreign securities Since the fund may invest in securities of foreign issuers,
the fund carries additional risks. Prices of foreign securities may go down
because of foreign government actions, political instability or the more lim-
ited availability of accurate information about foreign companies. Currency
fluctuations could erase investment gains or add to investment losses.
   
Derivative contracts The fund may, but need not, use derivative contracts, such
as futures and options on securities, securities indices, options on futures,
and swaps for the following purposes:     
   
 .To hedge against the economic impact of adverse changes in the market value of
  portfolio securities because of changes in stock market prices or interest
  rates     
 .As a substitute for buying or selling securities
   
 .To increase the fund's total return     
   
A derivative contract will obligate or entitle the fund to deliver or receive
an asset or cash payment based on the change in value of one or more securities
or indices. Even a small investment in derivative contracts can have a large
impact on a fund's stock price and interest rate exposure. Therefore, using
derivatives can disproportionately increase losses and reduce opportunities for
gains when stock prices or interest rates are changing. The fund may not fully
benefit from or may lose money on derivatives if changes in their value do not
correspond accurately to changes in the value of the fund's holdings. The other
parties to certain derivative contracts present the same types of default risk
as issuers of fixed income securities. Derivatives can also make a fund less
liquid and harder to value, especially in declining markets.     
 
Premium Total Return Fund
 
 6
<PAGE>
 
 
Defensive investing The fund may depart from its principal investment strate-
gies in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
 
 Management
   
Manager The fund's investment manager is SSBC Fund Management Inc., an affili-
ate of Salomon Smith Barney Inc. The manager's address is 388 Greenwich Street,
New York, New York 10013. The manager selects the fund's investments and
oversees its operations. The manager and Salomon Smith Barney are subsidiaries
of Citigroup Inc. Citigroup businesses produce a broad range of financial serv-
ices--asset management, banking and consumer finance, credit and charge cards,
insurance, investments, investment banking and trading--and use diverse chan-
nels to make them available to consumer and corporate customers around the
world. The fund's administrator is SSBC Fund Management Inc. The administrator
oversees all aspects of the fund's administration and operation.     
          
Effective on April 26, 1999, the fund's board of trustees appointed Salomon
Brothers Asset Management ("SaBAM"), an affiliate of SSBC Fund Management Inc.
located at 7 World Trade Center, New York, New York 10048, as the interim sub-
adviser pending shareholder approval. SaBAM provides investment management and
advisory services to mutual funds and currently manages over $27.6 billion.
       
Ross Margolies, a Managing Director of SaBAM and senior portfolio manager for
all SaBAM U.S. equity, convertibles and arbitrage portfolios serves as the
fund's portfolio manager and is responsible for the day-to-day management of
the fund. Mr Margolies has over 18 years of investment management experience.
       
Management fees During the fund's last fiscal year, the manager received an
advisory fee equal to 0.55% of the fund's average daily net assets. In addi-
tion, the administrator received a fee for its administrative services to the
fund equal to 0.20% of the fund's average daily net assets.     
 
Distributor The fund has entered into an agreement with CFBDS, Inc. to distrib-
ute the fund's shares. A selling group consisting of Salomon Smith Barney and
other broker-dealers sells fund shares to the public.
 
                                                       Smith Barney Mutual Funds
 
                                                                              7
<PAGE>
 
 
Distribution plans The fund has adopted Rule 12b-1 distribution plans for its
Class A, B, L and O shares. Under each plan, the fund pays distribution and
service fees. These fees are an ongoing expense and, over time, they increase
the cost of your investment and may cost you more than other types of sales
charges.
   
Year 2000 issue Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if sub-
stantial, could adversely affect companies and governments that issue securi-
ties held by the fund. The manager and Salomon Smith Barney are addressing the
Year 2000 issue for their systems. The fund has been informed by other service
providers that they are taking similar measures. Although the fund does not
expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
the efforts of the fund, which are limited to requesting and receiving reports
from its service providers, or the efforts of its service providers to correct
the problem will be successful.     
 
Premium Total Return Fund
 
 8
<PAGE>
 
 Choosing a class of shares to buy
 
You can choose among five classes of shares: Classes A, B, L, O and Y. Each
class has different sales charges and expenses, allowing you to choose the
class that best meets your needs. Which class is more beneficial to an investor
depends on the amount and intended length of the investment.
 
 .If you plan to invest regularly or in large amounts, buying Class A shares may
  help you reduce sales charges and ongoing expenses.
   
 .For Class B shares, all of your purchase amount and, for Class L and Class O
  shares, more of your purchase amount (compared to Class A shares) will be
  immediately invested. This may help offset the higher expenses of Class B,
  Class L and Class O shares, but only if the fund performs well.     
 .Class L and Class O shares have a shorter deferred sales charge period than
  Class B shares. However, because Class B shares convert to Class A shares,
  and Class L and Class O shares do not, Class B shares may be more attractive
  to long-term investors.
 
You may buy shares from:
 
 .A Salomon Smith Barney Financial Consultant
 .An investment dealer in the selling group or a broker that clears through Sal-
  omon Smith Barney--a dealer representative
 .The fund, but only if you are investing through certain qualified plans or
  certain dealer representatives
 
Investment minimums Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
 
<TABLE>
<CAPTION>
                                                  Initial             Additional
                                       Classes A, B, L, O   Class Y   All Classes
<S>                                    <C>                <C>         <C>
General                                      $1,000       $15 million     $50
IRAs, Self Employed Retirement Plans,
Uniform Gift to Minor Accounts                $250        $15 million     $50
Qualified Retirement Plans*                   $25         $15 million     $25
Simple IRAs                                    $1             n/a         $1
Monthly Systematic Investment Plans           $25             n/a         $25
Quarterly Systematic Investment Plans
</TABLE>
 
*Qualified Retirement Plans are retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Internal Revenue Code, including 401(k)
plans
 
                                                       Smith Barney Mutual Funds
 
                                                                              9
<PAGE>
 
 Comparing the fund's classes
 
Your Salomon Smith Barney Financial Consultant or dealer representative can
help you decide which class meets your goals. They may receive different com-
pensation depending upon which class you choose.
 
<TABLE>   
<CAPTION>
                       Class A    Class B   Class L   Class O     Class Y
<S>                   <C>        <C>       <C>       <C>        <C>
Key features          .Initial   .No ini-  .Initial  .Available .No initial
                       sales      tial      sales     for pur-   or deferred
                       charge     sales     charge    chase      sales
                       .You may   charge    is lower  only by    charge
                       qualify    .Deferred than      former     .Must invest
                       for        sales     Class A   Class C    at least
                       reduction  charge    .Deferred share-     $15 million
                       or waiver  declines  sales     holders    .Lower
                       of ini-    over      charge    .Deferred  annual
                       tial       time      for only  sales      expenses
                       sales      .Converts 1 year    charge     than the
                       charge     to Class  .Does     for only   other
                       .Lower     A after   not       1 year     classes
                       annual     8 years   convert   .Does not
                       expenses   .Higher   to        convert
                       than       annual    Class A   to
                       Class B,   expenses  .Higher   Class A
                       L or O     than      annual    .Higher
                                  Class A   expenses  annual
                                            than      expenses
                                            Class A   than
                                                      Class A
-----------------------------------------------------------------------------
Initial sales charge  Up to 5%;  None      1.00%     1.00%      None
                      reduced
                      for large
                      purchases
                      and waived
                      for cer-
                      tain
                      investors.
                      No charge
                      for pur-
                      chases of
                      $500,000
                      or more
-----------------------------------------------------------------------------
</TABLE>    
 
Smith Barney Mutual Funds
 
10
<PAGE>
 
 
<TABLE>
<CAPTION>
                          Class A   Class B   Class L   Class O   Class Y
<S>                      <C>       <C>       <C>       <C>       <C>
Deferred sales charge    1% on     Up to 5%  1% if     1% if     None
                         purchases charged   you       you
                         of        when you  redeem    redeem
                         $500,000  redeem    within 1  within 1
                         or more   shares.   year of   year of
                         if you    The       purchase  purchase
                         redeem    charge
                         within 1  is
                         year of   reduced
                         purchase  over
                                   time and
                                   there is
                                   no
                                   deferred
                                   sales
                                   charge
                                   after 6
                                   years
-------------------------------------------------------------------------
Annual distribution and  0.25% of  0.75% of  1.00% of  0.70% of  None
service fees             average   average   average   average
                         daily net daily     daily     daily
                         assets    net       net       net
                                   assets    assets    assets
-------------------------------------------------------------------------
Exchangeable into*       Class A   Class B   Class L   Class L   Class Y
                         shares of shares    shares    shares    shares
                         most      of most   of most   of most   of most
                         Smith     Smith     Smith     Smith     Smith
                         Barney    Barney    Barney    Barney    Barney
                         funds     funds     funds     funds     funds
-------------------------------------------------------------------------
</TABLE>
* Ask your Salomon Smith Barney Financial Consultant or dealer representative
or visit the web site for the Smith Barney funds available for exchange.
 
                                                       Premium Total Return Fund
 
                                                                              11
<PAGE>
 
 Sales charges
 
Class A shares
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge
on the fund's distributions or dividends you reinvest in additional Class A
shares.
 
<TABLE>
<CAPTION>
                                 Sales Charge as a % of
                                 Offering  Net amount
Amount of purchase               price (%) invested (%)
<S>                              <C>       <C>
Less than $25,000                  5.00        5.26
$25,000 but less than $50,000      4.00        4.17
$50,000 but less than $100,000     3.50        3.63
$100,000 but less than $250,000    3.00        3.09
$250,000 but less than $500,000    2.00        2.04
$500,000 or more                   0.00        0.00
</TABLE>
 
Investments of $500,000 or more You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
 
Qualifying for a reduced Class A sales charge There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
 
Accumulation privilege - lets you combine the current value of Class A shares
owned
 
  .by you, or
  .by members of your immediate family,
 
 and for which a sales charge was paid, with the amount of your next purchase
 of Class A shares for purposes of calculating the initial sales charge. Cer-
 tain trustees and fiduciaries may be entitled to combine accounts in deter-
 mining their sales charge.
 
Letter of intent - lets you purchase Class A shares of the fund and other Smith
Barney funds over a 13-month period and pay the same sales charge,
 
Smith Barney Mutual Funds
 
12
<PAGE>
 
if any, as if all shares had been purchased at once. You may include purchases
on which you paid a sales charge within 90 days before you sign the letter.
 
Waivers for certain Class A investors Class A initial sales charges are waived
for certain types of investors, including:
 
 .Employees of members of the NASD
 .403(b) or 401(k) retirement plans, if certain conditions are met
 .Clients of newly employed Salomon Smith Barney Financial Consultants, if cer-
  tain conditions are met
 .Investors who redeemed Class A shares of a Smith Barney fund in the past 60
  days, if the investor's Salomon Smith Barney Financial Consultant or dealer
  representative is notified
   
If you want to learn about additional waivers of Class A initial sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the Statement of Additional Information ("SAI").     
 
Class B Shares
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of pur-
chase, you will pay a deferred sales charge. The deferred sales charge
decreases as the number of years since your purchase increases.
 
<TABLE>   
<CAPTION>
Year after purchase    1st 2nd 3rd 4th 5th 6th through 8th
<S>                    <C> <C> <C> <C> <C> <C>
Deferred sales charge   5%  4%  3%  2%  1%         0%
</TABLE>    
 
Class B conversion After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
 
<TABLE>
<CAPTION>
                                        Shares issued:     Shares issued:
                                        On reinvestment of Upon exchange from
Shares issued:                          dividends and      another Smith Barney
At initial purchase                     distributions      fund
<S>                                     <C>                <C>
Eight years after the date of purchase  In same proportion On the date the
                                        as the number of   shares originally
                                        Class B shares     acquired would
                                        converting is to   have converted
                                        total Class B      into Class A
                                        shares you own     shares
</TABLE>
 
                                                       Premium Total Return Fund
 
                                                                              13
<PAGE>
 
   
Class L and O Shares     
You buy Class L or O shares at the offering price, which is the net asset value
plus a sales charge of 1% (1.01% of the net amount invested). In addition, if
you redeem your Class L or O shares within one year of purchase, you will pay a
deferred sales charge of 1%. If you held Class C shares of any Smith Barney
fund on June 12, 1998, you will not pay an initial sales charge on Class L
shares of the fund you may buy before June 22, 2001.
 
You may buy Class O shares only if you owned Class C shares of the fund on June
12, 1998. You will not pay an initial sales charge on Class O shares you buy
before June 22, 2001.
 
Class Y shares
   
You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $15,000,000 initial
investment requirement. You can use a letter of intent to meet this requirement
by buying Class Y shares of the fund over a 13-month period. To qualify, you
must initially invest $5,000,000.     
 
 More about deferred sales charges
 
The deferred sales charge is based on the net asset value at the time of pur-
chase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
 
In addition, you do not pay a deferred sales charge on:
 
 .Shares exchanged for shares of another Smith Barney fund
 .Shares representing reinvested distributions and dividends
 .Shares no longer subject to the deferred sales charge
 
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.
 
Salomon Smith Barney receives deferred sales charges as partial compensation
for its expenses in selling shares, including the payment of compensation to
your Salomon Smith Barney Financial Consultant or dealer representative.
 
Smith Barney Mutual Funds
 
14
<PAGE>
 
 
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
 
 .On payments made through certain systematic withdrawal plans
 .On certain distributions from a retirement plan
 .For involuntary redemptions of small account balances
 .For 12 months following the death or disability of a shareholder
 
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the SAI.
 
 Buying shares
 
     Through a   You should contact your Salomon Smith Barney Financial Con-
 Salomon Smith   sultant or dealer representative to open a brokerage account
        Barney   and make arrangements to buy shares.
     Financial
 Consultant or   If you do not provide the following information, your order
        dealer   will be rejected
representative   .Class of shares being bought
                 .Dollar amount or number of shares being bought
 
                 You should pay for your shares through your brokerage account
                 no later than the third business day after you place your
                 order. Salomon Smith Barney or your dealer representative may
                 charge an annual account maintenance fee.
--------------------------------------------------------------------------------
    Through the  Qualified retirement plans and certain other investors who
fund's transfer  are clients of the selling group are eligible to buy shares
          agent  directly from the fund.
 
                 .Write the transfer agent at the following address:
                      Smith Barney Income Funds
                       Premium Total Return Fund
                      (Specify class of shares)
                      c/o First Data Investor Services Group, Inc.
                      P.O. Box 5128
                      Westborough, Massachusetts 01581-5128
                 .Enclose a check to pay for the shares. For initial pur-
                   chases, complete and send an account application.
                 .For more information, call the transfer agent at 1-800-451-
                   2010.
--------------------------------------------------------------------------------
 
                                                       Premium Total Return Fund
 
                                                                              15
<PAGE>
 
 
     Through a   You may authorize Salomon Smith Barney, your dealer represen-
    systematic   tative or the transfer agent to transfer funds automatically
    investment   from a regular bank account, cash held in a Salomon Smith
          plan   Barney brokerage account or Smith Barney Money market fund to
                 buy shares on a regular basis.
 
                 .Amounts transferred should be at least: $25 monthly or $50
                   quarterly
                 .If you do not have sufficient funds in your account on a
                   transfer date, Salomon Smith Barney, your dealer represen-
                   tative or the transfer agent may charge you a fee
 
                 For more information, contact your Salomon Smith Barney
                 Financial Consultant, dealer representative or the transfer
                 agent or consult the SAI.
 
 Exchanging shares
                     
  Smith Barney   You should contact your Salomon Smith Barney Financial Con-
      offers a   sultant or dealer representative to exchange into other Smith
   distinctive   Barney funds. Be sure to read the prospectus of the Smith
     family of   Barney fund you are exchanging into. An exchange is a taxable
         funds   transaction. 
   tailored to
 help meet the
 varying needs
 of both large
     and small
     investors
              
                 .You may exchange shares only for shares of the same class of
                   another Smith Barney fund. Class O shares may be exchanged
                   for Class L shares of another Smith Barney mutual fund. Not
                   all Smith Barney funds offer all classes.
                    
                 .Not all Smith Barney funds may be offered in your state of
                   residence. Contact your Salomon Smith Barney Financial
                   Consultant, dealer representative or the transfer agent.
                       
                 .You must meet the minimum investment amount for each fund.
                 .If you hold share certificates, the transfer agent must
                   receive the certificates endorsed for transfer or with
                   signed stock powers (documents transferring ownership of
                   certificates) before the exchange is effective.
                 .The fund may suspend or terminate your exchange privilege if
                   you engage in an excessive pattern of exchanges.
--------------------------------------------------------------------------------
 
Smith Barney Mutual Funds
 
16
<PAGE>
 
     Waiver of   Your shares will not be subject to an initial sales charge at
    additional   the time of the exchange.
 sales charges
 
                 Your deferred sales charge (if any) will continue to be mea-
                 sured from the date of your original purchase. If the fund
                 you exchange into has a higher deferred sales charge, you
                 will be subject to that charge. If you exchange at any time
                 into a fund with a lower charge, the sales charge will not be
                 reduced.
--------------------------------------------------------------------------------
  By telephone   If you do not have a brokerage account, you may be eligible
                 to exchange shares through the transfer agent. You must com-
                 plete an authorization form to authorize telephone transfers.
                 If eligible, you may make telephone exchanges on any day the
                 New York Stock Exchange is open. Call the transfer agent at
                 1-800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern
                 time). Requests received after the close of regular trading
                 on the Exchange are priced at the net asset value next deter-
                 mined.
 
                 You can make telephone exchanges only between accounts that
                 have identical registrations.
--------------------------------------------------------------------------------
       By mail   If you do not have a Salomon Smith Barney brokerage account,
                 contact your dealer representative or write to the transfer
                 agent at the address on the opposite page.
 
                                                       Premium Total Return Fund
 
                                                                              17
<PAGE>
 
 Redeeming shares
 
     Generally   Contact your Salomon Smith Barney Financial Consultant or
                 dealer representative to redeem shares of the fund.
 
                 If you hold share certificates, the transfer agent must
                 receive the certificates endorsed for transfer or with signed
                 stock powers before the redemption is effective.
 
                 If the shares are held by a fiduciary or corporation, other
                 documents may be required.
 
                 Your redemption proceeds will be sent within three business
                 days after your request is received in good order. However,
                 if you recently purchased your shares by check, your redemp-
                 tion proceeds will not be sent to you until your original
                 check clears, which may take up to 15 days.
 
                 If you have a Salomon Smith Barney brokerage account, your
                 redemption proceeds will be placed in your account and not
                 reinvested without your specific instruction. In other cases,
                 unless you direct otherwise, your redemption proceeds will be
                 paid by check mailed to your address of record.
--------------------------------------------------------------------------------
       By Mail   For accounts held directly at the fund, send written requests
                 to the transfer agent at the following address:
                   Smith Barney Income Funds
                   Premium Total Return Fund
                   (Specify class of shares)
                   c/o First Data Investor Services Group, Inc.
                   P.O. Box 5128
                   Westborough, Massachusetts 01581-5128
 
                 Your written request must provide the following:
 
                 .Your account number
                 .The class of shares and the dollar amount or number of
                   shares to be redeemed
                 .Signatures of each owner exactly as the account is regis-
                   tered
 
 
Smith Barney Mutual Funds
 
18
<PAGE>
 
  By Telephone   If you do not have a brokerage account, you may be eligible
                 to redeem shares (except those held in retirement plans) in
                 amounts up to $10,000 per day through the transfer agent. You
                 must complete an authorization form to authorize telephone
                 redemptions. If eligible, you may request redemptions by tel-
                 ephone on any day the New York Stock Exchange is open. Call
                 the transfer agent at 1-800-451-2010 between 9:00 a.m. and
                 5:00 p.m. (Eastern time). Requests received after the close
                 of regular trading on the Exchange are priced at the net
                 asset value next determined.
                    
                 Your redemption proceeds can be sent by check to your address
                 of record or by wire transfer to a bank account designated on
                 your authorization form. You must submit a new authorization
                 form to change the bank account designated to receive wire
                 transfers and you may be asked to provide certain other docu-
                 ments.     
--------------------------------------------------------------------------------
     Automatic      
          cash   You can arrange for the automatic redemption of a portion of
    withdrawal   your shares on a monthly or quarterly basis. To qualify you
         plans   must own shares of the fund with a value of at least $10,000
                 ($5,000 for retirement plan accounts) and each automatic
                 redemption must be at least $50. If your shares are subject
                 to a deferred sales charge, the sales charge will be waived
                 if your automatic payments do not exceed 1% per month of the
                 value of your shares subject to a deferred sales charge.     
 
                 The following conditions apply:
 
                 .Your shares must not be represented by certificates
                 .All dividends and distributions must be reinvested
 
                 For more information, contact your Salomon Smith Barney
                 Financial Consultant or dealer representative or consult the
                 SAI.
 
