As filed with the Securities and Exchange Commission on February 27, 1998 
----------------------------------------------------------------------------- 
Registration No. 2-74288 
		811-3275 
 
U. S. SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C.  20549 
 
FORM N-1A 
 
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933	 
 
[   ]  Pre-Effective Amendment No.

[X]    Post-Effective Amendment  No. 47 

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940, 
Amendment No. 49 
 
SMITH BARNEY INVESTMENT FUNDS INC. 
(Exact name of Registrant as Specified in Charter) 
388 Greenwich Street, New York, New York  10013 
(Address of Principal Executive Offices)  (Zip Code) 
(800)-451-2010
(Registrant's Telephone Number, including Area Code:) 
Christina T. Sydor 
388 Greenwich Street, New York, New York 10013(22nd Floor)
(Name and Address of Agent For Service)
Continuous
(Approximate Date of Proposed Public Offering)

It is proposed that this filing will become effective: 
_____	immediately upon filing pursuant to Paragraph (b)
_____	On (date) pursuant to paragraph (b)
_____	60 days after filing pursuant to paragraph (a) (1)
   X    	On April 30, 1998 pursuant to paragraph (a)(1)
_____	75 days after filing pursuant to paragraph (a) (2)
_____	On (date) pursuant to paragraph (a) (2)of rule 485

If appropriate, check the following box:

_____	This post-effective amendment designates a new effective date for a
	previously filed post-effective amendment.

Title of Securities Being Registered: Shares of Common Stock

SMITH BARNEY INVESTMENT FUNDS INC. 

CONTENTS OF REGISTRATION STATEMENT 

This Registration Statement contains the following pages and documents 

Front Cover 

Contents Page 
 
Cross-Reference Sheet 
 
Part A - Prospectus 
 
Part B - Statement of Additional Information 
 
Part C - Other Information 
 
Signature Page 
 
Exhibits 
 
SMITH BARNEY INVESTMENT FUNDS INC. 
 
FORM  N-1A CROSS REFERENCE SHEET 
 
PURSUANT TO RULE 485(a) Under the Securities Act of 1933, as amended 
 
Part A 
Item No.					Prospectus Caption 
 
1. Cover Page 					Cover Page 
 
2. Synopsis 					Prospectus Summary  
 
3. Condensed Financial Highlights		Financial Highlights Information 
 
4. General Description of Registrant 		Cover Page;  
						Prospectus Summary 
						Investment Objective and  
						Management Policies; Additional  
						Information 
 
5. Management of the Fund			Management of the Fund and the Company;	
						Distributor; Additional Information; 
						 Annual Report 
 
6. Capital Stock and Other			Investment Objective and  
    Securities					Management Policies; Dividends, 		
						Distributions and Taxes; Additional Information 
 
7. Purchase of Securities Being Offered		Valuation of Shares; Purchase of
 Shares; 	
						Exchange Privilege; Redemption of Shares; 	
						Minimum Account Size; Distributor; Additional 	
						Information 
 
8  Redemption or Purchase of Shares; 		Redemption of Shares; Exchange 		
						Privilege 
 
9. Pending Legal Proceedings			Not Applicable 
 
Part B 
Item No. and Caption				Statement of Additional Information Caption 
 
10 Cover Page					Cover page 
 
11. Table of Contents				Contents 
 
12. General Information and History 		Distributor; Additional Information 
 
13. Investment Objectives and Policies 		Investment Objectives Management and
 Policies 
 
14. Management of the Fund			Management of the Company; Distributor 
 
15. Control Persons and 			Principal Management of the Company  
     Holders of Securities 
 
16. Investment Advisory and Other 		Management of the Company; 
      Services					Distributor 
 
17. Brokerage Allocation and 			Investment Objective and 
     Other Services				Management Policies; Distributor 
 
18. Capital Stock and Other 			Investment Objective and  
      Securities 					Management Policies; Purchase of Shares; 	
						Redemption of Shares; Taxes 
 
19. Purchase, Redemption and 			Purchase of Shares; Redemption 
     Pricing of  Securities Being Offered		Purchase of Shares;
      Redemption of Shares; 	
						Valuation of Shares; Distributor; Exchange 	
						Privilege 
 
20. Tax Status					Taxes 
 
21. Underwriters				see Prospectus "Purchase of Shares" 
 
22. Calculations of Performance 		Performance Data 
 
23. Financial Statements				Financial Statements 

SMITH BARNEY INVESTMENT FUNDS
PART A
<PAGE>
 
P R O S P E C T U S 

                                                                    SMITH BARNEY
                                                                         Special
                                                                        Equities
                                                                            Fund
                                                                  APRIL 30, 1997
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
[LOGO] SMITH BARNEY MUTUAL FUNDS
       Investing in your future.
       Every day.
<PAGE>
 
PROSPECTUS                                                      April 30, 1997
Smith Barney
Special Equities Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
   
  Smith Barney Special Equities Fund (the "Fund") seeks long-term capital
appreciation in a diversified portfolio of common stocks or securities con-
vertible into or exchangeable for common stocks, primarily of growth companies
as identified by the Fund's investment adviser.     
 
  The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up Smith Barney Investment Funds Inc. (the "Compa-
ny"). The Company is an open-end management investment company commonly
referred to as a mutual fund.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Company, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and to
retain it for future reference. Shares of other funds offered by the Company
are described in separate Prospectuses that may be obtained by calling the
Company at the telephone number set forth above or by contacting a Smith Bar-
ney Financial Consultant.
 
  Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated April 30, 1997 as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Company at the telephone number or address set forth
above or by contacting a Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                              1
<PAGE>
 
TABLE OF CONTENTS
<TABLE>   
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            9
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   14
-------------------------------------------------
VALUATION OF SHARES                            17
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             18
-------------------------------------------------
PURCHASE OF SHARES                             19
-------------------------------------------------
EXCHANGE PRIVILEGE                             29
-------------------------------------------------
REDEMPTION OF SHARES                           32
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           34
-------------------------------------------------
PERFORMANCE                                    34
-------------------------------------------------
MANAGEMENT OF THE COMPANY AND FUND             35
-------------------------------------------------
DISTRIBUTOR                                    36
-------------------------------------------------
ADDITIONAL INFORMATION                         37
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or the distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
PROSPECTUS SUMMARY
  The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
 
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management invest-
ment company that seeks long-term capital appreciation by investing in equity
securities consisting of common stocks or securities which are convertible
into or exchangeable for such stocks, including warrants, which the investment
adviser believes to have superior appreciation potential. See "Investment
Objective and Management Policies."
 
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of the sales charges and rate of
expenses to which they are subject. A fourth Class of shares, Class Y shares,
is offered only to investors meeting an initial investment minimum of
$5,000,000. In addition, a fifth class, Class Z shares, which is offered pur-
suant to a separate prospectus, is offered exclusively to tax-exempt employee
benefit and retirement plans of Smith Barney Inc. ("Smith Barney") and its
affiliates. See "Purchase of Shares" and "Redemption of Shares."
 
  Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of
$500,000 or more will be made at net asset value with no initial sales charge,
but will be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary--
Reduced or No Initial Sales Charge."
 
  Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year
after the date of purchase to zero. This CDSC may be waived for certain
redemptions. Class B shares are subject to an annual service fee of 0.25% and
an annual distribution fee of 0.75% of the average daily net assets of the
Class. The Class B shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.
 
  Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares no longer will be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have
 
                                                                              3
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
been acquired through the reinvestment of dividends and distributions ("Class
B Dividend Shares") will be converted at that time. See "Purchase of Shares--
Deferred Sales Charge Alternatives."
 
  Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. The CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of Fund shares which, when com-
bined with current holdings of Class C shares of the Fund, equal or exceed
$500,000 in the aggregate should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase.
 
  Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any serv-
ice or distribution fees.
 
  In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
 
  Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regu-
lar investment may wish to consider Class A shares; as the investment accumu-
lates shareholders may qualify for reduced sales charges and the shares are
subject to lower ongoing expenses over the term of the investment. As an
investment alternative, Class B and Class C shares are sold without any ini-
tial sales charge so the entire purchase price is immediately invested in the
Fund. Any investment return on these additional invested amounts may partially
or wholly offset the higher annual expenses of these Classes. Because the
Fund's future return cannot be predicted, however, there can be no assurance
that this would be the case.
 
  Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature, and therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.
 
  Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
subject to a CDSC of 1.00% on redemptions made within 12 months of purchase.
The $500,000 investment may be met by adding the purchase to the net asset
value of all Class A shares held in other funds sponsored by Smith Barney Inc.
("Smith Barney") listed under "Exchange Privilege." Class A share purchases may
also be eligible for a reduced initial sales charge. See "Purchase of Shares."
Because the ongoing expenses of Class A shares may be lower than those for
Class B and Class C shares, purchasers eligible to purchase Class A shares at
net asset value or at a reduced sales charge should consider doing so.
 
  Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.
 
  See "Purchase of Shares" and "Management of the Company and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
 
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without a
sales charge as investment alternatives under both of these programs. See "Pur-
chase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
 
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained by Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
institutional investors, may purchase shares directly from the Fund made
through the Fund's transfer agent, First Data Investor Services Group, Inc.
("First Data"). See "Purchase of Shares."
 
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed Retire-
ment Plan. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. For participants in retirement plans qualified under Section
403(b)(7) or
 
                                                                               5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
Section 401(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class C shares and the subsequent investment requirement
for all Classes of shares is $25. The minimum investment requirements for pur-
chases of Fund shares through the Systematic Investment Plan are described
below. See "Purchase of Shares."
 
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for shares. The minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes for shareholders purchasing shares through
the Systematic Investment Plan on a monthly basis is $25 and on a quarterly
basis is $50. See "Purchase of Shares."
 
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
 
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser and administrator. SBMFM provides
investment advisory and management services to investment companies affiliated
with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings
Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers Group
Inc. ("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services, Consumer Finance Services, Life Insurance Services and Property &
Casualty Insurance Services. See "Management of the Company and the Fund."
 
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respec-
tive net asset values next determined. See "Exchange Privilege."
 
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from a Smith Barney Financial Consultant. See "Valuation of Shares."
 
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and distribu-
tions of net realized capital gains, if any, are declared and paid annually.
See "Dividends, Distributions and Taxes."
 
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution reinvestments
 
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
will become eligible for conversion to Class A shares on a pro rata basis. See
"Dividends, Distributions and Taxes."
 
RISK FACTORS AND SPECIAL CONSIDERATIONS The Company is designed for long-term
investors and not for investors who intend to liquidate their investment after
a short period. Neither the Company as a whole nor any particular fund in the
Company, including the Fund, constitutes a balanced investment plan. There can
be no assurance that the Fund will achieve its investment objective. The Fund
may employ investment techniques which involve certain risks, including enter-
ing into repurchase agreements, lending portfolio securities, investing in
restricted securities, selling securities short and investing in foreign secu-
rities through the use of American Depositary Receipts. See "Investment Objec-
tive and Management Policies--Additional Investments."
 
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and the Fund's operating expenses for its most
recent fiscal year:
 
<TABLE>
<CAPTION>
                                                CLASS A CLASS B CLASS C CLASS Y
-------------------------------------------------------------------------------
  <S>                                           <C>     <C>     <C>     <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Maximum sales charge imposed on purchases
      (as a percentage of offering price)        5.00%   None    None    None
    Maximum CDSC (as a percentage of original
      cost or redemption proceeds whichever is
      lower)                                     None*   5.00%   1.00%   None
-------------------------------------------------------------------------------
  ANNUAL FUND OPERATING EXPENSES
      (AS A PERCENTAGE OF AVERAGE NET ASSETS)
    Management fees                              0.75%   0.75%   0.75%   0.75%
    12b-1 fees**                                 0.25%   1.00%   1.00%   None
    Other expenses                               0.17%   0.16%   0.15%   0.07%
-------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES                  1.17%   1.91%   1.90%   0.82%
-------------------------------------------------------------------------------
</TABLE>
 * Purchases of Class A shares of $500,000 or more will be made at net asset
   value with no sales charge, but will be subject to a CDSC of 1.00% on
   redemptions made within 12 months of purchase.
** Upon conversion of Class B shares to Class A shares, such shares will no
   longer be subject to a distribution fee. Class C shares do not have a
   conversion feature and, therefore, are subject to an ongoing distribution
   fee. As a result, long-term shareholders of Class C shares may pay more than
   the economic equivalent of the maximum front-end sales charge permitted by
   the National Association of Securities Dealers, Inc.
 
  Class A shares of the Fund purchased through the Smith Barney AssetOne Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the program. For more information, please
call your Smith Barney Financial Consultant.
 
 
                                                                               7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
  The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in
the case of Class B, Class C and certain Class A shares, the length of time
the shares are held and whether shares are held through the Smith Barney
401(k) and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption
of Shares." Smith Barney receives an annual 12b-1 service fee of 0.25% of the
value of average daily net assets of Class A shares. Smith Barney also
receives, with respect to Class B and Class C shares, an annual 12b-1 fee of
1.00% of the value of average daily net assets of the respective Class, con-
sisting of a 0.75% distribution fee and a 0.25% service fee. "Other expenses"
in the above table include fees for shareholder services, custodial fees,
legal and accounting fees, printing costs and registration fees.
 
EXAMPLE The following example is intended to assist an investor in understand-
ing the various costs that an investor in the Fund will bear directly or indi-
rectly. The example assumes payment by the Fund of operating expenses at the
levels set forth in the table above. See "Purchase of Shares," "Redemption of
Shares" and "Management of the Fund."
 
<TABLE>
<CAPTION>
                                              1 YEAR 3 YEARS 5 YEARS 10 YEARS*
------------------------------------------------------------------------------
  <S>                                         <C>    <C>     <C>     <C>
  An investor would pay the following
  expenses on a $1,000 investment, assuming
  (1) 5.00% annual return and (2) redemption
  at the end of each time period:
    Class A.................................   $61     $85    $111     $185
    Class B.................................    69      90     113      204
    Class C.................................    29      60     103      222
    Class Y.................................     8      26      46      101
  An investor would pay the following
  expenses on the same investment, assuming
  the same annual return and no redemption:
    Class A.................................    61      85     111      185
    Class B.................................    19      60     103      204
    Class C.................................    19      60     103      222
    Class Y.................................     8      26      46      101
------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at
  the end of the eighth year following the date of purchase.
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
 
8
<PAGE>
 
FINANCIAL HIGHLIGHTS
 
  The following information for the two year period ended December 31, 1996 has
been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's Annual Report dated December 31, 1996. The fol-
lowing information for the fiscal years ended December 31, 1986 through Decem-
ber 31, 1994 has been audited by other independent auditors. The information
set out below should be read in conjunction with the financial statements and
related notes that also appear in the Fund's Annual Report, which is incorpo-
rated by reference into the Statement of Additional Information.
 
FOR A CLASS A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
                                  1996(1)    1995   1994(1)   1993(1)  1992(2)
--------------------------------------------------------------------------------
<S>                               <C>       <C>     <C>       <C>      <C>
NET ASSET VALUE, BEGINNING OF
 YEAR                             $30.44    $19.10  $20.23    $15.47   $14.13
--------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment loss               (0.19)    (0.27)  (0.13)    (0.08)   (0.01)
 Net realized and unrealized gain
  (loss)                           (1.50)    12.37   (1.00)     5.17     1.35
--------------------------------------------------------------------------------
Total Income (Loss) From Opera-
 tions                             (1.69)    12.10   (1.13)     5.09     1.34
--------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net realized gains                (0.28)    (0.76)     --     (0.33)      --
 Capital                           (0.36)       --      --        --       --
--------------------------------------------------------------------------------
Total Distributions                (0.64)    (0.76)     --     (0.33)      --
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR      $28.11    $30.44  $19.10    $20.23   $15.47
--------------------------------------------------------------------------------
TOTAL RETURN++                     (5.81)%   63.48%  (5.59)%   32.90%    9.48%++
--------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MIL-
 LIONS)                           $  237    $  159  $  101    $   50   $  0.2
--------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                           1.17%     1.43%   1.49%     1.67%    1.51%+
 Net investment loss               (0.61)    (1.05)  (0.94)    (0.46)   (0.97)+
--------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE              118%      113%    123%      112%     211%
--------------------------------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
 EQUITY SECURITY TRANSACTIONS(3)  $ 0.06    $ 0.06      --        --       --
--------------------------------------------------------------------------------
</TABLE>
 (1) The per share amounts have been calculated using the monthly average
     shares method, which more appropriately presents the per share data for
     this year since use of the undistributed method did not accord with
     results of operations.
 (2) For the period from November 6, 1992 (inception date) to December 31,
     1992.
 (3) As of September 1995, the SEC instituted new guidelines requiring the
     disclosure of average commissions per share.
 ++ Total return represents the aggregate total return for the period
    indicated and does not reflect any applicable sales charges.
  ++Total return is not annualized, as it may not be representative of the
    total return for the year.
  + Annualized.
 
 
                                                                               9
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
                                     1996(1)   1995   1994(1)  1993(1)   1992
-------------------------------------------------------------------------------
<S>                                  <C>      <C>     <C>      <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR   $29.76   $18.82  $20.08   $15.47   $14.18
-------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment loss                  (0.41)   (0.37)  (0.27)   (0.20)   (0.26)
 Net realized and unrealized gain
   (loss)                             (1.43)   12.07   (0.99)    5.14     1.55
-------------------------------------------------------------------------------
Total Income (Loss) From Operations   (1.84)   11.70   (1.26)    4.94     1.29
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net realized gains                   (0.28)   (0.76)     --    (0.33)      --
 Capital                              (0.36)      --      --       --       --
-------------------------------------------------------------------------------
Total Distributions                   (0.64)   (0.76)     --    (0.33)      --
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR         $27.28   $29.76  $18.82   $20.08   $15.47
-------------------------------------------------------------------------------
TOTAL RETURN+                         (6.44)   62.30% (6.27)%   31.93%    9.10%
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS)   $  362   $  171  $   94   $  138   $   78
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                              1.91%    2.04%   2.21%    2.34%    2.32%
 Net investment (loss)                (1.36)   (1.61)  (1.66)   (1.13)   (1.77)
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                 118%     113%    123%     112%     211%
-------------------------------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
  EQUITY SECURITY TRANSACTIONS(2)    $ 0.06   $ 0.06      --       --       --
-------------------------------------------------------------------------------
</TABLE>
(1) The per share amounts have been calculated using the monthly average shares
    method, which more appropriately presents the per share data for the period
    since use of the undistributed method did not accord with results of
    operations.
(2) As of September, 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.
 + Total return represents the aggregate total return for the period indicated
   and does not reflect any applicable sales charges.
++ Net investment income before reimbursement of expenses by investment adviser
   and sub-investment adviser and administrator for the year ended December 31,
   1988 was $0.70.
 
 
10
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
<TABLE>
<CAPTION>
  1991             1990                    1989                    1988                     1987
--------------------------------------------------------------------------------------------------
<S>               <C>                     <C>                     <C>                      <C>
 $ 9.82           $13.77                  $12.04                  $11.48                   $13.02
--------------------------------------------------------------------------------------------------
  (0.07)            0.29                    0.28                    0.71++                  (0.10)
   4.46            (3.70)                   1.96                    0.70                    (1.30)
--------------------------------------------------------------------------------------------------
   4.39            (3.41)                   2.24                    1.41                    (1.40)
--------------------------------------------------------------------------------------------------
     --            (0.23)                     --                   (0.30)                   (0.14)
  (0.03)           (0.02)                  (0.24)                     --                       --
--------------------------------------------------------------------------------------------------
  (0.03)           (0.54)                  (0.51)                  (0.85)                   (0.14)
--------------------------------------------------------------------------------------------------
 $14.18            $9.82                  $13.77                  $12.04                   $11.48
--------------------------------------------------------------------------------------------------
 (24.71)%          18.60%                  12.60%                 (10.91)%                   7.05%
--------------------------------------------------------------------------------------------------
 $   82           $   76                  $  142                  $  170                   $  179
--------------------------------------------------------------------------------------------------
   2.31%            2.30%                   2.34%                   2.32%                    2.09%
  (0.74)            2.12                    1.69                    5.23                    (0.63)
--------------------------------------------------------------------------------------------------
    379%             372%                    228%                    165%                     148%
--------------------------------------------------------------------------------------------------
     --               --                      --                      --                       --
--------------------------------------------------------------------------------------------------
</TABLE>
 
                                                                              11
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
FOR A CLASS C SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
                          1996(1)    1995   1994(1)  1993(1)(2)
-----------------------------------------------------------------
<S>                       <C>       <C>     <C>      <C>
NET ASSET VALUE, BEGIN-
 NING OF YEAR             $29.77    $18.82  $20.08     $22.62
-----------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment loss       (0.41)    (0.42)  (0.25)     (0.16)
 Net realized and
   unrealized gain (loss)  (1.44)    12.13   (1.01)     (2.05)
-----------------------------------------------------------------
Total Income (Loss) From
 Operations                (1.85)    11.71   (1.26)     (2.21)
-----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net realized gains        (0.28)    (0.76)    --       (0.33)
 Capital                   (0.36)      --      --         --
-----------------------------------------------------------------
Total Distributions        (0.64)    (0.76)    --       (0.33)
-----------------------------------------------------------------
NET ASSET VALUE, END OF
 YEAR                     $27.28    $29.77  $18.82     $20.08
-----------------------------------------------------------------
TOTAL RETURN++             (6.44)%   62.35% (6.27)%     (9.77)%++
-----------------------------------------------------------------
NET ASSETS, END OF YEAR
  (MILLIONS)              $   26    $    9  $    2     $  0.2
-----------------------------------------------------------------
RATIOS TO AVERAGE NET
 ASSETS:
 Expenses                   1.90%     2.25%   2.15%      2.19%+
 Net investment loss       (1.34)    (1.79)  (1.60)     (0.98)+
-----------------------------------------------------------------
PORTFOLIO TURNOVER RATE      118%      113%    123%       112%
-----------------------------------------------------------------
AVERAGE COMMISSIONS PAID
 ON
 EQUITY SECURITY
 TRANSACTIONS(3)          $ 0.06    $ 0.06     --         --
-----------------------------------------------------------------
</TABLE>
 
(1) The per share amounts have been calculated using the monthly average shares
    method, which more appropriately presents the per share data for this
    period, since use of the undistributed net investment income method does
    not accord with results of operations.
(2) For the period from October 18, 1993 (inception date) to December 31, 1993.
(3) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.
++ Total return represents the aggregate total return for the period indicated
   and does not reflect any applicable sales charge.
 ++Total return is not annualized, as it may not be representative of the total
   return for the year.
 + Annualized.
 
12
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
FOR A CLASS Y SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
                                                           1996(1)(2)
-----------------------------------------------------------------------
<S>                                                        <C>
NET ASSET VALUE, BEGINNING OF YEAR                          $ 28.99
-----------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment loss                                          (0.08)
 Net realized and unrealized gain (loss)                      (0.06)
-----------------------------------------------------------------------
Total Income (Loss) From Operations                           (0.14)
-----------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net realized gains                                           (0.28)
 Capital                                                      (0.36)
-----------------------------------------------------------------------
Total Distributions                                           (0.64)
-----------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR                                $ 28.21
-----------------------------------------------------------------------
TOTAL RETURN                                                  (0.75)%++
-----------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)                              $93,938
-----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                                      0.82%+
 Net investment loss                                          (0.29)+
-----------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                                         118%
-----------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS   $  0.06
-----------------------------------------------------------------------
</TABLE>
(1) The per share amounts have been calculated using the monthly average shares
    method, which more appropriately presents per share data for this year
    since use of the undistributed method did not accord with results of
    operations.
(2) For the period from January 31, 1996 (inception date) to December 31, 1996.
 ++Total return is not annualized, as it may not be representative of the total
   return for the year.
 + Annualized.
 
                                                                              13
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
  The Fund's investment objective is long-term capital appreciation. It seeks
to achieve this objective by investing in equity securities (common stocks or
securities which are convertible into or exchangeable for such stocks, includ-
ing warrants) which SBMFM believes to have superior appreciation potential.
There can be no assurance that the Fund will achieve its investment objective.
   
  The Fund attempts to achieve its investment objective by investing primarily
in equity securities of growth companies, generally not within the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500"), as identified by SBMFM.
These companies may not have reached a fully mature stage of earnings growth,
since they may still be in the developmental stage, or may be older companies
which appear to be entering a new stage of more rapid earnings progress due to
factors such as management change or development of new technology, products or
markets. A significant number of these companies may be in technology areas,
including health care related sectors, and may have annual sales of less than
$300 million. The Fund may also choose to invest in some relatively unseasoned
stocks, i.e., securities issued by companies whose market capitalization is
under $100 million.     
   
    The Fund also may invest in small capitalization companies representative
of the broad benchmarks against which the Fund's performance is frequently
judged by utilizing an actively managed quantitative investment strategy to
isolate securities that are believed to have a high probability of
outperforming their respective industry/sector peer groups. In implementing
this strategy the Portfolio Manager is supported by investment professionals,
including a team that is quantitatively oriented.     
 
  Investing in smaller, newer issuers generally involves greater risk than
investing in larger, more established issuers. The Fund may purchase restricted
securities (subject to a limit on all illiquid securities of 10% of total
assets), invest in money market instruments, enter into repurchase and reverse
repurchase agreements for temporary defensive purposes, invest in real estate
investment trusts, purchase the securities of companies with less than three
years of continuous operation, borrow money from banks as a temporary measure
for extraordinary or emergency purposes in an amount not exceeding 5% of the
Fund's total assets, lend its portfolio securities and enter into short sales
"against the box."
 
  In making purchases of securities consistent with the above policies, the
Fund will be subject to the applicable restrictions referred to under "Invest-
ment Restrictions" in the Statement of Additional Information. These restric-
tions and the Fund's investment objective are fundamental policies, which means
that they may not be changed without a majority vote of shareholders of the
Fund. Except for the objective and those restrictions specifically identified
as fundamental, all investment policies and practices described in this Pro-
spectus and in the Statement of Additional Information
 
14
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
are non-fundamental, so that the Board of Directors may change them without
shareholder approval. The fundamental restrictions applicable to the Fund
include a prohibition on (a) purchasing a security if, as a result, more than
5% of the assets of the Fund would be invested in the securities of the issuer
(with certain exceptions) or the Fund would own more than 10% of the outstand-
ing voting securities of the issuer, (b) investing more than 10% of the Fund's
total assets in "illiquid" securities (which includes repurchase agreements
with more than seven days to maturity), and (c) investing more than 25% of the
Fund's total assets in the securities of issuers in a particular industry (with
exceptions for U.S. government securities and certain money market instru-
ments).
 
 ADDITIONAL INVESTMENTS
  U.S. Government Securities. U.S. government securities are obligations of, or
are guaranteed by, the U.S. government, its agencies or instrumentalities.
These include bills, certificates of indebtedness, and notes and bonds issued
by the United States Treasury or by agencies or instrumentalities of the United
States government. Some U.S. government securities, such as United States Trea-
sury bills and bonds, are supported by the full faith and credit of the United
States Treasury; others are supported by the right of the issuer to borrow from
the United States Treasury; others, such as those of the Federal National Mort-
gage Association, are supported by the discretionary authority of the United
States government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association and the Federal Home Loan Mort-
gage Corporation ("FHLMC"), are supported only by the credit of the instrumen-
tality. Mortgage participation certificates issued by the FHLMC generally rep-
resent ownership interests in a pool of fixed-rate conventional mortgages.
Timely payment of principal and interest on these certificates is guaranteed
solely by the issuer of the certificates. Other investments will include Gov-
ernment National Mortgage Association Certificates ("GNMA Certificates"), which
are mortgage-backed securities representing part ownership of a pool of mort-
gage loans on which timely payment of interest and principal is guaranteed by
the full faith and credit of the United States government. While the United
States government guarantees the payment of principal and interest on GNMA Cer-
tificates, the market value of the securities is not guaranteed and will fluc-
tuate.
 
  Repurchase Agreements. The Fund may enter into repurchase agreement transac-
tions on U.S. government securities with banks which are the issuers of instru-
ments acceptable for purchase by the Fund and with certain dealers on the Fed-
eral 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 obliga-
tion 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 obliga-
tion at an agreed-upon
 
                                                                              15
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
price and time, thereby determining the yield during the Fund's holding peri-
od. This arrangement results in a fixed rate of return that is not subject to
market fluctuations during the Fund's holding period. Under each repurchase
agreement, the selling institution will be required to maintain the value of
the securities subject to the repurchase agreement at not less than their
repurchase price. 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 securi-
ties, 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. SBMFM, acting under
the supervision of the Board of Directors, reviews on an ongoing basis to
evaluate potential risks, the value of the collateral and the creditworthiness
of those banks and dealers with which the Fund enters into repurchase agree-
ments.
 
  Loans of Portfolio Securities. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of
U.S. government securities, cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (b) the Fund may at any time call the loan and
obtain the return of the securities loaned; (c) the Fund will receive any
interest or dividends paid on the loaned securities; and (d) the aggregate
market value of securities loaned will not at any time exceed 33 1/3% of the
total assets of the Fund.
 
  Short Sales. The Fund may sell securities short "against the box." While a
short sale is the sale of a security the Fund does not own, it is "against the
box" if at all times when the short position is open, the Fund owns an equal
amount of the securities or securities convertible into, or exchangeable with-
out further consideration for, securities of the same issue as the securities
sold short. Short sales "against the box" are used to defer recognition of
capital gains or losses.
 
  American Depositary Receipts. The Fund may purchase American Depositary
Receipts ("ADRs"), which are 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.
 
  Restricted Securities. The Fund may invest in restricted securities.
Restricted securities are securities subject to legal or contractual restric-
tions on their resale. Such restrictions might prevent the sale of restricted
securities at a time when such a sale would otherwise be desirable. Restricted
securities and securities for which there is no readily available market ("il-
liquid assets") will not be acquired if such acquisition would cause the
aggregate value of illiquid assets and restricted securities to exceed 10% of
the Fund's total assets.
 
16
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 PORTFOLIO TRANSACTIONS AND TURNOVER
 
  SBMFM arranges for the purchase and sale of the Fund's securities and selects
brokers and dealers (including Smith Barney) which, in its best judgment, pro-
vide prompt and reliable execution at favorable prices and reasonable commis-
sion rates. SBMFM may select brokers and dealers which provide it with research
services and may cause the Fund to pay such brokers and dealers commissions
which exceed those other brokers and dealers may have charged, if it views the
commissions as reasonable in relation to the value of the brokerage and/or
research services.
 
  For reporting purposes, the Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fis-
cal year by the monthly average of the value of the Fund's securities, with
money market instruments with less than one year to maturity excluded. A 100%
portfolio turnover rate would occur, for example, if all included securities
were replaced once during the year. The Fund's portfolio turnover rates for
each of the past fiscal years are set forth under "Financial Highlights."
 
VALUATION OF SHARES
 
  The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
 
  Securities listed on an exchange are valued on the basis of the last sale
prior to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken from the exchange where the security is primarily traded. Portfolio
securities which are primarily traded on foreign exchanges may be valued with
the assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchange, except that
when an occurrence subsequent to the time a foreign security is valued is
likely to have changed such value, then the fair value of those securities will
be determined by consideration of other factors by or under the direction of
the Board of Directors. Over-the-counter securities are valued on the basis of
the bid price at the close of business on each day. Unlisted foreign securities
are valued at the mean between the last available bid and offer price prior to
the time of valuation. Any assets or liabilities initially expressed in terms
of foreign currencies 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. Securities for which market quotations
are not readily available are valued at fair value. Notwithstanding the above,
bonds and other fixed-income securities are valued by using market quotations
and may be valued on the basis of prices provided by a pricing service approved
by the Board of Directors.
 
                                                                              17
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 DIVIDENDS AND DISTRIBUTIONS
  The Fund will be treated separately from the Company's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
 
  The Fund's policy is to distribute its investment income (that is, its
income other than its net realized capital gains) and net realized capital
gains, if any, once a year, normally at the end of the year in which earned or
at the beginning of the next year.
 
  If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. In order to
avoid the application of a 4% nondeductible excise tax on certain undistrib-
uted amounts of ordinary income and capital gains, the Fund may make an addi-
tional distribution shortly before December 31 in each year of any undistrib-
uted ordinary income or capital gains and expects to pay any other dividends
and distributions necessary to avoid the application of this tax.
 
  The per share dividends on Class B and Class C shares of the Fund may be
lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and
Class C shares. The per share dividends on Class A shares of the Fund may be
lower than the per share dividends on Class Y shares principally as a result
of the service fee applicable to Class A shares. Distributions of capital
gains, if any, will be in the same amount for Class A, Class B, Class C and
Class Y shares.
 
 TAXES
  The Fund will be treated as a separate taxpayer with the result that, for
Federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Company-wide
basis. The Fund has qualified and intends to continue to qualify as a "regu-
lated investment company" under the Code. In any taxable year in which the
Fund so qualifies and distributes at least 90% of its investment company tax-
able income (which includes, among other items, dividends, interest and the
excess of any net short-term capital gains over net long-term capital losses),
the Fund (but not its shareholders) generally will be relieved of Federal
income tax on the investment company taxable income and net realized capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, distributed to shareholders. In order to qualify as a regu-
lated investment company, the Fund will be required to meet various Code
requirements.
 
  Distributions of any investment company taxable income are taxable to share-
holders as ordinary income. Distributions of any net capital gains designated
by the Fund as capital gains dividends are taxable to shareholders as long-
term capital gains regardless of the length of time a shareholder may have
held shares of the Fund.
 
18
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
  Dividends (including capital gains dividends) declared by the Fund in Octo-
ber, November or December of any calendar year to shareholders of record on a
date in such a month will be deemed to have been received by shareholders on
December 31 of that calendar year, provided that the dividend is actually paid
by the Fund during January of the following calendar year.
 
  Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capital
assets in the shareholder's hands, and generally will be long-term or short-
term depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the shareholder
for six months or more will be treated as long-term capital loss to the extent
of any distributions of capital gains dividends received by the shareholder
with respect to such shares.
 
  Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gains dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Divi-
dends consisting of interest from U.S. government securities may be exempt from
all state and local income taxes. Shareholders should consult their tax advi-
sors for specific information on the tax consequences of particular types of
distributions.
 
PURCHASE OF SHARES
 
 
 GENERAL
  The Fund offers four Classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class Y shares are sold without an initial sales charge or a CDSC and
are available only to investors investing a minimum of $5,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). The Fund also offers a fifth class
of share: Class Z shares, which are offered without a sales charge, CDSC, serv-
ice fee or distribution fee, exclusively to tax-exempt employee benefit and
retirement plans of Smith Barney and its affiliates. Investors meeting these
criteria who are interested in acquiring Class Z shares should contact a Smith
Barney Financial Consultant for a Class Z shares Prospectus. See "Prospectus
Summary--Alternative Purchase Arrangements" for a discussion of factors to con-
sider in selecting which Class of shares to purchase.
 
  Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group. In addition, certain investors, including qualified retirement plans and
certain
 
                                                                              19
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
other institutional investors, may purchase shares directly through First Data.
When purchasing shares of the Fund, investors must specify whether the purchase
is for Class A, Class B, Class C or Class Y shares. Smith Barney and other
broker/dealers may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or
holds shares. Accounts held directly at First Data are not subject to a mainte-
nance fee.
 
  Investors in Class A, Class B and Class C shares may open an account by mak-
ing an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan, in the Fund. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000. Sub-
sequent investments of at least $50 may be made for all Classes. For partici-
pants in retirement plans qualified under Section 403(b)(7) or Section 401(a)
of the Code, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes in
the Fund is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes is $25. For shareholders purchasing shares of
the Fund through the Systematic Investment Plan on a quarterly basis, the mini-
mum initial investment requirement for Class A, Class B and Class C shares and
the subsequent investment requirement for all Classes is $50. There are no min-
imum investment requirements for Class A shares for employees of Travelers and
its subsidiaries, including Smith Barney, Directors or Trustees of any of the
Smith Barney Mutual Funds and their spouses and children. The Fund reserves the
right to waive or change minimums, to decline any order to purchase its shares
and to suspend the offering of shares from time to time. Shares purchased will
be held in the shareholder's account by First Data. Share certificates are
issued only upon a shareholder's written request to First Data.
 
  Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset val-
ue, 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 or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or Intro-
ducing Brokers purchasing through Smith Barney, payment for Fund shares is due
on the third business day after the trade date. In all other cases, payment
must be made with the purchase order.
 
 SYSTEMATIC INVESTMENT PLAN
  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the Sys-
 
20
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
tematic Investment Plan, Smith Barney or First Data is authorized, through pre-
authorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis, to charge the regular bank account or other financial institu-
tion indicated by the shareholder to provide systematic additions to the share-
holder's Fund account. A shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Smith Barney or First Data. The
Systematic Investment Plan also authorizes Smith Barney to apply cash held in
the shareholder's Smith Barney brokerage account or redeem the shareholder's
shares of a Smith Barney money market fund to make additions to the account.
Additional information is available from the Fund or a Smith Barney Financial
Consultant.
 
 INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
  The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
 
<TABLE>
<CAPTION>
                               SALES CHARGE
                      ------------------------------       DEALERS
                           % OF           % OF       REALLOWANCE AS % OF
AMOUNT OF INVESTMENT  OFFERING PRICE AMOUNT INVESTED   OFFERING PRICE
------------------------------------------------------------------------
<S>                   <C>            <C>             <C>
Less than $ 25,000         5.00%           5.26%             4.50%
$ 25,000 - $ 49,999        4.00            4.17              3.60
  50,000 - $ 99,999        3.50            3.63              3.15
 100,000 - $249,999        3.00            3.09              2.70
 250,000 - $499,999        2.00            2.04              1.80
 500,000 and over           *               *                 *
------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
  value without any initial sales charge, but will be subject to a CDSC of
  1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
  shares is payable to Smith Barney, which compensates Smith Barney Financial
  Consultants and other dealers whose clients make purchases of $500,000 or
  more. The CDSC is waived in the same circumstances in which the CDSC
  applicable to Class B and Class C shares is waived. See "Deferred Sales
  Charge Alternatives" and "Waivers of CDSC."
 
  Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
 
  The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of
a single trust estate or single fiduciary account.
 
 INITIAL SALES CHARGE WAIVERS
  Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds
 
                                                                              21
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
(including retired Board Members and employees); the immediate families of such
persons (including the surviving spouse of a deceased Board Member or employ-
ee); and to a pension, profit-sharing or other benefit plan for such persons
and (ii) employees of members of the National Association of Securities Deal-
ers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company in connection with the combination of
such company with the Fund by merger, acquisition of assets or otherwise; (c)
purchases of Class A shares by any client of a newly employed Smith Barney
Financial Consultant (for a period up to 90 days from the commencement of the
Financial Consultant's employment with Smith Barney), on the condition the pur-
chase 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) purchase by shareholders who have redeemed Class
A shares in the Fund (or Class A shares of another fund of the Smith Barney
Mutual Funds that are offered with a sales charge, and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made within
60 calendar days of the redemption; (e) purchase by accounts managed by regis-
tered investment advisory subsidiaries of Travelers; (f) direct rollovers by
plan participants of distributions from a 401(k) plan offered to employees of
Travelers or its subsidiaries or a 401(k) plan enrolled in the Smith Barney
401(k) Program (Note: subsequent investments will be subject to the applicable
sales charge); (g) purchases by separate accounts used to fund certain unregis-
tered variable annuity contracts; and (h) purchases by investors participating
in a Smith Barney fee-based arrangement. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.
 
 RIGHT OF ACCUMULATION
  Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
offered with a sales charge listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
 
22
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 GROUP PURCHASES
  Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan meet-
ing certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A
shares at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of Class A shares offered
with a sales charge that have been previously purchased and are still owned by
the group, plus the amount of the current purchase. A "qualified group" is one
which (a) has been in existence for more than six months, (b) has a purpose
other than acquiring Fund shares at a discount and (c) satisfies uniform crite-
ria which enable Smith Barney to realize economies of scale in its costs of
distributing shares. A qualified group must have more than 10 members, must be
available to arrange for group meetings between representatives of the Fund and
the members, and must agree to include sales and other materials related to the
Fund in its publications and mailings to members at no cost to Smith Barney. In
order to obtain such reduced sales charge or to purchase at net asset value,
the purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to the discre-
tion of Smith Barney.
 
 LETTER OF INTENT
  Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Fund and other funds of the Smith Barney
Mutual Funds
 
                                                                              23
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
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 pur-
chased and still owned. An alternative is to compute the 13 month period
starting up to 90 days before the date of execution of a Letter of Intent.
Each investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously
paid, or an appropriate number of escrowed shares will be redeemed. Please
contact a Smith Barney Financial Consultant or First Data to obtain a Letter
of Intent application.
 
  Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Fund and agree to purchase a total of $5,000,000 of Class Y shares of the same
Fund within six months from the date of the Letter. If a total investment of
$5,000,000 is not made within the six-month period, all Class Y shares pur-
chased to date will be transferred to Class A shares, where they will be sub-
ject to all fees (including a service fee of 0.25%) and expenses applicable to
the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund expects
that such transfer will not be subject to Federal income taxes. Please contact
a Smith Barney Financial Consultant or First Data for further information.
 
 DEFERRED SALES CHARGE ALTERNATIVES
  "CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class
C shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.
 
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a
CDSC to the extent that the value of such shares represents: (a) capital
appreciation of Fund assets; (b) reinvestment of dividends or capital gains
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class C shares and
Class A shares that are CDSC Shares, shares redeemed more than 12 months after
their purchase.
 
  Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the
 
24
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
Class B shares held under the Smith Barney 401(k) Programs as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs Pro-
gram."
 
<TABLE>
<CAPTION>
      YEAR SINCE PURCHASE
      PAYMENT WAS MADE      CDSC
---------------------------------
      <S>                   <C>
      First                 5.00%
      Second                4.00
      Third                 3.00
      Fourth                2.00
      Fifth                 1.00
      Sixth and Thereafter  0.00
---------------------------------
</TABLE>
 
  Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fee. There also will be converted at that time such propor-
tion 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
Class B shares (other than Class B Dividend Shares) owned by the shareholder.
See "Prospectus Summary--Alternative Purchase Arrangements--Class B Shares Con-
version Feature."
 
  In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that CDSC Shares acquired through an
exchange have been held will be calculated from the date that the shares
exchanged were initially acquired in one of the other applicable Smith Barney
Mutual Funds, and Fund shares being redeemed will be considered to represent,
as applicable, capital appreciation or dividend and capital gains distribution
reinvestments in such other funds. For Federal income tax purposes, the amount
of the CDSC will reduce the gain or increase the loss, as the case may be, on
the amount realized on redemption. The amount of any CDSC will be paid to Smith
Barney.
 
  To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 addi-
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the
 
                                                                              25
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
value of the investor's shares would be $1,260 (105 shares at $12 per share).
The CDSC would not be applied to the amount which represents appreciation
($200) and the value of the reinvested dividend shares ($60). Therefore, $240
of the $500 redemption proceeds ($500 minus $260) would be charged at a rate of
4.00% (the applicable rate for Class B shares) for a total deferred sales
charge of $9.60.
 
 WAIVERS OF CDSC
  The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of
the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a share-
holder who has redeemed shares from other funds of the Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by FDISG in the case
of all other shareholders) of the shareholder's status or holdings, as the case
may be.
 
 SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
  Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans par-
ticipating ("Participating Plans") in these programs.
 
  The Fund offers to Participating Plans Class A and Class C shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class C shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class C shares
acquired by other investors; however, they are not subject to any initial sales
charge or CDSC. Once a Participating Plan has made an initial investment in the
Fund, all of its subsequent investments in the Fund must be in the same Class
of shares, except as otherwise described below.
 
  Class A Shares. Class A shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
 
26
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
  Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class C shares of one or more funds of the Smith Barney Mutual Funds.
 
  401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at the
end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a Par-
ticipating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund (For Participating Plans that were originally established through a Smith
Barney retail brokerage account, the five year period will be calculated from
the date the retail brokerage account was opened.) Such Participating Plans
will be notified of the pending exchange in writing within 30 days after the
fifth anniversary of the enrollment date and, unless the exchange offer has
been rejected in writing, the exchange will occur on or about the 90th day
after the fifth anniversary date. If the Participating Plan does not qualify
for the five year exchange to Class A shares, a review of the Participating
Plan's holdings will be performed each quarter until either the Participating
Plan qualifies or the end of the eighth year.
 