                                                       Premium Total Return Fund
 
                                                                              19
<PAGE>
 
 Other things to know about share transactions
   
When you buy, exchange or redeem shares, your request must be in good order.
This means you have provided the following information, without which your
request will not be processed:     
 
 .Name of the fund
 .Account number
 .Class of shares being bought, exchanged or redeemed M Dollar amount or number
  of shares being bought, exchanged or redeemed
 .Signature of each owner exactly as the account is registered
 
The transfer agent will try to confirm that any telephone exchange or redemp-
tion request is genuine by recording calls, asking the caller to provide a per-
sonal identification number for the account, sending you a written confirmation
or requiring other confirmation procedures from time to time.
 
Signature guarantees To be in good order, your redemption request must include
a signature guarantee if you:
   
 .Are redeeming over $10,000 of shares     
 .Are sending signed share certificates or stock powers to the transfer agent
 .Instruct the transfer agent to mail the check to an address different from the
  one on your account
 .Changed your account registration
 .Want the check paid to someone other than the account owner(s)
 .Are transferring the redemption proceeds to an account with a different regis-
  tration
 
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
 
The fund has the right to:
 
 .Suspend the offering of shares
 .Waive or change minimum and additional investment amounts
 .Reject any purchase or exchange order
 .Change, revoke or suspend the exchange privilege
 .Suspend telephone transactions
 
Smith Barney Mutual Funds
 
20
<PAGE>
 
 .Suspend or postpone redemptions of shares on any day when trading on the New
  York Stock Exchange is restricted, or as otherwise permitted by the Securi-
  ties and Exchange Commission
 .Pay redemption proceeds by giving you securities. You may pay transaction
  costs to dispose of the securities
 
Small account balances If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
 
Excessive exchange transactions The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other share-
holders. If so, the fund may limit additional purchases and/or exchanges by the
shareholder.
   
Share certificates The fund does not issue share certificates unless a written
request signed by all registered owners is made to the transfer agent. If you
hold share certificates it will take longer to exchange or redeem shares.     
 
                                                       Premium Total Return Fund
 
                                                                              21
<PAGE>
 
 Smith Barney 401(k) and ExecChoice(TM) programs
 
You may be eligible to participate in the Smith Barney 401(k) program or the
Smith Barney ExecChoice(TM) program. The fund offers Class A, Class L and, in
limited circumstances, Class O shares to participating plans as investment
alternatives under the programs. You can meet minimum investment and exchange
amounts by combining the plan's investments in any of the Smith Barney mutual
funds.
 
There are no sales charges when you buy or sell shares and the class of shares
you may purchase depends on the amount of your initial investment. Once a class
of shares is chosen, all additional purchases must be of the same class.
 
 .Class A shares may be purchased by plans investing at least $1 million.
 
 .Class L shares may be purchased by plans investing less than $1 million.
 
 .Class O shares may be purchased by plans investing less than $1 million if the
  plan opened its account on or before June 12, 1998. Class L and O shares are
  eligible for exchange to Class A shares not later than 8 years after the plan
  joined the program. They are eligible for conversion sooner in the following
  circumstances:
     
  If the account was opened on or after June 21, 1996 and a total of $1 mil-
  lion is invested in Smith Barney Funds, Class L and O shares (other than
  money market funds), all Class L and O shares are eligible for exchange
  after the plan is in the program 5 years.     
     
  If the account was opened before June 21, 1996 and a total of $500,000 is
  invested in Smith Barney Funds, Class L and O shares (other than money
  market funds) on December 31 in any year, all Class L and O shares are
  eligible for exchange on or about March 31 of the following year.     
 
For more information, call your Salomon Smith Barney Financial Consultant or
the transfer agent, or consult the SAI.
 
Smith Barney Mutual Funds
 
22
<PAGE>
 
 Distributions, dividends and taxes
 
Dividends The fund pays dividends and capital gains distributions, if any, each
quarter from its net investment income. The fund may pay additional distribu-
tions and dividends at other times if necessary for the fund to avoid a federal
tax. Capital gain distributions and dividends are reinvested in additional fund
shares of the same class you hold. The fund expects distributions to be primar-
ily from capital gains. You do not pay a sales charge on reinvested distribu-
tions or dividends. Alternatively, you can instruct your Salomon Smith Barney
Financial Consultant, dealer representative or the transfer agent to have your
distributions and/or dividends paid in cash. You can change your choice at any
time to be effective as of the next distribution or dividend, except that any
change given to the transfer agent less than five days before the payment date
will not be effective until the next distribution or dividend is paid.
 
Taxes In general, redeeming shares, exchanging shares and receiving distribu-
tions (whether in cash or additional shares) are all taxable events.
 
<TABLE>
<CAPTION>
 Transaction                           Federal Tax Status
<S>                                    <C>
Redemption or exchange of shares       Usually capital gain or
                                       loss; long-term only if
                                       shares owned more than
                                       one year
 
Long-term capital gain distributions   Long-term capital gain
Short-term capital gain distributions  Ordinary income
 
Dividends                              Ordinary income
</TABLE>
 
Any taxable dividends and capital gains are taxable whether received in cash or
reinvested in fund shares. Long-term capital gain distributions are taxable to
you as long-term capital gain regardless of how long you have owned your
shares. You may want to avoid buying shares when the fund is about to declare a
capital gain distribution or a dividend, because it will be taxable to you even
though it may actually be a return of a portion of your investment.
 
After the end of each year, the fund will provide you with information about
the distributions and dividends you received and any redemptions of shares dur-
ing the previous year. If you do not provide the fund with your correct tax-
payer identification number and any required certifications, you may be subject
to back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special
tax rules may apply, you should consult your tax adviser about your investment
in the fund.
 
                                                       Premium Total Return Fund
 
                                                                              23
<PAGE>
 
 Share price
 
You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its liabili-
ties. Net asset value is calculated separately for each class of shares. The
fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This calcu-
lation is done when regular trading closes on the Exchange (normally 4:00 p.m.,
Eastern time).
   
The fund generally values its fund securities based on market prices or quota-
tions. The fund's currency conversions are done when the London stock exchange
closes, which is 12 noon Eastern time. When reliable market prices or quota-
tions are not readily available, or when the value of a security has been mate-
rially affected by events occurring after a foreign exchange closes, the fund
may price those securities at fair value. Fair value is determined in accor-
dance with procedures approved by the fund's board. A fund that uses fair value
to price securities may value those securities higher or lower than another
fund that uses market quotations to price the same securities.     
 
International markets may be open on days when U.S. markets are closed and the
value of foreign securities owned by the fund could change on days when you
cannot buy or redeem shares.
 
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer repre-
sentative before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
 
Salomon Smith Barney or members of the selling group must transmit all orders
to buy, exchange or redeem shares to the fund's agent before the agent's close
of business.
 
Smith Barney Mutual Funds
 
24
<PAGE>
 
 Financial highlights
   
The financial highlights tables are intended to help you understand the perfor-
mance of each class for the past 5 years (or since inception if less than 5
years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by KPMG LLP, independent
accountants, whose report, along with the fund's financial statements, are
included in the annual report (available upon request). The information for the
fiscal year ended July 31, 1994 has been audited by another independent accoun-
tant.     
    
 For a Class A share of beneficial interest outstanding throughout each year
 ended December 31 except where noted:     
<TABLE>   
<CAPTION>
                               1998(/1/)     1997(/1/)     1996(/1/)(/2/) 1996(/5/)  1995(/5/)  1994(/5/)
---------------------------------------------------------------------------------------------------------
 <S>                       <C>           <C>           <C>                <C>        <C>        <C>
 Net asset value,
 beginning of year           $22.19        $19.14        $17.40             $16.33     $15.69     $15.65
---------------------------------------------------------------------------------------------------------
 Income from operations:
 Net investment income         0.33          0.39          0.16               0.37       0.44       0.33
 Net realized and
 unrealized gain               1.00          4.29          2.21               1.98       1.48       0.99
---------------------------------------------------------------------------------------------------------
 Total income from
 operations                    1.33          4.68          2.37               2.35       1.92       1.32
---------------------------------------------------------------------------------------------------------
 Less distributions from:
 Net investment income        (0.25)        (0.38)        (0.16)             (0.37)     (0.43)     (0.55)
 Net realized gains           (1.89)        (1.25)        (0.47)             (0.91)     (0.14)     (0.52)
 Capital                         --            --            --                 --      (0.71)     (0.21)
---------------------------------------------------------------------------------------------------------
 Total distributions          (2.14)        (1.63)        (0.63)             (1.28)     (1.28)     (1.28)
---------------------------------------------------------------------------------------------------------
 Net asset value, end of
 year                        $21.38        $22.19        $19.14             $17.40   $  16.33     $15.69
---------------------------------------------------------------------------------------------------------
 Total return                  6.20%        25.19%        13.80%(/3/)        14.76%     12.92%      8.65%
---------------------------------------------------------------------------------------------------------
 Net assets, end of year
 (000)'s                   $896,342      $833,540      $608,203           $534,329   $471,578    $67,699
---------------------------------------------------------------------------------------------------------
 Ratios to average net
 assets:
 Expenses                      1.12%         1.11%         1.12%(/4/)         1.12%      1.16%      1.19%
 Net investment income         1.48          1.89          2.05(/4/)          2.16       2.81       2.05
---------------------------------------------------------------------------------------------------------
 Portfolio turnover rate         43%           43%           30%                58%        63%        34%
---------------------------------------------------------------------------------------------------------
</TABLE>    
(/1/)Per share amounts calculated using the monthly average shares method
   
(/2/For)the period from August 1, 1996 to December 31, 1996, which reflects a
    change in the fiscal year end of the fund.     
(/3/)Not annualized.
(/4/)Annualized.
   
(/5/)For the fiscal year ended July 31.     
 
                                                       Premium Total Return Fund
 
                                                                              25
<PAGE>
 
    
 For a Class B share of beneficial interest outstanding throughout each year
 ended December 31 except where noted:     
<TABLE>   
<CAPTION>
                           1998(/1/) 1997(/1/) 1996(/1/)(/2/)   1996(/5/) 1995(/5/) 1994(/5/)
---------------------------------------------------------------------------------------------
 <S>                       <C>       <C>       <C>              <C>       <C>       <C>
 Net asset value,
 beginning
 of year                    $22.17    $19.14       $17.40        $16.33    $15.69    $15.65
---------------------------------------------------------------------------------------------
 Income from operations:
 Net investment income        0.22      0.29         0.12          0.28      0.36      0.25
 Net realized and
 unrealized gain              0.99      4.28         2.21          1.99      1.48      1.00
---------------------------------------------------------------------------------------------
 Total income from
 operations                   1.21      4.57         2.33          2.27      1.84      1.25
---------------------------------------------------------------------------------------------
 Less distributions from:
 Net investment income       (0.23)    (0.29)       (0.12)        (0.29)    (0.34)    (0.49)
 Net realized gains          (1.89)    (1.25)       (0.47)        (0.91)    (0.14)    (0.52)
 Capital                        --        --           --            --     (0.72)    (0.20)
---------------------------------------------------------------------------------------------
 Total distributions         (2.12)    (1.54)       (0.59)        (1.20)    (1.20)    (1.21)
---------------------------------------------------------------------------------------------
 Net asset value, end of
 year                       $21.26    $22.17       $19.14        $17.40    $16.33    $15.69
---------------------------------------------------------------------------------------------
 Total return                 5.64%    24.55%       13.57%(/3/)   14.21%    12.36%     8.12%
---------------------------------------------------------------------------------------------
 Net assets, end of year
 (millions)                 $3,110    $3,170       $2,355        $2,021    $1,655    $1,697
---------------------------------------------------------------------------------------------
 Ratios to average net
 assets:
 Expenses                     1.61%     1.60%        1.54%(/4/)    1.62%     1.66%     1.66%
 Net investment income        0.99      1.39         1.63(/4/)     1.66      2.31      1.58
---------------------------------------------------------------------------------------------
 Portfolio turnover rate        43%       43%          30%           58%       63%       34%
---------------------------------------------------------------------------------------------
</TABLE>    
(/1/)Per share amounts calculated using the monthly average shares method.
   
(/2/)For the period from August 1, 1996 to December 31, 1996, which reflects a
 change in the fiscal year end of the fund.     
(/3/)Not annualized.
(/4/)Annualized.
   
(/5/)For the fiscal year ended July 31.     
 
Smith Barney Mutual Funds
 
26
<PAGE>
 
 For a Class L share of beneficial interest outstanding throughout the year
 ended December 31:
<TABLE>   
<CAPTION>
                                     1998(/1/)(/2/)
---------------------------------------------------
 <S>                                 <C>
 Net asset value, beginning of year     $ 23.06
---------------------------------------------------
 Income from operations:
 Net investment income                     0.06
 Net realized and unrealized loss         (0.01)
---------------------------------------------------
 Total income from operations              0.05
---------------------------------------------------
 Less distributions from:
 Net realized gains                       (1.82)
---------------------------------------------------
 Total distributions                      (1.82)
---------------------------------------------------
 Net asset value, end of year           $ 21.29
---------------------------------------------------
 Total return(/3/)                         0.36%
---------------------------------------------------
 Net assets, end of year (000)'s        $25,471
---------------------------------------------------
 Ratios to average net assets(/4/):
 Expenses                                  1.82%
 Net investment income                     0.55
---------------------------------------------------
 Portfolio turnover rate                     43%
---------------------------------------------------
</TABLE>    
   
(/1/)For the period from June 15, 1998 (inception date) to December 31, 1998.
          
(/2/)Per share amounts calculated using the monthly average shares method.     
   
(/3/)Not Annualized.     
   
(/4/)Annualized.     
 
                                                       Premium Total Return Fund
 
                                                                              27
<PAGE>
 
    
 For a Class O(/1/) share of beneficial interest outstanding throughout each
 year ended December 31 except where noted:     
<TABLE>   
<CAPTION>
                           1998(/2/)  1997(/2/) 1996(/2/)(/3/)    1996(/7/) 1995(/4/)(/7/) 1994(/7/)
----------------------------------------------------------------------------------------------------
 <S>                       <C>        <C>       <C>               <C>       <C>            <C>
 Net asset value,
 beginning of year           $22.18     $19.15      $17.41          $16.33      $15.69      $15.65
----------------------------------------------------------------------------------------------------
 Income from operations:
 Net investment income         0.23       0.30        0.12            0.29        0.36        0.23
 Net realized and
 unrealized gain               0.99       4.28        2.21            1.99        1.48        1.02
----------------------------------------------------------------------------------------------------
 Total income from
 operations                    1.22       4.58        2.33            2.28        1.84        1.25
----------------------------------------------------------------------------------------------------
 Less distributions from:
 Net investment income        (0.23)     (0.30)      (0.12)          (0.29)      (0.35)      (0.49)
 Net realized gains           (1.89)     (1.25)      (0.47)          (0.91)      (0.14)      (0.52)
 Capital                         --         --          --              --       (0.71)      (0.20)
----------------------------------------------------------------------------------------------------
 Total distributions          (2.12)     (1.55)      (0.59)          (1.20)      (1.20)      (1.21)
----------------------------------------------------------------------------------------------------
 Net asset value, end of
 year                        $21.28     $22.18      $19.15          $17.41      $16.33      $15.69
----------------------------------------------------------------------------------------------------
 Total return                  5.69%     24.60%      13.58%(/5/)     14.30%      12.36%       8.12%
----------------------------------------------------------------------------------------------------
 Net assets, end of year
 (000)'s                   $108,576    $93,676     $42,637         $31,044     $12,937      $1,878
----------------------------------------------------------------------------------------------------
 Ratios to average net
 assets:
 Expenses                      1.59%      1.56%       1.55%(/6/)      1.59%       1.62%       1.60%
 Net investment income         1.02       1.41        1.61(/6/)       1.68        2.35        1.65
----------------------------------------------------------------------------------------------------
 Portfolio turnover rate         43%        43%         30%             58%         63%         34%
----------------------------------------------------------------------------------------------------
</TABLE>    
   
(/1/)On June 12, 1998, Class C shares were renamed Class O shares.     
   
(/2/)Per share amounts calculated using the monthly average shares method.     
   
(/3/For)the period from August 1, 1996 to December 31, 1996, which reflects a
    change in the fiscal year end of the fund.     
   
(/4/)On November 7, 1994 the former Class D shares were renamed Class C shares.
          
(/5/)Not annualized.     
   
(/6/)Annualized.     
   
(/7/)For the fiscal year ended July 31.     
 
Smith Barney Mutual Funds
 
28
<PAGE>
 
    
 For a Class Y share of beneficial interest outstanding throughout each year
 ended December 31 except where noted:     
<TABLE>   
<CAPTION>
                           1998(/1/) 1997(/1/) 1996(/1/)(/2/)    1996(/3/)
-------------------------------------------------------------------------------
 <S>                       <C>       <C>       <C>               <C>
 Net asset value,
 beginning of year           $22.24    $19.17      $17.42          $17.57
-------------------------------------------------------------------------------
 Income from operations:
 Net investment income         0.40      0.47        0.17            0.19
 Net realized and
 unrealized gain               1.01      4.29        2.23            0.33
-------------------------------------------------------------------------------
 Total income from
 operations                    1.41      4.76        2.40            0.52
-------------------------------------------------------------------------------
 Less distributions from:
 Net investment income        (0.27)    (0.44)      (0.18)          (0.21)
 Net realized gains           (1.89)    (1.25)      (0.47)          (0.46)
-------------------------------------------------------------------------------
 Total distributions          (2.16)    (1.69)      (0.65)          (0.67)
-------------------------------------------------------------------------------
 Net asset value, end of
 year                        $21.49    $22.24      $19.17          $17.42
-------------------------------------------------------------------------------
 Total return                  6.56%    25.61%      13.95%(/4/)      2.93%(/4/)
-------------------------------------------------------------------------------
 Net assets, end of year
 (000)'s                    $77,210   $50,882     $26,585         $13,192
-------------------------------------------------------------------------------
 Ratios to average net
 assets:
 Expenses                      0.76%     0.76%      0.80%(/5/)       0.87%(/5/)
 Net investment income         1.82      2.22        2.36(/5/)       2.24(/5/)
-------------------------------------------------------------------------------
 Portfolio turnover rate         43%       43%        30%             58%
-------------------------------------------------------------------------------
</TABLE>    
(/1/)Per share amounts calculated using the monthly average shares method.
   
(/2/For)the period from August 1, 1996 to December 31, 1996, which reflects a
    change in the fiscal year end of the fund.     
(/3/)For the period from February 7, 1996 (inception date) to July 31, 1996.
(/4/)Not annualized.
(/5/)Annualized.
 
                                                       Premium Total Return Fund
 
                                                                              29
<PAGE>
 
                                                              SalomonSmithBarney
                                                    ----------------------------
                                                    A member of citigroup [LOGO]

Premium Total Return Fund
 
Shareholder reports Annual and semiannual reports to shareholders provide addi-
tional information about the fund's investments. These reports discuss the mar-
ket conditions and investment strategies that affected the fund's performance.
 
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
 
Statement of additional information The statement of additional information
provides more detailed information about the fund and is incorporated by refer-
ence into (is legally part of) this prospectus.
 
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
 
Visit our web site. Our web site is located at www.smithbarney.com
   
You can also review and copy the fund's shareholder reports, prospectus and
statement of additional information at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. You can get copies of these materials
for a duplicating fee by writing to the Public Reference Section of the Commis-
sion, Washington, D.C. 20549-6009. Information about the public reference room
may be obtained by calling 1-800-SEC-0330. You can get the same information
free from the Commission's Internet web site at http:www.sec.gov     
 
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not law-
fully sell its shares.
 
 SMSalomon Smith Barney is a service mark of Salomon Smith Barney Inc.
   
(Investment Company Act file no. 811-04254) (FD0213 4/99]     



Smith Barney
INCOME FUNDS - SMITH BARNEY PREMIUM TOTAL RETURN FUND

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


Statement of Additional Information				
			April 30, 1999  

This Statement of Additional Information ("SAI") is 
meant to be read in conjunction with the prospectus of 
the Smith Barney Premium Total Return Fund (the 
"fund") dated April 30, 1999, as amended or 
supplemented from time to time (the "Prospectus"), and 
is incorporated by reference in its entirety into the 
prospectus.  Additional information about the fund's 
investments is available in the fund's annual and 
semi-annual reports to shareholders which are 
incorporated herein by reference.  The prospectus and 
copies of the reports may be obtained free of charge 
by contacting a Salomon Smith Barney Financial 
Consultant, or by writing or calling Salomon Smith 
Barney at the address or telephone number above.  The 
fund is a separate investment series of Smith Barney 
Income Funds (the "trust").

This SAI is not a prospectus.  It is intended to 
provide more detailed information about the fund as 
well as matters already discussed in the Prospectus 
and therefore should be read in conjunction with the 
Prospectus dated April 30, 1999, which may be obtained 
from the fund or your Salomon Smith Barney Financial 
Consultant. 


TABLE OF CONTENTS

Trustees and Executive Officers of the 
Trust....................................................................2
Investment Objectives and Management 
Policies..............................................................6
Purchase, Exchange and Redemption of 
Shares...............................................................33
Distributor....................................................45
Valuation of 
Shares.....................................................47
Performance Data...............................................48
Taxes..........................................................52
Additional 
Information..................................................57
Financial 
Statements......................................................58
Appendix A......................................................59

TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST

The names of the trustees of the trust and executive 
officers of the fund, together with information as to 
their principal business occupations, are set forth 
below.  The executive officers of the fund are 
employees of organizations that provide services to 
the fund.  Each Trustee who is an "interested person" 
of the trust, as defined in the Investment Company Act 
of 1940, as amended (the "1940 Act"), is indicated by 
an asterisk. The address of the "non-interested" 
trustees and the executive officers of the fund is 388 
Greenwich Street, New York, New York 10013.

Lee Abraham, Trustee (Age 71).  Retired; formerly 
Chairman and Chief Executive Officer of Associated 
Merchandising Corporation, a major retail 
merchandising and sourcing organization.  His address 
is 106 Barnes Road, Stamford, Connecticut 06902.

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

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

*Heath B. McLendon, Chairman of the Board, President 
and Chief Executive Officer (Age 65).  Managing 
Director of Salomon Smith Barney Inc. ("Salomon Smith 
Barney"), Chairman of the Board and President of SSBC 
Fund Management Inc. ("SSBC") (formerly known as 
Mutual Management Corp.) and Travelers Investment 
Adviser, Inc. ("TIA"); Chairman or Co-Chairman of the 
Board of 64 investment companies managed by affiliates 
of Citigroup Inc. ("Citigroup"); and former Chairman 
of the Board of Smith Barney Strategy Advisers Inc.

Jane F. Dasher, Trustee (Age 49). Investment Officer; 
Korsant Partners, a family investment company, 283 
Greenwich Avenue, Greenwich, Connecticut 06830; Prior 
to 1997, Independent Financial Consultant from 1975 to 
1987, held various positions with Philip Morris 
Companies, Inc. including Director of Financial 
Services, Treasurers Department.

Donald R. Foley, Trustee (Age 76). Retired; 3668 
Freshwater Drive, Jupiter, Florida 33477; Formerly 
Vice President of Edwin Bird Wilson, Incorporated (an 
advertising agency).

Paul Hardin, Trustee (Age 67). Professor of Law at 
University of North Carolina at Chapel Hill; 12083 
Morehead, Chapel Hill, North Carolina 27514; Director 
of The Summit Bancorporation; Formerly, Chancellor of 
the University of North Carolina at Chapel Hill.

Roderick C. Rasmussen, Trustee (Age 72). Investment 
Counselor; 9 Cadence Court, Morristown, New Jersey 
07960; Formerly Vice President of Dresdner and Company 
Inc. (investment counselors).

John P. Toolan, Trustee (Age 68). Retired; 13 Chadwell 
Place, Morristown, New Jersey 07960; Trustee of John 
Hancock Funds; Formerly, Director and Chairman of 
Smith Barney Trust Company, Director of Smith Barney 
Holdings Inc. and various subsidiaries, Senior 
Executive Vice President, Director and Member of the 
Executive Committee of Smith Barney.
   
Ross Margolies, Investment Officer (Age 40). Managing 
Director of Salomon Brothers Asset Management Inc. 
("SaBAM"); Senior Portfolio Manager for all SaBAM 
U.S. equity, convertibles and arbitrage portfolios; 
Portfolio Manager of 25 other investment companies 
associated with Citigroup. His address is 7 World 
Trade Center, New York, New York 10048.
    
Lewis E. Daidone, Senior Vice President and Treasurer 
(Age 41).  Managing Director of Salomon Smith Barney; 
Senior Vice President and Treasurer of 59 investment 
companies associated with Citigroup; and Director and 
Senior Vice President of SSBC and TIA.

Paul A. Brook, Controller (Age 45).  Director of 
Salomon Smith Barney; Controller or Assistant 
Treasurer of 43 investment companies associated with 
Citigroup since 1998; from 1997-1998 Managing Director 
of AMT Capital Services Inc.; prior to 1997, Partner 
with Ernst & Young LLP.

Christina T. Sydor, Secretary (Age 49).  Managing 
Director of Salomon Smith Barney; Secretary of 59 
investment companies associated with Citigroup; and 
General Counsel and Secretary of SSBC and TIA.

As of April 15, 1999, the Trustees and officers of the 
fund, as a group, owned less than 1% of the 
outstanding shares of beneficial interest of the fund.  
As of April 15, 1999, to the best knowledge of the 
fund and the Board the following shareholders or 
"groups" (as that term is used in Section 13 (d) of 
the Securities Act of 1934, as amended) beneficially 
owned more than 5% of the outstanding shares of the 
following Class:

Class Y						
	Percentage
Smith Barney					
	64.8615
Concert Series, Inc.
Balanced Portfolio PNC Bank, N.A.
Attn: Beverly Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522

Smith Barney					
	18.0384
Concert Series, Inc.
Select Balanced Portfolio
PNC Bank Attn: Beverly Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522

Smith Barney						8.7399
Concert Series, Inc.
Conservative Port. PNC Bank, N.A.
Attn: Beverly Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522

No officer, Trustee or employee of Salomon Smith 
Barney or any Salomon Smith Barney parent or 
subsidiary receives any compensation from the trust 
for serving as an officer or Trustee of the trust. The 
trust, on behalf of the fund and the other series of 
the trust, pays each Trustee who is not an officer, 
director or employee of Salomon Smith Barney or any of 
its affiliates a fee of $3,000 per year plus $500 per 
meeting attended, and reimburses them for travel and 
out-of-pocket expenses.  For the fiscal year ended 
December 31, 1998, such travel and out-of-pocket 
expenses totaled $2,862.

For the fiscal year ended and the calendar year ended 
December 31, 1998, the Trustees of the trust were paid 
the following compensation with respect to the fund:





Trustee(*)

Aggregate 
Compensation from 
the Fund for the 
Fiscal Year ended 
December 31, 1998

Total 
Pension or 
Retirement 
Benefits 
Accrued from 
the Fund
Aggregate 
Compensation from 
the Fund and the 
Fund Complex for 
the Year ended 
December 31, 1998




Lee Abraham (9)
$5,570
$0
$47,750
Allan J. Bloostein 
(15)
 5,540
  0
 90,500
Richard E. Hanson, Jr. 
(9)
 5,590
  0
 47,950
Heath B. McLendon (64)
 0
  0
 0
Donald R. Foley (12)** 
+
 0
  0
 57,100
Paul Hardin (14)+
 0
  0
 71,400
Roderick C. Rasmussen 
(12)+
 0
  0
 57,100
John P. Toolan (12)** 
+
 0
  0
 54,700

(*)	Number of directorships/trusteeships held with 
other Smith Barney Mutual Funds. 

**	Pursuant to a deferred compensation plan, the 
indicated trustees have elected to defer the 
following amounts of their total compensation 
from the Fund Complex: Donald R. Foley: $21,000 
and John P. Toolan: $54,700.

+	Elected as of April 19, 1999, therefore no 
compensation was paid by fund through December 31, 
1998.
	
Investment Adviser, Sub-Investment Adviser and 
Administrator
   
SSBC serves as investment adviser to the fund pursuant 
to a written agreement with the fund (an "Advisory 
Agreement").  SSBC is a wholly owned subsidiary of 
Salomon Smith Barney Holdings Inc. ("Holdings").  
Holdings is a wholly owned subsidiary of Citigroup.  
The Advisory Agreement was most recently approved by 
the Board of Trustees, including a majority of the 
Trustees who are not "interested persons" of the trust 
or the Investment Adviser ("Independent Trustees"), on 
December 4, 1998.  SSBC serves as administrator to the 
fund pursuant to a separate written agreement dated 
August 31, 1995 (the "Administration Agreement") which 
was most recently approved by the Board of Trustees, 
including a majority of the Independent Trustees, on 
August 5, 1998.  SSBC (through its predecessor 
entities) has been in the investment counseling 
business since 1968 and renders investment advice to a 
wide variety of individual, institutional and 
investment company clients that had aggregate assets 
under management as of March 31, 1999 in excess of 
$114 billion.

At a meeting of the Board of Trustees of the trust 
held on April 15, 1999, the Trustees approved an 
interim sub-advisory contract and subject to 
shareholder approval, a new Sub-Advisory Agreement 
("Agreement"), with SaBAM, on behalf of the fund.  
SaBAM is an affiliate of SSBC.  The Trustees also 
approved the termination of the current sub-advisory 
agreement with Boston Partners Asset Management LP 
("Boston Partners"). The interim sub-advisory contract 
commenced on April 26 and will terminate on the later 
of 120 days or upon shareholder approval of the 
Agreement. If the 120 days expires without shareholder 
approval of the Agreement, SSBC would manage the fund 
without the assistance of a sub-adviser until the 
Board determines that additional action is 
appropriate. Both the interim sub-advisory contract 
and the Agreement obligate the sub-adviser to provide 
investment advisory services to the fund. The interim 
sub-advisory contract is identical to the current sub-
advisory agreement with Boston Partners in all 
material respects. There are no material changes in 
its terms and conditions and no change in fees. The 
Agreement, if approved by shareholders would provide 
for fees to be paid by the adviser to the sub-adviser 
at a rate to be agreed upon from time to time but in 
no instance to exceed the fees currently being paid to 
the adviser.

The Investment Adviser, Sub-Investment Adviser and 
Administrator pay the salaries of all officers and 
employees who are employed by both it and the trust, 
and maintain office facilities for the trust.  In 
addition to those services, the Investment Adviser 
furnishes the trust with statistical and research 
data, clerical help and accounting, data processing, 
bookkeeping, internal auditing and legal services and 
certain other services required by the trust, prepares 
reports to the fund's shareholders and prepares tax 
returns, reports to and filings with the Securities 
and Exchange Commission (the "SEC") and state Blue Sky 
authorities.  The Investment Adviser and Sub-
Investment Adviser bear all expenses in connection 
with the performance of their services.

As compensation for investment advisory services, the 
fund pays the Investment Adviser a fee computed daily 
and paid monthly at the annual rate of 0.55% of the 
value of the fund's average daily net assets.  As 
compensation for sub-advisory services, the Investment 
Adviser pays the Sub-Investment Adviser a fee in an 
amount agreed to from time to time by the parties but 
not to exceed the fee paid to SSBC under its current 
advisory agreement.  Payments of the sub-advisory fee 
to SaBAM will commence in accordance with the current 
sub-advisory agreement dated December 1, 1997, with 
Boston Partners upon the expiration of 60 days from 
April 16, 1999, the date of the notice of termination 
of that agreement.
    
For the periods below, the fund paid investment 
advisory fees to its Investment Adviser as follows:

For the 
Period from 
August 1, 
1996 through 
December 31, 
1996
For the 
Fiscal 

1996*
Year Ended

1997
December 31:

1998
$6,454,801
$13,381,076
$19,865,93
5
$23,785,495              

	*Figures are for the period ended July 31.

As compensation for administrative services, the fund 
pays the Administrator a fee computed daily and paid 
monthly at the annual rate of 0.20% of the fund's 
average daily net assets.  For the periods shown 
below, the fund paid administrative fees to SSBC or 
Mutual Management Corp., the fund's predecessor 
administrator, as follows:

For the 
Period from 
August 1, 
1996 
through 
December 
31, 1996
For the 
Fiscal 

1996*
Year Ended

1997
December 31:

1998
$2,347,201
$2,299,999
$7,223,977
$8,649,271              

	*Figures are for the period ended July 31.

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

Auditors

KPMG LLP, 345 Park Avenue, New York, New York 10154 
has been selected as the fund's independent auditors 
to examine and report on the fund's financial 
statements and highlights for the fiscal year ending 
December 31, 1999.

INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES

Investment Objectives and Policies
   
The fund's investment objective is total return.  The 
fund's investment objective may be changed only with 
the approval of a majority of the fund's outstanding 
shares.  There can be no assurance that the fund will 
achieve its investment objective.  The fund will seek 
to achieve its objective by investing in equity and 
fixed income securities of both U.S. and foreign 
issuers.  The fund may engage in various portfolio 
strategies involving options, futures, options on 
futures and swaps to seek to increase its return, to 
hedge its portfolio against movements in the equity 
markets and interest rates or as a substitute for 
buying and selling securities.  Until the shareholders 
approve a new sub-advisory agreement with SaBAM, the 
fund also may invest up to 35% of its assets in:  (a) 
medium- or low-rated securities or unrated securities 
of comparable quality.  Medium- and low-rated 
securities are securities rated less than investment 
grade by a nationally recognized statistical rating 
organization ("NRSRO") such as Moody's Investors 
Service, Inc. ("Moody's") or Standard & Poor's Ratings 
Group ("S&P").  See "Medium-, Low- and Unrated 
Securities"; (b) interest-paying debt securities, such 
as obligations issued or guaranteed as to principal 
and interest by the United States government; and (c) 
other securities, including convertible bonds, 
convertible preferred stock and warrants.  In 
addition, the fund will limit its investments in 
warrants to 5% of its net assets.  The fund also may 
lend its portfolio securities and enter into "short 
sales against the box."  Special considerations 
associated with the fund's investment strategies are 
described below.
    
Certain Investment Strategies

In attempting to achieve its investment objective, the 
fund may employ, among others, one or more of the 
strategies set forth below.  See "Additional Risk 
Factors" for additional information about the risks 
of these investment practices.

Equity Securities

Common Stocks. The fund may purchase common stocks. 
Common stocks are shares of a corporation or other 
entity that entitle the holder to a pro rata share of 
the profits of the corporation, if any, without 
preference over any other shareholder or class of 
shareholders, including holders of the entity's 
preferred stock and other senior equity. Common stock 
usually carries with it the right to vote and 
frequently an exclusive right to do so.

Convertible Securities. The fund may invest in 
convertible securities which are fixed-income 
securities that may be converted at either a stated 
price or stated rate into underlying shares of common 
stock. Convertible securities have general 
characteristics similar to both fixed-income and 
equity securities. Although to a lesser extent than 
with fixed-income securities, the market value of 
convertible securities tends to decline as interest 
rates increase and, conversely, tends to increase as 
interest rates decline. In addition, because of the 
conversion feature, the market value of convertible 
securities tends to vary with fluctuations in the 
market value of the underlying common stocks and, 
therefore, also will react to variations in the 
general market for equity securities.

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

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

Synthetic Convertible Securities.  The fund may invest 
in synthetic convertible securities. Synthetic 
convertible securities differ from convertible 
securities in certain respects, including that each 
component of a synthetic convertible security has a 
separate market value and responds differently to 
market fluctuations. Investing in synthetic 
convertible securities involves the risk normally 
involved in holding the securities comprising the 
synthetic convertible security.

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

Warrants or Rights. Warrants or rights may be acquired 
by the fund in connection with other securities or 
separately and provide the fund with the right to 
purchase at a later date other securities of the 
issuer. The fund has undertaken that its investment in 
warrants or rights, valued at the lower of cost or 
market, will not exceed 5% of the value of its net 
assets. Warrants or rights acquired by the fund in 
units or attached to securities will be deemed to be 
without value for purposes of this restriction.
   
Real Estate Investment Trusts ("REITs"). The fund may 
invest in shares of REITs. REITs are pooled investment 
vehicles which invest primarily in income producing 
real estate or real estate related loans or interests. 
REITs are generally classified as equity REITs,  
mortgage REITs or a combination of equity and mortgage 
REITs. Equity REITs invest the majority of their 
assets directly in real property and derive income 
primarily from the collection or rents. Equity REITs 
may also include operating or finance companies. 
Equity REITs can also realize capital gains by selling 
properties that have appreciated in value. Mortgage 
REITs invest the majority of their assets in real 
estate mortgages and derive income from the collection 
of interest payments. REITs are not taxed on income 
distributed to shareholders provided they comply with 
several requirements of the Internal Revenue Code of 
1986, as amended (the "Code"). A mortgage trust can 
make construction, development or long-term mortgage 
loans, which are sensitive to the credit quality of 
the borrower. Mortgage trusts derive their income from 
interest payments. Hybrid trusts combine the 
characteristics of both equity and mortgage trusts, 
generally by holding both ownership interests and 
mortgage interests in real estate. 
    
Fixed Income Securities

Corporate Debt Obligations.  The fund may invest in 
corporate debt obligations and zero coupon securities 
issued by financial institutions and corporations. 
Corporate debt obligation are subject to the risk of 
an issuer's inability to meet principal and interest 
payments on the obligations and may also be subject to 
price volatility due to such facts as market interest 
rates, market perception of the creditworthiness of 
the issuer and general market liquidity.  Zero coupon 
securities are securities sold at a discount to par 
value and on which interest payments are not made 
during the life of the security.

Zero Coupon, Pay-In-Kind and Delayed Interest 
Securities.  The fund may invest in zero coupon, pay-
in-kind and delayed interest securities as well as 
custodial receipts or certificates underwritten by 
securities dealers or banks that evidence ownership of 
future interest payments, principal payments or both 
on certain U.S. government securities.  Zero coupon 
securities pay no cash income to their holders until 
they mature and are issued at substantial discounts 
from their value at maturity. When held to maturity, 
their entire return comes from the difference between 
their purchase price and their maturity value. Zero-
coupon and delayed interest securities are issued at a 
significant discount from their principal amount. 
While zero-coupon bonds do not require the periodic 
payment of interest, deferred interest bonds provide 
for a period of delay before the regular payment of 
interest begins. Payment-in-kind bonds allow the 
issuer, at its option, to make current interest 
payments on the bonds either in cash or in additional 
bonds. Because interest on zero coupon, pay-in-kind 
and delayed interest securities is not paid on a 
current basis, the values of securities of this type 
are subject to greater fluctuations than are the 
values of securities that distribute income regularly 
and may be more speculative than such securities.

Custodial receipts evidencing specific coupon or 
principal payments have the same general attributes as 
zero coupon U.S. government securities but are not 
considered to be U.S. government securities. Although 
under the terms of a custodial receipt a fund is 
typically authorized to assert its rights directly 
against the issuer of the underlying obligation, the 
fund may be required to assert through the custodian 
bank such rights as may exist against the underlying 
issuer. Thus, in the event the underlying issuer fails 
to pay principal and/or interest when due, the fund 
may be subject to delays, expenses and risks that are 
greater than those that would have been involved if 
the fund had purchased a direct obligation of the 
issuer. In addition, in the event that the trust or 
custodial account in which the underlying security has 
been deposited is determined to be an association 
taxable as a corporation, instead of a non-taxable 
entity, the yield on the underlying security would be 
reduced in respect of any taxes paid.

Mortgage-Backed Securities. The fund may invest in 
mortgage backed securities, which are securities 
representing interests in "pools" of mortgage loans. 
Monthly payments of interest and principal by the 
individual borrowers on mortgages are "passed through" 
to the holders of the securities (net of fees paid to 
the issuer or guarantor of the securities) as the 
mortgages in the underlying mortgage pools are paid 
off. The average lives of mortgage pass-throughs are 
variable when issued because their average lives 
depend on prepayment rates. The average life of these 
securities is likely to be substantially shorter than 
their stated final maturity as a result of unscheduled 
principal prepayment. Prepayments on underlying 
mortgages result in a loss of anticipated interest, 
and all or part of a premium if any has been paid, and 
the actual yield (or total return) to a fund may be 
different than the quoted yield on the securities. 
Mortgage prepayments generally increase with falling 
interest rates and decrease with rising interest 
rates. Additional payment 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-
backed securities may tend to increase due to 
refinancing of mortgages as interest rates decline. 
Like other fixed income securities, when interest 
rates rise the value of a mortgage pass-through 
security generally will decline; however, when 
interest rates are declining, the value of mortgage 
pass-through securities with prepayment features may 
not increase as much as that of other fixed-income 
securities.

Payment of principal and interest on some mortgage 
pass-through securities (but not the market value of 
the securities themselves) may be guaranteed by the 
full faith and credit of the U.S. government (in the 
case of securities guaranteed by the Government 
National Mortgage Association ("GNMA"); or guaranteed 
by agencies or instrumentalities of the U.S. 
government (such as the Federal National Mortgage 
Association ("FNMA") or the Federal Home Loan Mortgage 
Corporation, ("FHLMC") which are supported only by the 
discretionary authority of the U.S. government to 
purchase the agency's obligations). Mortgage pass-
through securities may also be issued by non-
governmental issuers (such as commercial banks, 
savings and loan institutions, private mortgage 
insurance companies, mortgage bankers and other 
secondary market issuers). Some of these mortgage 
pass-through securities may be supported by various 
forms of insurance or guarantees.