  40l(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if its total Class
C holdings in all non-money market Smith Barney Mutual Funds equal at least
$500,000 as of the calendar year-end, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
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) Program, whether opened
before or after June 21, 1996, that has not previously qualified for an
exchange into Class A shares will be offered the opportunity to exchange all of
its Class C shares for Class A shares of the 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) 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 C shares of the Fund but instead may acquire Class A shares of the Fund.
Any Class C shares not converted will continue to be subject to the distribu-
tion 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
 
                                                                              27
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
such shares directly from the Transfer Agent. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
 
  Existing 401(k) Plans Investing in Class B shares. Class B shares of the 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 CDSC of 3.00% of
redemption proceeds, if the Participating Plan terminates within eight years of
the date the Participating Plan first enrolled in the Smith Barney 401(k) Pro-
gram.
 
  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 writ-
ing 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 Par-
ticipating Plan will not be eligible to acquire additional Class B shares of
the Fund but instead may acquire Class A shares of the Fund. If the Participat-
ing 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 fea-
ture as Class B shares held by other investors. See "Purchase of Shares--
Deferred Sales Charge Alternatives."
 
  No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
 
  The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee in the Participating Plan; (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemptions of shares in connection with a loan made by the Par-
ticipating Plan to an employee.
 
28
<PAGE>
 
EXCHANGE PRIVILEGE
 
  Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class C shares are subject to minimum investment requirements and all shares
are subject to the other requirements of the fund into which exchanges are
made.
 
 FUND NAME
 
 Growth Funds
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Growth Opportunity Fund
    Smith Barney Managed Growth Fund
    Smith Barney Natural Resources Fund Inc.
 
 Growth and Income Funds
    Concert Social Awareness Fund
    Smith Barney Convertible Fund
    Smith Barney Funds, Inc.--Equity Income Portfolio
    Smith Barney Growth and Income Fund
    Smith Barney Premium Total Return Fund
    Smith Barney Utilities Fund
 
 Taxable Fixed-Income Funds
    **Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
    +++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities
    Portfolio
    Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
 
 Tax-Exempt Funds
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
    *Smith Barney Intermediate Maturity California Municipals Fund
    *Smith Barney Intermediate Maturity New York Municipals Fund
    Smith Barney Managed Municipals Fund Inc.
    Smith Barney Massachusetts Municipals Fund
    Smith Barney Muni Funds--Florida Portfolio
    Smith Barney Muni Funds--Georgia Portfolio
    *Smith Barney Muni Funds--Limited Term Portfolio
 
                                                                              29
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
    Smith Barney Muni Funds--National Portfolio
    Smith Barney Muni Funds--New York Portfolio
    Smith Barney Muni Funds--Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund
    Smith Barney Tax-Exempt Income Fund
 
 International Funds
    Smith Barney World Funds, Inc.--Emerging Markets Portfolio
    Smith Barney World Funds, Inc.--European Portfolio
    Smith Barney World Funds, Inc.--Global Government Bond Portfolio
    Smith Barney World Funds, Inc.--International Balanced Portfolio
    Smith Barney World Funds, Inc.--International Equity Portfolio
    Smith Barney World Funds, Inc.--Pacific Portfolio
 
 Smith Barney Concert Series Inc.
    Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
    Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
    Smith Barney Concert Allocation Series Inc.--Growth Portfolio
    Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
    Smith Barney Concert Allocation Series Inc.--Income Portfolio
 
 Money Market Funds
    +Smith Barney Exchange Reserve Fund
    ++Smith Barney Money Funds, Inc.--Cash Portfolio
    ++Smith Barney Money Funds, Inc.--Government Portfolio
    ***Smith Barney Money Funds, Inc.--Retirement Portfolio
    +++Smith Barney Muni Funds--California Money Market Portfolio
    +++Smith Barney Muni Funds--New York Money Market Portfolio
    +++Smith Barney Municipal Money Market Fund, Inc.
--------------------------------------------------------------------------------
  * Available for exchange with Class A, Class C and Class Y shares of the
    Fund.
 ** Available for exchange with Class A and Class B shares of the Fund. In
    addition, shareholders who own Class C shares of the Fund through the Smith
    Barney 401(k) Program may exchange those shares for Class C shares of this
    fund.
*** Available for exchange with Class A shares of the Fund.
  + Available for exchange with Class B and Class C shares of the Fund.
 ++ Available for exchange with Class A and Class Y shares of the Fund. In
    addition, Participating Plans opened prior to June 21, 1996 and investing
    in Class C shares may exchange Fund shares for Class C shares of this fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
 
30
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
  Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Fund that have been exchanged.
 
  Class C Exchanges. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the 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 respec-
tive class in any of the funds identified above may do so without imposition of
any charge.
 
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. SBMFM may deter-
mine that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by a share-
holder. Upon such a determination, the Fund will provide notice in writing or
by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be
required to (a) redeem his or her shares in the Fund or (b) remain invested in
the Fund or exchange into any of the funds of the Smith Barney Mutual Funds
ordinarily available, which position the shareholder would be expected to main-
tain for a significant period of time. All relevant factors will be considered
in determining what constitutes an abusive pattern of exchanges.
 
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program."
 
  Exchanges will be processed at the net asset value next determined. Redemp-
tion 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 identi-
cal to the registration of the shares of the fund exchanged, no signature guar-
antee is required. A capital gain or loss for tax purposes will be realized
upon the exchange, depending upon the cost or other basis of shares redeemed.
Before exchanging shares, investors should read the current prospectus describ-
ing the shares to be acquired. The Fund reserves the right to modify or discon-
tinue exchange privileges upon 60 days prior notice to shareholders.
 
                                                                              31
<PAGE>
 
REDEMPTION OF SHARES
 
  The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
 
  If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permit-
ted under the 1940 Act in extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Smith Barney brokerage account, these
funds will not be invested for the shareholder's benefit without specific
instruction and Smith Barney will benefit from the use of temporarily
uninvested funds. Redemption proceeds for shares purchased by check, other than
a certified or official bank check, will be remitted upon clearance of the
check, which may take up to ten days or more.
 
  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
 
  Smith Barney Special Equities Fund, Inc.
  Class A, B, C or Y (please specify)
  c/o First Data Investors Services Group, Inc.
  P.O. Box 5128
  Westborough, Massachusetts 01581-5128
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or on a
written redemption request in excess of $2,000 must be guaranteed by an eligi-
ble guarantor institution such as a domestic bank, savings and loan institu-
tion, domestic credit union, member bank of the Federal Reserve System or mem-
ber firm of a national securities exchange. Written redemption requests of
$2,000 or less do not require a signature guarantee unless
 
32
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
more than one such redemption request is made in any 10-day period. Redemption
proceeds are to be sent to an address other than the address of record. Unless
otherwise directed, redemption proceeds will be mailed to an investor's address
of record. First Data may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees or guardians. A
redemption request will not be deemed properly received until First Data
receives all required documents in proper form.
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
is entitled to participate in this program, he or she should contact First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization Form, along with a signature guaran-
tee that will be provided by First Data upon request. (Alternatively, an
investor may authorize telephone redemptions on the new account application
with the applicant's signature guarantee when making his/her initial investment
in the Fund.)
 
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 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 per-
mitted 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 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 sharehold-
er'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 share-
holder's assets, will be required to provide a signature guarantee and certain
other documentation.
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day on which the NYSE is open.
 
                                                                              33
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
  Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven (7) days' prior notice to shareholders.
 
 AUTOMATIC CASH WITHDRAWAL PLAN
  The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on
exchanges between funds or Classes of the Fund. Any applicable CDSC will not
be waived on amounts withdrawn by a shareholder that exceed 1.00% per month of
the value of the shareholder's shares subject to the CDSC at the time the
withdrawal plan commences. For further information regarding the automatic
cash withdrawal plan, shareholders should contact a Smith Barney Financial
Consultant.
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
 
PERFORMANCE
 
 
 TOTAL RETURN
  From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types
of sales literature. These figures are computed separately for Class A, Class
B, Class C and Class Y shares of the Fund. These figures are based on histori-
cal earnings and are
 
34
<PAGE>
 
PERFORMANCE (CONTINUED)
not intended to indicate future performance. Total return is computed for a
specified period of time assuming deduction of the maximum sales charge, if
any, from the initial amount invested and reinvestment of all income dividends
and capital gain distributions on the reinvestment dates at prices calculated
as stated in this Prospectus, then dividing the value of the investment at the
end of the period so calculated by the initial amount invested and subtracting
100%. The standard average annual total return, as prescribed by the SEC, is
derived from this total return which provides the ending redeemable value. Such
standard total return information may also be accompanied with nonstandard
total return information for differing periods computed in the same manner but
without annualizing the total return or taking sales charges into account. The
Fund calculates current dividend return for each Class by annualizing the most
recent monthly distribution and dividing by the net asset value or the maximum
public offering price (including sales charge) on the last day of the period
for which current dividend return is presented. The current dividend return for
each Class may vary from time to time depending on market conditions, the com-
position of its investment portfolio and operating expenses. These factors and
possible differences in the methods used in calculating current dividend return
should be considered when comparing a Class' current return to yields published
for other investment companies and other investment vehicles. The Fund may also
include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
 
MANAGEMENT OF THE COMPANY AND THE FUND
 
 
 
 BOARD OF DIRECTORS
  Overall responsibility for management and supervision of the Fund rests with
the Company's Board of Directors. The Directors approve all significant agree-
ments between the Company and the companies that furnish services to the Fund
and the Company, including agreements with its distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains background information regarding
each Director and executive officer of the Company.
 
 INVESTMENT ADVISER AND ADMINISTRATOR--SBMFM
  SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. SBMFM (through predecessor entities) has been in
the investment counseling business since 1940. SBMFM renders investment advice
to a wide variety of individual, institutional and investment company clients
which had aggregate assets under management as of February 28, 1997 in excess
of $80 billion.
 
                                                                              35
<PAGE>
 
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)
 
  Subject to the supervision and direction of the Company's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research services to the Fund. For
investment advisory services rendered, the Fund pays SBMFM a monthly fee at the
annual rate of 0.55% of the value of its average daily net assets.
 
  SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets.
 
 PORTFOLIO MANAGEMENT
  George V. Novello, a Managing Director of SBMFM, has served as Investment
Officer of the Fund since September 1990 and manages the day-to-day operations
of the Fund, including making all investment decisions.
 
  Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended December 31, 1996 is included
in the Fund's Annual Report dated December 31, 1996. A copy of the Annual
Report may be obtained upon request without charge from a Smith Barney Finan-
cial Consultant or by writing or calling the Fund at the address or phone num-
ber listed on page one of this Prospectus.
 
 
DISTRIBUTOR
 
 
 
  Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee
with respect to Class A, Class B and Class C shares of the Fund at the annual
rate of 0.25% of the average daily net assets of the respective Class. Smith
Barney is also paid a distribution fee with respect to Class B and Class C
shares at the annual rate of 0.75% of the average daily net assets attributable
to those Classes. Class B shares that automatically convert to Class A shares
eight years after the date of original purchase will no longer be subject to a
distribution fee. The fees are used by Smith Barney to pay its Financial Con-
sultants for servicing shareholder accounts and, in the case of Class B and
Class C shares, to cover expenses primarily intended to result in the sale of
those shares. These expenses include: advertising expenses; the cost of print-
ing and mailing prospectuses to potential investors; payments to and expenses
of
 
36
<PAGE>
 
DISTRIBUTOR (CONTINUED)
Smith Barney Financial Consultants and other persons who provide support serv-
ices in connection with the distribution of shares; interest and/or carrying
charges; and indirect and overhead costs of Smith Barney associated with the
sale of Fund shares, including lease, utility, communications and sales promo-
tion expenses.
 
  The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
 
  Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Company's Board of
Directors will evaluate the appropriateness of the Plan and its payment terms
on a continuing basis and in so doing will consider all relevant factors,
including expenses borne by Smith Barney, amounts received under the Plan and
proceeds of the CDSC.
 
ADDITIONAL INFORMATION
 
 
  The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time. The Fund
offers shares of common stock currently classified into five Classes, A, B, C ,
Y, and Z with a par value of $.001 per share. Each Class of shares has the same
rights, privileges and preferences, except with respect to: (a) the designation
of each Class; (b) the effect of the respective sales charges for each Class;
(c) the distribution and/or service fees borne by each Class; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; (f) the exchange privilege of each Class; and (g) the
conversion feature of the Class B shares. The Board of Directors does not
anticipate that there will be any conflicts among the interests of the holders
of the different Classes. The Directors, on an ongoing basis, will consider
whether any such conflict exists and, if so, take appropriate action.
 
  PNC Bank, located at 17th and Chestnut Streets, Philadelphia, PA 19103,
serves as custodian of the Fund's investments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Company's transfer agent.
 
  The Company does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected
 
                                                                              37
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
by shareholders. The Directors will call a meeting for any purpose upon written
request of shareholders holding at least 10% of the Company's outstanding
shares and the Company will assist shareholders in calling such a meeting as
required by the 1940 Act. When matters are submitted for shareholder vote,
shareholders of each Class will have one vote for each full share owned and a
proportionate fractional vote for any fractional share held of that Class. Gen-
erally, shares of the Company will be voted on a Company-wide basis on all mat-
ters except matters affecting only the interests of one Fund or one Class of
shares.
 
  The Fund sends each of its shareholders a semi-annual report and an audited
annual report, which include listings of the investment securities held by the
Fund at the end of the period covered. In an effort to reduce the Fund's print-
ing and mailing costs, the Company plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this consol-
idation to apply to their accounts should contact their Smith Barney Financial
Consultant or First Data.
 
38
<PAGE>
 
                      
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<PAGE>
 
 
 
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<PAGE>
 
 
                                                                    SMITH BARNEY
                                               ---------------------------------
                                               A Member of TravelersGroup [LOGO]

 


                                                                   SMITH BARNEY
                                                                        SPECIAL
                                                                       EQUITIES
                                                                           FUND
 
                                                           388 Greenwich Street
                                                       New York, New York 10013
 
                                                                    FD 0232 4/97

<PAGE>
 
P R O S P E C T U S

 
                                                                    SMITH BARNEY
                                                                         Special
                                                                        Equities
                                                                            Fund
                                                             Class Z Shares Only
                                                                  APRIL 30, 1997
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
 LOGO  Smith Barney Mutual Funds
       INVESTING FOR YOUR FUTURE.
       EVERY DAY.


<PAGE>
 
PROSPECTUS                                                      April 30, 1997
 
Smith Barney
Special Equities Fund -- Class Z Shares
388 Greenwich Street
New York, New York 10013
(800) 451-2010
   
  Smith Barney Special Equities Fund (the "Fund") seeks long-term capital
appreciation by investing in a diversified portfolio of common stocks or secu-
rities convertible into or exchangeable for common stocks, primarily of growth
companies as identified by the Fund's investment adviser.     
 
  The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up Smith Barney Investment Funds Inc. (the "Compa-
ny"). The Company is an open-end, diversified management investment company
commonly referred to as a mutual fund.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Company, including expenses, that prospective investors will find helpful
in making an investment decision. Investors are encouraged to read this Pro-
spectus carefully and to retain it for future reference. Shares of other funds
offered by the Company are described in separate Prospectuses that may be
obtained by calling the Company at the telephone number set forth above or by
contacting a Smith Barney Financial Consultant.
 
  The Class Z shares described in this Prospectus are currently offered exclu-
sively for sale to tax-exempt employee benefit and retirement plans of Smith
Barney Inc. ("Smith Barney") or any of its affiliates ("Qualified Plans").
 
  Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated April 30, 1997 as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Company at the telephone number or address set forth
above or by contacting a Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this Prospectus in its
entirety.
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                              1
<PAGE>
 
TABLE OF CONTENTS
 
 
<TABLE>
<S>                                           <C>
THE FUND'S EXPENSES                             3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            4
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    5
-------------------------------------------------
VALUATION OF SHARES                             8
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES              8
-------------------------------------------------
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES    10
-------------------------------------------------
PERFORMANCE                                    11
-------------------------------------------------
MANAGEMENT OF THE FUND                         11
-------------------------------------------------
ADDITIONAL INFORMATION                         12
-------------------------------------------------
</TABLE>
 
--------------------------------------------------------------------------------
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
--------------------------------------------------------------------------------
 
2
<PAGE>
 
THE FUND'S EXPENSES
 
  The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of Class Z shares of the
Fund, based on the Fund's operating expenses for its most recent fiscal year.
 
-------------------------------------------------------------------------------
<TABLE>
 <S>                                         <C>
 ANNUAL FUND OPERATING EXPENSES
   (as a percentage of average net assets)
   Management fees                           0.75%
   Other expenses                            0.05%
--------------------------------------------------
 TOTAL FUND OPERATING EXPENSES               0.80%
</TABLE>
-------------------------------------------------------------------------------
 
  The nature of the services for which the Fund pays management fees is
described under "Management of the Fund." "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
 
  EXAMPLE
 
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the table above. See "Purchase and Redemption of Shares" and
"Management of the Fund."
 
<TABLE>
<CAPTION>
                                                1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
 <S>                                            <C>    <C>     <C>     <C>
 An investor would pay the following expenses
 on a $1,000 investment in Class Z shares of
 the Fund, assuming (1) 5.00% annual return
 and (2) redemption at the end of each time
 period:                                         $ 8     $26     $44     $99
-------------------------------------------------------------------------------
</TABLE>
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
 
                                                                              3
<PAGE>
 
FINANCIAL HIGHLIGHTS
 
  The following information for the two-year period ended December 31, 1996
has been audited in conjunction with the annual audits of the financial
statements of the Fund by KPMG Peat Marwick LLP, independent auditors. The
1996 financial statements and the independent auditors' report thereon appear
in the December 31, 1996 Annual Report to Shareholders.
 
FOR A CLASS Z SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD:
 
<TABLE>
<CAPTION>
                                         1996(1)  1995(2)
-----------------------------------------------------------
<S>                                      <C>      <C>
NET ASSET VALUE, BEGINNING OF PERIOD      $30.46  $26.49
-----------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment loss                      (0.08)   (0.06)
 Net realized and unrealized gain (loss)  (1.48)    4.79
-----------------------------------------------------------
Total Income (Loss) From Operations       (1.56)    4.73
-----------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net realized gains                       (0.28)   (0.76)
 Capital                                  (0.36)      --
-----------------------------------------------------------
Total Distributions                       (0.64)   (0.76)
-----------------------------------------------------------
NET ASSET VALUE, END OF PERIOD            $28.26  $30.46
-----------------------------------------------------------
TOTAL RETURN                              (5.37)%  17.95%++
-----------------------------------------------------------
NET ASSETS, END OF PERIOD (000S)         $12,671  $5,364
-----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                   0.80%   1.10%+
 Net investment loss                      (0.24)   (0.86)+
-----------------------------------------------------------
PORTFOLIO TURNOVER RATE                      118%    113%
-----------------------------------------------------------
AVERAGE COMMISSIONS PAID ON
  EQUITY SECURITY TRANSACTIONS             $0.06  $ 0.06
-----------------------------------------------------------
</TABLE>
 (1) The per share amounts have been calculated using the monthly average
    shares method, which more appropriately presents per share data for this
    year since use of the undistributed method did not accord with results of
    operations.
 (2) For the period from October 2, 1995 (inception date) to December 31,
 1995.
 ++
  Total return is not annualized, as it may not be representative of the
  total return for the year.
 +
  Annualized.
 
4
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
 
  The Fund's investment objective is long-term capital appreciation. It seeks
to achieve this objective by investing in equity securities (common stocks or
securities which are convertible into or exchangeable for such stocks, includ-
ing warrants) which Smith Barney Mutual Funds Management Inc. ("SBMFM"), the
Fund's investment adviser, believes to have superior appreciation potential.
There can be no assurance that the Fund will achieve its investment objective.
   
  The Fund attempts to achieve its investment objective by investing primarily
in equity securities of growth companies, generally not within the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500"), as identified by SBMFM.
These companies may not have reached a fully mature stage of earnings growth,
since they may still be in the developmental stage, or may be older companies
which appear to be entering a new stage of more rapid earnings progress due to
factors such as management change or development of new technology, products or
markets. A significant number of these companies may be in technology areas,
including health care related sectors, and may have annual sales of less than
$300 million. The Fund may also choose to invest in some relatively unseasoned
stocks, i.e., securities issued by companies whose market capitalization is
under $100 million.     
   
  The Fund also may invest in small capitalization companies representative of
the broad benchmarks against which the Fund's performance is frequently judged
by utiliziang an actively managed quantitative investment strategy to isolate
securities that are believed to have a high probability of outperforming their
respective industry/sector peer groups. In implementing this strategy the port-
folio manager is supported by investment professionals, including a team that
is quantitatively oriented.     
 
  Investing in smaller, newer issuers generally involves greater risk than
investing in larger, more established issuers. The Fund may purchase restricted
securities (subject to a limit on all illiquid securities of 10% of total
assets), invest in money market instruments, enter into repurchase and reverse
repurchase agreements for temporary defensive purposes, invest in real estate
investment trusts, purchase the securities of companies with less than three
years of continuous operation, borrow money from banks as a temporary measure
for extraordinary or emergency purposes in an amount not exceeding 5% of the
Fund's total assets, lend its portfolio securities and enter into short sales
"against the box."
 
  In making purchases of securities consistent with the above policies, the
Fund will be subject to the applicable restrictions referred to under "Invest-
ment Restrictions" in the Statement of Additional Information. These restric-
tions and the Fund's investment objective are fundamental policies, which means
that they may not be changed without a majority vote of shareholders of the
Fund. Except for the objective and those restrictions specifically identified
as fundamental, all investment policies and practices described in this Pro-
spectus and in the Statement of Additional Information are non-fundamental, so
that the Board of Directors may change them without shareholder approval. The
fundamental restrictions applicable to the
 
                                                                               5
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
Fund include a prohibition on (a) purchasing a security if, as a result, more
than 5% of the assets of the Fund would be invested in the securities of the
issuer (with certain exceptions) or the Fund would own more than 10% of the
outstanding voting securities of the issuer, (b) investing more than 10% of
the Fund's total assets in "illiquid" securities (which includes repurchase
agreements with more than seven days to maturity), and (c) investing more than
25% of the Fund's total assets in the securities of issuers in a particular
industry (with exceptions for U.S. government securities and certain money
market instruments).
 