Interests in pools of mortgage-related securities 
differ from other forms of debt securities, which 
normally provide for periodic payment of interest in 
fixed amounts with principal payments at maturity or 
specified call dates. Instead, these securities 
provide a monthly payment which consists of both 
interest and principal payments. In effect, these 
payments are a "pass-through" of the monthly payments 
made by the individual borrowers on their mortgage 
loans, net of any fees paid to the issuer or guarantor 
of such securities. Additional payments are caused by 
prepayments of principal resulting from the sale, 
refinancing or foreclosure of the underlying property, 
net of fees or costs which may be incurred. Some 
mortgage pass-through securities (such as securities 
issued by the GNMA) are described as "modified pass-
through." These securities entitle the holder to 
receive all interest and principal payments owed on 
the mortgages in the mortgage pool, net of certain 
fees, at the scheduled payment dates regardless of 
whether the mortgagor actually makes the payment.

The principal governmental guarantor of mortgage pass-
through securities is the GNMA. GNMA is a wholly owned 
U.S. government corporation within the Department of 
Housing and Urban Development. GNMA is authorized to 
guarantee, with the full faith and credit of the U.S. 
government, the timely payment of principal and 
interest on securities issued by institutions approved 
by GNMA (such as savings and loan institutions, 
commercial banks and mortgage bankers) and backed by 
pools of FHA-insured or VA-guaranteed mortgages. These 
guarantees, however, do not apply to the market value 
or yield of mortgage pass-through securities. GNMA 
securities are often purchased at a premium over the 
maturity value of the underlying mortgages. This 
premium is not guaranteed and will be lost if 
prepayment occurs.

Government-related guarantors (i.e., whose guarantees 
are not backed by the full faith and credit of the 
U.S. government) include the FNMA and the FHLMC. FNMA 
is a government-sponsored corporation owned entirely 
by private stockholders. It is subject to general 
regulation by the Secretary of Housing and Urban 
Development. FNMA purchases conventional residential 
mortgages (i.e., mortgages not insured or guaranteed 
by any governmental agency) from a list of approved 
seller/servicers which include state and federally-
chartered savings and loan associations, mutual 
savings banks, commercial banks, credit unions and 
mortgage bankers. Pass-through securities issued by 
FNMA are guaranteed as to timely payment by FNMA of 
principal and interest.

FHLMC is also a government-sponsored corporation owned 
by private stockholders. FHLMC issues Participation 
Certificates ("PCs") which represent interests in 
conventional mortgages (i.e., not federally insured or 
guaranteed) from FHLMC's national portfolio. FHLMC 
guarantees timely payment of interest and ultimate 
collection of principal regardless of the status of 
the underlying mortgage loans. Commercial banks, 
savings and loan institutions, private mortgage 
insurance companies, mortgage bankers and other 
secondary market issuers also create pass-through 
pools of mortgage loans. Such issuers may also be the 
originators and/or servicers of the underlying 
mortgage-related securities. Pools created by such 
non-governmental issuers generally offer a higher rate 
of interest than government and government-related 
pools because there are no direct or indirect 
government or agency guarantees of payments in the 
former pools. However, timely payment of interest and 
principal of mortgage loans in these pools may be 
supported by various forms of insurance or guarantees, 
including individual loan, title, pool and hazard 
insurance and letters of credit. The insurance and 
guarantees are issued by governmental entities, 
private insurers and the mortgage poolers. There can 
be no assurance that the private insurers or 
guarantors can meet their obligations under the 
insurance policies or guarantee arrangements. The fund 
may also buy mortgage-related securities without 
insurance or guarantees.

Collateralized mortgage obligations are a type of bond 
secured by an underlying pool of mortgages or mortgage 
pass-through certificates that are structured to 
direct payments on underlying collateral to different 
series of classes of the obligations.

Asset-Backed Securities. The fund may invest in asset-
backed securities. These securities, issued by trusts 
and special purpose corporations, are backed by a pool 
of assets, such as credit card and automobile loan 
receivables, representing the obligations of a number 
of different parties. Asset-backed securities arise 
through the grouping by governmental, government-
related and private organizations of loans, 
receivables and other assets originated by various 
lenders. Interests in pools of these assets differ 
from other forms of debt securities, which normally 
provide for periodic payment of interest in fixed 
amounts with principal paid at maturity or specified 
call dates. Instead, asset-backed securities provide 
periodic payments which generally consist of both 
interest and principal payments.

Corporate asset-backed securities present certain 
risks. For instance, in the case of credit card 
receivables, these securities may not have the benefit 
of any security interest in the related collateral. 
Credit card receivables are generally unsecured and 
the debtors are entitled to the protection of a number 
of state and federal consumer credit laws, many of 
which give such debtors the right to set off certain 
amounts owed on the credit cards, thereby reducing the 
balance due. Most issuers of automobile receivables 
permit the servicers to retain possession of the 
underlying obligations. If the servicer were to sell 
these obligations to another party, there is a risk 
that the purchaser would acquire an interest superior 
to that of the holders of the related automobile 
receivables. In addition, because of the large number 
of vehicles involved in a typical issuance and 
technical requirements under state laws, the trustee 
for the holders of the automobile receivables may not 
have a proper security interest in all of the 
obligations backing such receivables. Therefore, there 
is the possibility that recoveries on repossessed 
collateral may not, in some cases, be available to 
support payments on these securities.

Corporate asset-backed securities are often backed by 
a pool of assets representing the obligations of a 
number of different parties. To lessen the effect of 
failures by obligors to make payments on underlying 
assets, the securities may contain elements of credit 
support which fall into two categories:  (i) liquidity 
protection and (ii) protection against losses 
resulting from ultimate default by an obligor on the 
underlying assets. Liquidity protection refers to the 
provision of advances, generally by the entity 
administering the pool of assets, to ensure that the 
receipt of payments on the underlying pool occurs in a 
timely fashion. Protection against losses resulting 
from ultimate default ensures payment through 
insurance policies or letters of credit obtained by 
the issuer or sponsor from third parties. The fund 
will not pay any additional or separate fees for 
credit support. The degree of credit support provided 
for each issue is generally based on historical 
information respecting the level of credit risk 
associated with the underlying assets. Delinquency or 
loss in excess of that anticipated or failure of the 
credit support could adversely affect the return on an 
instrument in such a security.

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

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

Upon the exercise of a put option written by the fund, 
the fund may suffer a loss equal to the difference 
between the price at which the fund is required to 
purchase the underlying security and its market value 
at the time of the option exercise, less the premium 
received for writing the option.  Upon the exercise of 
a call option written by the fund, the fund may suffer 
a loss equal to the excess of the security's market 
value at the time of the option exercise over the 
option exercise price, less the premium received for 
writing the option.

The fund will write only covered options.  
Accordingly, whenever the fund writes a call option, 
it will continue to own or have the present right to 
acquire the underlying security for as long as it 
remains obligated as the writer of the option.  To 
support its obligation to purchase the underlying 
security if a put option is exercised, the fund will 
either (a) deposit with PNC Bank, National Association 
("PNC Bank") in a segregated account cash or equity 
and debt securities of any grade provided such 
securities have been determined by the Investment 
Adviser or Sub-Investment Adviser to be liquid and 
unencumbered pursuant to guidelines established by the 
Trustees, having a value at least equal to the 
exercise price of the option or (b) continue to own an 
equivalent number of puts on the same underlying 
security having the same exercise prices and 
expiration dates as those written by the fund, or an 
equivalent number of puts on the same underlying 
security with exercise prices equal to or greater than 
those that it has written (or, if the exercise prices 
of the puts it holds are less than the exercise prices 
of those that it has written, it will deposit the 
difference with PNC Bank in a segregated account).

Purchasing Put and Call Options on Securities.  The 
fund may utilize up to 10% of its assets to purchase 
put options on portfolio securities and may do so at 
or about the same time it purchases the underlying 
security or at a later time.  By buying a put, the 
fund limits the risk of loss from a decline in market 
value of the security until the put expires.  Any 
appreciation in the value of, or in the yield 
otherwise available from the underlying security, 
however, will be partially offset by the amount of the 
premium paid for the put option and any related 
transaction costs.  The fund may utilize up to 10% of 
its assets to purchase call options on portfolio 
securities.  Call options may be purchased by the fund 
in order to acquire the underlying securities for the 
fund at a price that avoids any additional cost that 
would result from a substantial increase in the market 
value of a security.  The fund also may purchase call 
options to increase its return to investors at a time 
when the call is expected to increase in value due to 
anticipated appreciation of the underlying security.

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

More About Options on Securities.  Although the fund 
generally will purchase or write only those options 
for which its Investment Adviser or Sub-Investment 
Adviser believes there is an active secondary market, 
there is no assurance that sufficient trading interest 
to create a liquid secondary market on a securities 
exchange will exist for any particular option or at 
any particular time, and for some options no such 
secondary market may exist.  A liquid secondary market 
in an option may cease to exist for a variety of 
reasons.  At times in the past, for example, higher 
than anticipated trading activity or order flow or 
other unforeseen events have rendered inadequate 
certain of the facilities of the Options Clearing 
Corporation (the "Clearing Corporation") as well U.S. 
and foreign securities exchanges and resulted in the 
institution of special procedures such as trading 
rotations, restrictions on certain types of orders or 
trading halts or suspensions in one or more options.  
There can be no assurance that similar events, or 
events that may otherwise interfere with the timely 
execution of customers' orders, will not recur.  In 
such event, it might not be possible to effect closing 
transactions in particular options.  If the fund as a 
covered call option writer is unable to effect a 
closing purchase transaction in a secondary market, it 
will not be able to sell the underlying security until 
the option expires or it delivers the underlying 
security upon exercise.

Securities exchanges generally have established 
limitations governing the maximum number of calls and 
puts of each class that may be held, written or 
exercised within certain time periods by an investor 
or group of investors acting in concert (regardless of 
whether the options are written on the same or 
different securities exchanges or are held, written or 
exercised in one or more accounts or through one or 
more brokers).  It is possible the fund, other clients 
of the Investment Adviser and certain of their 
affiliates may be considered to be such a group.  A 
securities exchange may order the liquidation of 
positions found to be in violation of these limits and 
it may impose certain other sanctions.

In the case of options that are deemed covered by 
virtue of the fund's holding convertible or 
exchangeable preferred stock or debt securities, the 
time required to convert or exchange and obtain 
physical delivery of the underlying common stocks with 
respect to which the fund has written options may 
exceed the time within which the fund must make 
delivery in accordance with an exercise notice.  In 
these instances, the fund may purchase or borrow 
temporarily the underlying securities for purposes of 
physical delivery.  By so doing, the fund will not 
bear any market risk because the fund will have the 
absolute right to receive from the issuer of the 
underlying security an equal number of shares to 
replace the borrowed stock, but the fund may incur 
additional transaction costs or interest expenses in 
connection with any such purchase or borrowing.

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

Stock Index Options.  The fund may purchase and write 
exchange-listed put and call options on stock indexes 
primarily to hedge against the effects of market-wide 
price movements.  A stock index measures the movement 
of a certain group of stocks by assigning relative 
values to the common stocks included in the index.  
Examples of well-known stock indexes are the Standard 
& Poor's Daily Price Index of 500 Common Stocks and 
the NYSE Composite Index.  Some stock index options 
are based on a broad market index such as the New York 
Stock Exchange Composite Index or a narrower market 
index such as the Standard & Poor's 100.  Indexes also 
are based on an industry or market segment such as the 
AMEX Oil and Gas Index or the Computer and Business 
Equipment Index.

Options on stock indexes are similar to options on 
securities.  However,(a) because options on stock 
indexes do not involve the delivery of an underlying 
security, the option represents the holder's right to 
obtain from the writer in cash a fixed multiple of the 
amount by which the exercise price exceeds (in the 
case of a put) or is less than (in the case of a call) 
the closing value of the underlying index on the 
exercise date, (b) the expiration cycles of stock 
index options are monthly, while those of stock 
options are currently quarterly and (c) the delivery 
requirements are different.  Instead of giving the 
right to take or make delivery of stock at a specified 
price, an option on a stock index gives the holder the 
right to receive a cash "exercise settlement amount" 
equal to (a) the amount, if any, by which the fixed 
exercise price of the option exceeds (in the case of a 
put) or is less than (in the case of a call) the 
closing value of the underlying index on the date of 
exercise, multiplied by (b) a fixed "index 
multiplier." Receipt of this cash amount will depend 
upon the closing level of the stock index upon which 
the option is based being greater than (in the case of 
a call) or less than (in the case of a put) the 
exercise price of the option.  The amount of cash 
received will be equal to such difference between the 
closing price of the index and the exercise price of 
the option expressed in dollars times a specified 
multiple.  The writer of the option is obligated, in 
return for the premium received, to make delivery of 
this amount.  The writer may offset its position in 
stock index options prior to expiration by entering 
into a closing transaction on an exchange or it may 
let the option expire unexercised.

Because the value of an index option depends upon 
movements in the level of the index rather than the 
price of a particular stock, whether the fund will 
realize gain or loss from the purchase or writing of 
options on an index depends upon movements in the 
level of stock prices in the stock market generally 
or, in the case of certain indexes, in an industry or 
market segment, rather than movements in the price of 
a particular stock.  Accordingly, successful use by 
the fund of options on stock indexes will be subject 
to the ability of the Investment Adviser and/or Sub-
Investment Adviser to predict correctly movements in 
the direction of the stock market generally or of a 
particular industry.  This requires different skills 
and techniques than predicting changes in the prices 
of individual stocks.

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

Futures Contracts and Options on Futures Contracts.  
To seek to increase total return or hedge against 
changes in interest rates or securities prices, the 
fund may purchase and sell futures contracts, and 
purchase and write call and put options on these 
futures contracts.  The fund may also enter into 
closing purchase and sale transactions with respect to 
any of these contracts and options.  These futures 
contracts may be based on various securities (such as 
U.S. government securities), securities indices and 
any other financial instruments and indices.  All 
futures contracts entered into by the fund are traded 
on U.S. exchanges or boards of trade that are 
licensed, regulated or approved by the Commodity 
Futures Trading Commission ("CFTC").

Futures Contracts.  A futures contract may generally 
be described as an agreement between two parties to 
buy and sell particular financial instruments for an 
agreed price during a designated month (or to deliver 
the final cash settlement price, in the case of a 
contract relating to an index or otherwise not calling 
for physical delivery at the end of trading in the 
contract).

Positions taken in the futures markets are not 
normally held to maturity but are instead liquidated 
through offsetting transactions which may result in a 
profit or a loss.  While futures contracts on 
securities will usually be liquidated in this manner, 
the fund may instead make, or take, delivery of the 
underlying securities whenever it appears economically 
advantageous to do so.  A clearing corporation 
associated with the exchange on which futures 
contracts are traded guarantees that, if still open, 
the sale or purchase will be performed on the 
settlement date.

Hedging and Other Strategies.  Hedging is an attempt 
to establish with more certainty than would otherwise 
be possible the effective price or rate of return on 
portfolio securities or securities that the fund 
proposes to acquire.  When interest rates are rising 
or securities prices are falling, the fund can seek to 
offset a decline in the value of its current portfolio 
securities through the sale of futures contracts.  
When interest rates are falling or securities prices 
are rising, the fund, through the purchase of futures 
contracts, can attempt to secure better rates or 
prices than might later be available in the market 
when it effects anticipated purchases.

The fund may, for example, take a "short" position in 
the futures market by selling futures contracts in an 
attempt to hedge against an anticipated rise in 
interest rates or a decline in market prices that 
would adversely affect the value of the fund's 
portfolio securities.  These futures contracts may 
include contracts for the future delivery of 
securities held by the fund or securities with 
characteristics similar to those of the fund's 
portfolio securities.

If, in the opinion of the Sub-Investment Adviser, 
there is a sufficient degree of correlation between 
price trends for the fund's portfolio securities and 
futures contracts based on other financial 
instruments, securities indices or other indices, the 
fund may also enter into such futures contracts as 
part of its hedging strategy.  Although under some 
circumstances prices of securities in the fund's 
portfolio may be more or less volatile than prices of 
these futures contracts, the Sub-Investment Adviser 
will attempt to estimate the extent of this volatility 
difference based on historical patterns and compensate 
for any differential by having the fund enter into a 
greater or lesser number of futures contracts or by 
attempting to achieve only a partial hedge against 
price changes affecting the fund's portfolio 
securities.  

When a short hedging position is successful, any 
depreciation in the value of portfolio securities will 
be substantially offset by appreciation in the value 
of the futures position.  On the other hand, any 
unanticipated appreciation in the value of the fund's 
portfolio securities would be substantially offset by 
a decline in the value of the futures position.

On other occasions, the fund may take a "long" 
position by purchasing futures contracts.  This would 
be done, for example, when the fund anticipates the 
subsequent purchase of particular securities when it 
has the necessary cash, but expects the prices then 
available in the applicable market to be less 
favorable than prices that are currently available.  
The fund may also purchase futures contracts as a 
substitute for transactions in securities, to alter 
the investment characteristics of portfolio securities 
or to gain or increase its exposure to a particular 
securities market.

Options on Futures Contracts.  The fund may purchase 
and write options on futures for the same purposes as 
its transactions in futures contracts.  The purchase 
of put and call options on futures contracts will give 
the fund the right (but not the obligation) for a 
specified price to sell or to purchase, respectively, 
the underlying futures contract at any time during the 
option period.  As the purchaser of an option on a 
futures contract, the fund obtains the benefit of the 
futures position if prices move in a favorable 
direction but limits its risk of loss in the event of 
an unfavorable price movement to the loss of the 
premium and transaction costs.

The writing of a call option on a futures contract 
generates a premium which may partially offset a 
decline in the value of the fund's assets.  By writing 
a call option, the fund becomes obligated, in exchange 
for the premium (upon exercise of the option) to sell 
a futures contract if the option is exercised, which 
may have a value higher than the exercise price.  
Conversely, the writing of a put option on a futures 
contract generates a premium which may partially 
offset an increase in the price of securities that the 
fund intends to purchase.  However, the fund becomes 
obligated (upon exercise of the option) to purchase a 
futures contract if the option is exercised, which may 
have a value lower than the exercise price.  The loss 
incurred by the fund in writing options on futures is 
potentially unlimited and may exceed the amount of the 
premium received.

The holder or writer of an option on a futures 
contract may terminate its position by selling or 
purchasing an offsetting option of the same series.  
There is no guarantee that such closing transactions 
can be effected.  The fund's ability to establish and 
close out positions on such options will be subject to 
the development and maintenance of a liquid market.

Other Considerations.  The fund may engage in futures 
and related options transactions either for bona fide 
hedging purposes or to seek to increase total return 
as permitted by the CFTC.  To the extent that the fund 
is using futures and related options for hedging 
purposes, futures contracts will be sold to protect 
against a decline in the price of securities that the 
fund owns or futures contracts will be purchased to 
protect the fund against an increase in the price of 
securities it intends to purchase.  The Sub-Investment 
Adviser will determine that the price fluctuations in 
the futures contracts and options on futures used for 
hedging purposes are substantially related to price 
fluctuations in securities held by the fund or 
securities or instruments which it expects to 
purchase.  As evidence of its hedging intent, the fund 
expects that, on 75% or more of the occasions on which 
it takes a long futures or option position (involving 
the purchase of futures contracts), the fund will have 
purchased, or will be in the process of purchasing, 
equivalent amounts of related securities in the cash 
market at the time when the futures or option position 
is closed out.  However, in particular cases, when it 
is economically advantageous for the fund to do so, a 
long futures position may be terminated or an option 
may expire without the corresponding purchase of 
securities or other assets.

To the extent that the fund engages in nonhedging 
transactions in futures contracts and options on 
futures, the aggregate initial margin and premiums 
required to establish these nonhedging positions will 
not exceed 5% of the net asset value of the fund's 
portfolio, after taking into account unrealized 
profits and losses on any such positions and excluding 
the amount by which such options were in-the-money at 
the time of purchase.

Transactions in futures contracts and options on 
futures involve brokerage costs, require margin 
deposits and, in the case of contracts and options 
obligating the fund to purchase securities, require 
the fund to establish a segregated account consisting 
of cash or liquid securities in an amount equal to the 
underlying value of such contracts and options.

While transactions in futures contracts and options on 
futures may reduce certain risks, these transactions 
themselves entail certain other risks.  For example, 
unanticipated changes in interest rates or securities 
prices may result in a poorer overall performance for 
the fund than if it had not entered into any futures 
contracts or options transactions.

Perfect correlation between the fund's futures 
positions and portfolio positions will be impossible 
to achieve.  In the event of an imperfect correlation 
between a futures position and a portfolio position 
which is intended to be protected, the desired 
protection may not be obtained and the fund may be 
exposed to risk of loss.

Some futures contracts or options on futures may 
become illiquid under adverse market conditions.  In 
addition, during periods of market volatility, a 
commodity exchange may suspend or limit trading in a 
futures contract or related option, which may make the 
instrument temporarily illiquid and difficult to 
price.  Commodity exchanges may also establish daily 
limits on the amount that the price of a futures 
contract or related option can vary from the previous 
day's settlement price.  Once the daily limit is 
reached, no trades may be made that day at a price 
beyond the limit. This may prevent the fund from 
closing out positions and limiting its losses.

Among the several risks accompanying the utilization 
of futures contracts and options on futures contracts 
are the following: First, the successful use of 
futures and options is dependent upon the ability of 
the adviser to predict correctly movements in the 
stock market or in the direction of interest rates.  
These predictions involve skills and techniques that 
may be different from those involved in the management 
of investments in securities.  If the prices of the 
underlying commodities move in an unanticipated 
manner, the fund may lose the expected benefit of 
these futures or options transactions and may incur 
losses.  Second, positions in futures contracts and 
options on futures contracts may be closed out only by 
entering into offsetting transactions on the exchange 
where the position was entered into (or through a 
linked exchange), and as a result of daily price 
fluctuation limits there can be no assurance the 
offsetting transaction could be entered into at an 
advantageous price at a particular time.  
Consequently, the fund may realize a loss on a futures 
contract or option that is not offset by an increase 
in the value of its portfolio securities being hedged 
or the fund may not be able to close a futures or 
options position without incurring a loss in the event 
of adverse price movements.

Swaps, Caps, Floors, Collars and Swaptions.	As one 
way of managing its exposure to different types of 
investments, the fund may enter into interest rate 
swaps, currency swaps, and other types of swap 
agreements such as caps, collars, floors and 
swaptions.  In a typical interest rate swap, one party 
agrees to make regular payments equal to a floating 
interest rate times a "notional principal amount," 
in return for payments equal to a fixed rate times the 
same notional amount, for a specified period of time.  
If a swap agreement provides for payment in different 
currencies, the parties might agree to exchange the 
notional principal amount as well.  Swaps may also 
depend on other prices or rates, such as the value of 
an index or mortgage prepayment rates.

In a typical cap or floor agreement, one party agrees 
to make payments only under specified circumstances, 
usually in return for payment of a fee by the other 
party.  For example, the buyer of an interest rate cap 
obtains the right to receive payments to the extent 
that a specified interest rate exceeds an agreed-upon 
level, while the seller of an interest rate floor is 
obligated to make payments to the extent that a 
specified interest rate falls below an agreed-upon 
level.  An interest rate collar combines elements of 
buying a cap and selling a floor.  A swaption is an 
option to buy or sell a swap position.

Swap agreements will tend to shift the fund's 
investment exposure from one type of investment to 
another.  For example, if the fund agreed to exchange 
payments in dollar for payments in a foreign currency, 
the swap agreement would tend to decrease the fund's 
exposure to U.S. interest rates and increase its 
exposure to foreign currency and interest rates.  Caps 
and floors have an effect similar to buying or writing 
options.  Depending on how they are used, swap 
agreements may increase or decrease the overall 
volatility of the fund's investments and its share 
price and yield.

Swap agreements are sophisticated risk management 
instruments that typically require a small cash 
investment relative to the magnitude of risks assumed.  
As a result, swaps can be highly volatile and may have 
a considerable impact on the fund's performance.  Swap 
agreements are subject to credit risks related to the 
counterparty's ability to perform, and may decline in 
value if the counterparty's creditworthiness 
deteriorates.  The fund may also suffer losses if it 
is unable to terminate outstanding swap agreements or 
reduce its exposure through offsetting transactions.  
The fund will maintain in a segregated account cash or 
liquid securities equal to the net amount, if any, of 
the excess of the fund's obligations over its 
entitlements with respect to swap, cap, collar, floor 
or swaption transactions. 

Additional Investments

Foreign Securities and American Depositary Receipts.  
Until such time as the shareholders of the fund 
approve a new sub-advisory agreement with SaBAM, the 
fund will voluntarily limit its investments in foreign 
securities and American Depositary Receipts ("ADRs") 
to 20% of its assets. 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 standards, generally 
higher commission rates on foreign portfolio 
transactions, the possibility of expropriation or 
confiscatory taxation, adverse changes in investment 
or exchange control regulations, political instability 
which could affect U.S. investments in foreign 
countries and potential restrictions on the flow of 
international capital.  Additionally, dividends or 
interest payable on foreign securities, and in some 
cases capital gains, may be subject to foreign 
withholding or other foreign taxes.   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 
U.S. dollars.  Many of the foreign securities held by 
the fund will not be registered with, nor will the 
issuers thereof be subject to the reporting 
requirements of, the SEC.  Accordingly, there may be 
less publicly available information about the 
securities and the foreign company or government 
issuing them than is available about a domestic 
company or government 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.

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

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

U.S. Government Securities.  United States government 
securities include debt obligations of varying 
maturities issued or guaranteed by the United States 
government or its agencies or instrumentalities ("U.S. 
government securities").  U.S. government securities 
include not only direct obligations of the United 
States Treasury (such as Treasury Bills, Treasury 
Notes and Treasury Bonds), but also securities issued 
or guaranteed by the Federal Housing Administration, 
Farmers Home Administration, Export-Import Bank of the 
United States, Small Business Administration, 
Government National Mortgage Association ("GNMA"), 
General Services Administration, Central Bank for 
Cooperatives, Federal Intermediate Credit Banks, 
Federal Land Banks, Federal National Mortgage 
Association ("FNMA"), Maritime Administration, 
Tennessee Valley Authority, District of Columbia 
Armory Board, Student Loan Marketing Association, and 
Resolution Trust Corporation.  Certain U.S. government 
securities, such as those issued or guaranteed by 
GNMA, FNMA and Federal Home Loan Mortgage Corporation 
("FHLMC"), are mortgage-related securities.  Because 
the United States government is not obligated by law 
to provide support to an instrumentality that it 
sponsors, the fund will invest in obligations issued 
by such an instrumentality only if its Investment 
Adviser or Sub-Investment Adviser determines that the 
credit risk with respect to the instrumentality does 
not make its securities unsuitable for investment by 
the fund.  U.S. government securities generally do not 
involve the credit risks associated with other types 
of interest-bearing securities, although, as a result, 
the yields available from U.S. government securities 
are generally lower than the yields available from 
interest-bearing corporate securities.

Bank Obligations.  Domestic commercial banks organized 
under Federal law are supervised and examined by the 
Comptroller of the Currency and are required to be 
members of the Federal Reserve System and to be 
insured by the Federal Deposit Insurance Corporation 
(the "FDIC").  Domestic banks organized under state 
law are supervised and examined by state banking 
authorities, but are members of the Federal Reserve 
System only if they elect to join.  Most state banks 
are insured by the FDIC (although such insurance may 
not be of material benefit to the fund, depending upon 
the principal amount of certificates of deposit 
("CDs") of each held by the fund) and are subject to 
Federal examination and to a substantial body of 
Federal law and regulation.  As a result of Federal 
and state laws and regulations, domestic branches of 
domestic banks are, among other things, generally 
required to maintain specified levels of reserves, and 
are subject to other supervision and regulation 
designed to promote financial soundness.

Obligations of foreign branches of U.S. banks, such as 
CDs and time deposits ("TDs"), may be general 
obligations of the parent bank in addition to the 
issuing branch, or may be limited by the terms of a 
specific obligation and governmental regulation.  
Obligations of foreign branches of U.S. banks and 
foreign banks are subject to different risks than are 
those of U.S. banks or U.S. branches of foreign banks.  
These risks include foreign economic and political 
developments, foreign governmental restrictions that 
may adversely affect payment of principal and interest 
on the obligations, foreign exchange controls and 
foreign withholding and other taxes on interest 
income.  Foreign branches of U.S. banks are not 
necessarily subject to the same or similar regulatory 
requirements applicable to U.S. banks, such as 
mandatory reserve requirements, loan limitations and 
accounting, auditing and financial recordkeeping 
requirements.  In addition, less information may be 
publicly available about a foreign branch of a U.S. 
bank than about a U.S. bank.  CDs issued by wholly 
owned Canadian subsidiaries of U.S. banks are 
guaranteed as to repayment of principal and interest, 
but not as to sovereign risk, by the U.S. parent bank. 

Obligations of U.S. branches of foreign banks may be 
general obligations of the parent bank in addition to 
the issuing branch, or may be limited by the terms of 
a specific obligation and by Federal and state 
regulation as well as governmental action in the 
country in which the foreign bank has its head office.  
A U.S. branch of a foreign bank with assets in excess 
of $1 billion may or may not be subject to reserve 
requirements imposed by the Federal Reserve System or 
by the state in which the branch is located if the 
branch is licensed in that state.  In addition, 
branches licensed by the Comptroller of the Currency 
and branches licensed by certain states ("State 
Branches") may or may not be required to: (a) pledge 
to the regulator by depositing assets with a 
designated bank within the state, an amount of its 
assets equal to 5% of its total liabilities; and (b) 
maintain assets within the state in an amount equal to 
a specified percentage of the aggregate amount of 
liabilities of the foreign bank payable at or through 
all of its agencies or branches within the state.  The 
deposits of State Branches may not necessarily be 
insured by the FDIC.  In addition, there may be less 
publicly available information about a U.S. branch of 
a foreign bank than about a U.S. bank.

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

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

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

When-Issued Securities and Delayed-Delivery 
Transactions.  To secure an advantageous price or 
yield, the fund may purchase certain securities on a 
when-issued basis or purchase or sell securities for 
delayed delivery.  The fund will enter into such 
transactions for the purpose of acquiring portfolio 
securities and not for the purpose of leverage.  
Delivery of the securities in such cases occurs beyond 
the normal settlement periods, but no payment or 
delivery is made by the fund prior to the reciprocal 
delivery or payment by the other party to the 
transaction.  In entering into a when-issued or 
delayed-delivery transaction, the fund will rely on 
the other party to consummate the transaction and may 
be disadvantaged if the other party fails to do so.

U.S. government securities are normally subject to 
changes in value based upon changes, real or 
anticipated, in the level of interest rates and, 
although to a lesser extent in the case of U.S. 
government securities, the public's perception of the 
creditworthiness of the issuers.  In general, U.S. 
government securities tend to appreciate when interest 
rates decline and depreciate when interest rates rise.  
Purchasing these securities on a when-issued or 
delayed-delivery basis, therefore, can involve the 
risk that the yields available in the market when the 
delivery takes place may actually be higher than those 
obtained in the transaction itself.  Similarly, the 
sale of U.S. government securities for delayed 
delivery can involve the risk that the prices 
available in the market when the delivery is made may 
actually be higher than those obtained in the 
transaction itself.

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

Lending of Portfolio Securities.  The fund has the 
ability to lend portfolio securities to brokers, 
dealers and other financial organizations.  Such 
loans, if and when made, may not exceed 20% of the 
fund's total assets taken at value.  The fund will not 
lend portfolio securities to Salomon Smith Barney 
unless it has applied for and received specific 
authority to do so from the SEC.  Loans of portfolio 
securities will be collateralized by cash, letters of 
credit or U.S. government securities which are 
maintained at all times in an amount at least equal to 
the current market value of the loaned securities.  
From time to time, the fund may pay a part of the 
interest earned from the investment of collateral 
received for securities loaned to the borrower and/or 
a third party which is unaffiliated with the fund and 
is acting as a "finder."

By lending its securities, the fund can increase its 
income by continuing to receive interest or dividends 
on the loaned securities as well as by either 
investing the cash collateral in short-term 
instruments or obtaining yield in the form of interest 
paid by the borrower when U.S. government securities 
are used as collateral.  The fund will comply with the 
following conditions whenever its portfolio securities 
are loaned: (a) the fund must receive at least 100% 
cash collateral or equivalent securities from the 
borrower; (b) the borrower must increase such 
collateral whenever the market value of the securities 
loaned rises above the level of such collateral; (c) 
the fund must be able to terminate the loan at any 
time; (d) the fund must receive reasonable interest on 
the loan, as well as any dividends, interest or other 
distributions on the loaned securities, and any 
increase in market value; (e) the fund may pay only 
reasonable custodian fees in connection with the loan; 
and (f) voting rights on the loaned securities may 
pass to the borrower; provided, however, that if a 
material event adversely affecting the investment in 
the loaned securities occurs, the trust's Board of 
Trustees must terminate the loan and regain the right 
to vote the securities.  The risks in lending 
portfolio securities, as with other extensions of 
secured credit, consist of a possible delay in 
receiving additional collateral or in the recovery of 
the securities or possible loss of rights in the 
collateral should the borrower fail financially.  
Loans will be made to firms deemed by the fund's 
Investment Adviser or Sub-Investment Adviser to be of 
good standing and will not be made unless, in the 
judgment of the Investment Adviser or Sub-Investment 
Adviser, the consideration to be earned from such 
loans would justify the risk.

Medium-, Low- and Unrated Securities.  The fund may 
invest up to 35% of its assets in medium- or low- 
rated securities and unrated securities of comparable 
quality. Securities rated below investment grade are 
frequently called junk bonds. Generally, these 
securities offer a higher current yield than the yield 
offered by higher-rated securities, but involve 
greater volatility of price and risk of loss of income 
and principal, including the probability of default by 
or bankruptcy of the issuers of such securities.  
Medium- and low-rated and comparable unrated 
securities: (a) will likely have some quality and 
protective characteristics that, in the judgment of 
the rating organization, are outweighed by large 
uncertainties or major risk exposures to adverse 
conditions and (b) are predominantly speculative with 
respect to the issuer's capacity to pay interest and 
repay principal in accordance with the terms of the 
obligation.  Thus, it is possible that these types of 
factors could, in certain instances, reduce the value 
of securities held by the fund with a commensurate 
effect on the value of the fund's shares.  Therefore, 
an investment in the fund should not be considered as 
a complete investment program and may not be 
appropriate for all investors. 

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

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

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

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

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

Illiquid and Restricted Securities. The fund may 
purchase securities that are restricted as to resale 
("restricted securities") under the Securities Act of 
1933, as amended (the "1933 Act"). Some restricted 
securities can be offered and sold to "qualified 
institutional buyers" under Rule 144A under the 1933 
Act. The Board of Trustees may determine, based upon a 
continuing review of the trading markets for a 
specific restricted security, that such restricted 
securities are liquid and therefore not subject to the 
fund's restriction on illiquid investments. The Board 
of Trustees has adopted guidelines and delegated to 
management the daily function of determining and 
monitoring liquidity of restricted securities 
available pursuant to Rule 144A. The Board, however, 
retains sufficient oversight and is ultimately 
responsible for the determinations. Since it is not 
possible to predict with assurance exactly how the 
market for Rule 144A restricted securities will 
develop, the Board will carefully monitor the fund's 
investments in these securities, focusing on such 
important factors, among others, as valuation, 
liquidity and availability of information. Investments 
in restricted securities could have the effect of 
increasing the level of illiquidity in a fund to the 
extent that qualified institutional buyers become for 
a time uninterested in purchasing these restricted 
securities. 

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

Yield Curve Options. The fund may enter into options 
on the "spread," or yield differential, between two 
fixed income securities, in transactions referred to 
as "yield curve" options. In contrast to other types 
of options, a yield curve option is based on the 
difference between the yields of designated 
securities, rather than the prices of the individual 
securities, and is settled through cash payments. 
Accordingly, a yield curve option is profitable to the 
holder if this differential widens (in the case of a 
call) or narrows (in the case of a put), regardless of 
whether the yields of the underlying securities 
increase or decrease.

Yield curve options may be used for the same purposes 
as other options on securities. Specifically, the fund 
may purchase or write such options for hedging 
purposes. For example, the fund may purchase a call 
option on the yield spread between two securities, if 
it owns one of the securities and anticipates 
purchasing the other security and wants to hedge 
against an adverse change in the yield spread between 
the two securities. The fund may also purchase or 
write yield curve options for other than hedging 
purposes (i.e., in an effort to increase its current 
income) if, in the judgment of management, the fund 
will be able to profit from movements in the spread 
between the yields of the underlying securities. The 
trading of yield curve options is subject to all of 
the risks associated with the trading of other types 
of options. In addition, however, such options present 
risk of loss even if the yield of one of the 
underlying securities remains constant, if the spread 
moves in a direction or to an extent which was not 
anticipated. Yield curve options written by the fund 
will be "covered". A call (or put) option is covered 
if the fund holds another call (or put) option on the 
spread between the same two securities and maintains 
in a segregated account with its custodian cash or 
cash equivalents sufficient to cover the fund's net 
liability under the two options. Therefore, the fund's 
liability for such a covered option is generally 
limited to the difference between the amount of the 
fund's liability under the option written by the fund 
less the value of the option held by the fund. Yield 
curve options may also be covered in such other manner 
as may be in accordance with the requirements of the 
counterparty with which the option is traded and 
applicable laws and regulations. Yield curve options 
are traded over-the-counter and because they have been 
only recently introduced, established trading markets 
for these securities have not yet developed.

Additional Risk Factors

General. Investors should realize that risk of loss is 
inherent in the ownership of any securities and that 
the fund's net asset value will fluctuate, reflecting 
the fluctuations in the market value of its portfolio 
positions. The following sections describe some of the 
important risk factors involved in connection with the 
types of investments or investment practices 
indicated.  See "Investment Objectives and Management 
Policies" for a description of the permissible 
investments and investment practices of the fund.

Fixed Income Securities. Investments in fixed income 
securities may subject the fund to risks, including 
the following.  

Interest Rate Risk. When interest rates decline, the 
market value of fixed income securities tends to 
increase.  Conversely, when interest rates increase, 
the market value of fixed income securities tends to 
decline.  The volatility of a security's market value 
will differ depending upon the security's duration, 
the issuer and the type of instrument.

Default Risk/Credit Risk.  Investments in fixed income 
securities are subject to the risk that the issuer of 
the security could default on its obligations, causing 
a fund to sustain losses on such investments.  A 
default could impact both interest and principal 
payments.

Call Risk and Extension Risk. Fixed income securities 
may be subject to both call risk and extension risk.  
Call risk exists when the issuer may exercise its 
right to pay principal on an obligation earlier than 
scheduled, which would cause cash flows to be returned 
earlier than expected.  This typically results when 
interest rates have declined and the fund will suffer 
from having to reinvest in lower yielding securities.  
Extension risk exists when the issuer may exercise its 
right to pay principal on an obligation later than 
scheduled, which would cause cash flows to be returned 
later than expected.  This typically results when 
interest rates have increased, and a fund will suffer 
from the inability to invest in higher yield 
securities.

Real Estate Investment Trusts. The values of 
securities issued by REITs are affected by tax and 
regulatory requirements and by perceptions of 
management skill. They are also subject to heavy cash 
flow dependency, defaults by borrowers or tenants, 
self-liquidation, the possibility of failing to 
qualify for the ability to avoid tax by satisfying 
distribution requirements under the Internal Revenue 
Code of 1986, as amended, and failing to maintain 
exemption from the 1940 Act. Also, the fund will 
indirectly bear its proportionate share of expenses 
incurred by REITs in which the fund invests.  REITs 
are also sensitive to factors such as changes in real 
estate values and property taxes, interest rates, 
overbuilding and creditworthiness of the issuer.

Zero Coupon, Pay-In-Kind and Delayed Interest 
Securities.  The values of these securities may be 
highly volatile as interest rates rise or fall.  In 
addition, the fund's investments in zero coupon, pay-
in-kind and delayed interest securities will result in 
special tax consequences.  Although zero coupon 
securities do not make interest payments, for tax 
purposes a portion of the difference between a zero 
coupon security's maturity value and its purchase 
price is taxable income of the fund each year.  The 
value of zero-coupon bonds is subject to greater 
fluctuation in market value in response to changes in 
market interest rates than bonds of comparable 
maturity which pay interest currently. Both zero-
coupon and payment-in-kind bonds allow an issuer to 
avoid the need to generate cash to meet current 
interest payments. Accordingly, such bonds may involve 
greater credit risks than bonds that pay interest 
currently. Even though such bonds do not pay current 
interest in cash, the fund is nonetheless required to 
accrue interest income on such investments and to 
distribute such amounts at least annually to 
shareholders. Accordingly, for the fund to continue to 
qualify for tax treatment as a regulated investment 
company and to avoid income and possibly excise tax, 
the fund may be required to distribute as a dividend 
an amount that is greater than the total amount of 
cash it actually receives. These distributions must be 
made from the fund's cash assets or, if necessary, 
from the proceeds of sales of portfolio securities. 
The fund will not be able to purchase additional 
income-producing securities with cash used to make 
such distributions and its current income ultimately 
may be reduced as a result.

Derivative Instruments.  In accordance with its 
investment policies, the fund may invest in certain 
derivative instruments, which are securities or 
contracts that provide for payments based on or 
"derived" from the performance of an underlying asset, 
index or other economic benchmark.  Essentially, a 
derivative instrument is a financial arrangement or a 
contract between two parties (and not a true security 
like a stock or a bond).  Transactions in derivative 
instruments can be, but are not necessarily, riskier 
than investments in conventional stocks, bonds and 
money market instruments.  A derivative instrument is 
more accurately viewed as a way of reallocating risk 
among different parties or substituting one type of 
risk for another.  Every investment by a fund, 
including an investment in conventional securities, 
reflects an implicit prediction about future changes 
in the value of that investment.  Every fund 
investment also involves a risk that the portfolio 
manager's expectations will be wrong.  Transactions in 
derivative instruments often enable a fund to take 
investment positions that more precisely reflect the 
portfolio manager's expectations concerning the future 
performance of the various investments available to 
the fund.  Derivative instruments can be a legitimate 
and often cost-effective method of accomplishing the 
same investment goals as could be achieved through 
other investment in conventional securities.