 ADDITIONAL INVESTMENTS
  U.S. Government Securities. U.S. government securities are obligations of,
or are guaranteed by, the U.S. government, its agencies or instrumentalities.
These include bills, certificates of indebtedness, and notes and bonds issued
by the United States Treasury or by agencies or instrumentalities of the
United States government. Some U.S. government securities, such as United
States Treasury bills and bonds, are supported by the full faith and credit of
the United States Treasury; others are supported by the right of the issuer to
borrow from the United States Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the United States government to purchase the agency's obligations; still oth-
ers, such as those of the Student Loan Marketing Association and the Federal
Home Loan Mortgage Corporation ("FHLMC"), are supported only by the credit of
the instrumentality. Mortgage participation certificates issued by the FHLMC
generally represent ownership interests in a pool of fixed-rate conventional
mortgages. Timely payment of principal and interest on these certificates is
guaranteed solely by the issuer of the certificates. Other investments will
include Government National Mortgage Association Certificates ("GNMA Certifi-
cates"), which are mortgage-backed securities representing part ownership of a
pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the United States government. While
the United States government guarantees the payment of principal and interest
on GNMA Certificates, the market value of the securities is not guaranteed and
will fluctuate.
 
  Repurchase Agreements. The Fund may enter into repurchase agreement transac-
tions on U.S. government securities 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. Under each repurchase agreement, the sell-
 
6
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
ing institution will be required to maintain the value of the securities sub-
ject to the repurchase agreement at not less than their repurchase price.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities, the risk of a pos-
sible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its 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. SBMFM acting under the supervision of
the Board of Directors, reviews on an ongoing basis to evaluate potential
risks, the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements.
 
  Loans of Portfolio Securities. The Fund may lend its portfolio securities
provided: (a) the loan is secured continuously by collateral consisting of U.S.
government securities, cash or cash equivalents maintained on a daily marked-
to-market basis in an amount at least equal to the current market value of the
securities loaned; (b) the Fund may at any time call the loan and obtain the
return of the securities loaned; (c) the Fund will receive any interest or div-
idends paid on the loaned securities; and (d) the aggregate market value of
securities loaned will not at any time exceed 33 1/3% of the total assets of
the Fund.
 
  Short Sales. The Fund may sell securities short "against the box." While a
short sale is the sale of a security the Fund does not own, it is "against the
box" if at all times when the short position is open, the Fund owns an equal
amount of the securities or securities convertible into, or exchangeable with-
out further consideration for, securities of the same issue as the securities
sold short. Short sales "against the box" are used to defer recognition of cap-
ital gains or losses.
 
  American Depositary Receipts. The Fund may purchase American Depositary
Receipts ("ADRs"), which are 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.
 
  Restricted Securities. The Fund may invest in restricted securities.
Restricted securities are securities subject to legal or contractual restric-
tions on their resale. Such restrictions might prevent the sale of restricted
securities at a time when such a sale would otherwise be desirable. Restricted
securities and securities for which there is no readily available market ("il-
liquid assets") will not be acquired if such acquisition would cause the aggre-
gate value of illiquid assets and restricted securities to exceed 10% of the
Fund's total assets.
 
 PORTFOLIO TRANSACTIONS AND TURNOVER
  SBMFM arranges for the purchase and sale of the Fund's securities and selects
brokers and dealers (including Smith Barney) which, in its best judgment, pro-
vide
 
                                                                               7
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
prompt and reliable execution at favorable prices and reasonable commission
rates. SBMFM may select brokers and dealers which provide it with research
services and may cause the Fund to pay such brokers and dealers commissions
which exceed those other brokers and dealers may have charged, if it views the
commissions as reasonable in relation to the value of the brokerage and/or
research services.
 
  For reporting purposes, the Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fis-
cal year by the monthly average of the value of the Fund's securities, with
money market instruments with less than one year to maturity excluded. A 100%
portfolio turnover rate would occur, for example, if all included securities
were replaced once during the year. The Fund's portfolio turnover rates for
each of the past fiscal years are set forth under "Financial Highlights."
 
VALUATION OF SHARES
 
 
  The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
 
  Securities listed on an exchange are valued on the basis of the last sale
prior to the time the valuation is made. If there has been no sale since the
immediately previous valuation, then the current bid price is used. Quotations
are taken from the exchange where the security is primarily traded. Portfolio
securities which are primarily traded on foreign exchanges may be valued with
the assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchange, except that
when an occurrence subsequent to the time a foreign security is valued is
likely to have changed such value, then the fair value of those securities will
be determined by consideration of other factors by or under the direction of
the Board of Directors. Over-the-counter securities are valued on the basis of
the bid price at the close of business on each day. Unlisted foreign securities
are valued at the mean between the last available bid and offer price prior to
the time of valuation. Any assets or liabilities initially expressed in terms
of foreign currencies 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. Securities for which market quotations
are not readily available are valued at fair value. Notwithstanding the above,
bonds and other fixed-income securities are valued by using market quotations
and may be valued on the basis of prices provided by a pricing service approved
by the Board of Directors.
 
8
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
  The Fund will be treated separately from the Company's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
 
  The Fund's policy is to distribute its investment income (that is, its
income other than its net realized capital gains) and net realized capital
gains, if any, once a year, normally at the end of the year in which earned or
at the beginning of the next year.
 
  If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. In order to
avoid the application of a 4% nondeductible excise tax on certain undistrib-
uted amounts of ordinary income and capital gains, the Fund may make an addi-
tional distribution shortly before December 31 in each year of any undistrib-
uted ordinary income or capital gains and expects to pay any other dividends
and distributions necessary to avoid the application of this tax.
 
 TAXES
  The Fund will be treated as a separate taxpayer with the result that, for
Federal tax purposes, the amount of investment income and capital gains earned
will be determined on a fund-by-fund basis, rather than on a Company-wide
basis. The Fund has qualified and intends to continue to qualify each year as
a "regulated investment company" under the Code. In any taxable year in which
the Fund so qualifies and distributes at least 90% of its investment company
taxable income (which includes, among other items, dividends, interest and the
excess of any net short-term capital gains over net long-term capital losses),
the Fund (but not its shareholders) generally will be relieved of Federal
income tax on the investment company taxable income and net realized capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, distributed to shareholders. In order to qualify as a regu-
lated investment company, the Fund will be required to meet various Code
requirements.
 
  Distributions of any investment company taxable income are taxable to share-
holders as ordinary income. Distributions of any net capital gains designated
by the Fund as capital gains dividends are taxable to shareholders as long-
term capital gains regardless of the length of time a shareholder may have
held shares of the Fund.
 
  Dividends (including capital gains dividends) declared by the Fund in Octo-
ber, November or December of any calendar year to shareholders of record on a
date in such a month will be deemed to have been received by shareholders on
December 31 of that calendar year, provided that the dividend is actually paid
by the Fund during January of the following calendar year.
 
                                                                              9
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
 
  Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capital
assets in the shareholder's hands, and generally will be long-term or short-
term depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the shareholder
for six months or more will be treated as long-term capital loss to the extent
of any distributions of capital gains dividends received by the shareholder
with respect to such shares.
 
  Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gains dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Divi-
dends consisting of interest from U.S. government securities may be exempt from
all state and local income taxes. Shareholders should consult their plan docu-
ments and/or tax advisors for specific information on the tax consequences of
participating in a Qualified Plan.
 
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
 
 
  Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan. Purchases are effected at the net asset value next
determined after a purchase order is received by Smith Barney (the "trade
date"). Payment is due to Smith Barney on the third business day (the "settle-
ment date") after the trade date. Investors who make payment prior to the set-
tlement date may designate a temporary investment (such as a money market fund
of the Smith Barney Mutual Funds) for such payment until settlement date. The
Fund reserves the right to reject any purchase order and to suspend the offer-
ing of shares for a period of time. There are no minimum investment require-
ments for Class Z shares; however, the Fund reserves the right to vary this
policy at any time.
 
  Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, currently 4:00 p.m., New York time, on any day
that the Fund calculates its net asset value, are priced according to the net
asset value determined on that day. See "Valuation of Shares."
 
  Qualified Plans may redeem their shares on any day the Fund calculates its
net asset value. See "Valuation of Shares." Redemption requests received in
proper form prior to the close of regular trading on the NYSE are priced at the
net asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value as next determined. Shareholders acquiring Class Z shares through a Qual-
ified Plan should consult the terms of their respective plans for redemption
provisions.
 
  Holders of Class Z shares should consult their Qualified Plans for informa-
tion about available exchange options.
 
10
<PAGE>
 
PERFORMANCE
 
 
 TOTAL RETURN
  From time to time, the Fund may include its total return, average annual
total return and current dividend return for Class Z shares in advertisements
and/or other types of sales literature. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the invest-
ment at the end of the period so calculated by the initial amount invested and
subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeem-
able value. Such standard total return information may also be accompanied with
non-standard total return information for differing periods computed in the
same manner but without annualizing the total return or taking sales charges
into account. The Fund calculates current dividend return for Class Z shares by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return may vary from time to time depending on market conditions, the
composition of its investment portfolio and operating expenses. These factors
and possible differences in the methods used in calculating current dividend
return should be considered when comparing Class Z shares' current return to
yields published for other investment companies and other investment vehicles.
The Fund may also include comparative performance information in advertising or
marketing its shares. Such performance information may include data from Lipper
Analytical Services, Inc. or similar independent services that monitor the per-
formance of mutual funds or other industry publications. the Fund will include
performance data for Class Z shares in any advertisement or information includ-
ing performance data of the Fund.
 
MANAGEMENT OF THE FUND
 
 
 BOARD OF DIRECTORS
  Overall responsibility for management and supervision of the Fund rests with
the Company's Board of Directors. The Directors approve all significant agree-
ments between the Company and the companies that furnish services to the Fund
and the Company, including agreements with its distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains background information regarding
each Director and executive officer of the Company.
 
                                                                              11
<PAGE>
 
MANAGEMENT OF THE FUND (CONTINUED)
 
 
 INVESTMENT ADVISER AND ADMINISTRATOR-SBMFM
  SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. SBMFM (through predecessor entities) has been in
the investment counseling business since 1968 and is a registered investment
adviser. SBMFM renders investment advice to a wide variety of investment com-
pany client, which had aggregate assets under management as of February 28,
1997, in excess of $80 billion.
 
  Subject to the supervision and direction of the Company's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research services to the Fund. For
investment advisory services rendered, the Fund pays SBMFM a monthly fee at the
annual rate of 0.55% of the value of its average daily net assets.
  SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets.
 
 PORTFOLIO MANAGEMENT
  George V. Novello, a Managing Director of SBMFM, has served as Investment
Officer of the Fund since September 1990 and manages the day-to-day operations
of the Fund, including making all investment decisions.
 
  Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended December 31, 1996 is included
in the Fund's Annual Report dated December 31, 1996. A copy of the Annual
Report may be obtained upon request without charge from a Smith Barney Finan-
cial Consultant or by writing or calling the Fund at the address or phone num-
ber listed on page one of this Prospectus.
 
 DISTRIBUTOR-SMITH BARNEY
  Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary
of Travelers.
 
ADDITIONAL INFORMATION
 
 
  The Company was organized as a Maryland corporation pursuant to Articles of
Incorporation dated September 29, 1981, as amended from time to time. The Fund
offers shares of common stock currently classified into five Classes, A, B, C,
Y, and Z with a par value of $.001 per share. Each Class of shares has the same
rights,
 
12
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
 
privileges and preferences, except with respect to: (a) the designation of each
Class; (b) the effect of the respective sales charges for each Class; (c) the
distribution and/or service fees borne by each Class; (d) the expenses alloca-
ble exclusively to each Class; (e) voting rights on matters exclusively affect-
ing a single Class; (f) the exchange privilege of each Class; and (g) the con-
version feature of the Class B shares. The Board of Directors does not antici-
pate that there will be any conflicts among the interests of the holders of the
different Classes. The Directors, on an ongoing basis, will consider whether
any such conflict exists and, if so, take appropriate action.
 
  The Company does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected by shareholders. The Directors will call a meeting for any purpose
upon written request of shareholders holding at least 10% of the Company's out-
standing shares and the Company will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for shareholder
vote, shareholders of each Class will have one vote for each full share owned
and a proportionate fractional vote for any fractional share held of that
Class. Generally, shares of the Company will be voted on a Company-wide basis
on all matters except matters affecting only the interests of one Fund or one
Class of shares.
 
  The Fund sends each of its shareholders a semi-annual report and an audited
annual report, which include listings of the investment securities held by the
Fund at the end of the period covered. In an effort to reduce the Fund's print-
ing and mailing costs, the Company plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Company also plans to
consolidate the mailing of its Prospectuses so that a shareholder having multi-
ple accounts (i.e., individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their Smith
Barney Financial Consultants or the Fund's transfer agent.
 
  PNC Bank, located at 17th and Chestnut Streets Philadelphia, PA 19103, serves
as custodian of the Fund's investments.
 
  First Data Investor Services Group, Inc., formerly known as The Shareholder
Services Group, Inc., located at Exchange Place, Boston, Massachusetts 02109,
serves as the Fund's transfer agent.
 
                                                                              13
<PAGE>

                                                                    SMITH BARNEY
                                               ---------------------------------


                                               A MEMBER OF TRAVELERSGROUP  LOGO 

 
 
 
                                              SMITH BARNEY SPECIAL EQUITIES FUND
 
                                                            388 Greenwich Street
                                                        New York, New York 10013
 
                                                                    FD 1009 4/97


SMITH BARNEY INVESTMENT FUNDS  
PART B
Smith Barney
Investment Funds Inc.
388 Greenwich Street
New York, New York  10013
(212) 723-9218


Statement of Additional Information

April 30, 1997

This Statement of Additional Information 
expands upon and supplements the information 
contained in the current Prospectuses of 
Smith Barney Investment Funds Inc. (the 
"Company"), dated April 30, 1997, as amended 
or supplemented from time to time, and should 
read in conjunction with the Company's 
Prospectuses.  The Company issues a 
Prospectus for each of the investment funds 
offered by the Company (the "Funds").  The 
Company's Prospectuses may be obtained from a 
Smith Barney Financial Consultant, or by 
writing or calling the Company at the address 
or telephone number listed above.  This 
Statement of Additional Information, although 
not in itself a prospectus, is incorporated 
by reference into the Prospectuses in its 
entirety.

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

Management of the Company (see in the 
Prospectuses "Management of the Company and 
the Fund")
1
Investment Objectives and Management 
Policies
5
Purchase of Shares
22
Redemption of Shares
22
Distributor
23
Valuation of Shares
26
Exchange Privilege
26
Performance Data (See in the Prospectus 
"Performance")
27
Taxes (See in the Prospectus "Dividends, 
Distributions and Taxes")
31
Additional Information
34
Financial Statements
35
Appendix
A-1

MANAGEMENT OF THE COMPANY
The executive officers of the Company are 
employees of certain of the organizations 
that provide services to the Company.  These 
organizations are the following:

Name
Service

Smith Barney Inc. ("Smith Barney")
Distributor

PFS Distributors, Inc.("PFS") 
 .....................................

Smith Barney Mutual Funds Management 
Inc. ("SBMFM")	
Distributor (Growth Opportunity 
Fund and Investment Grade Bond 
Fund)

Investment Adviser and 
Administrator

PNC Bank, National Association ("PNC")	
Custodian

First Data Investor Services Group, Inc. 
("First Data")	......
Transfer Agent


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

Directors and Executive Officers of the 
Company

The names of the Directors and executive 
officers of the Company, together with 
information as to their principal business 
occupations during the past five years, are 
shown below.  Each Director who is an 
"interested person" of the Company, as 
defined in the Investment Company Act of 
1940, as amended (the "1940 Act"), is 
indicated by an asterisk.

Paul R. Ades, Director (Age 56). Partner in 
the law firm of Murov & Ades.  His address is 
272 South Wellwood Avenue, P.O. Box 504, 
Lindenhurst, New York 11757.

Herbert Barg, Director (Age 73). Private 
investor. His address is 273 Montgomery 
Avenue, Bala Cynwyd, Pennsylvania 19004.

Alger B. Chapman, Director (Age 65). 
Chairman and Chief Operating Officer of the 
Chicago Board of Options Exchange. His 
address is Chicago Board of Options Exchange, 
LaSalle at Van Buren, Chicago, Illinois 
60605.

Dwight B. Crane, Director (Age 59). 
Professor, Graduate School of Business 
Administration, Harvard University. His 
address is Graduate School of Business 
Administration, Harvard University, Boston, 
Massachusetts 02163.

Harvey Eisen, Senior Vice President and 
Investment Officer. Vice President of 
Investment Funds of Travelers Group Inc.  His 
address is 388 Greenwich Street, New York, NY  
10013. 

Frank G. Hubbard, Director (Age 61).  Vice 
President, S&S Industries; Former Corporate 
Vice President, Materials Management and 
Marketing Services of Huls America, Inc.  His 
address is 80 Centennial Avenue P.O. Box 456, 
Piscataway, New Jersey 08855-0456.

Allan R. Johnson, Director Emeritus (Age 
80). Retired; Former Chairman, Retail 
Division of BATUS, Inc., and Chairman and 
Chief Executive Officer of Saks Fifth Avenue, 
Inc. His address is 2 Sutton Place South, New 
York, New York 10022.

*Heath B. McLendon, Chairman of the Board 
(Age 63). Managing Director of Smith Barney 
and Chairman of the Board of Smith Barney 
Strategy Advisers Inc.; prior to July 1993, 
Senior Executive Vice President of Shearson 
Lehman Brothers Inc. ("Shearson Lehman 
Brothers"); Vice Chairman of Shearson Asset 
Management; a Director of PanAgora Asset 
Management, Inc. and PanAgora Asset 
Management Limited.  Mr. McLendon is a 
director of 41 investment companies 
associated with Smith Barney.  His address is 
388 Greenwich Street, New York, New York 
10013.

Ken Miller, Director (Age 55). President of 
Young Stuff Apparel Group, Inc.  His address 
is 1411 Broadway, New York, New York 10018.

John F. White, Director (Age 79). President 
Emeritus of The Cooper Union for the 
Advancement of Science and Art; Special 
Assistant to the President of the Aspen 
Institute.  His address is Crows Nest Road, 
Tuxedo Park, New York 10987.

Jessica M. Bibliowicz, President (Age 37). 
Executive Vice President of Smith Barney; 
prior to 1994, Director of Sales and 
Marketing for Prudential Mutual Funds.  Ms. 
Bibliowicz serves as President of 40 
investment companies associated with Smith 
Barney.  Her address is 388 Greenwich Street, 
New York, New York 10013.



James Conroy, Vice President and Investment 
Officer.  Managing Director of Smith Barney. 
His address is 388 Greenwich Street, New 
York, New York 10013.

Douglas H. Johnson, Vice President and 
Investment Officer.  Director of Mutual Fund 
Division of Smith Barney.  Prior to January 
1995, Vice President of SafeCo Asset 
Management Company.  His address is 500 108th 
Avenue, North E., Bellevue, Washington 98004.

George E. Mueller, Jr., Vice President and 
Investment Officer.  Managing Director of 
SBMFM; prior to July 1993, Managing Director 
of Shearson Lehman Advisors. His address is 
388 Greenwich Street, New York, New York 
10013.

George V. Novello, Vice Presiddent and 
Investment Officer.  Managing Director of 
SBMFM; prior to July 1993, Managing Director 
of Shearson Lehman Advisors.  Prior to 
September 1990, Mr. Novello was a Managing 
Director at McKinley-Allsopp, where he served 
as Head of Research.  His address is 388 
Greenwich Street, New York, New York 10013. 

Lewis E. Daidone, Senior Vice President and 
Treasurer (Age 39). Director and Senior Vice 
President of SBMFM.  Mr. Daidone serves as 
Senior Vice President and Treasurer of 41 
investment companies associated with Smith 
Barney.  His address is 388 Greenwich Street, 
New York, New York 10013. 

Christina T. Sydor, Secretary (Age 46).  
Managing Director of Smith Barney and 
Secretary of SBMFM; General Counsel and  
Secretary of SBMFM.  Ms. Sydor serves as 
Secretary of 41 investment companies 
associated with Smith Barney.  Her address is 
388 Greenwich Street, New York, New York 
10013. 

Each Director also serves as a director, 
trustee and/or general partner of certain 
other mutual funds for which Smith Barney 
serves as distributor.  As of January 31, 
1997, the Directors and officers of the 
Company, as a group, owned less than 1.00% of 
the outstanding common stock of the Company.

No officer, director or employee of Smith 
Barney or any parent or subsidiary receives 
any compensation from the Company for serving 
as an officer or Director of the Company.  
The Company pays each Director who is not an 
officer, director or employee of Smith Barney 
or any of its affiliates a fee of $16,000 per 
annum plus $2,500 per meeting attended and 
reimburses travel and out-of-pocket expenses.  
For the fiscal year ended December 31, 1996, 
the Directors of the Company were paid the 
following compensation:






Director

Aggregate 
Compensation
from the Company
Aggregate 
Compensation
from the Smith Barney
Mutual Funds

Paul R. Ades (5)	
	$28,600.00
	$52,475.00

Herbert Barg (20)	
	28,600.00
	105,175.00

Alger B. Chapman (9)	
	26,000.00
	76,775.00

Dwight B. Crane (26)	
	26,100.00
	140,375.00

Frank G. Hubbard (5)	
	28,600.00
	52,475.00

Heath McLendon (41)	
	N/A
	N/A

Ken Miller (5)	
	               
26,100.00**  
	49,475.00

John F. White (5)	
	               
28,500.00**
	52,375.00

Allan G. Johnson 
(5)(*)	
	18,035.51
	33,125.00

+  Number of funds for which director 
serves within fund complex
*   Director Emeritus
**  Mr. Miller and Mr. White have deferred 
$6,500 and $26,000, respectively, of 
compensation from the Company in 1996.