Derivative contracts include options, futures 
contracts, forward contracts, forward commitment and 
when-issued securities transactions, forward foreign 
currency exchange contracts and interest rate, 
mortgage and currency swaps.  The following are the 
principal risks associated with derivative 
instruments.

Market risk: The instrument will decline in value or 
that an alternative investment would have appreciated 
more, but this is no different from the risk of 
investing in conventional securities.

Leverage and associated price volatility:  Leverage 
causes increased volatility in the price and magnifies 
the impact of adverse market changes, but this risk 
may be consistent with the investment objective of 
even a conservative fund in order to achieve an 
average portfolio volatility that is within the 
expected range for that type of fund. 

Credit risk:  The issuer of the instrument may default 
on its obligation to pay interest and principal.

Liquidity and valuation risk:  Many derivative 
instruments are traded in institutional markets rather 
than on an exchange.  Nevertheless, many derivative 
instruments are actively traded and can be priced with 
as much accuracy as conventional securities.  
Derivative instruments that are custom designed to 
meet the specialized investment needs of a relatively 
narrow group of institutional investors such as the 
funds are not readily marketable and are subject to a 
fund's restrictions on illiquid investments.

Correlation risk:  There may be imperfect correlation 
between the price of the derivative and the underlying 
asset.  For example, there may be price disparities 
between the trading markets for the derivative 
contract and the underlying asset.

Each derivative instrument purchased for the fund's 
portfolio is reviewed and analyzed by the fund's 
portfolio manager to assess the risk and reward of 
each such instrument in relation the fund's portfolio 
investment strategy.  The decision to invest in 
derivative instruments or conventional securities is 
made by measuring the respective instrument's ability 
to provide value to the fund and its shareholders.

Special Investment Considerations and Risks With 
Respect to Futures, Options and Currency Transactions 
and Swaps and Swap-Related Products. The successful 
use of the investment practices described above with 
respect to futures contracts, options on futures 
contracts, forward contracts, options on securities 
and on foreign currencies, and swaps and swap-related 
products draws upon skills and experience which are 
different from those needed to select the other 
instruments in which the fund invests. Should interest 
or exchange rates or the prices of securities or 
financial indices move in an unexpected manner, the 
fund may not achieve the desired benefits of futures, 
options, swaps and forwards or may realize losses and 
thus be in a worse position than if such strategies 
had not been used. Unlike many exchange-traded futures 
contracts and options on futures contracts, there are 
no daily price fluctuation limits with respect to 
options on currencies, forward contracts and other 
negotiated or over-the-counter instruments, and 
adverse market movements could therefore continue to 
an unlimited extent over a period of time. In 
addition, the correlation between movements in the 
price of the securities and currencies hedged or used 
for cover will not be perfect and could produce 
unanticipated losses.

With respect to interest rate swaps, each fund 
recognizes that such arrangements are relatively 
illiquid and will include the principal amount of the 
obligations owed to it under a swap as an illiquid 
security for purposes of the fund's investment 
restrictions except to the extent a third party (such 
as a large commercial bank) has guaranteed the fund's 
ability to offset the swap at any time.

The fund's ability to dispose of its positions in the 
foregoing instruments will depend on the availability 
of liquid markets in the instruments. Markets in a 
number of the instruments are relatively new and still 
developing, and it is impossible to predict the amount 
of trading interest that may exist in those 
instruments in the future. Particular risks exist with 
respect to the use of each of the foregoing 
instruments and could result in such adverse 
consequences to the fund as the possible loss of the 
entire premium paid for an option bought by the fund, 
and the inability of the fund, as the writer of a 
covered call option, to benefit from the appreciation 
of the underlying securities above the exercise price 
of the option. As a result, no assurance can be given 
that the fund will be able to use those instruments 
effectively for the purposes set forth above. 

In connection with its transactions in futures, 
options, swaps and forwards, the fund may be required 
to place assets in a segregated account with the 
fund's custodian bank to ensure that the fund will be 
able to meet its obligations under these instruments. 
Assets held in a segregated account generally may not 
be disposed of for so long as the fund maintains the 
positions giving rise to the segregation requirement. 
Segregation of a large percentage of the fund's assets 
could impede implementation of the fund's investment 
policies or the fund's ability to meet redemption 
requests or other current obligations.

Particular Risks of Futures Contracts. The prices of 
futures contracts are volatile and are influenced, 
among other things, by actual and anticipated changes 
in interest rates, which in turn are affected by 
fiscal and monetary policies and national and 
international political and economic events.

At best, the correlation between changes in prices of 
futures contracts and of the securities or currencies 
being hedged can be only approximate. The degree of 
imperfection of correlation depends upon circumstances 
such as:  variations in speculative market demand for 
futures and for debt securities or currencies, 
including technical influences in futures trading; and 
differences between the financial instruments being 
hedged and the instruments underlying the standard 
futures contracts available for trading, with respect 
to interest rate levels, maturities, and 
creditworthiness of issuers. A decision of whether, 
when, and how to hedge involves skill and judgment, 
and even a well-conceived hedge may be unsuccessful to 
some degree because of unexpected market behavior or 
interest rate trends.

Because of the low margin deposits required, futures 
trading involves an extremely high degree of leverage. 
As a result, a relatively small price movement in a 
futures contract may result in immediate and 
substantial loss, as well as gain, to the investor. 
For example, if at the time of purchase, 10% of the 
value of the futures contract is deposited as margin, 
a subsequent 10% decrease in the value of the futures 
contract would result in a total loss of the margin 
deposit, before any deduction for the transaction 
costs, if the account were then closed out. A 15% 
decrease would result in a loss equal to 150% of the 
original margin deposit, if the futures contract were 
closed out. Thus, a purchase or sale of a futures 
contract may result in losses in excess of the amount 
invested in the futures contract. The fund, however, 
would presumably have sustained comparable losses if, 
instead of the futures contract, it had invested in 
the underlying financial instrument and sold it after 
the decline.

Furthermore, in the case of a futures contract 
purchase, in order to be certain that the fund has 
sufficient assets to satisfy its obligations under a 
futures contract, the fund sets aside and commits to 
back the futures contract an amount of cash, U.S. 
government securities and other liquid, high-grade 
debt securities equal in value to the current value of 
the underlying instrument less the margin deposit. In 
the case of a futures contract sale, the fund will 
either set aside amounts as in the case of a futures 
contract purchase, own the security underlying the 
contract, or hold a call option permitting the fund to 
purchase the same futures contract at a price no 
higher than the contract price. Assets used as cover 
cannot be sold while the position in the corresponding 
futures contract is open, unless they are replaced 
with similar assets. As a result, the commitment of a 
significant portion of the fund's assets to cover 
could impede portfolio management or the fund's 
ability to meet redemption requests or other current 
obligations.

Most United States futures exchanges limit the amount 
of fluctuation permitted in futures contract prices 
during a single trading day. The daily limit 
establishes the maximum amount that the price of a 
futures contract may vary either up or down from the 
previous day's settlement price at the end of a 
trading session. Once the daily limit has been reached 
in a particular type of futures contract, no trades 
may be made on that day at a price beyond that limit. 
The daily limit governs only price movement during a 
particular trading day and therefore does not limit 
potential losses, because the limit may prevent the 
liquidation of unfavorable positions. Futures contract 
prices have occasionally moved to the daily limit for 
several consecutive trading days with little or no 
trading, thereby preventing prompt liquidation of 
futures positions and subjecting some futures traders 
to substantial losses.

Mortgage-Backed Securities. To the extent the fund 
purchases mortgage-related securities at a premium, 
mortgage foreclosures and prepayments of principal 
(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 yield generated 
by the fund that invests in mortgage-related 
securities 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 mortgage pools, 
generally will fluctuate in response to market 
interest rates.

Other Asset-Backed Securities. The estimated life of 
an asset-backed security varies with the prepayment 
experience with respect to the underlying debt 
instruments. The rate of such prepayments, and hence 
the life of an asset-backed security, will be 
primarily a function of current market interest rates, 
although other economic and demographic factors may be 
involved. For example, falling interest rates 
generally result in an increase in the rate of 
prepayments of mortgage loans while rising interest 
rates generally decrease the rate of prepayments. An 
acceleration in prepayments in response to sharply 
falling interest rates will shorten the security's 
average maturity and limit the potential appreciation 
in the security's value relative to a conventional 
debt security. Consequently, asset-backed securities 
are not as effective in locking in high long-term 
yields. Conversely, in periods of sharply rising 
rates, prepayments generally slow, increasing the 
security's average life and its potential for price 
depreciation.

Certain Investment Guidelines

The fund may invest up to 10% of its total assets in 
securities with contractual or other restrictions on 
resale and other instruments not readily marketable, 
including (a) repurchase agreements with maturities 
greater than seven days, (b) time deposits maturing 
from two business days through seven calendar days and 
(c) to the extent that a liquid secondary market does 
not exist for the instruments, futures contracts and 
options thereon.  In addition, the fund may invest up 
to 5% of its assets in the securities of issuers which 
have been in continuous operation for less than three 
years.  The investment guidelines set forth in this 
paragraph may be changed at any time without 
shareholder consent by vote of the trust's Board of 
Trustees.

Investment Restrictions

The trust has adopted investment restrictions 1 
through 7 below as fundamental policies with respect 
to the fund and the other series of the trust (the 
"funds").  Under the terms of the 1940 Act, these 
fundamental policies may not be changed with respect 
to the fund without the vote of a majority of the 
outstanding voting securities of the fund.  A 
"majority" is defined in the 1940 Act as the lesser of 
(a) 67% or more of the shares present at a shareholder 
meeting, if the holders of more than 50% of the 
outstanding shares of the fund are present or 
represented by proxy, or (b) more than 50% of the 
outstanding shares.  Set forth below are the 
investment policies of the trust, some of which apply 
to the other series of the trust.

The investment policies adopted by the trust prohibit 
the fund from:

	1.	Investing in a manner that would cause it 
to fail to be a "diversified company" 
under the 1940 Act and the rules, 
regulations and orders thereunder.

	2.	Investing in "senior securities" as 
defined in the 1940 Act and the rules, 
regulations and orders thereunder except 
as permitted under the 1940 Act and the 
rules, regulations and orders thereunder. 

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

	4.	Borrowing money, except that (a) the fund 
may borrow from banks for temporary or 
emergency (not leveraging) purposes, 
including the meeting of redemption 
requests which might otherwise require the 
untimely disposition of securities, and 
(b) the fund may to the extent consistent 
with its investment policies, enter into 
reverse repurchase agreements, forward 
roll transactions and similar investment 
strategies and techniques.  To the extent 
that it engages in transactions described 
in (a) and (b), the fund will be limited 
so that no more than 33-1/3% of the value 
of its total assets (including the amount 
borrowed), valued at the lesser of cost or 
market, less liabilities (not including 
the amount borrowed) valued at the time 
the borrowing is made, is derived from 
such transactions.

	5.	Making Loans.  This restriction does not 
apply to: (a) the purchase of debt 
obligations in which the fund may invest 
consistent with its investment objective 
and policies; (b) repurchase agreements; 
and (c) loans of its portfolio securities, 
to the fullest extent permitted under the 
1940 Act.

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

	7.	Purchasing or selling real estate, real 
estate mortgages, commodities or commodity 
contracts, but this restriction shall not 
prevent the fund from (a) investing in 
securities of issuers engaged in the real 
estate business or the business of 
investing in real estate (including 
interests in limited partnerships owning 
or otherwise engaging in the real estate 
business or the business of investing in 
real estate) and securities which are 
secured by real estate or interests 
therein; (b) holding or selling real 
estate received in connection with 
securities it holds or held; (c) trading 
in futures contracts and options on 
futures contracts (including options on 
currencies to the extent consistent with 
the fund's investment objective and 
policies); (d) investing in real estate 
investment trust securities; or (e) 
investing in gold bullion and coins or 
receipts for gold.

	8.	Purchasing securities on margin (except 
for such short-term credits as are 
necessary for the clearance of purchases 
and sales of portfolio securities) or sell 
any securities short (except "against the 
box").  For purposes of this restriction 
the deposit or payment by the fund of 
underlying securities and other assets in 
escrow and collateral agreements with 
respect to initial or maintenance margin 
in connection with futures contracts and 
related options and options on securities, 
indexes or similar items is not considered 
to be the purchase of a security on 
margin. 

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

	10.	Investing in securities of other 
investment companies registered or 
required to be registered under the 1940 
Act, except as they may be acquired as 
part of a merger, consolidation, 
reorganization, acquisition of assets or 
an offer of exchange.

	11.	With respect to all funds except Exchange 
Reserve Fund, writing or selling puts, 
calls, straddles, spreads or combinations 
thereof, except as permitted under the 
fund's investment objective and policies.

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

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

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

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

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

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

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

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

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

Portfolio Turnover

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

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

Certain other practices which may be employed by the 
fund also could result in high portfolio turnover.  
For example, portfolio securities may be sold in 
anticipation of a rise in interest rates (market 
decline) or purchased in anticipation of a decline in 
interest rates (market rise) and later sold.  In 
addition, a security may be sold and another of 
comparable quality purchased at approximately the same 
time to take advantage of what the fund's Investment 
Adviser or Sub-Investment Adviser believes to be a 
temporary disparity in the normal yield relationship 
between the two securities.  These yield disparities 
may occur for reasons not directly related to the 
investment quality of particular issues or the general 
movement of interest rates, such as changes in the 
overall demand for, or supply of, various types of 
securities.  For the period August 1, 1996 to December 
31, 1996, the fund's portfolio turnover rate was 30%.  
For the fiscal years ended July 31, 1996 and December 
31, 1997 and 1998, the fund's portfolio turnover rate 
was 58%, 43% and 43%, respectively.

Portfolio Transactions

Most of the purchases and sales of securities by the 
fund, whether transacted on a securities exchange or 
over-the-counter, will be made in the primary trading 
market for the securities, except for Eurobonds which 
are principally traded over-the-counter.  The primary 
trading market for a given security is generally 
located in the country in which the issuer has its 
principal office.  Decisions to buy and sell 
securities for the fund are made by its Investment 
Adviser or Sub-Investment Adviser, who is also 
responsible for placing these transactions subject to 
the overall review of the Board of Trustees.  Although 
investment decisions for the fund are made 
independently from those of the other accounts managed 
by its Investment Adviser and Sub-Investment Adviser, 
investments of the type that the fund may make also 
may be made by those other accounts.  When the fund 
and one or more other accounts managed by its 
Investment Adviser or Sub-Investment Adviser are 
prepared to invest in, or desire to dispose of, the 
same security, available investments or opportunities 
for sales will be allocated in a manner believed by 
the Investment Adviser or Sub-Investment Adviser to be 
equitable to each.  In some cases this procedure may 
adversely affect the price paid or received by the 
fund, or the size of the position obtained or disposed 
of by the fund.

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

Total Brokerage Commissions Paid



Fiscal 
Year

1996
$3,935,585
1996*
  1,179,425
1997
11,955,237
1998
  3,815,634

Brokerage Commissions Paid to Salomon Smith Barney


Fiscal 
Year

1996
$ 628,778
1996* 
   209,905
1997
   936,326
1998
1,102,296

% of Total Brokerage Commissions Paid to Salomon Smith 
Barney


Fiscal 
Year

1996
15.98%
1996*
17.80
1997
 7.83
1998
28.88

% of Total Transactions Involving Commissions paid to 
Salomon Smith Barney


Fiscal 
Year

1996
 16.30%
1996*
 13.26
1997
 23.74
1998
 22.81

(*)	For the period from August 1, 1996 through December 
31, 1996.

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

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

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

PURCHASE, EXCHANGE AND REDEMPTION OF SHARES

Purchase of Shares

General.  The fund offers five Classes of shares. 
Class A, L and O shares are sold to investors with an 
initial sales charge.  Class B shares are sold without 
an initial sales charge but are subject to a deferred 
sales charge payable upon certain redemptions.  Class 
L and O shares are also subject to a deferred sales 
charge payable upon certain redemptions.  Class Y 
shares are sold without an initial sales charge or 
deferred sales charge and are available only to 
investors investing a minimum of $15,000,000. See the 
Prospectus for a discussion of factors to consider in 
selecting which Class of shares to purchase.  Class O 
shares are available for purchase only by former Class 
C shareholders of the fund.

Purchases of shares of the fund must be made through a 
brokerage account maintained with Salomon Smith 
Barney, an Introducing Broker or an investment dealer 
in the selling group. In addition, certain investors, 
including qualified retirement plans and certain other 
institutional investors, may purchase shares directly 
from the fund through the transfer agent. When 
purchasing shares of the fund, investors must specify 
whether the purchase is for Class A, Class B, Class L, 
Class O or Class Y shares. Salomon Smith Barney and 
other broker/dealers may charge their customers an 
annual account maintenance fee in connection with a 
brokerage account through which an investor purchases 
or holds shares.  Accounts held directly at the 
transfer agent are not subject to a maintenance fee. 

Investors in Class A, Class B, Class L and Class O 
shares may open an account by making an initial 
investment of at least $1,000 for each account, or 
$250 for an IRA or a Self-Employed Retirement Plan, in 
the fund. Investors in Class Y shares may open an 
account by making an initial investment of 
$15,000,000.  Subsequent investments of at least $50 
may be made for all Classes.  For participants in 
retirement plans qualified under Section 403(b)(7) or 
Section 401(a) of the Internal Revenue Code of 1986, 
as amended (the "Code"), the minimum initial and 
subsequent investment requirement for Class A, Class 
B, Class L and Class O shares and the subsequent 
investment requirement for all Classes in the fund is 
$25.  For shareholders purchasing shares of the fund 
through the Systematic Investment Plan on a monthly 
basis, the minimum initial investment requirement for 
Class A, Class B, Class L and Class O shares and the 
subsequent investment requirement for all Classes is 
$25.  For shareholders purchasing shares of the fund 
through the Systematic Investment Plan on a quarterly 
basis, the minimum initial investment requirement for 
Class A, Class B, Class L and Class O shares and the 
subsequent investment requirement for all Classes is 
$50.  There are no minimum investment requirements in 
Class A shares for employees of Citigroup and its 
subsidiaries, including Salomon Smith Barney, 
Directors or Trustees of any of the Smith Barney 
Mutual Funds, and their spouses and children. The fund 
reserves the right to waive or change minimums, to 
decline any order to purchase its shares and to 
suspend the offering of shares from time to time. 
Shares purchased will be held in the shareholder's 
account by the transfer agent. Share certificates are 
issued only upon a shareholder's written request to 
the transfer agent. 

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

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

Initial Sales Charge Alternative - Class A Shares.  
The sales charges applicable to purchases of Class A 
shares of the fund are as follows: 

Amount of 
Investment
Sales Charge 
as % of 
Offering 
Price
Sales Charge as
% of Amount Invested
Less than $25,000
5.00%
5.26%
25,000 - 49,999
4.00   
4.17   
50,000 - 99,999
3.50   
3.63   
100,000 - 249,999
3.00   
3.09   
250,000 - 499,999
2.00   
2.04   
500,000 and over
-0-
-0-   

*	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 
deferred sales charge of 1.00% on redemptions 
made within 12 months of purchase. The deferred 
sales charge on Class A shares is payable to 
Salomon Smith Barney, which compensates Salomon 
Smith Barney Financial Consultants and other 
dealers whose clients make purchases of $500,000 
or more. The deferred sales charge is waived in 
the same circumstances in which the deferred 
sales charge applicable to Class B, Class L and 
Class O shares is waived.  See "Purchase, 
Exchange and Redemption of Shares" - ''Deferred 
Sales Charge Alternatives'' and ''Waivers of 
Deferred Sales Charge.'' 

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."  Any "person" is 
defined to include the following: (a) an individual; 
(b) an individual's spouse and his or her children 
purchasing shares for his or her own account; (c) a 
Trustee or other fiduciary purchasing shares for a 
single trust estate or single fiduciary account; (d) a 
pension, profit-sharing or other employee benefit plan 
qualified under Section 401(a) of the Code and 
qualified employee benefit plans of employers who are 
"affiliated persons" of each other within the meaning 
of the 1940 Act; (e) tax-exempt organizations 
enumerated in Section 501(c)(3) or (13) of the Code; 
(f) any other organized group of persons, provided the 
organization has been in existence for at least six 
months and was organized for a purpose other than the 
purchase of investment company securities at a 
discount; or (g) a trustee or other professional 
fiduciary (including a bank, or an investment adviser 
registered with the SEC under the Investment Advisers 
Act of 1940) purchasing shares of the fund for one or 
more trust estates or fiduciary accounts.  Purchasers 
who wish to combine purchase orders to take advantage 
of volume discounts on Class A shares should contact a 
Salomon Smith Barney Financial Consultant. 