Investment Adviser and Administrator - SBMFM

SBMFM serves as investment adviser to the 
Funds pursuant to separate advisory 
agreements (the "Advisory Agreements").  With 
respect to the Investment Grade Bond Fund, 
Government Securities Fund and Special 
Equities Fund, the Advisory Agreements were 
transferred to SBMFM effective November 7, 
1994, from its affiliate, Mutual Management 
Corp.  Mutual Management Corp. and SBMFM are 
both wholly owned subsidiaries of Smith 
Barney Holdings Inc. ("Holdings").  Holdings 
is a wholly owned subsidiary of Travelers 
Group Inc. ("Travelers").  The Advisory 
Agreements were most recently approved by the 
Board of Directors, including a majority of 
the Directors who are not "interested 
persons" of the Company or the investment 
advisers (the "Independent Directors"), on 
July 25, 1996.  SBMFM bears all expenses in 
connection with the performance of its 
services.  The services provided by SBMFM 
under the Advisory Agreements are described 
in the Prospectuses under "Management of the 
Company and the Fund."  SBMFM provides 
investment advisory and management services 
to investment companies affiliated with Smith 
Barney.

As compensation for investment advisory 
services rendered to Investment Grade Bond 
Fund, Special Equities Fund, Managed Growth 
Fund and Growth Opportunity Fund, each Fund 
pays SBMFM a fee computed daily and paid 
monthly at the annual rates of 0.45%, 0.55%, 
0.85% and 1.00%, respectively, of the value 
of their average daily net assets.

As compensation for investment advisory 
services rendered to Government Securities 
Fund, the Fund pays SBMFM a fee computed 
daily and paid monthly at the following 
annual rates of average daily net assets:  
0.35% up to $2 billion; 0.30% on the next $2 
billion; 0.25% on the next $2 billion; 0.20% 
on the next $2 billion; and 0.15% on net 
assets thereafter.

For the fiscal years ended December 31, 1994, 
1995 and 1996, the Funds accrued advisory 
fees as follows:

Fund
1994
1995
1996

Investment Grade Bond Fund	
	$1,926,359
	$2,067,222
	$2,198,162

Government Securities Fund	
	2,578,209
	2,287,647
	1,979,639

Special Equities Fund	
	1,052,635
	1,276,355
	3,094,925

Managed Growth Fund	
	
	2,022,754
	6,034,652

Growth Opportunity Fund	

	390,902
	1,040,355


SBMFM also serves as administrator to 
Investment Grade Bond Fund, Government 
Securities Fund and Special Equities Fund 
pursuant to a written agreement dated May 5, 
1994 (the "Administration Agreement"), which 
was first approved by the Board of Directors, 
including a majority of the Independent 
Directors, on May 5, 1994.  The services 
provided by SBMFM under the Administration 
Agreement are described in the Prospectuses 
under "Management of the Company and the 
Fund."  SBMFM pays the salary of any officer 
and employee who is employed by both it and 
the Fund and bears all expenses in connection 
with the performance of its services.  Prior 
to May 5, 1994, The Boston Company Advisors 
("Boston Advisors") served as the Company's 
sub-investment adviser and/or administrator.

As compensation for administrative services 
rendered to each of Investment Grade Bond 
Fund, Government Securities Fund and Special 
Equities Fund, SBMFM receives a fee computed 
daily and paid monthly at the annual rate of 
0.20 of the value of the Fund's average daily 
net assets.  For the fiscal years ended 
December 31, 1994, 1995 and 1996, these Funds 
paid administrative fees to Boston Advisors 
or SBMFM as follows:

Boston 
Advisors
SBMFM




Fund

For the Fiscal Period From 1/1/94
through 5/4/94

For the Fiscal Period From 5/5/94
through 12/31/94

For the Fiscal Year Ended 12/31/95

For the FiscalYear Ended 12/31/96

Investment Grade Bond Fund
$290,859
$565,300
$918,76
5
$976,938

Government Securities Fund
500,505
972,757
1,307,2
22
1,131,222

Special Equities Fund
130,039
252,737
464,129
1,125,428


Counsel and Auditors

Willkie Farr & Gallagher L.L.P.serves as 
counsel to the Company.  The Directors who 
are not "interested persons" of the Company 
have selected Stroock & Stroock & Lavan LLP 
as their legal counsel.

KPMG Peat Marwick LLP, 345 Park Avenue, New 
York, New York 10154, has been selected as 
the Fund's independent auditor to examine and 
report on the Fund's financial statements and 
highlights for the fiscal year ending 
December 31, 1997.


INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES

The Prospectuses discuss the investment 
objectives of each Fund and the policies they 
employ to achieve such objectives.  The 
following discussion supplements the 
description of the Funds' investment 
objectives and management policies contained 
in the Prospectuses.

Repurchase Agreements.  As described in the 
applicable Prospectus, each Fund may enter 
into repurchase agreements.  A repurchase 
agreement is a contract under which a Fund 
acquires a security for a relatively short 
period (usually not more than one week) 
subject to the obligation of the seller to 
repurchase and the Fund to resell such 
security at a fixed time and price 
(representing the Fund's cost plus interest).  
It is each Fund's present intention to enter 
into repurchase agreements only upon receipt 
of fully adequate collateral and only with 
commercial banks (whether U.S. or foreign) 
and registered broker-dealers.  Repurchase 
agreements may also be viewed as loans made 
by a Fund which are collateralized primarily 
by the securities subject to repurchase.  A 
Fund bears a risk of loss in the event that 
the other party to a repurchase agreement 
defaults on its obligations and the Fund is 
delayed or prevented from exercising its 
rights to dispose of the collateral 
securities.  Pursuant to policies established 
by the Board of Directors, SBMFM monitors the 
creditworthiness of all issuers with which 
each Fund enters into repurchase agreements. 

Reverse Repurchase Agreements.  Each Fund may 
enter into reverse repurchase agreements. A 
reverse repurchase agreement involves the 
sale of a money market instrument held by a 
Fund coupled with an agreement by a Fund to 
repurchase the instrument at a stated price, 
date and interest payment.  A Fund will use 
the proceeds of a reverse repurchase 
agreement to purchase other money market 
instruments which either mature at a date 
simultaneous with or prior to the expiration 
of the reverse repurchase agreement or which 
are held under an agreement to resell 
maturing as of that time.

A Fund will enter into a reverse repurchase 
agreement only when the interest income to be 
earned from the investment of the proceeds of 
the transaction is greater than the interest 
expense of the transaction.  Under the 1940 
Act, reverse repurchase agreements may be 
considered to be borrowings by the seller.  A 
Fund may not enter into a reverse repurchase 
agreement if, as a result, its current 
obligations under such agreements would 
exceed one-third of the current market value 
of a Fund's total assets (less all of its 
liabilities other than obligations under such 
agreements).

A Fund may enter into reverse repurchase 
agreements with banks or broker-dealers.  
Entry into such agreements with broker-
dealers requires the creation and maintenance 
of a segregated account with the Company's 
custodian consisting of U.S. government 
securities, cash or cash equivalents.

Warrants.  All Funds except the Government 
Securities Fund may purchase warrants.  A 
warrant is a security that gives the holder 
the right, but not the obligation, to 
subscribe for newly created securities of the 
issuer at a fixed price either at a certain 
date or during a set period. The Investment 
Grade Bond Fund and the Special Equities Fund 
will not invest in warrants if, as a result 
of such investment, the value of their 
investments in warrants, valued at the lower 
of cost or market, exceeds 5% of the value of 
the Fund's net assets.  Included in this 5% 
limitation, but not to exceed 2% of the 
Fund's net assets, may be warrants which are 
not listed on either the New York Stock 
Exchange (the "NYSE") or the American Stock 
Exchange.  Warrants acquired by the Fund in 
units or attached to securities will be 
deemed to be without value for purposes of 
this restriction.  These limits are not 
fundamental policies of either Fund and may 
be changed by the Board of Directors without 
shareholder approval.

Short Sales Against the Box.  Each Fund may 
sell securities short "against the box" which 
means that at all times when the short 
position is open, the Fund owns an equal 
amount of the securities or securities 
convertible into, or exchangeable without 
further consideration for, securities of the 
same issue as the securities sold short.  
Short sales against the box are used to defer 
recognition of capital gains or losses or to 
extend the holding period of securities for 
certain Federal income tax purposes.

Firm Commitment Agreements and When-Issued 
Purchases.  The Government Securities Fund, 
Investment Grade Bond Fund and Growth 
Opportunity Fund may enter into firm 
commitment agreements and purchase when-
issued securities, as decribed more fully in 
each Fund's Prospectus. Firm commitment 
agreements and when-issued purchases involve 
the purchase of securities at an agreed-upon 
price on a specified future date.  Such 
agreements might be entered into, for 
example, when a decline in the yield of 
securities of a given issuer is anticipated 
and a more advantageous yield may be obtained 
by committing currently to purchase 
securities to be issued later.  Liability for 
the purchase price, and all the rights and 
risks of ownership of the securities, accrue 
to the Fund at the time it becomes obligated 
to purchase such securities, although 
delivery and payment occur at a later date.  
Accordingly, if the market price of the 
security should decline, the effect of the 
agreement would be to obligate the Fund to 
purchase the security at a price above the 
current market price on the date of delivery 
and payment.  During the time a Fund is 
obligated to purchase such securities, it 
will maintain in a segregated account with 
the Company's custodian, eligible segregated 
assets (as defined in each Fund's Prospectus) 
equal to the aggregate current value 
sufficient to make payment for the 
securities. The Government Securities Fund 
and Investment Grade Bond Fund will not enter 
into such agreements for the purpose of 
investment leverage

Lending Portfolio Securities.  Each Fund has 
the ability to lend securities from its 
portfolio to brokers, dealers and other 
financial organizations.  Such loans, if and 
when made, may not exceed 33 1/3% of a Fund's 
total assets taken at value.  A Fund will not 
lend its portfolio securities to Smith Barney 
or its affiliates unless it has applied for 
and received specific authority to do so from 
the SEC.  Loans of portfolio securities will 
be collateralized by cash, letters of credit 
or U.S. government securities which are 
maintained at all times in an amount at least 
equal to the current market value of the 
loaned securities.  From time to time, a Fund 
may return 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 or with Smith Barney, and which is 
acting as a "finder."

In lending its securities, a Fund can 
increase its income by continuing to receive 
interest on the loaned securities as well as 
by either investing the cash collateral in 
short-term instruments or obtaining yield in 
the form of interest paid by the borrower 
when U.S. government securities are used as 
collateral.  Requirements of the SEC, which 
may be subject to further modifications, 
currently provide that the following 
conditions must be met whenever a Fund's 
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 an amount equal to 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 Board of 
Directors 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 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 SBMFM to be of good standing and 
will not be made unless, in the judgment of 
SBMFM, the consideration to be earned from 
such loans would justify the risk.

Government Securities.  Direct obligations of 
the United States Treasury include a variety 
of securities, which differ in their interest 
rates, maturities and dates of issuance.  
Treasury Bills have maturities of one year or 
less; Treasury Notes have maturities of one 
to ten years and Treasury Bonds generally 
have maturities of greater than ten years at 
the date of issuance.

In addition to direct obligations of the 
United States Treasury, securities issued or 
guaranteed by the United States government, 
its agencies or instrumentalities include 
securities issued or guaranteed by the 
Federal Housing Administration, Federal 
Financing Bank, Export-Import Bank of the 
United States, Small Business Administration, 
Government National Mortgage Association 
("GNMA"), General Services Administration, 
Federal Home Loan Banks, Federal Home Loan 
Mortgage Corporation, Federal National 
Mortgage Association ("FNMA"), Federal 
Maritime Administration, Tennessee Valley 
Authority, Resolution Trust Corporation, 
District of Columbia Armory Board, Student 
Loan Marketing Association and various 
institutions that previously were or 
currently are part of the Farm Credit System 
(which has been undergoing a reorganization 
since 1987).  Because the United States 
government is not obligated by law to provide 
support to an instrumentality that it 
sponsors, a Fund will invest in obligations 
of an instrumentality to which the United 
States government is not obligated by law to 
provide support only if SBMFM determines that 
the credit risk with respect to the 
instrumentality does not make its securities 
unsuitable for investment by a Fund.

Exchange Rate-Related U.S. Government 
Securities.  The Government Securities Fund 
may invest up to 5% of its net assets in U.S. 
government securities for which the principal 
repayment at maturity, while paid in U.S. 
dollars, is determined by reference to the 
exchange rate between the U.S. dollar and the 
currency of one or more foreign countries 
("Exchange Rate-Related Securities").  The 
interest payable on these securities is 
denominated in U.S. dollars, is not subject 
to foreign currency risks and, in most cases, 
is paid at rates higher than most other U.S. 
government securities in recognition of the 
foreign currency risk component of Exchange 
Rate-Related Securities.

Exchange Rate-Related Securities are issued 
in a variety of forms, depending on the 
structure of the principal repayment formula.  
The principal repayment formula may be 
structured so that the securityholder will 
benefit if a particular foreign currency to 
which the security is linked is stable or 
appreciates against the U.S. dollar.  In the 
alternative, the principal repayment formula 
may be structured so that the securityholder 
benefits if the U.S. dollar is stable or 
appreciates against the linked foreign 
currency.  Finally, the principal repayment 
formula can be a function of more than one 
currency and, therefore, be designed in 
either of the aforementioned forms or a 
combination of those forms.

Investments in Exchange Rate-Related 
Securities entail special risks.  There is 
the possibility of significant changes in 
rates of exchange between the U.S. dollar and 
any foreign currency to which an Exchange 
Rate-Related Security is linked.  If currency 
exchange rates do not move in the direction 
or to the extent anticipated at the time of 
purchase of the security, the amount of 
principal repaid at maturity might be 
significantly below the par value of the 
security, which might not be offset by the 
interest earned by the Fund over the term of 
the security.  The rate of exchange between 
the U.S. dollar and other currencies is 
determined by the forces of supply and demand 
in the foreign exchange markets.  These 
forces are affected by the international 
balance of payments and other economic and 
financial conditions, government 
intervention, speculation and other factors.  
The imposition or modification of foreign 
exchange controls by the United States or 
foreign governments or intervention by 
central banks also could affect exchange 
rates.  Finally, there is no assurance that 
sufficient trading interest to create a 
liquid secondary market will exist for 
particular Exchange Rate-Related Securities 
due to conditions in the debt and foreign 
currency markets.  Illiquidity in the forward 
foreign exchange market and the high 
volatility of the foreign exchange market may 
from time to time combine to make it 
difficult to sell an Exchange Rate-Related 
Security prior to maturity without incurring 
a significant price loss.

Special Considerations Relating to Options on 
Certain U.S. Government Securities

	Treasury Bonds and Notes.  Because 
trading interest in U.S. Treasury bonds and 
notes tends to center on the most recently 
auctioned issues, the exchanges will not 
continue indefinitely to introduce new 
expirations to replace expiring options on 
particular issues.  The expirations 
introduced at the commencement of options 
trading on a particular issue will be allowed 
to run, with the possible addition of a 
limited number of new expirations as the 
original expirations expire.  Options trading 
on each issue of bonds or notes will thus be 
phased out as new options are listed on more 
recent issues, and a full range of 
expirations will not ordinarily be available 
for every issue on which options are traded.

	Treasury Bills.  Because the 
deliverable U.S. Treasury bill changes from 
week to week, writers of U.S. Treasury bill 
calls cannot provide in advance for their 
potential exercise settlement obligations by 
acquiring and holding the underlying 
security.  However, if the Fund holds a long 
position in U.S. Treasury bills with a 
principal amount corresponding to the 
contract size of the option, it may be hedged 
from a risk standpoint.  In addition, the 
Fund will maintain U.S. Treasury bills 
maturing no later than those which would be 
deliverable in the event of the exercise of a 
call option it has written in a segregated 
account with its custodian so that it will be 
treated as being covered for margin purposes.

	GNMA Certificates.  GNMA Certificates 
are mortgage-backed securities representing 
part ownership of a pool of mortgage loans.  
These loans are made by private lenders and 
are either insured by the Federal Housing 
Administration or guaranteed by the Veterans 
Administration.  Once approved by GNMA, the 
timely payment of interest and principal on 
each mortgage in a "pool" of such mortgages 
is guaranteed by the full faith and credit of 
the U.S. government.  Unlike most debt 
securities, GNMA Certificates provide for 
repayment of principal over the term of the 
loan rather than in a lump sum at maturity.  
GNMA Certificates are called "pass-through" 
securities because both interest and 
principal payments on the mortgages are 
passed through to the holder.

Since the remaining principal balance of GNMA 
Certificates declines each month as mortgage 
payments are made, the Fund as a writer of a 
GNMA call may find that the GNMA Certificates 
it holds no longer have a sufficient 
remaining principal balance to satisfy its 
delivery obligation in the event of exercise 
of the call options it has written.  Should 
this occur, additional GNMA Certificates from 
the same pool (if obtainable) or replacement 
GNMA Certificates will have to be purchased 
in the cash market to meet delivery 
obligations.

The Fund will either replace GNMA 
Certificates representing cover for call 
options it has written or will maintain in a 
segregated account with its custodian cash, 
cash equivalents or U.S. government 
securities having an aggregate value equal to 
the market value of the GNMA Certificates 
underlying the call options it has written.

	Other Risks.  In the event of a 
shortage of the underlying securities 
deliverable on exercise of an option, the 
Options Clearing Corporation has the 
authority to permit other, generally 
comparable securities to be delivered in 
fulfillment of option exercise obligations.  
If the Options Clearing Corporation exercises 
its discretionary authority to allow such 
other securities to be delivered it may also 
adjust the exercise prices of the affected 
options by setting different prices at which 
otherwise ineligible securities may be 
delivered.  As an alternative to permitting 
such substitute deliveries, the Options 
Clearing Corporation may impose special 
exercise settlement procedures.

The hours of trading for options on U.S. 
government securities may not conform to the 
hours during which the underlying securities 
are traded.  To the extent that the options 
markets close before the markets for the 
underlying securities, significant price and 
rate movements can take place in the 
underlying markets that cannot be reflected 
in the options markets.

Options are traded on exchanges on only a 
limited number of U.S. government securities, 
and exchange regulations limit the maximum 
number of options which may be written or 
purchased by a single investor or a group of 
investors acting in concert.  The Company and 
other clients advised by affiliates of Smith 
Barney may be deemed to constitute a group 
for these purposes.  In light of these 
limits, the Board of Directors may determine 
at any time to restrict or terminate the 
public offering of the Fund's shares 
(including through exchanges from the other 
Funds).

Exchange markets in options on U.S. 
government securities are a relatively new 
and untested concept.  It is impossible to 
predict the amount of trading interest that 
may exist in such options, and there can be 
no assurance that viable exchange markets 
will develop or continue.

Leverage Through Borrowing.  The Government 
Securities Fund may borrow up to 25% of the 
value of its net assets on an unsecured basis 
from banks to increase its holdings of 
portfolio securities or to acquire securities 
to be placed in a segregated account with its 
custodian for various purposes (e.g., to 
secure puts written by the Fund).  The Fund 
is required to maintain continuous asset 
coverage of 300% with respect to such 
borrowings, and to sell (within three days) 
sufficient portfolio holdings to restore such 
coverage, if it should decline to less than 
300% due to market fluctuations or otherwise, 
even if disadvantageous from an investment 
standpoint.  Leveraging will exaggerate the 
effect of any increase or decrease in the 
value of portfolio securities on the Fund's 
net asset value, and money borrowed will be 
subject to interest costs (which may include 
commitment fees and/or the cost of 
maintaining minimum average balances) which 
may or may not exceed the interest and option 
premiums received from the securities 
purchased with borrowed funds.
   
Special Risks Involving Investments in 
Smaller, Newer Companies.  The Special 
Equities Fund invests primarily in equity 
securities of growth companies that have 
yet to reach a fully mature stage of earnings 
growth.  A significant number of these 
companies may be in technology areas and may 
have annual sales less than $300 million.  
Some of the securities in which the Fund 
invests may not be listed on a national 
securities exchange, but such securities will 
usually have an established over-the-counter 
market.  Investors should realize that the 
very nature of investing in smaller, newer 
companies involves greater risk than is 
customarily associated with investing in 
larger, more established companies.  Smaller, 
newer companies often have limited product 
lines, markets or financial resources, and 
they may be dependent for management upon one 
of a few key persons.  The securities of such 
companies may be subject to more abrupt or 
erratic market movements than securities of 
larger, more established companies or than 
the market averages in general.  In 
accordance with its investment objective of 
long-term capital appreciation, securities 
purchased for the Fund will not generally be 
traded for short-term profits, but will be 
retained for their longer-term appreciation 
potential.  This general practice limits the 
Fund's ability to adopt a defensive position 
by investing in money market instruments 
during periods of market downturn.  
Accordingly, while in periods of market 
upturn the Fund may outperform the market 
averages, in periods of downturn, it is 
likely to underperform the market averages.  
Thus, investing in Special Equities Fund may 
involve greater risk than investing in other 
Funds.
    

Investment Restrictions

The Fund's investment objectives and the 
investment restrictions set forth below are 
fundamental policies of each Fund, i.e., they 
may not be changed with respect to a Fund 
without a majority vote of the outstanding 
shares of that Fund.  (All other investment 
practices described in the Prospectuses and 
the Statement of Additional Information may 
be changed by the Board of Directors without 
the approval of shareholders.)

Unless otherwise indicated, all percentage 
limitations apply to each Fund on an 
individual basis, and apply only at the time 
a transaction is entered into.  (Accordingly, 
if a percentage restriction is complied with 
at the time of investment, a later increase 
or decrease in the percentage which results 
from a relative change in values or from a 
change in the Fund's net assets will not be 
considered a violation.)

Restrictions Applicable to All Funds.  No 
Fund may:

1.Purchase the securities of any one issuer, 
other than the U.S. government or its 
agencies or instrumentalities, if 
immediately after such purchase more than 5% 
of the value of the total assets of the Fund 
would be invested in securities of such 
issuer;

	2.Invest in real estate (including real 
estate limited partnerships), real estate 
mortgage loans, or interests in oil, gas 
and/or mineral exploration, mineral leases 
or development programs, provided that this 
limitation shall not prohibit the purchase 
of securities by companies, including real 
estate investment trusts, which invest in 
real estate or interests therein;

	3.Purchase securities of any other 
investment company, except in connection 
with a merger, consolidation, 
reorganization, or acquisition or assets.  
(For purposes of this limitation, foreign 
banks or their agencies or subsidiaries are 
not considered "investment companies") (the 
Managed Growth Fund may purchase the 
securities of closed-end investment 
companies to the extent permitted by law);

4.Make investments in securities for the 
purpose of exercising control over or 
management of the issuer;

5.Participate on a joint or a joint and 
several basis in any trading account in 
securities.  (The "bunching" of orders of 
two or more Funds  or of one or more Funds 
and of other accounts  for the sale or 
purchase of portfolio securities shall not 
be considered participation in a joint 
securities trading account);

	6.Purchase the securities of any one issuer 
if, immediately after such purchase, the 
Fund would own more than 10% of the 
outstanding voting securities of such 
issuer;

	7.Purchase securities on margin, except such 
short-term credits as are necessary for the 
clearance of transactions.  (For this 
purpose, the deposit or payment by 
Government Securities Fund of initial or 
maintenance margin in connection with 
futures contracts and related options is not 
considered to be the purchase of a security 
on margin.  Additionally, borrowing by 
Government Securities Fund to increase its 
holdings of portfolio securities is not 
considered to be the purchase of securities 
on margin);

8.Make loans, except that this restriction 
shall not prohibit (a) the purchase and 
holding of a portion of an issue of publicly 
distributed debt securities, (b) the lending 
of portfolio securities, or (c) entry into 
repurchase agreements;

9.Invest in securities of an issuer which, 
together with any predecessor, has been in 
operation for less than three years if, as a 
result, more than 5% of the total assets of 
the Fund would then be invested in such 
securities (for purposes of this restriction, 
issuers include predecessors, sponsors, 
controlling persons, general guarantors and 
originators of underlying assets);

10.Purchase the securities of an issuer if 
one or more of the Directors or officers of 
the Company individually own beneficially 
more than 0.5 of 1% of the outstanding 
securities of such issuer or together own 
beneficially more than 5% of such securities;

11.Purchase a security which is not readily 
marketable if, as a result, more than 10% of 
the Fund's total assets would consist of such 
securities.  (For purposes of this 
limitation, restricted securities and 
repurchase agreements having more than seven 
days remaining to maturity are considered not 
readily marketable);

12.Purchase the securities of issuers 
conducting their principal business 
activities in the same industry, if 
immediately after such purchase the value of 
its investments in such industry would exceed 
25% of the value of the total assets of the 
Fund, provided that (a) neither all utility 
companies (including telephone companies), as 
a group, nor all banks, savings and loan 
associations and savings banks, as a group, 
will be considered a single industry for 
purposes of this limitation, and (b) there is 
no such limitation with respect to repurchase 
agreements or to investments in U.S. 
government securities or certificates of 
deposit or bankers' acceptances issued by 
domestic institutions (but not their foreign 
branches).

13.Sell securities short, unless at all times 
when a short position is open, it owns an 
equal amount of the securities or securities 
convertible into, or exchangeable without 
payment of any further consideration for, 
securities of the same issue as the 
securities sold short; or

Restrictions Applicable to All Funds Except 
Government Securities Fund.  The Funds 
may not:

1.	Invest in commodities or commodity 
futures contracts;

2	Borrow amounts in excess of 5% (33 1/3% in 
the case of the Managed Growth Fund and the 
Growth Opportunity Fund) of their total 
assets taken at cost or at market value, 
whichever is lower, and then only from banks 
as a temporary measure for extraordinary or 
emergency purposes.  A Fund may not 
mortgage, pledge or in any other manner 
transfer any of its assets as security for 
any indebtedness.  This restriction shall 
not prohibit entry into reverse repurchase 
agreements, provided that a Fund may not 
enter into a reverse repurchase agreement 
if, as a result, its current obligations 
under such agreements would exceed one-third 
of the current market value of the Fund's 
total assets (less its liabilities other 
than obligations under such agreements); or

	3.Write, purchase or sell puts, calls, 
straddles, spreads or any combinations 
thereof (the Managed Growth Fund and the 
Growth Opportunity Fund each may purchase 
puts, calls, straddles, spreads and any 
combination thereof up to 5% of their 
assets).

Restrictions Applicable to All Funds Except 
Special Equities Fund, Growth Opportunity 
Fund and Managed Growth Fund.  The Funds may 
not:

	1.Purchase securities which may not be 
resold to the public without registration 
under the Securities Act of 1993, as amended 
(the "1933 Act"); or

2.Act as an underwriter of securities.

Restrictions Applicable to Special Equities 
Fund.  Special Equities Fund may not act as 
an underwriter of securities, except that the 
Fund may invest up to 10% of its total assets 
in securities which it may not be free to 
resell without registration under the 1933 
Act, in which registration the Fund may 
technically be deemed an underwriter for 
purposes of the 1933 Act.

Restrictions Applicable to Investment Grade 
Bond Fund Only.  Investment Grade Bond Fund 
may not purchase corporate bonds unless rated 
at the time of purchase Baa or better by 
Moody's or BBB or better by S&P, or purchase 
commercial paper unless issued by a U.S. 
corporation and rated at the time of purchase 
Prime-1 or Prime-2 by Moody's or A-1 or A-2 
by S&P (or, if not rated, issued by a 
corporation having outstanding debt rated Aa 
or better by Moody's or AA or better by S&P), 
although it may continue to hold a security 
if its quality rating is reduced by a rating 
service below those specified.

Brokerage

In selecting brokers or dealers to execute 
securities transactions on behalf of a Fund, 
SBMFM seeks the best overall terms available.  
In assessing the best overall terms available 
for any transaction, SBMFM will consider the 
factors that it deems relevant, including the 
breadth of the market in the security, the 
price of the security, the financial 
condition and execution capability of the 
broker or dealer and the reasonableness of 
the commission, if any, for the specific 
transaction and on a continuing basis.  In 
addition, each investment advisory agreement 
authorizes SBMFM, 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) provided to the Company, the 
other Funds and other accounts over which 
SBMFM or its affiliates exercise investment 
discretion.  The fees under the investment 
advisory agreements and the administration 
agreement between the Company and SBMFM are 
not reduced by reason of their receiving such 
brokerage and research services.  The Board 
of Directors periodically will review the 
commissions paid by the Funds to determine if 
the commissions paid over representative 
periods of time were reasonable in relation 
to the benefits inuring to the Company.  SEC 
rules require that commissions paid to Smith 
Barney by a Fund on exchange transactions not 
exceed "usual and customary brokerage 
commissions."  The rules define "usual and 
customary" commissions to include amounts 
which are "reasonable and fair compared to 
the commission, fee or other remuneration 
received or to be received by other brokers 
in connection with comparable transactions 
involving similar securities being purchased 
or sold on a securities exchange during a 
comparable period of time."  The Board of 
Directors, particularly the Independent 
Directors of the Company (as defined in the 
1940 Act), has adopted procedures for 
evaluating the reasonableness of commissions 
paid to Smith Barney and reviews these 
procedures periodically.  In addition, under 
rules adopted by the SEC, Smith Barney may 
directly execute transactions for a Fund on 
the floor of any national securities 
exchange, provided: (a) the Board of 
Directors has expressly authorized Smith 
Barney to effect such transactions; and (b) 
Smith Barney annually advises the Fund of the 
aggregate compensation it earned on such 
transactions.

To the extent consistent with applicable 
provisions of the 1940 Act and the rules and 
exemptions adopted by the SEC thereunder, the 
Board of Directors has determined that 
transactions for a Fund may be executed 
through Smith Barney and other affiliated 
broker-dealers if, in the judgment of SBMFM, 
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.

Portfolio securities are not purchased from 
or through Smith Barney or any affiliated 
person (as defined in the 1940 Act) of Smith 
Barney where such entities are acting as 
principal, except pursuant to the terms and 
conditions of exemptive rules or orders 
promulgated by the SEC.  Pursuant to 
conditions set forth in rules of the SEC, the 
Company may purchase securities from an 
underwriting syndicate of which Smith Barney 
is a member (but not from Smith Barney).  
Such conditions relate to the price and 
amount of the securities purchased, the 
commission or spread paid, and the quality of 
the issuer.  The rules further require that 
such purchases take place in accordance with 
procedures adopted and reviewed periodically 
by the Board of Directors, particularly those 
Directors who are not interested persons of 
the Company.

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

The following table sets forth certain 
information regarding each Fund's payment of 
brokerage commissions to Smith Barney:


Fiscal Year Ended December 31,

Special Equities Fund
Managed GrowthFund
Growth Opportunity Fund

Total Brokerage Commissions

1994
$217,269
N/A
N/A

1995
$56,735
$164,975
$201,706

1996
$378,451
$1,272,7
02
$716,937

Commissions paid to Smith Barney

1994
$14,280
N/A
N/A


1995
$11,052
$140,970
$650

1996
$47,100
$166,656
$21,6
80

% of Total Brokerage Commissions paid to Smith Barney
1996
12.4%
13.1%
3.0%

% of Total Transactions Involving Commissions paid
to Smith Barney
1996
7.3%
11.5%
3.0%

____________________

No commissions were paid by the Investment 
Grade Bond Fund and Goverment Securites Fund.

Portfolio Turnover

For reporting purposes, a Fund's portfolio 
turnover rate is calculated by dividing the 
lesser of purchases or sales of portfolio 
securities for the fiscal year by the monthly 
average of the value of the portfolio 
securities owned by the Fund during the 
fiscal year.  In determining such portfolio 
turnover, all securities whose maturities at 
the time of acquisition were one year or less 
are excluded.  A 100% portfolio turnover rate 
would occur, for example, if all of the 
securities in the Fund's investment portfolio 
(other than short-term money market 
securities) were replaced once during the 
fiscal year.

Investment Grade Bond Fund will not normally 
engage in the trading of securities for the 
purpose of realizing short-term profits, but 
it will adjust its portfolio as considered 
advisable in view of prevailing or 
anticipated market conditions.  Portfolio 
turnover will not be a limiting factor should 
SBMFM deem it advisable to purchase or sell 
securities.

Special Equities Fund invests for long-term 
capital appreciation and will not generally 
trade for short-term profits.  However, its 
portfolio will be adjusted as deemed 
advisable by SBMFM, and portfolio turnover 
will not be a limiting factor should SBMFM 
deem it advisable to purchase or sell 
securities.

The options activities of Government 
Securities Fund may affect its portfolio 
turnover rate and the amount of brokerage 
commissions paid by the Fund.  The exercise 
of calls written by the Fund may cause the 
Fund to sell portfolio securities, thus 
increasing its turnover rate.  The exercise 
of puts also may cause the sale of securities 
and increase turnover; although such exercise 
is within the Fund's control, holding a 
protective put might cause the Fund to sell 
the underlying securities for reasons which 
would not exist in the absence of the put.  
The Fund will pay a brokerage commission each 
time it buys or sells a security in 
connection with the exercise of a put or 
call.  Some commissions may be higher than 
those which would apply to direct purchases 
or sales of portfolio securities.  High 
portfolio turnover involves correspondingly 
greater commission expenses and transaction 
costs.

For the fiscal years ended December 31, 1995 
and 1996, the portfolio turnover rates were 
as follows:

Fund
1995
1996

Investment Grade Bond Fund	
49%
48%

Government Securities Fund	
294%
420%

Special Equities Fund	
113%
118%

Managed Growth 
Fund..................................
6%
34%

Growth Opportunity 
Fund..................................
0%
183%

Increased portfolio turnover necessarily 
results in correspondingly greater brokerage 
commissions which must be paid by the Fund.  
To the extent that portfolio trading results 
in realization of net short-term capital 
gains, shareholders will be taxed on such 
gains at ordinary tax rates (except 
shareholders who invest through IRAs and 
other retirement plans which are not taxed 
currently on accumulations in their 
accounts).

SBMFM manages a number of private investment 
accounts on a discretionary basis and it is 
not bound by the recommendations of the Smith 
Barney research department in managing the 
Funds.  Although investment decisions are 
made individually for each client, at times 
decisions may be made to purchase or sell the 
same securities for one or more of the Funds 
and/or for one or more of the other accounts 
managed by SBMFM or the Fund manager.  When 
two or more such accounts simultaneously are 
engaged in the purchase or sale of the same 
security, transactions are allocated in a 
manner considered equitable to each, with 
emphasis on purchasing or selling entire 
orders wherever possible.  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.

PURCHASE OF SHARES

Volume Discounts

The schedules of sales charges on Class A 
shares described in the Prospectuses apply to 
purchases made by any "purchaser," which 
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 Internal Revenue Code of 1986, as 
amended (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; and (f) a trustee or 
other professional fiduciary (including a 
bank, or an investment adviser registered 
with the SEC under the Investment Advisers 
Act of 1940, as amended) purchasing shares of 
a Fund for one or more trust estates of 
fiduciary accounts.  Purchasers who wish to 
combine purchase orders to take advantage of 
volume discounts on Class A shares should 
contact a Smith Barney Financial Consultant.

Combined Right of Accumulation

Reduced sales charges, in accordance with the 
schedule in the Prospectuses, apply to any 
purchase of Class A shares if the aggregate 
investment of any purchaser in Class A shares 
of a Fund and in Class A shares of the other 
Funds in the Company and of other funds of 
the Smith Barney Mutual Funds that are 
offered with a sales charge, including the 
purchase being made is $25,000 or more.  The 
reduced sales charge is subject to 
confirmation of the shareholder's holdings 
through a check of appropriate records.  Each 
Fund reserves the right to terminate or amend 
the combined right of accumulation at any 
time after written notice to shareholders.  
For further information regarding the right 
of accumulation, shareholders should contact 
a Smith Barney Financial Consultant.

Determination of Public Offering Price

Each Fund offers its shares to the public on 
a continuous basis.  The public offering 
price for a Class A and Class Y share of each 
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 C share, and Class A share purchases, 
including applicable right of accumulation, 
equaling or exceeding $500,000, is equal to 
the net asset value per share at the time of 
purchase and no sales charge is imposed at 
the time of purchase.  A contingent deferred 
sales charge ("CDSC"), however, is imposed on 
certain redemptions of Class B shares, Class 
C shares, and Class A shares when purchased 
in amounts equaling or exceeding $500,000.  
The method of computation of the public 
offering price is shown in each Fund's 
financial statements, incorporated by 
reference in their entirety into this 
Statement of Additional Information.




REDEMPTION OF SHARES

The right of redemption may be suspended or 
the date of payment postponed (a) for any 
period during which the NYSE is closed (other 
than for customary weekend and holiday 
closings), (b) when trading in markets a Fund 
normally utilizes is restricted, or an 
emergency as determined by the SEC exists, so 
that disposal of the Fund's investments or 
determination of net asset value is not 
reasonably practicable or (c) for such other 
periods as the SEC by order may permit for 
the protection of the Fund's shareholders.

Distributions in Kind

If the Board of Directors of the Company 
determines that it would be detrimental to 
the best interests of the remaining 
shareholders of a Fund to make a redemption 
payment wholly in cash, the Fund may pay, in 
accordance with the SEC rules, any portion of 
a redemption in excess of the lesser of 
$250,000 or 1% of the Fund's net assets by a 
distribution in kind of portfolio securities 
in lieu of cash.  Securities issued as a 
distribution in kind may incur brokerage 
commissions when shareholders subsequently 
sell those securities.

Automatic Cash Withdrawal Plan

An automatic cash withdrawal plan (the 
"Withdrawal Plan") is available to 
shareholders who own shares with a value of 
at least $10,000 ($5,000 for retirement plan 
accounts) and who wish to receive specific 
amounts of cash monthly or quarterly.  
Withdrawals of at least $50 may be made under 
the Withdrawal Plan by redeeming as many 
shares of a Fund as may be necessary to cover 
the stipulated withdrawal payment.  Any 
applicable CDSC will not be waived on amounts 
withdrawn by shareholders that exceed 1.00% 
per month of the value of a shareholder's 
shares at the time the Withdrawal Plan 
commences.  To the extent withdrawals exceed 
dividends, distributions and appreciation of 
a shareholder's investment in a 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.  Furthermore, as it generally would 
not be advantageous to a shareholder to make 
additional investments in the Fund at the 
same time that he or she is participating in 
the Withdrawal Plan, purchases by such 
shareholders in amounts of 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 with First Data as agent for 
Withdrawal Plan members.  All dividends and 
distributions on shares in the Withdrawal 
Plan are automatically reinvested at net 
asset value in additional shares of the 
Company.  Withdrawal Plans should be set up 
with a Smith Barney Financial Consultant.  A 
shareholder who purchases shares directly 
through First Data may continue to do so and 
applications for participation in the 
Withdrawal Plan must be received by First 
Data no later than the eighth day of the 
month to be eligible for participation 
beginning with that month's withdrawal.  For 
additional information, shareholders should 
contract a Smith Barney Financial Consultant.

DISTRIBUTORS

Smith Barney serves as the Company's 
distributor on a best efforts basis pursuant 
to a distribution agreement (the 
"Distribution Agreement") which was most 
recently approved by the Company's Board of 
Directors on July 25, 1996.

PFS serves as one of the Company's 
distributors with respect to the Growth 
Opportunity Fund and Investment Grade Bond 
Fund pursuant to a Distribution Agreement 
which was most recently approved by the 
Company's Board of Directors on July 25, 
1996.

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 Smith 
Barney may benefit from the temporary use of 
the funds.  The investor may designate 
another use for the funds prior to settlement 
date, such as investment in a money market 
fund (other than Smith Barney Exchange 
Reserve Fund) of the Smith Barney Mutual 
Funds.  If the investor instructs Smith 
Barney 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 Company 
and the money market fund, and affiliates of 
Smith Barney that serve the funds in an 
investment advisory capacity will benefit 
from the fact that they are receiving fees 
from both such investment companies for 
managing these assets computed on the basis 
of their average daily net assets.  The 
Company's Board of Directors has been advised 
of the benefits to Smith Barney resulting 
from these settlement procedures and will 
take such benefits into consideration when 
reviewing the Advisory, Administration and 
Distribution Agreements for continuance.

For the fiscal year ended December 31, 1996, 
Smith Barney incurred distribution expenses 
totaling approximately $11,195,985, 
consisting of approximately $834,786 for 
advertising, $82,862 for printing and mailing 
of Prospectuses, $6,683,975 for support 
services, $14,110,451 to Smith Barney 
Financial Consultants, and $850,755 in 
accruals for interest on the excess of Smith 
Barney expenses incurred in distributing the 
Fund's shares over the sum of the 
distribution fees and CDSC received by Smith 
Barney from the Fund.

Distribution Arrangements

To compensate Smith Barney for the services 
it provides and for the expense it bears 
under the Distribution Agreement, the Company 
has adopted a services and distribution plan 
(the "Plan") pursuant to Rule 12b-1 under the 
1940 Act.  Under the Plan, each Fund pays 
Smith Barney and, with respect to the Class A 
and Class B shares of Growth Opportunity Fund 
and Investment Grade Bond Fund, PFS a service 
fee, accrued daily and paid monthly, 
calculated at the annual rate of 0.25% of the 
value of each Fund's average daily net assets 
attributable to the Class A, Class B and 
Class C shares.  In addition, the Fund pays 
Smith Barney, and  with respect to the Class 
B shares of Growth Opportunity Fund and 
Investment Grade Bond Fund, PFS, a 
distribution fee with respect to the Class B 
and Class C shares primarily intended to 
compensate Smith Barney and/or PFS for its 
initial expense of paying its Financial 
Consultants and Registered Representatives, 
respectively, a commission upon sales of 
those shares.  Such shares' distribution 
fees, which are accrued daily and paid 
monthly, are calculated at the annual rate of 
0.75% of the value of average daily net 
assets attributable to the Class B and Class 
C shares with respect to Special Equities 
Fund, Managed Growth Fund and Growth 
Opportunity Fund, and 0.50% of the value of 
average daily net assets attributable to the 
Class B shares and 0.45% of the value of 
average daily net assets attributable to 
Class C shares, with respect to Government 
Securities Fund and Investment Grade Bond 
Fund.

The following expenses were incurred during 
the periods indicated:

Sales Charges paid to Smith Barney.

Class A

Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96

Investment Grade Bond Fund 
$114,571
$181,000
$182,000

Government Securities Fund	
66,217
63,000
65,000

Special Equities Fund	
186,104
347,000
1,800,000

Managed Growth Fund
N/A
5,400,000
1,700,000

Growth Opportunity Fund
N/A
18,000
18,000

CDSC paid to Smith Barney.