The reduced sales charge minimums may also be met by 
aggregating the purchase with the net asset value of 
all Class A shares offered with a sales charge held in 
funds sponsored by Salomon Smith Barney listed under 
"Exchange Privilege."

Initial Sales Charge Alternative - Class L and O 
Shares.  For purchases of Class L and O shares, there 
is a sales charge of 1% of the offering price (1.01% 
of the net amount invested).

Initial Sales Charge Waivers for Class A Shares.  
Purchases of Class A shares may be made at net asset 
value without a sales charge in the following 
circumstances: (a) sales to (i) Board Members and 
employees of Citigroup and its subsidiaries and any 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 
Board members of any funds sponsored by Citigroup and 
its affiliates and (ii) employees of members of the 
National Association of Securities Dealers, Inc., 
provided such sales are made upon the assurance of the 
purchaser that the purchase is made for investment 
purposes and that the securities will not be resold 
except through redemption or repurchase; (b) offers of 
Class A shares to any other investment company to 
effect the combination of such company with the fund 
by merger, acquisition of assets or otherwise; (c) 
purchases of Class A shares by any client of a newly 
employed Salomon Smith Barney Financial Consultant 
(for a period up to 90 days from the commencement of 
the Financial Consultant's employment with Salomon 
Smith Barney), on the condition the purchase of Class 
A shares is made with the proceeds of the redemption 
of shares of a mutual fund which (i) was sponsored by 
the Financial Consultant's prior employer, (ii) was 
sold to the client by the Financial Consultant and 
(iii) was subject to a sales charge; (d) purchases by 
shareholders who have redeemed Class A shares in the 
fund (or Class A shares of another fund of the Smith 
Barney Mutual Funds that are offered with a sales 
charge) and who wish to reinvest their redemption 
proceeds in the same fund, provided the reinvestment 
is made within 60 calendar days of the redemption; (e) 
purchases by accounts managed by registered investment 
advisory subsidiaries of Citigroup; (f) purchase by 
Section 403(b) or Section 401(a) or (k) accounts 
associated with Copeland Retirement Programs; (g) 
direct rollovers by plan participants of distributions 
from a 401(k) plan offered to employees of Citigroup 
or its subsidiaries or a 401(k) plan enrolled in the 
Salomon 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; 
and (i) purchases by investors participating in a 
Salomon Smith Barney fee-based arrangement.  In order 
to obtain such discounts, the purchaser must provide 
sufficient information at the time of purchase to 
permit verification the purchase would qualify for the 
elimination of the sales charge. 

Right of Accumulation.  Class A shares of the fund may 
be purchased by "any person"' (as defined above) at a 
reduced sales charge or at net asset value determined 
by aggregating the dollar amount of the new purchase 
and the total net asset value of all Class A shares of 
the fund and of funds sponsored by Salomon 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. 

Letter of Intent.  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 the investor refers to such Letter when 
placing orders.  For purposes of a Letter of Intent, 
the ''Amount of Investment'' as referred to in the 
preceding sales charge table includes purchases of all 
Class A shares of the 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 contact a Salomon Smith Barney 
Financial Consultant or the transfer agent to obtain a 
Letter of Intent application. 

A Letter of Intent may also be used as a way for 
investors to meet the minimum investment requirement 
for Class Y shares.  The investor 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.  If a total investment of 
$15,000,000 is not made within the 13-month period, 
all Class Y shares purchased to date will be 
transferred to Class A shares, where they will be 
subject to all fees (including a service fee of 0.25%) 
and expenses applicable to the fund's Class A shares, 
which may include a deferred sales charge of 1.00%. 
Please contact a Salomon Smith Barney Financial 
Consultant or the transfer agent for further 
information. 

Deferred Sales Charge Alternatives.  Deferred Sales 
Charge 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 deferred sales 
charge, however, may be imposed on certain redemptions 
of these shares. ''Deferred Sales Charge Shares'' are: 
(a) Class B shares; (b) Class L shares; (c) Class O 
shares; and (d) Class A shares that were purchased 
without an initial sales charge but subject to a 
deferred sales charge. 

Any applicable deferred sales charges 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. Deferred Sales Charge 
Shares that are redeemed will not be subject to a 
deferred sales charge to the extent 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, Class 
O shares and Class A shares that are Deferred Sales 
Charge Shares, shares redeemed more than 12 months 
after their purchase. 

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

	Year Since Purchase 
	Payment Was Made
Deferred Sales 
Charge

	First
5.00%
	Second
4.00   
	Third
3.00   
	Fourth
2.00   
	Fifth
1.00   
	Sixth and thereafter
0.00   

Class B shares will convert automatically to Class A 
shares eight years after the date on which they were 
purchased and thereafter will no longer be subject to 
any distribution fees.  There will also be converted 
at that time such proportion of Class B Dividend 
Shares owned by the 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. 

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

To provide an example, assume an investor purchased 
100 Class B shares of the fund at $10 per share for a 
cost of $1,000.  Subsequently, the investor acquired 5 
additional shares of the fund 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 deferred 
sales charge 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 Deferred Sales Charge.  The deferred sales 
charge 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'') (automatic cash withdrawals in 
amounts equal to or less than 2.00% per month of the 
value of the shareholder's shares will be permitted 
for withdrawal plans that were established prior to 
November 7, 1994); (c) redemptions of shares within 
twelve months following the death or disability of the 
shareholder; (d) redemptions of shares made in 
connection with qualified distributions from 
retirement plans or IRAs upon the attainment of age 
591/2; (e) involuntary  redemptions; and (f) redemptions 
of shares to effect the combination of the fund with 
any other investment company by merger, acquisition of 
assets or otherwise. In addition, a shareholder who 
has redeemed shares from other funds of the Smith 
Barney Mutual Funds may, under certain circumstances, 
reinvest all or part of the redemption proceeds within 
60 days and receive pro rata credit for any deferred 
sales charge imposed on the prior redemption. 

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

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

The fund offers to Participating Plans Class A, Class 
L and Class O shares as investment alternatives under 
the Smith Barney 401(k) and ExecChoiceTM Programs.  
Class A, Class L and Class O shares acquired through 
the Participating Plans are subject to the same 
service and/or distribution fees as the Class A, Class 
L and Class O shares acquired by other investors; 
however, they are not subject to any initial sales 
charge or deferred sales charge. 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 deferred sales 
charge 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 and O Shares.  Class L and O shares of the 
fund are offered without any sales charge or deferred 
sales charge to any Participating Plan that purchases 
less than $1,000,000 of Class L and/or O shares of one 
or more funds of the Smith Barney Mutual Funds.  Class 
O shares may only be purchased by plans if the plan 
opened its account on or before June 12, 1998. 

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

401(k) Plans Opened Prior to June 21, 1996.  In any 
year after the date a Participating Plan enrolled in 
the Smith Barney 401(k) Program, if its total Class L 
and/or O holdings in all non-money market Smith Barney 
Mutual Funds equal at least $500,000 as of the 
calendar year-end, the Participating Plan will be 
offered the opportunity to exchange all of its Class L 
and/or O shares for Class A shares of the same 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) Program, whether opened before or after 
June 21, 1996, that has not previously qualified for 
an exchange into Class A shares will be offered the 
opportunity to exchange all of its Class L and/or O 
shares for Class A shares of the same 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) Program. Such Plans will 
be notified of the pending exchange in writing 
approximately 60 days before the eighth anniversary of 
the enrollment date and, unless the exchange has been 
rejected in writing, the exchange will occur on or 
about the eighth anniversary date. Once an exchange 
has occurred, a Participating Plan will not be 
eligible to acquire additional Class L and/or O 
shares, but instead may acquire Class A shares of the 
same fund. Any Class L and/or O shares not converted 
will continue to be subject to the distribution fee. 

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

Existing 401(k) Plans Investing in 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 in the Smith Barney 401(k) Program 
opened prior to such date and originally investing in 
such Class. Class B shares acquired are subject to a 
deferred sales charge of 3.00% of redemption proceeds 
if the Participating Plan terminates within eight 
years of the date the Participating Plan first 
enrolled in the Smith Barney 401(k) Program. 

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

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

The deferred sales charge 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's in the Participating Plan; termination of 
employment, death, disability, or attainment of age 59 
1/2; (b) hardship of an employee in the Participating 
Plan to the extent permitted under Section 401(k) of 
the Code; or (c) redemptions of shares in connection 
with a loan made by the Participating Plan to an 
employee.

Determination of Public Offering Prices

The trust offers shares of the fund to the public on a 
continuous basis.  The public offering price for a 
Class A and Class Y shares of the fund is equal to the 
net asset value per share at the time of purchase, 
plus for Class A shares an initial sales charge based 
on the aggregate amount of the investment.  The public 
offering price for a Class B share (and Class A share 
purchases, including applicable rights of 
accumulation, equaling or exceeding $500,000), is 
equal to the net asset value per share at the time of 
purchase and no sales charge is imposed at the time of 
purchase.  A deferred sales charge, however, is 
imposed on certain redemptions of Class B and Class O 
shares and of Class A shares when purchased in amounts 
exceeding $500,000.  The method of computation of the 
public offering price is shown in the fund's financial 
statements incorporated by reference in their entirety 
into this SAI.

Exchange Privilege

As your needs change, you may wish to reposition your 
investments.  With Smith Barney Mutual Funds, you have 
the ability to exchange shares of most Smith Barney 
mutual funds for those of others within the family.

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

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

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

Class O Exchanges.  Class O shares may only be 
exchanged for Class L shares of another fund.  Upon an 
exchange, the new Class L shares will be deemed to 
have been purchased on the same date as the Class O 
shares of the fund that have been exchanged.

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

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

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

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

Certain shareholders may be able to exchange shares by 
telephone. See ''Redemption of Shares-Telephone 
Redemption and Exchange Program.''  Exchanges will be 
processed at the net asset value next determined.  
Redemption procedures discussed below are also 
applicable for exchanging shares, and exchanges will 
be made upon receipt of all supporting documents in 
proper form.  If the account registration of the 
shares of the fund being acquired is identical to the 
registration of the shares of the fund exchanged, no 
signature guarantee is required.  An exchange involves 
a taxable redemption of shares, subject to the tax 
treatment described in "Taxes" below, followed by a 
purchase of shares of a different fund.  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 
deferred sales charge. Redemption requests received 
after the close of regular trading on the NYSE are 
priced at the net asset value next determined.  The 
right of redemption of shares of the fund may be 
suspended or the date of payment postponed (a) for any 
periods during which the NYSE is closed (other than 
for customary weekend and holiday closings), (b) when 
trading in the markets the fund normally utilizes is 
restricted, or an emergency exists, as determined by 
the SEC, so that disposal of the fund's investments or 
determination of its net asset value is not reasonably 
practicable or (c) for such other periods as the SEC 
by order may permit for the protection of the fund's 
shareholders.

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

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

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

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

Automatic Cash Withdrawal Plan.  The fund offers 
shareholders an automatic cash withdrawal plan, under 
which shareholders who own shares with a value of at 
least $10,000 ($5,000 for retirement plan accounts) 
may elect to receive cash payments of at least $50 
monthly or quarterly.  Retirement plan accounts are 
eligible for automatic cash withdrawal plans only 
where the shareholder is eligible to receive qualified 
distributions and has an account value of at least 
$5,000.  The withdrawal plan will be carried over on 
exchanges between funds or Classes of the fund.  Any 
applicable deferred sales charge will not be waived on 
amounts withdrawn by a shareholder exceeding 1.00% per 
month of the value of the shareholder's shares subject 
to the deferred sales charge at the time the 
withdrawal plan commences.  (With respect to 
withdrawal plans in effect prior to November 7, 1994, 
any applicable deferred sales charge will be waived on 
amounts withdrawn that do not exceed 2.00% per month 
of the value of the shareholder's shares subject to 
the deferred sales charge.)  To the extent withdrawals 
exceed dividends, distributions and appreciation of a 
shareholder's investment in the fund, there will be a 
reduction in the value of the shareholder's investment 
and continued withdrawal payments may reduce the 
shareholder's investment and ultimately exhaust it.  
Withdrawal payments should not be considered as income 
from investment in the fund.  Withdrawals involve 
share redemptions that may have tax consequences for 
shareholders.  Furthermore, as it generally would not 
be advantageous to a shareholder to make additional 
investments in the fund at the same time he or she is 
participating in the Withdrawal Plan with respect to 
that fund, purchases by such shareholders of 
additional shares in the fund in amounts less than 
$5,000 will not ordinarily be permitted.

Shareholders who wish to participate in the Withdrawal 
Plan and who hold their shares in certificate form 
must deposit their share certificates of the fund from 
which withdrawals will be made with First Data 
Investors Services Group, Inc. ("First Data"), as 
agent for Withdrawal Plan members.  All dividends and 
distributions on shares in the Withdrawal Plan are 
reinvested automatically at net asset value in 
additional shares of the fund.  All applications for 
participation in the Withdrawal Plan must be received 
by First Data as Plan Agent no later than the eighth 
day of each month to be eligible for participation 
beginning with that month's withdrawal.  For 
additional information regarding the Withdrawal Plan, 
contact your Salomon Smith Barney Financial 
Consultant.

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

Redemptions.  Redemption requests of up to $10,000 of 
any class or classes of shares of the fund may be made 
by eligible shareholders by calling the transfer agent 
at 1-800-451-2010. Such requests may be made between 
9:00 a.m. and 5:00 p.m. (New York City time) on any 
day the NYSE is open.  Redemptions of shares (i) by 
retirement plans or (ii) for which certificates have 
been issued are not permitted under this program. 

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

Exchanges.  Eligible shareholders may make exchanges 
by telephone if the account registration of the shares 
of the fund being acquired is identical to the 
registration of the shares of the fund exchanged.  
Such exchange requests may be made by calling the 
transfer agent at 1-800-451-2010 between 9:00 a.m. and 
5:00 p.m. (New York City time) on any day on which the 
NYSE is open. 

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

Redemptions in Kind.  In conformity with applicable 
rules of the SEC, redemptions may be paid in portfolio 
securities, in cash or any combination of both, as the 
Board of Trustees may deem advisable; however, 
payments shall be made wholly in cash unless the Board 
of Trustees believes that economic conditions exist 
that would make such a practice detrimental to the 
best interests of the fund and its remaining 
shareholders.  If the Board of Trustees of the trust 
determines that it would be detrimental to the best 
interests of the remaining shareholders of the fund to 
make a redemption payment wholly in cash, the trust 
may pay, in accordance with SEC rules, any portion of 
a redemption in excess of the lesser of $250,000 or 1% 
of the fund's net assets by distribution in kind of 
portfolio securities in lieu of cash.  Shareholders 
may incur brokerage commissions when they subsequently 
sell those securities.  If a redemption is paid in 
portfolio securities, such securities will be valued 
in accordance with the procedures described under 
"Share Price" in the Prospectus and a shareholder 
would incur brokerage expenses if these securities 
were then converted to cash. 

DISTRIBUTOR

CFBDS, Inc. ("CFBDS") located at 20 Milk Street, 
Boston, Massachusetts 02109-5408 serves as the trust's 
distributor on a best efforts basis pursuant to a 
distribution agreement dated October 8, 1998 (the 
"Distribution Agreement") which was approved by the 
trust's Board of Trustees on July 15, 1998.  Prior to 
the merger of Travelers Group, Inc. and Citicorp Inc. 
on October 8, 1998, Salomon Smith Barney served as the 
trust's distributor. 

At a December 13, 1996 telephone Board meeting, the 
fund's fiscal year end changed from July 31 to 
December 31.  For the fiscal year ended July 31, 1996, 
Salomon Smith Barney received $968,000 in sales 
charges from the sale of Class A shares and did not 
reallow any portion thereof to dealers.  From August 
1, 1996 through December 31, 1996, Salomon Smith 
Barney received $435,000 in sales charges from the 
sale of Class A shares and did not reallow any portion 
thereof to dealers.  For the December 31, 1997 fiscal 
year, Salomon Smith Barney received $1,746,000 in 
sales charges from the sale of Class A shares, and did 
not reallow any portion thereof to dealers.  For the 
period January 1, 1998 through October 7, 1998 the 
aggregate dollar amount of sales charges on Class A 
shares was $1,531,000 all of which was paid to Salomon 
Smith Barney.  For the period October 8, 1998 through 
December 31, 1998, the aggregate dollar amount of 
sales charges on Class A shares was $157,000, $141,000 
of which was paid to Salomon Smith Barney.

For the period June 12, 1998 through October 7, 1998, 
the aggregate dollar amount of sales charges on Class 
L shares was $184,000, all of which was paid to 
Salomon Smith Barney.  For the period October 8, 1998 
through December 31, 1998 the aggregate dollar amount 
of sales charges on Class L shares was $50,000, 
$45,000 of which was paid to Salomon Smith Barney.

For the fiscal year ended July 31, 1996, Salomon Smith 
Barney received from shareholders $1,000 in deferred 
sales charges on the redemption of Class A shares.  
From August 1, 1996 through December 31, 1996, Salomon 
Smith Barney received from shareholders $3,000 in 
deferred sales charges on the redemption of Class A 
shares.  For the fiscal years ended December 31, 1997 
and 1998, Salomon Smith Barney received from 
shareholders $3,000 and $2,000, respectively, in 
deferred sales charges on the redemption of Class A 
shares. 

For the fiscal year ended July 31, 1996, Salomon Smith 
Barney received from shareholders $2,905,000 in 
deferred sales charges on the redemption of Class B 
shares.  From August 1, 1996 through December 31, 
1996, Salomon Smith Barney received from shareholders 
$1,009,000 in deferred sales charges on the redemption 
of Class B shares.  For the fiscal years ended 
December 31, 1997 and 1998, Salomon Smith Barney 
received from shareholders $2,318,000 and $3,233,000, 
respectively, in deferred sales charges on the 
redemption of Class B shares.

For the fiscal year ended December 31, 1998, Salomon 
Smith Barney received from shareholders $19,000 in 
deferred sales charges on the redemption of Class L 
shares.

For the fiscal year ended July 31, 1996, Salomon Smith 
Barney received from shareholders $12,000 in deferred 
sales charges on the redemption of Class O shares.  
From August 1, 1996 through December 31, 1996, Salomon 
Smith Barney received from shareholders $5,000 in 
deferred sales charges on the redemption of Class O 
shares.  For the fiscal years ended December 31, 1997 
and 1998, Salomon Smith Barney received from 
shareholders $17,000 and $24,000, respectively, in 
deferred sales charges on the redemption of Class O 
shares.  For the fiscal year ended December 31, 1998, 
there were no initial sales charges for Class O.

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

Distribution Arrangements

To compensate Salomon Smith Barney for the service it 
provides and for the expense it bears under the 
Distribution Agreement, the fund has adopted a 
services and distribution plan (the "Plan") pursuant 
to Rule 12b-1 under the 1940 Act.  Under the Plan, the 
fund pays Salomon Smith Barney a service fee, accrued 
daily and paid monthly, calculated at the annual rate 
of 0.25% of the value of the fund's average daily net 
assets attributable to the Class A, Class B Class L 
and Class O shares.  In addition, the fund pays 
Salomon Smith Barney a distribution fee with respect 
to Class B and Class O shares primarily intended to 
compensate Salomon Smith Barney for its initial 
expense of paying Financial Consultants a commission 
upon sales of those shares.  The Class B, Class L and 
Class O shares distribution fee is calculated at the 
annual rate of 0.50% for Class B shares, 0.75% for 
Class L shares and 0.45% for Class O shares of the 
value of the fund's average net assets attributable to 
the shares of the respective Class.

	The following service and distribution fees were 
incurred during the periods indicated:

		Fiscal Year		Fiscal Year		Fiscal 
Period		Fiscal Period
		Ended 12/31/98		12/31/97	
	8/1/96-12/31/96		1/1/96-7/31/96

Class A		$2,248,211		$1,813,203		 
$592,473		$1,284,390	
Class B		24,304,146		20,846,887	
	6,846,405		14,202,022
Class L*	       90,652		      n/a		
	     n/a			        n/a
Class O**	     791,809		     473,007	
	  106,973		     159,735

*  The fund commenced selling Class L shares on June 
15, 1998.

**Class O shares were called Class C shares until June 
12, 1998.
For the fiscal year ended December 31, 1998, Salomon 
Smith Barney incurred distribution expenses totaling 
$26,938,444 consisting of $212,486 for advertising, 
$38,913 for printing and mailing prospectuses, 
$6,830,453 for support services and overhead expenses, 
$19,105,781 to Salomon Smith Barney Consultants and 
$750,811 for accruals for interest on the excess of 
Salomon Smith Barney expenses incurred in the 
distribution of the fund's shares over the sum of the 
distribution fees and deferred sales charges received 
by Salomon Smith Barney.