Class B

Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96

Investment Grade Bond Fund 
$556,007
$541,000
$422,000

Government Securities Fund
629,700
512,000
305,000

Special Equities Fund
288,013
379,000
658,000 

Managed Growth Fund
N/A
174,000
       
1,112,000

Growth Opportunity Fund
N/A
N/A
  	  3,000

Class C

Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96

Investment Grade Bond Fund 
N/A
$5,000
$1,000

Government Securities Fund
N/A
1,000
0

Special Equities Fund
N/A
1,000
22,000

Managed Growth Fund
N/A
10,000
27,000

Growth Opportunity Fund
N/A
N/A
1,000

Service Fees

Class A


Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96

Investment Grade Bond Fund 

$147,152
$505,094 
$524,533 

Government Securities Fund	
334,848
     
1,212,522
1,026,748


Special Equities Fund	
147,488
286,910 
525,204 

Managed Growth Fund
N/A
189,955
495,536

Growth Opportunity Fund
N/A
63,606
162,606

Class B

Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96

Investment Grade Bond Fund 

$922,038
$638,293 
$662,187 

Government Securities Fund
1,505,763
419,433 
340,572 

Special Equities Fund	.
329,007
283,978 
696,750 

Managed Growth Fund

N/A
351,874
1,024,802

Growth Opportunity Fund
N/A
34,096
96,931

Class C
(formerly designated as Class D)

Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96

Investment Grade Bond Fund 

$1,009
$5,068 
$14,456

Government Securities Fund	
967
2,078
3,050

Special Equities Fund	
1,975
8,675
56,094

Managed Growth Fund.
N/A
47,170
141,702

Growth Opportunity Fund
N/A
23
552

Distribution Fees

Class B

Name of Fund
Fiscal YearEnded 12/31/94
Fiscal YearEnded 12/31/95
Fiscal YearEnded 12/31/96

Investment Grade Bond Fund 
	
	$	1,844,077
	$	1,276,588
	$	1,324,350

Government Securities Fund	
		3,011,526
		838,868
		681,144

Special Equities Fund	
		987,022
		851,933
		2,090,250

Managed Growth Fund
 ........
	N/A
		1,055,621
		3,074,405

Growth Opportunity Fund
N/A
102,289
290,792

Class C
(formerly designated as Class D)


Name of Fund
Fiscal Year Ended 12/31/94
Fiscal Year Ended 12/31/95
Fiscal Year Ended 12/31/96

Investment Grade Bond Fund 
$1,958
$9,124 
$ 26,020

Government Securities Fund	
1,893
3,741
5,491

Special Equities Fund
5,927
26,026
168,282

Managed Growth Fund
N/A
141,508
425,107

Growth Opportunity Fund
N/A
71
1,657

Under its terms, the Plan continues from year 
to year, provided such continuance is 
approved annually by vote of the Board of 
Directors, including a majority of the 
Independent Directors. The Plan may not be 
amended to increase the amount to be spent 
for the services provided by Smith Barney or 
PFS without shareholder approval, and all 
amendments of the Plan also must be approved 
by the Directors in the manner described 
above. The Plan may be terminated at any 
time, without penalty, by vote of a majority 
of the Independent Directors or by a vote of 
a majority of the outstanding voting 
securities of the Company (as defined in the 
1940 Act). Pursuant to the Plan, Smith Barney 
and PFS will provide the Board of Directors 
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, President's 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 the procedures 
used by the Funds in valuing its assets.

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 Board of Directors.  In 
carrying out the Board of Directors' 
valuation policies, SBMFM, as administrator, 
may consult with an independent pricing 
service (the "Pricing Service") retained by 
the Company.

Debt securities of United States issuers 
(other than U.S. government securities and 
short-term investments) are valued by SBMFM, 
as administrator, after consultation with the 
Pricing Service approved by the Board of 
Directors.  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 
not readily obtainable market quotations are 
carried at fair value as determine by the 
Pricing Service.  The procedures of the 
Pricing Service are reviewed periodically by 
the officers of the Company under the general 
supervision and responsibility of the Board 
of Directors.

EXCHANGE PRIVILEGE

Except as noted below, shareholders of any 
fund of the Smith Barney Mutual Funds may 
exchange all or part of their shares for 
shares of the same class of other funds of 
the Smith Barney Mutual Funds, to the extent 
such shares are offered for sale in the 
shareholder's state of residence and provided 
your Registered Representative or your 
investment dealer is authorized to distribute 
shares of the fund, on the basis of relative 
net asset value per share at the time of 
exchange.  Class B shares of any fund may be 
exchanged without a CDSC.  Class B shares of 
the Fund exchanged for Class B shares of 
another fund will be subject to the higher 
applicable CDSC of the two funds and, for the 
purposes of calculating CDSC rates and 
conversion periods, will be deemed to have 
been held since the date the shares being 
exchanged were deemed to be purchased.

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

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

PERFORMANCE DATA

From time to time, a Fund may quote its yield 
or total return in advertisements or in 
reports and other communications to 
shareholders.  The Fund 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 a Fund describes the expenses or 
performance of a Class, it will also disclose 
such information for the other Classes.



Yield

A Fund's 30-day yield figure described below 
is calculated according to a formula 
prescribed by the SEC.  The formula can be 
expressed as follows:

YIELD = 2[(a (minus) bcd + 1)6 (minus) 1]


Where:
a = 
dividends and interest earned during the period.


b = 
expenses accrued for the period (net of 
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 a Fund's yield will 
tend to be somewhat higher than prevailing 
market rates, and in periods of rising 
interest rates, the Fund's yield will tend to 
be somewhat lower.  In addition, when 
interest rates are falling, the inflow of net 
new money to the Fund from the continuous 
sales of its shares will likely be invested 
in portfolio instruments producing lower 
yields than the balance of the 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

"Average annual total return" figures, as 
described below, are computed according to a 
formula prescribed by the SEC.  The formula 
can be expressed as follows:

P(1+T)n = ERV

Where:
P 	=
a hypothetical initial payment of $1,000.


T	=
average annual total return.


n 	=
number of years.


ERV	=
Ending Redeemable Value of a hypothetical 
$1,000 investment made at the beginning of a 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.  A Class' total 
return figures calculated in accordance with 
the above formula assume that the maximum 
applicable sales charge or maximum applicable 
CDSC, as the case may be, has been deducted 
from the hypothetical $1,000 initial investment 
at the time of purchase or redemption, as 
applicable.




Class A average annual total returns were as 
follows for the periods indicated:


Name of Fund
Year Ended
December 31, 1996
Inception*
Through December 31, 
1996

Investment Grade Bond Fund 
	
(4.92)%
9.02%

Government Securities Fund	
(2.62)%
5.15%

Special Equities Fund	
(10.51)%
18.36%

Managed Growth Fund	
10.54%
7.94%

Growth Opportunity Fund **	
8.28%
14.44%

__________________
* 	The Investment Grade Bond, Government 
Securities and Special Equities Funds 
commenced selling Class A shares on 
November 6, 1992.  The Managed Growth Fund 
and Growth Opportunity Fund Commenced 
Selling Class A shares on June 30, 1995 and 
July 3, 1995, respectively.
**	Performance calculations include the 
historical return information related to 
the Common Sense II Aggressive Opportunity 
Fund of the Common Sense Trust (for the 
period from May 3, 1994 through June 30, 
1995.)

Class B's average annual total returns were 
as follows for the periods indicated:



Name of Fund

Year Ended December 31, 1996
Five YearPeriod EndedDecember 31, 1996
Ten YearPeriod EndedDecember 31, 1996(1)

Inception Through December 31, 1996

Investment Grade Bond Fund	 
(5.07)%
9.11%
8.83%
11.39%

Government Securities Fund	
(2.89)%
5.26%
6.50%
8.04%

Special Equities Fund	
(11.03)%
15.31%
10.26%
10.55%

Managed Growth Fund	
10.55%
N/A
N/A
8.30%

Growth Opportunity Fund **	
8.12%
N/A
N/A
15.14%

__________________
(1)	Class B shares automatically convert to 
Class A shares eight years after date of 
original purchase.  Thus, a shareholder's 
actual return for the ten years ended 
December 31, 1994 would be different than 
that reflected above.
**	Performance calculations include the 
historical return information related to 
the Common Sense II Aggressive Opportunity 
Fund of the Common Sense Trust (for the 
period from May 3, 1994 through June 30, 
1995.)

Class C's average annual total returns were 
as follows for the periods indicated:



Name of Fund
One Year Period Ended
12/31/96

Inception Through 12/31/96

Investment Grade Bond Fund (1)
	
(1.76)%
7.83%

Government Securities Fund (2)
	
0.52%
4.87%

Special Equities Fund (3)	
(7.38)%
8.11%

Managed Growth Fund (4)	
14.45%
10.83%

Growth Opportunity Fund (5)
	.............
12.24%
15.98%

__________________
(1) The Fund commenced selling Class C shares 
on February 26, 1993.
(2)	The Fund commenced selling Class C 
shares on February 4, 1993.
(3)	The Fund commenced selling Class C 
shares on October 18, 1993.
(4)	The Fund commenced selling Class C 
shares on June 30, 1995.
(5)	The Fund commenced selling Class C 
shares on July 3, 1995.

Aggregate Total Return

Aggregate total return figures, as described 
below, represent the cumulative change in the 
value of an investment in the Class of the 
specified period and are computed by the 
following formula:


	AGGREGATE TOTAL RETURN = 
	ERV(minus)P
				P

Where:
P 	=
a hypothetical initial payment of $1,000.


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

Class A's aggregate total returns were as 
follows for the periods indicated:

        Name of Fund

One Year Period Ended
December 31, 
1996**
Period from Inception
throughDecember 31,
1996**

One Year Period Ended
December 31, 1996***
Period from Inception
through December 31,
1996***

Investment Grade Bond Fund 
(0.47)%
49.96%
(4.92)%
43.21%

Government Securities Fund
1.96%
29.01%
(2.62)%
23.21%

Special Equities Fund	
(5.81)%
111.55%
(10.51)%
101.02%

Managed Growth Fund	
16.33%
18.12%
10.54%
12.22%

Growth Opportunity Fund****	
13.96%
50.83%
8.28%
43.31%

__________________
*The Investment Grade Bond Fund, Government 
Securities Fund, and Special Equities Fund 
commenced selling Class A shares on 
November 6, 1992.  The Managed Growth Fund 
and Growth Opportunity Fund commenced 
selling Class A shares on June 30, 1995 and 
July 3, 1995, respectively.
**Figures do not include the effect of the 
maximum sales charge.
***Figures include the effect of the 
maximum sales charge.
****Performance calculations include the 
historical return information related to 
the Common Sense II Aggressive Opportunity 
Fund of the Common Sense Trust (for the 
period from May 3, 1994 through June 30, 
1995.

Class B's aggregate total returns were as 
follows for the periods indicated:

       Name of Fund

One YearPeriod Ended
Dec. 31,1996*

Five YearPeriod Ended
Dec. 31,1996*

Ten Year PeriodEnded
Dec. 31,1996*

Period fromInception
through Dec. 31, 1996*

One Year PeriodEnded
Dec. 31,1996**

Five Year Period Ended
Dec. 31,1996**

Ten Year PeriodEnded
Dec. 31, 1996**(1)

Period from Inception
through Dec. 31, 1996**

Investment Grade
Bond Fund	

(0.89)%

54.64%

133.15%

441.23%

(5.07)%

53.64%

133.15%

441.23%

Government Securities 
Fund

1.42%

30.23%

87.74%

168.75%

(2.89)%

29.23%

87.74%

168.75%

Special Equities
Fund	

(6.44)%

104.83%

165.64%

309.77%

(11.03)%

103.83%

165.64%

309.77%

Managed Growth Fund

15.55%





16.79%

10.55%





12.79%

Growth Opportunity
Fund***

13.12%





48.68%

8.12%





45.07%

__________________
*	Figures do not include the effect of the 
CDSC (maximum 4.50% for Investment Grade 
Bond Fund and Government Securities Fund 
and 5.00% for the other Funds).
**	Figures include the effect of the maximum 
applicable CDSC, if any.
(1)	Class B shares automatically convert to 
Class A shares eight years after date of 
original purchase.  Thus, a shareholder's 
actual return for the ten years ended 
December 31, 1995 would be different than 
that reflected above.
***	Performance calculations include the 
historical return information related to 
the Common Sense II Aggressive Opportunity 
Fund of the Common Sense Trust (for the 
period from May 3, 1994 through June 30, 
1995.



Class C's aggregate total returns were as 
follows for the periods indicated:




        Name of Fund

One Year Period Ended
Dec. 31, 1996**
Period from Inception*
through Dec. 31,1996**

One Year Period Ended
Dec. 31, 1996***
Period from Inception*
through Dec. 31, 
1996*** 

Investment Grade Bond 
Fund 	
(0.83)%
33.62%
(1.76)%
33.62%

Government Securities 
Fund	
1.47%
20.41%
0.52%
20.41%

Special Equities Fund	
(6.44)%
28.40%
(7.38)%
28.40%

Managed Growth Fund	
15.45%
16.79%
14.45%
16.79%

Growth Opportunity Fund	
13.24%
23.07%
12.24%
23.07%

__________________
*	Investment Grade Bond Fund, Government 
Securities Fund, Special Equities Fund, 
Managed Growth Fund and Growth Opportunity 
Fund commenced selling Class C shares on 
February 26, 1993, February 4, 1993 October 
18, 1993, June 30, 1995 and July 3, 1995, 
respectively.  Class C shares are sold at 
net asset value without any sales charge or 
CDSC.
**	Figures do not include the effect of the 
CDSC.
***	Figures include the effect of the 
applicable CDSC (1.00%)

It is important to note that the yield and 
total return figures set forth above are 
based on historical earnings and are not 
intended to indicate future performance.  A 
Class' performance will vary from time to 
time depending upon market conditions, the 
composition of the Fund's investment 
portfolio and operating expenses and the 
expenses exclusively attributable to the 
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 
the Class' performance with that of other 
mutual funds should give consideration to the 
quality and maturity of the respective 
investment companies' portfolio securities.


TAXES

The following is a summary of certain Federal 
income tax considerations that may affect the 
Company and its shareholders.  The summary is 
not intended as a substitute for individual 
tax advice, and investors are urged to 
consult their tax advisors as to the tax 
consequences of an investment in any Fund of 
the Company.

Tax Status of the Funds

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

Each Fund has qualified and the Company 
intends that each Fund will continue to 
qualify separately each year as a "regulated 
investment company" under the Code.  A 
qualified Fund will not be liable for Federal 
income taxes to the extent that its taxable 
net investment income and net realized 
capital gains are distributed to its 
shareholders, provided that each Fund 
distributes at least 90% of its net 
investment income.

Each Fund intends to accrue dividend income 
for Federal income tax purposes in accordance 
with the rules applicable to regulated 
investment companies.  In some cases, these 
rules may have the effect of accelerating (in 
comparison to other recipients of the 
dividend) the time at which the dividend is 
taken into account by a Fund as taxable 
income.

Certain options, futures contracts and 
forward contracts in which the Funds may 
invest are "section 1256 contracts."  Gains 
or losses on 1256 contracts generally are 
considered 60% long-term and 40% short-term 
capital gains or losses ("60/40"); however, 
foreign currency gains or losses arising from 
certain section 1256 contracts may be treated 
as ordinary income or loss.  Also, section 
1256 contracts held by a Fund at the end of 
each taxable year are "marked-to-market" with 
the result that unrealized gains or losses 
are treated as though they were realized and 
the resulting gain or loss is treated as 
60/40 gain or loss as ordinary income or 
loss, as the case may be.  These contracts 
also may be marked-to-market for purposes of 
the 4% excise tax under rules prescribed in 
the Code.

Many of the hedging transactions undertaken 
by the Funds will result in "straddles" for 
Federal income tax purposes.  Straddles are 
defined to include "offsetting positions" in 
actively traded personal property.  It is not 
entirely clear under what circumstances one 
investment made by a Fund will be treated as 
offsetting another investment held by the 
Fund.  In general, positions are 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.  The straddle rules may affect the 
character of gains (or losses) realized on 
straddle positions.  In addition, losses 
realized by a Fund on straddle positions may 
be deferred under the straddle rules, rather 
than being taken into account in calculating 
the taxable income for the taxable year in 
which losses are realized.  The hedging 
transactions may also increase the amount of 
gains from assets held less than three 
months.  As a result, the 30% limit on gains 
from certain assets held less then three 
months, which applies to regulated investment 
companies, may restrict a Fund in the amount 
of hedging transactions which it may 
undertake.  In addition, hedging transactions 
may increase the amount of short-term capital 
gain realized by a Fund which is taxed as 
ordinary income when distributed to the 
shareholders.  The Fund may make one or more 
of the elections available under the Code 
which are applicable to straddles.  If a Fund 
makes any of the elections, the amount, 
character and timing of the recognition of 
gain or losses from the effected straddle 
positions will be determined under rules that 
vary according to the election(s) made.

Distributions of investment company taxable 
income generally are taxable to shareholders 
as ordinary income.  In view of each Fund's 
investment policy, it is expected that 
dividends from domestic corporations will 
constitute a portion of the gross income of 
several of the Funds but not of others.  
Therefore, it is expected that a portion of 
the income distributed by the Special 
Equities Fund but not others (Investment 
Grade Bond Fund and Government Securities 
Fund) may be eligible for the dividends-
received deduction for corporations.  

Distributions of net realized capital gains 
designated by a Fund as capital gains 
dividends are taxable to shareholders as 
long-term capital gain, regardless of the 
length of time the shares of a Fund have been 
held by a shareholder.  Distributions of 
capital gains, whether long or short-term, 
are not eligible for the dividends-received 
deduction.

Dividends (including capital gain dividends) 
declared by a Fund in October, November or 
December of any calendar year to shareholders 
of record on a date in such a month will be 
deemed to have been received by shareholders 
on December 31 of that calendar year, 
provided that the dividend is actually paid 
by the Fund during January of the following 
calendar year.

All dividends are taxable to the shareholder 
whether reinvested in additional shares or 
received in cash.  Shareholders receiving 
distributions in the form of additional 
shares will have a cost basis for Federal 
income tax purposes in each share received 
equal to the net asset value of a share of 
the Fund on the reinvestment date.  
Shareholders will be notified annually as to 
the Federal tax status of distributions.

Under the Code, gains or losses attributable 
to fluctuations in currency exchange rates 
which occur between the time a Fund accrues 
income or other receivables or accrues 
expenses or other liabilities denominated in 
a foreign currency and the time a Fund 
actually collects such receivables or pays 
such liabilities, generally are treated as 
ordinary income or ordinary loss.  Similarly, 
on disposition of debt securities denominated 
in a foreign currency and on disposition of 
certain futures contracts, forward contracts 
and options, gains or losses attributable to 
fluctuations in the value of certain currency 
between the date of acquisition of the 
security and the date of disposition also are 
treated as ordinary gain or loss.  These 
gains or losses, referred to under the Code 
as "section 988" gains or losses, may 
increase or decrease the amount of a Fund's 
investment company taxable income to be 
distributed to its shareholders as ordinary 
income.

It is expected that certain dividends and 
interest received by the Fund will be subject 
to foreign withholding taxes.  So long as 
more than 50% in value of a Fund's total 
assets at the close of a given taxable year 
consists of stocks or securities of foreign 
corporations, the Fund may elect to treat any 
foreign taxes paid or accrued by it as paid 
by its shareholders.  Each Fund will notify 
shareholders in writing each year whether it 
makes the election and the amount of foreign 
taxes it has elected to have treated as paid 
by the shareholders.  If a Fund makes the 
election, shareholders will be required to 
include as income their proportionate share 
of the amount of foreign taxes paid or 
accrued by the Fund and generally be entitled 
to claim either a credit or deduction (as an 
itemized deduction) for their share of the 
taxes in computing their Federal income tax, 
subject to limitations.

Generally, a credit for foreign taxes is 
subject to the limitation that it may not 
exceed the shareholder's United States tax 
attributable to his or her total foreign 
source taxable income.  For this purpose, if 
the pass-through election is made, the source 
of the electing Fund's income will flow 
through to its shareholders.  With respect to 
a Fund, gains from the sales of securities 
generally will be treated as derived from 
United States sources and certain currency 
fluctuation gains, including fluctuation 
gains from foreign currency denominated debt 
securities, receivables and payables, will be 
treated as ordinary income derived from 
United States sources.  The limitation on the 
foreign tax credit is applied separately to 
foreign source passive income (as defined for 
purposes of the foreign tax credit), 
including the foreign source passive income 
passed through by a Fund.  Shareholders may 
be unable to claim a credit for the full 
amount of their proportionate share of the 
foreign tax paid or accrued by a Fund.  A 
foreign tax credit can be used to offset only 
90% of the alternative minimum tax (as 
computed under the Code for purposes of the 
limitation) imposed on corporations and 
individuals.  If a Fund is not eligible to 
make the election to "pass through" to its 
shareholders its foreign taxes, the foreign 
taxes it pays will reduce investment company 
taxable income and the distributions by that 
Fund will be treated as United States source 
income.

The foregoing is only a general description 
of the foreign tax credit.  Because 
application of the credit depends on the 
particular circumstances of each shareholder, 
shareholders are advised to consult their own 
tax advisors.

Distributions by a Fund reduces the net asset 
value of the Fund's shares.  Should a 
distribution reduce the net asset value below 
a shareholder's cost basis, such distribution 
nevertheless generally would be taxable to 
the shareholder as ordinary income or capital 
gains as described above, even though, from 
an investment standpoint, it may constitute a 
partial return of capital.  In particular, 
investors should be careful to consider the 
tax implications of buying shares just prior 
to a distribution.  The price of shares 
purchased at that time includes the amount of 
the forthcoming distribution but the 
distribution generally would be taxable to 
him.

Upon redemption, sale or exchange of his 
shares, a shareholder will realize a taxable 
gain or loss depending upon his basis for his 
shares.  Such gain or loss will be treated as 
capital gain or loss if the shares are 
capital assets in the shareholder's hands.  
Such gain or loss generally will be long-term 
or short-term depending upon the 
shareholder's holding period for the shares.  
However, a loss realized by a shareholder on 
the sale of shares of a Fund with respect to 
which capital gain dividends have been paid 
will, to the extent of such capital gain 
dividends, be treated as long-term capital 
loss if such shares have been held by the 
shareholder for six months or less.  A gain 
realized on a redemption, sale or exchange 
will not be affected by a reacquisition of 
shares.  A loss realized on a redemption, 
sale or exchange, however, will be disallowed 
to the extent the shares disposed of are 
replaced (whether through reinvestment of 
distributions or otherwise) within a period 
of 61 days beginning 30 days before and 
ending 30 days after the shares are disposed 
of.  In such a case, the basis of the shares 
acquired will be adjusted to reflect the 
disallowed loss.

For the purposes of computing the revised 
alternative minimum tax of 20% for 
corporations, 75% of the excess of the 
adjusted current earnings (as defined in the 
Code) over other alternative minimum taxable 
income is treated as an adjustment item.  
Shareholders are advised to consult their own 
tax advisors for details regarding the 
alternative minimum tax.