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

VALUATION OF SHARES

Each Class' net asset value per share is calculated on 
each day, Monday through Friday, except days on which 
the NYSE is closed.  The NYSE currently is scheduled 
to be closed on New Year's Day, Martin Luther King, 
Jr. Day, Presidents' Day, Good Friday, Memorial Day, 
Independence Day, Labor Day, Thanksgiving and 
Christmas, and on the preceding Friday or subsequent 
Monday when one of these holidays falls on a Saturday 
or Sunday, respectively.  Because of the differences 
in distribution fees and Class-specific expenses, the 
per share net asset value of each Class may differ.  
The following is a description of procedures used by 
the fund in valuing its assets. 

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

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

PERFORMANCE DATA

From time to time, the fund's yield or total return 
may be quoted in advertisements or in reports and 
other communications to shareholders.  The trust may 
include comparative performance information in 
advertising or marketing the fund's shares.  Such 
performance information may include the following 
industry and financial publications: Barron's, 
Business Week, CDA Investment Technologies, Inc., 
Changing Times, Forbes, Fortune, Institutional 
Investor, Investors Daily, Money, Morningstar Mutual 
Fund Values, The New York Times, USA Today and The 
Wall Street Journal.  To the extent any advertisement 
or sales literature of the fund describes the expenses 
or performance of Class A, Class B, Class L, Class O 
or Class Y, it will also disclose such information for 
the other Classes.








Yield

The 30-day yield figure is calculated according to a 
formula prescribed by the SEC.  The formula can be 
expressed as follows:
YIELD =2[(a-bcd+1)6-1]
Where:
	a = dividends and interest earned during the 
period.
	b = expenses accrued for the period (net of 
waiver and reimbursement).
c = the average daily number of shares 
outstanding during the period that were entitled 
to receive dividends.
	d = the maximum offering price per share on the 
last day of the period.

For the purpose of determining the interest earned 
(variable "a" in the formula) on debt obligations 
purchased by the fund at a discount or premium, the 
formula generally calls for amortization of the 
discount or premium; the amortization schedule will be 
adjusted monthly to reflect changes in the market 
values of the debt obligations.
Investors should recognize that, in periods of 
declining interest rates, the fund's yield will tend 
to be somewhat higher than prevailing market rates, 
and in periods of rising interest rates the fund's 
yield will tend to be somewhat lower.  In addition, 
when interest rates are falling, the inflow of net new 
money to the fund from the continuous sale of its 
shares will likely be invested in portfolio 
instruments producing lower yields than the balance of 
such fund's investments, thereby reducing the current 
yield of the fund.  In periods of rising interest 
rates, the opposite can be expected to occur.
Average Annual Total Return
The "average annual total return" for the fund is 
computed according to a formula prescribed by the SEC.  
The formula can be expressed as follows:
P(1+T)n = ERV
Where:
				P =	a hypothetical initial 
payment of $1,000.
				T = 	average annual total 
return.
				n = 	number of years.
			ERV = 	Ending Redeemable 
Value of a hypothetical $1,000 
investment made at the 
beginning of the 1-, 5- or 10-
year period at the end of the 
1-, 5- or 10-year period (or 
fractional portion thereof), 
assuming reinvestment of all 
dividends and distributions.
The average annual total returns with sales charges of 
the fund's Class A shares were as follows for the 
periods indicated:

One-Year 
Period

Five-Year 
Period
Commencement of 
Operations*
0.88%
14.05%
13.94%

	
The average annual total without sales charges of the 
fund's Class A shares were as follows for the period 
indicated:


One-Year 
Period

Five-Year 
Period
Commencement of 
Operations*
6.20%
15.23%
14.89%

* Fund commenced selling Class A shares on November 6, 
1993.

The average annual total returns (with fees waived and 
without deferred sales charge) of the fund's Class B 
shares were as follows for the periods indicated:

One-Year 
Period
Five-Year 
Period
Ten-Year 
Period
Commencement 
of Operations*
0.84%
14.54%
14.37%
13.60%

	* Fund commenced operations on September 16, 
1985.

Had the maximum applicable deferred sales charge not 
been deducted at the time of redemption, Class B's 
average annual total return would have been 5.64%, 
14.66%, 14.37% and 13.60% for the same periods.

The average annual total return (with fees waived) of 
the fund's Class L shares were as follows for the 
period indicated:
Commencemen
t of 
Operations*
(1.55)%

The average annual total return without sales charges 
of the fund's Class L shares were as follows for the 
period indicated:
Commencemen
t of 
Operations*
0.36%

*The fund commenced selling Class L shares on June 15, 
1998.
The average annual total returns (with fees waived) of 
the fund's Class O shares were as follows for the 
periods indicated:

One-Year 
Period

Five-Year 
Period
Commencement 
of Operations*
4.73%
14.70%
14.51%




The average annual total returns without sales charges 
of the fund's Class O shares were as follows for the 
periods indicated:


One-Year 
Period

Five-Year 
Period
Commencement 
of Operations*
5.69%
14.70%
14.51%

* The Fund commenced selling Class O shares on June 1, 
1993.

The average annual total returns of the fund's Class Y 
shares were as follows for the periods indicated:


One-Year 
Period
Commencement 
of Operations*
6.56%
16.84%

Aggregate Total Return

The aggregate total return for the fund represents the 
cumulative change in the value of an investment in the 
Class for the specified period and is computed by the 
following formula:

ERV - P
P
Where:
			P =	a hypothetical initial payment 
of $10,000.
			ERV =	Ending Redeemable Value of a 
hypothetical $10,000 investment made 
at the beginning of the 1-, 5- or 
10-year period at the end of the 1-, 
5- or 10-year period (or fractional 
portion thereof), assuming 
reinvestment of all dividends and 
distributions. 

The aggregate total returns (with fees waived) of the 
Class B shares of the fund is as follows for the 
periods indicated:

No Load*

One-Year 
Period
Five-
Year 
Period
Ten-Year 
Period
Commencement 
of Operations
5.64%
98.14%
282.89%
444.93%

Load**

One-Year 
Period
Five-
Year 
Period
Ten-Year 
Period
Commencement 
of Operations
0.84%
97.14%
282.89%
444.93%




The aggregate total returns (with fees waived) of the 
Class A, Class O and Class L shares of the fund were 
as follows for the periods indicated:

No Load*

Class
One-Year 
Period
Five-
Year 
Period
Commencement 
of Operations




Class A (1)
6.2%
103.15%
134.96%
Class O (2)
5.69%
98.49%
113.12%
Class L (3)
N/A
N/A
1.59%
Class Y
6.56%
N/A
56.99%

Load**

Class
One-Year 
Period
Five-
Year 
Period
Commencement 
of Operations




Class A (1)
0.88%
92.93%
123.18%
Class O (2)
4.73%
98.49%
113.12%
Class L (3)
N/A
N/A
(0.35)%
Class Y
6.56%
N/A
56.99%

*	Figures do not include the effect of the maximum 
sales charge or maximum applicable deferred sales 
charge. 
**	Figures include the effect of the maximum sales 
charge or maximum applicable deferred sales charge.
(1)	The Fund commenced selling Class A shares on 
November 6, 1992.
(2)	The Fund commenced selling Class O shares 
(previously designated as Class C shares) on June 1, 
1993.  
(3)	The Fund commenced selling Class L shares on 
June 15, 1998.  

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

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

TAXES

The following is a summary of certain federal income 
tax considerations that may affect the fund and its 
shareholders.  In addition to the considerations 
described below, there may be other federal, state, 
local or foreign tax applications to consider.  This 
summary does not address all of the potential federal 
income tax consequences that may be applicable to the 
fund or to all categories of investors, some of which 
may be subject to special tax rules.  The summary is 
not intended as a substitute for individual tax advice 
and investors are urged to consult their own tax 
advisors as to the tax consequences of an investment 
in the fund.

Tax Status of the Fund

The fund is treated as a separate taxable entity for 
federal income tax purposes.

The fund has qualified and the trust intends that the 
fund continue to qualify separately each year as a 
"regulated investment company" under the Code by 
complying with certain requirements regarding the 
sources and distribution of its income and the 
diversification of its assets.  If it so qualifies, 
the fund will not be liable for Federal income taxes 
to the extent its taxable net investment income and 
net realized capital gains are distributed to its 
shareholders in accordance with the Code's timing and 
other requirements.  One of the several requirements 
for qualification is that the fund receive at least 
90% of its gross income for each taxable year from 
dividends, interest, payments with respect to 
securities loans and gains from the sale or other 
disposition of equity or debt securities or foreign 
currencies, or other income (including but not limited 
to gains from options, futures, or forward contracts) 
derived with respect to the fund's investment in such 
stock, securities, or currencies.  The trust does not 
expect the fund to have difficulty meeting this test.

Taxation of Investments by the Fund

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

Dividends or other income (including, in some cases, 
capital gains) received by the fund from investments 
in foreign securities may be subject to withholding 
and other taxes imposed by foreign countries.  Tax 
conventions between certain countries and the United 
States may reduce or eliminate such taxes in some 
cases.  The fund will not be eligible to elect to 
treat any foreign taxes paid by it as paid by its 
shareholders, who therefore will not be entitled to 
deductions or credits for such taxes on their own tax 
returns.

If the fund acquires an equity interest (including a 
depositary receipt for shares of stock) in certain 
foreign investment entities, referred to as "passive 
foreign investment companies," the fund itself may be 
subject to U.S. federal income tax and an additional 
charge in the nature of interest on a portion of any 
"excess distribution" from such company or gain from 
the disposition of its equity interest, even if the 
distribution or gain is distributed by the fund to its 
shareholders in a manner that satisfies the 
requirements referred to above.  If the fund were able 
and elected to treat a passive foreign investment 
company as a "qualified electing fund," in lieu of the 
treatment described above, the fund would be required 
each year to include in income, and distribute to 
shareholders in accordance with the distribution 
requirements referred to above, the fund's pro rata 
share of the ordinary earnings and net capital gains 
of the company, whether or not actually received by 
the fund.  The fund generally should be able to make 
an alternative election to mark these investments to 
market annually, resulting in the recognition of 
ordinary income (rather than capital gain) or ordinary 
loss, subject to certain limitations on the ability to 
use any such loss.

Under the Code, gains or losses attributable to 
foreign currency transactions, or to fluctuations in 
exchange rates between the time the fund accrues 
income or receivables or expenses or other liabilities 
denominated in a foreign currency and the time the 
fund actually collects such income or pays such 
liabilities, are treated as ordinary income or 
ordinary loss.  Similarly, gains or losses on the 
disposition of debt securities denominated in foreign 
currency, to the extent attributable to fluctuations 
in exchange rates between the acquisition and 
disposition dates, are also treated as ordinary income 
or loss.

In order to avoid the application of a 4% 
nondeductible excise tax on certain undistributed 
amounts of ordinary income and capital gains, the fund 
may make an additional distribution shortly before or 
shortly after December 31 in each year of any 
undistributed ordinary income or capital gains and 
expects to pay any additional dividends and 
distributions necessary to avoid the application of 
this tax. 

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

If a put or call option the fund has purchased on an 
equity security (including a narrow-based stock index) 
or convertible debt security or an over-the-counter 
option on a debt security expires unexercised, the 
fund will realize capital loss equal to the cost of 
the option.  If the fund enters into a closing sale 
transaction with respect to the option, it will 
realize a capital gain or loss (depending on whether 
the proceeds from the closing transaction are greater 
or less than the cost of the option).  The gain or 
loss will be short-term or long-term, depending on the 
fund's holding period for the option.  If the fund 
exercises such a put option, it will realize a short-
term or long-term capital gain or loss (depending upon 
its tax holding period for the underlying security) 
from the sale of the underlying security measured by 
the sales proceeds, decreased by the premium paid, and 
the fund's tax basis for the underlying security.  If 
the fund exercises such a call option, the premium 
paid for the option will be added to the tax basis of 
the security purchased.

In lieu of the foregoing treatment, the Code imposes a 
special "mark-to-market" system for taxing "section 
1256 contracts" including certain listed options on 
nonconvertible debt securities (including U.S. 
government securities) or other listed nonequity 
options and options on certain stock indexes.  In 
general, gain or loss on section 1256 contracts will 
be taken into account for tax purposes when actually 
realized (by a closing transaction, by exercise, by 
taking or making delivery or by other termination).  
In addition, any section 1256 contracts held at the 
end of a taxable year will be treated as sold at their 
year-end fair market value (that is, marked to the 
market), and the resulting gain or loss will be 
recognized for tax purposes.  Provided section 1256 
contracts are held as capital assets and are not part 
of a straddle, both the realized and mark-to-market 
year-end gain or loss from these investment positions 
(including premiums received on listed, nonequity 
options that expire unexercised) will be treated as 
60% long-term and 40% short-term capital gain or loss, 
regardless of the period of time particular positions 
are actually held by the fund.  Constructive sale 
rules may also require the recognition of gains (but 
not losses) if the fund engages in short sales or 
certain other transactions.

Straddles.  While the mark-to-market system is limited 
to section 1256 contracts, the Code contains other 
rules applicable to transactions which create 
positions which offset positions in section 1256 or 
other investment contracts or securities 
("straddles").  Straddles are defined to include 
"offsetting positions" in actively traded personal 
property.  In general, investment positions may be 
"offsetting" if there is a substantial diminution in 
the risk of loss from holding one position by reason 
of holding one or more other positions.  Under current 
law, it is not clear under certain circumstances 
whether one investment made by the fund, such as an 
option contract, would be treated as offsetting 
another investment also held by the fund, and, 
therefore, whether the fund would be treated as having 
entered into a straddle.

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

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

Taxation of the Fund's Shareholders

Dividends paid by the fund from investment income and 
distributions from any excess of its net short-term 
capital gain over its net long-term capital loss are 
taxable to shareholders as ordinary income for federal 
income tax purposes, whether received in cash or 
reinvested in additional shares.  Distributions from 
any excess of the fund's net long-term capital gain 
over its net short-term capital loss are 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 shareholder has 
held his or her shares of the fund.  For federal 
income tax purposes, dividends declared by the fund in 
October, November or December as of a record date in 
such a month and which are actually paid in January of 
the following year will be treated as if they were 
paid on December 31.  These dividends will be taxable 
to shareholders as if received on December 31 rather 
than in the year in which shareholders actually 
receive the dividends.

Statements as to the tax status of each shareholder's 
dividends and distributions are mailed annually.  Each 
shareholder will also receive, if appropriate, various 
written notices after the close of the fund's taxable 
year as to the federal income tax status of his or her 
dividends and distributions which were received from 
the fund during the fund's taxable year.  Shareholders 
should consult their tax advisors regarding specific 
questions as to the federal, state and local tax 
consequences of investing in the fund.

Dividends of investment income (but not capital gains) 
from the fund generally will qualify for the Federal 
dividends-received deduction for domestic corporate 
shareholders to the extent such dividends do not 
exceed the aggregate amount of qualified dividends 
received by the fund from domestic corporations.  If 
securities held by the fund are considered to be 
"debt-financed" (generally, acquired with borrowed 
funds), are held by the fund for less than 46 days (91 
days in the case of certain preferred stock) during a 
prescribed period, or are subject to certain forms of 
hedges or short sales, the portion of the dividends 
paid by the fund which corresponds to the dividends 
paid with respect to such securities will not be 
eligible for the corporate dividends-received 
deduction.  Receipt of dividends that qualify for the 
dividends received deduction may increase a corporate 
shareholder's liability, if any, for the alternative 
minimum tax.  Such a shareholder should also consult 
its tax adviser regarding the possibility that its 
federal tax basis in its fund shares may be reduced by 
the receipt of "extraordinary dividends" from the fund 
and, to the extent such basis would be reduced below 
zero, current recognition of income would be required.  
The dividends-received deduction will be allowed only 
with respect to properly-designated dividends on fund 
shares for which a corporate shareholder satisfies the 
same holding period rules, and subject to the same 
limitations on debt financing, applicable to the fund.

If a shareholder (a) incurs a sales charge in 
acquiring fund shares and (b) disposes of those shares 
within 90 days after the original acquisition, and (c) 
acquires shares in a mutual fund for which the 
otherwise applicable sales charge is reduced by reason 
of a reinvestment right (e.g., an exchange privilege), 
the original sales charge increases the shareholder's 
tax basis in the original shares only to the extent 
the otherwise applicable sales charge for the second 
acquisition is not reduced.  The portion of the 
original sales charge that does not increase the 
shareholder's tax basis in the original shares would 
be treated as incurred with respect to the second 
acquisition and, as a general rule, would increase the 
shareholder's tax basis in the newly acquired shares.  
Furthermore, the same rule also applies to a 
disposition of the newly acquired shares within 90 
days of the second acquisition.  This provision 
prevents a shareholder from immediately deducting the 
sales charge by shifting his or her investment in a 
family of mutual funds.  Additionally, any loss 
realized on a disposition of fund shares generally 
will be disallowed to the extent the shares disposed 
of are replaced with other shares of the fund within a 
period of 61 days, beginning 30 days before and ending 
30 days after such disposition, such as pursuant to 
reinvestment of dividends in fund shares.  
	
Investors considering buying shares of the fund on or 
just prior to a record date for a taxable dividend or 
capital gain distribution should be aware that even if 
the net asset value of the fund's shares is reduced 
below the investor's cost as a result of such a 
distribution, any such payment will be a taxable 
dividend or distribution payment even though it may 
represent a return of invested capital.
	
Share Redemptions.  As a general rule, a shareholder 
who is not a dealer in securities and who redeems or 
exchanges his or her shares will recognize long-term 
capital gain or loss if the shares have been held for 
more than one year, and will recognize short-term 
capital gain or loss if the shares have been held for 
one year or less, provided in each case the 
transaction is properly treated as a sale rather than 
a dividend for tax purposes.  However, if a 
shareholder receives a distribution taxable as long-
term capital gain with respect to shares of the fund 
and redeems or exchanges the shares before he or she 
has held them for more than six months, any loss on 
such redemption or exchange will be treated as a long-
term capital loss to the extent of the distribution.  

Backup Withholding.  If a shareholder fails to furnish 
a correct taxpayer identification number, fails to 
fully report dividend or interest income, or fails to 
certify that he or she has provided a correct taxpayer 
identification number and that he or she is not 
subject to such withholding, then the shareholder may 
be subject to a 31% "backup withholding tax" with 
respect to (a) any dividends and distributions and (b) 
any proceeds of any redemption of fund shares.  An 
individual's taxpayer identification number is his or 
her social security number.  The backup withholding 
tax is not an additional tax and may be credited 
against a shareholder's federal income tax liability.  
Certain distributions to nonresident aliens and 
foreign entities may also be subject to other 
withholding taxes.  

ADDITIONAL INFORMATION

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

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

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

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

Description of Shares

The Master Trust Agreement of the fund permits the 
Trustees of the fund to issue an unlimited number of 
full and fractional shares of a single class and to 
divide or combine the shares into a greater or lesser 
number of shares without thereby changing the 
proportionate beneficial interests in the fund.  Each 
share in the fund represents an equal proportional 
interest in the fund with each other share.  
Shareholders of the fund are entitled upon its 
liquidation to share pro rata in its net assets 
available for distribution.  No shareholder of the 
fund has any preemptive or conversion rights.  Shares 
of the fund are fully paid and non-assessable.

Pursuant to the Master Trust Agreement, the fund's 
Trustees may authorize the creation of additional 
series of shares (the proceeds of which would be 
invested in separate, independently managed 
portfolios) and additional classes of shares within 
any series (which would be used to distinguish among 
the rights of different categories of shareholders, as 
might be required by future regulations or other 
unforeseen circumstances).

FINANCIAL STATEMENTS

The fund's annual report for the fiscal year ended 
December 31, 1998 was filed on April 9, 1999 and is 
incorporated in its entirety by reference, Accession 
No.0000091155-99-000245.


APPENDIX A


Description of Ratings

Description of S&P Corporate Bond Ratings

	AAA

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

	AA

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

	A

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

	BBB

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

	BB, B and CCC

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


Description of Moody's Corporate Bond Ratings

	Aaa

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

	Aa

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

	A

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

	Baa

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

	Ba

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

	B

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

	Caa

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

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




Description of S&P Municipal Bond Ratings

AAA

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

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

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

	AA

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

	A

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

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

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

	BBB

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

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

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

	BB, B, CCC and CC

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

C

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

	D

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

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

Description of S&P Municipal Note Ratings

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

Description of Moody's Municipal Bond Ratings

	Aaa

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

	Aa

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

	A

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

	Baa

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

	Ba

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

	B

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

	Caa

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

	Ca

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

	C

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

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

Description of Moody's Municipal Note Ratings

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

Description of Commercial Paper Ratings

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

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

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

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

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

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


Smith Barney
INCOME FUNDS - SMITH BARNEY PREMIUM TOTAL 
RETURN FUND


Statement of Additional Information
April 30, 1999




Smith Barney
Income Funds - Premium Total Return 
Fund
388 Greenwich Street
New York, New York 10013
SALOMON SMITH BARNEY
A Member of Citigroup Inc.



4
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