If a Fund purchases shares in certain foreign 
investment funds classified under the Code as 
a "passive foreign investment company," the 
Fund may be subject to Federal income tax on 
a  portion of an "excess distribution" and 
gain from the disposition of such shares, 
even though such income may have to be 
distributed as a taxable dividend by the Fund 
to its shareholders.  In addition, gains on 
the disposition of shares in a passive 
foreign investment company generally are 
treated as ordinary income even though the 
shares are capital assets in the hands of the 
Company.  Certain interest charges may be 
imposed on either the Fund or its 
shareholders in respect of any taxes arising 
from such distributions or gains.  A Fund may 
be eligible to elect to include in its gross 
income its share of earnings of a passive 
foreign investment company on a current 
basis.  Generally the election would 
eliminate the interest charge and the 
ordinary income treatment on the disposition 
of stock, but such an election may have the 
effect of accelerating the recognition of 
income and gains by the Fund compared to a 
fund that did not make the election.  In 
addition, another election may be available 
that would involve marking to market a Fund's 
passive foreign investment company shares at 
the end of each taxable year (and on certain 
other dates prescribed in the Code), with the 
result that unrealized gains are treated as 
though they were realized.  If this election 
were made, tax at the Fund level under the 
passive foreign investment company rules 
would generally be eliminated, but the Fund 
could, in limited circumstances, incur 
nondeductible interest charges.  Each Fund's 
intention to qualify annually as a regulated 
investment company may limit its elections 
with respect to shares of passive foreign 
investment companies.

Because the application of the passive 
foreign investment company rules may affect, 
among other things, the character of gains, 
the amount of gain or loss and the timing of 
the recognition of income with respect to 
passive foreign investment company shares, as 
well as subject a Fund itself to tax on 
certain income from such shares, the amount 
that must be distributed to shareholders, and 
which will be taxed to shareholders as 
ordinary income or long-term capital gain, 
may be increased or decreased substantially 
as compared to a fund that did not invest in 
passive foreign investment companies.

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

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

The foregoing discussion relates only to 
Federal income tax law as applicable to 
United States citizens.  Distributions by the 
Funds also may be subject to state, local and 
foreign taxes, and their treatment under 
state, local and foreign income tax laws may 
differ from the Federal income tax treatment.  
The Government Securities Fund's dividends, 
to the extent they consist of interest from 
obligations of the United States government 
and certain of its agencies and 
instrumentalities, may be exempt from state 
and local income taxes in some jurisdictions.  
The Company intends to advise shareholders of 
the proportion of that Fund's dividends which 
are derived from such interest.  Shareholders 
should consult their tax advisors with 
respect to particular questions of Federal, 
state, local and foreign taxation. 

ADDITIONAL INFORMATION

The Company was incorporated on September 29, 
1981 under the name Hutton Investment Series 
Inc.  The Company's corporate name was 
changed on December 29, 1988, July 30, 1993 
and October 28, 1994, to SLH Investment 
Portfolios Inc., Smith Barney Shearson 
Investment Funds Inc., and Smith Barney 
Investment Funds, Inc., respectively.

PNC Bank, located at 17th and Chestnut 
Streets, Philadelphia, Pennsylvania 19103, 
serves as the custodian of the Company.  
Under its custody agreement with the Company, 
PNC Bank holds the Company's fund securities 
and keeps all necessary accounts and records.  
For its services, PNC Bank receives a monthly 
fee based upon the month-end market value of 
securities held in custody and also receives 
transaction charges.  PNC bank is authorized 
to establish separate accounts for foreign 
securities owned by the Company to be held 
with foreign branches of other domestic banks 
as well as with certain foreign banks and 
securities depositories.  The assets of the 
Company are held under bank custodianship in 
compliance with the 1940 Act.

First Data located at Exchange Place, Boston, 
Massachusetts 02109, serves as the Company's 
transfer agent.  For these services, First 
Data receives a monthly fee computed on the 
basis of the number of shareholder accounts 
it maintains with the Company during the 
month and is reimbursed for out-of-pocket 
expenses.


FINANCIAL STATEMENTS

The Annual Reports for each Fund for the 
fiscal year ended December 31, 1996 are 
incorporated herein by reference in their 
entirety.



APPENDIX

BOND (AND NOTE) RATINGS

Moody's Investors Service, Inc. ("Moody's")

	Aaa - Bonds that are rated "Aaa" are 
judged to be of 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 that 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 that make the long term 
risks appear somewhat larger than in "Aaa" 
securities. 

	A - Bonds that 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 that 
suggest a susceptibility to impairment 
sometime in the future. 

	Baa - Bonds that 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 that 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 that 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. 

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

	C - Bonds that 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 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. 



Standard & Poor's Ratings Group ("Standard & 
Poors") 

	AAA - Debt rated "AAA" has the highest 
rating assigned by Standard & Poor's.  
Capacity to pay interest and repay principal 
is extremely strong. 

	AA - Debt rated "AA" has a very strong 
capacity to pay interest and repay principal 
and differs from the highest rated issues 
only in small degree. 

	A - Debt rated "A" has a strong 
capacity to pay interest and repay principal 
although it is somewhat more susceptible to 
the adverse effects of changes in 
circumstances and economic conditions than 
debt in higher rated categories. 

	BBB - Debt rated "BBB" is regarded as 
having an adequate capacity to pay interest 
and repay principal.  Whereas it normally 
exhibits 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 debt in this category than 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 if speculation than 
B and CCC 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 
category. 

COMMERCIAL PAPER RATINGS

Moody's Investors Service, Inc. 

Issuers rated "Prime-1" (or related 
supporting institutions) have a superior 
capacity for repayment of short-term 
promissory obligations.  Prime-1 repayment 
capacity will normally be evidenced by the 
following characteristics: leading market 
positions in well-established industries; 
high rates of return on funds employed; 
conservative capitalization structures with 
moderate reliance on debt and ample asset 
protection; broad margins in earnings 
coverage of fixed financial charges and high 
internal cash generation; well-established 
access to a range of financial markets and 
assured sources of alternate liquidity. 

Issuers rated "Prime-2" (or related 
supporting institutions) have a strong 
capacity for repayment of short-term 
promissory obligations.  This will normally 
be evidenced by many of the characteristics 
cited above but to a lesser degree.  Earnings 
trends and coverage ratios, while sound, will 
be more subject to variation.  Capitalization 
characteristics, while still appropriate, may 
be more affected by external conditions.  
Ample alternate liquidity is maintained. 



Standard & Poor's Ratings Group

		A-1 - This designation indicates that 
the degree of safety regarding timely payment 
is either overwhelming or very strong.  Those 
issues determined to possess overwhelming 
safety characteristics will be denoted with a 
plus (+) sign designation.

     A-2 - Capacity for timely payment on 
issues with this designation is strong.  
However, the relative degree of safety is not 
as high as for issues designated A-1.

Supplementary Description of Interest Rate 
Futures Contracts and Related Options

Characteristics of Futures Contracts.  
Currently, futures contracts can be purchased 
and sold on such securities as U.S. Treasury 
bonds, U.S. Treasury notes, GNMAs and U.S. 
Treasury bills.  Unlike when the Fund 
purchases or sells a security, no price is 
paid or received by the Fund upon the 
purchase or sales of a futures contract.  The 
Fund will initially be required to deposit 
with the custodian or the broker an amount of 
"initial margin" of cash of U.S. Treasury 
bills.  The nature of initial margin in 
futures transactions is different from that 
of margin in security transactions in that 
futures contract initial margin does not 
involve the borrowing of funds by their 
customer to finance the transaction.  Rather, 
the initial margin is in the nature of a 
performance bond or good faith deposit on the 
contract which is returned to the Fund upon 
termination of the futures contract, assuming 
all contractual obligations have been 
satisfied.  Subsequent payments, called 
maintenance margin, to and from the broker, 
will be made on a daily basis as the price of 
the underlying debt security fluctuates, 
making the long and short positions in the 
futures contract more or less valuable, a 
process known as "marked-to-market."  For 
example, when the Fund has purchased a 
futures contract and the price of the 
underlying debt security has risen, that 
position will have increased in value and the 
Fund will receive from the broker a 
maintenance margin payment equal to that 
increase in value.  Conversely, when the Fund 
has purchased a futures contract and the 
price of the underlying debt security has 
declined, the position would be less valuable 
and the Fund would be required to make a 
maintenance margin payment to the broker.  At 
any time prior to expiration of the futures 
contract, the Fund may elect to close the 
position by taking an opposite position which 
will operate to terminate the Fund's position 
in the futures contract.  A final 
determination of maintenance margin is then 
made, additional cash is required to be paid 
by or released to the Fund, and the Fund 
realizes a loss or a gain.

While futures contracts based on debt 
securities do provide for the delivery and 
acceptance of securities, such deliveries and 
acceptances are very seldom made.  Generally, 
the futures contract is terminated by 
entering into an offsetting transaction.  An 
offsetting transaction for a futures contract 
sale is effected by the Fund entering into a 
futures contract purchase for the same 
aggregate amount of the specific type of 
financial instrument and same delivery date.  
If the price in the sale exceeds the price in 
the offsetting purchase, the Fund pays the 
difference and realizes the loss.  Similarly, 
the closing out of a futures contract 
purchase is effected by the Fund entering 
into a futures contract sale.  If the 
offsetting sale price exceeds the purchase 
price, the Fund realizes a gain, and if the 
purchase price exceeds the offsetting price, 
the Fund realizes a loss.

Risks of Transactions in Futures Contracts.  
There are several risks in connection with 
the use of futures contracts by Government 
Securities Fund as a hedging device.  One 
risk arises because of the imperfect 
correlation between movements in the price of 
the futures contracts and movements in the 
price of the debt securities which are the 
subject of the hedge.  The price of the 
futures contract may move more than or less 
than the price of the debt securities being 
hedged.  If the price of the futures contract 
moves less than the price of the securities 
which are the subject of the hedge, the hedge 
will not be fully effective, but, if the 
price of the securities being hedged has 
moved in an unfavorable direction, the Fund 
would be in a better position than if it has 
not hedged at all.  If the price of the 
securities being hedged has moved in a 
favorable direction, this advantage will be 
partially offset by the movement in the price 
of the futures contract.  If the price of the 
futures contracts moves more than the price 
of the security, the Fund will experience 
either a loss or a gain on the future which 
will not be completely offset by movements in 
the prices of the debt securities which are 
the subject of the hedge.  To compensate for 
the imperfect correlation of movements in the 
price of debt securities being hedged and 
movements in the prices of the futures 
contracts, the Fund may buy or sell futures 
contracts in a greater dollar amount of the 
securities being hedged if the historical 
volatility of the prices of such securities 
has been greater than the historical 
volatility of the futures contracts.  
Conversely, the Fund may buy or sell fewer 
futures contracts if the historical 
volatility of the price of the securities 
being hedged is less than the historical 
volatility of the futures contracts.  It is 
also possible that, where the Fund has sold 
futures to hedge its portfolio against 
decline in the market, the market may advance 
and the value of securities held in the 
Fund's portfolio may decline.  If this 
occurred, the Fund would lose money on the 
futures contracts and also experience a 
decline in value in its portfolio securities.  
However, while this could occur for a very 
brief period or to a very small degree, over 
time the value of a diversified portfolio 
will tend to move in the same direction as 
the futures contracts.  Where futures are 
purchased to hedge against a possible 
increase in prices of securities before the 
Fund is able to invest its cash (or cash 
equivalents) in U.S. government securities 
(or options) in an orderly fashion, it is 
possible that the market may decline instead; 
if the Fund then concludes not to invest in 
U.S. government securities or options at that 
time because of concern as to possible 
further market decline or for other reasons, 
the Fund will realize a loss on the futures 
contract that is not offset by a reduction in 
the price of securities purchased.

In addition to the possibility that there may 
be an imperfect correlation, or no 
correlation at all, between movements in the 
futures contracts and the portion of the 
portfolio being hedged, the market prices of 
futures contracts may be affected by certain 
factors.  First, all participants in the 
futures market are subject to margin deposit 
and maintenance requirements.  Rather than 
meeting additional margin deposit 
requirements, investors may close futures 
contracts though offsetting transactions 
which could distort the normal relationship 
between the debt securities and futures 
markets; second, from the point of view of 
speculators, the deposit requirements in the 
futures market are less onerous than margin 
requirements in the securities market.  
Therefore, increased participation by 
speculators in the futures market may also 
cause temporary price distortions.  Due to 
the possibility of price distortion in the 
futures market and because of the imperfect 
correlation between movements in the debt 
securities and movements in the prices of 
futures contracts, a correct forecast of 
interest rate trends by the investment 
advisor may still not result in a successful 
hedging transaction over a very short time 
frame.

Positions in futures contracts may be closed 
out only on an exchange or board of trade 
which provides a secondary market for such 
futures.  Although Government Securities Fund 
intends to purchase or sell futures only on 
exchanges or boards of trade where there 
appears to be an active secondary market, 
there is no assurance that a liquid secondary 
market on an exchange or board of trade will 
exist for any particular contract or at any 
particular time.  In such event, it may not 
be possible to close a futures position, and 
in the event of adverse price movements, the 
Fund would continue to be required to make 
daily cash payments of variation margin.  
However, in the event that the futures 
contracts have been used to hedge portfolio 
securities, such securities will not be sold 
until the futures contracts can be 
terminated.  In such circumstances, an 
increase in the price of the securities, if 
any, may partially or completely offset 
losses on the futures contracts.  However, as 
described above, there is no guarantee that 
the price of the securities will, in fact, 
correlate with the price movements of the 
futures contracts and thus provide an offset 
to losses on futures contracts.  Successful 
use of futures contracts by the Fund is also 
subject to the investment adviser's ability 
to predict correctly movements in the 
direction of interest rates and other factors 
affecting markets of debt securities.  For 
example, if the Fund has hedged against the 
possibility of an increase in interest rates 
which would adversely affect debt securities 
held in its portfolio and prices of such 
securities increase instead, the Fund will 
lose part or all of the benefit of the 
increased value of its securities which it 
has hedged because it will have offsetting 
losses in its futures positions.  In 
addition, in such situations, if the Fund has 
insufficient cash, it may have to sell 
securities to meet daily variation margin 
requirements.  Such sale of securities may 
be, but will not necessarily be, at increased 
prices which reflect the rising market.  The 
Fund may have to sell securities at a time 
when it may be disadvantageous to do so.

Characteristics of Options on Futures 
Contracts.  As with options on debt 
securities, the holder of an option may 
terminate his position by selling an option 
of the same series.  There is no guarantee 
that such closing transactions can be 
effected.  The Fund will be required to 
deposit initial margin and maintenance margin 
with respect to put and call options on 
futures contracts described above, and, in 
addition, net option premiums received will 
be included as initial margin deposits.

In addition to the risks which apply to all 
options transaction, there are several 
special risks relating to options on futures 
contracts.  Trading in such options commenced 
in October 1982.  The ability to establish 
and close out positions on such options will 
be subject to the development and maintenance 
of a liquid secondary market.  It is not 
certain that this market will develop.  The 
Fund will not purchase options on futures 
contracts on any exchange unless and until, 
in the investment advisor's opinion, the 
market for such options had developed 
sufficiently that the risks in connection 
with options on futures contracts are not 
greater than the risks in connection with 
futures contracts.  Compared to the use of 
futures contracts, the purchase of options on 
futures contracts involves less potential 
risk to the Fund because the maximum amount 
of risk is the premium paid for the options 
(plus transaction costs).  However, there may 
be circumstances when the use of an option on 
a futures contract would result in a loss to 
the Fund when the use of a futures contract 
would not, such as when there is no movement 
in the prices of debt securities.  Writing an 
option on a futures contract involves risks 
similar to those arising in the sale of 
futures contracts, as described above.


Smith Barney
Investment Funds Inc.

44

SMITH BARNEY INVESTMENT FUNDS  
PART C
 
Item 24. Financial Statements and Exhibits 
 
(a) Not Applicable 
 
Included in Part B: 
 
(b) Exhibits 
 
All references are to the Registrant's registration statement on Form N-1A
(the "Registration Statement") as filed with the SEC on October 2, 1981
(File Nos. 2-74288 and 811-3275). 
 
(1)  Articles of Restatement dated September 17, 1993 to Registrant's  Articles
of  Incorporation dated September 28, 1981, Articles of Amendment dated
October 14, 1994, Articles Supplementary, Articles  of Amendment dated
October 14, 1994, Articles Supplementary, Articles of Amendments and 
Certificates of Correction dated November 7, 1994, are incorporated by 
reference to Post-Effective Amendment No. 37 to the Registration Statement 
filed on  November 7, 1994. Articles of Amendment dated October 23, 1997
are incorporated by reference to Post-Effective Amendment No. 46 dated 
October 23, 1997("Post-Effective Amendment No.46").  Articles of Amendment
dated February 27, 1998 (filed herewith).

(2) Registrant's By-Laws, as amended on September 30, 1992 are incorporated by 
reference to Post-Effective Amendment No. 30 to the Registration Statement 
filed on April 30, 1993. 
 
(3) Not Applicable. 
 
(4) Registrant's form of stock certificate for Smith Barney Hansberger Global 
Value Fund ("Global Value Fund") and Smith Barney Hansberger Global Value 
Small Cap Fund ("Small Cap Fund") is incorporated by reference to Post 
Effective Amendment 46.
 
(5) (a) Investment Advisory Agreement dated July 30, 1993, between the 
Registrant on behalf of Smith Barney Investment Grade Bond Fund, 
Smith Barney Government Securities Fund and Smith Barney Special Equities 
Fund and Greenwich Street Advisors is incorporated by reference to the 
Registration Statement filed on Form N-14 on September 2, 1993, File 
No. 33-50153. 
 
    (b) Investment Advisory Agreements on behalf of Smith Barney Growth
Opportunity Fund and Smith Barney Managed Growth Fund is incorporated by 
reference to Post-Effective Amendment No. 40 filed on June 27, 1995. 
 
    (c) Investment Management Agreements on behalf of Global Value Fund and 
Global Small Cap Fund between Registrant and Smith Barney Mutual Funds 
Management Inc. is incorporated by reference to Post-Effective Amendment
No. 46.
 
    (d) Sub-Advisory Agreement on behalf of Global Value Fund and Global Small 
Cap Fund between MMC and Hansberger Global Investors Inc. will be filed by
amendment.
 
(6) (a) Distribution Agreement dated July 30, 1993, between the Registrant and
Smith Barney Shearson Inc. is incorporated by reference to the registration
statement filed on Form N-14 on September 2, 1993.  File 33-50153. 
 
     (b) Form of Distribution Agreement between the Registrant and PFS 
Distributors on behalf of Smith Barney Investment Funds Inc. is incorporated 
by reference to Post-Effective Amendment No. 40 filed on June 27, 1995. 
 
(7) Not Applicable. 
 
8 (a) Custodian Agreement with PNC Bank, National Association is incorporated by
reference to Post -Effective Amendment  No. 44 filed on April 29, 1997. 
 
   (b) Custodian Agreement with Chase Manhattan Bank is incorporated by
 reference to Post-Effective Amendment No. 46.
 
9 (a)  Transfer Agency and Registrar Agreement dated August 5, 1993 with First 
Data Investor Services Group, Inc. (formerly The Shareholder Services Group, 
Inc.) is incorporated by reference to Post-Effective Amendment No. 31 as 
filed on December 22, 1993 (Post-Effective Amendment No. 31"). 
 
   (b)	Sub-Transfer Agency Agreement between the Registrant and PFS Shareholders
Services on behalf of  Smith Barney Investment Funds Inc. is incorporated by 
reference to Post-Effective Amendment No. 40 filed on June 27, 1995. 
 
(10)  Opinion of Robert A. Vegliante, Deputy General Counsel of Smith Barney
Mutual Funds Management Inc. filed with the Registrant's rule 24-f2 Notice
(Accession No. 000091155-97-000104) is incorporated by reference. 
 
(11)  Not Applicable 
  
(12) Not Applicable 
 
(13)  Not Applicable 
 
(14)  Not Applicable 
 
(15) (a) Amended Services and Distribution Plans pursuant to Rule 12b-1 between
the Registrant on behalf of Smith Barney Invest Grade Bond Fund, Smith Barney
Government Securities Fund, Smith Barney Special Equities Fund and Smith Barney 
European Fund and Smith Barney, Inc. ("Smith Barney") are incorporated by 
reference to Post-Effective Amendment No. 37' 
 
    (b) Form of Services and Distribution Plans pursuant to Rule 12b-1 between 
the Registrant on behalf  of Smith Barney Growth Opportunity Fund and Smith 
Barney Managed Growth Fund is incorporated by reference to Post-Effective
Amendment No. 40 filed on June 27, 1995. 
 
    (c) Form of Services and Distribution Plans pursuant to Rule 12b-1 between 
the Registrant on behalf of  the Global Value Fund and Small Cap Fund is
incorporated by reference to Post-Effective Amendment No. 46.
 
(16) Performance Date is incorporated by reference to Post-Effective Amendment
No. 22 as filed on May 1, 1989. 
 
(17) Not Applicable 
 
(18)  Plan pursuant to Rule 18f-3 is incorporated by reference to Post-Effective
Amendment No.42 to Registration Statement dated January 10, 1996. 
 
Item 25  Persons Controlled by or Under Common Control with Registrant 
 
None. 
 
Item 26.  Not Applicable 
 
Item  27.  Indemnification 
 
	The response to this item is incorporated by reference to Pre-Effective 
Amendment No. 1 to the registration statement filed on Form N-14 on 
October 8, 1993 (File No. 33-50153). 
 
Item 28(a).  Business and Other Connections of Investment Adviser 
 
Investment Adviser -Mutual Management Corp.("MMC") formerly Smith Barney Mutual
Funds Management Inc. 
 
MMC was incorporated in December 1968 under the laws of the State of Delaware.
MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings")(formerly known as Smith Barney Holdings Inc.), which in turn is a 
wholly owned subsidiary of Travelers Group Inc. (formerly known as 
Primerica Corporation) ("Travelers").  MMC is registered as an 
investment adviser under the Investment Advisers Act of 1940 (the
 "Advisers Act").The list required by this Item 28 of officers and 
directors of MMC together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such 
officers and directors during the past two years, is incorporated by 
reference to Schedules A and D of FORM ADV filed by MMC pursuant to the 
Advisers Act (SEC File No. 801-8314). 
 
Item 29.	Principal Underwriters 

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

Smith Barney is a wholly owned subsidiary of Holdings.  The information 
required by this Item 29 with respect to each director, officer and partner of 
Smith Barney is incorporated by reference to Schedule A of Form BD filed by 
Smith Barney pursuant to the Securities Exchange Act of 1934 (SEC File No.
812-8510). 
 
Item 30.  Location of Accounts and Records 
 
(1) 	Smith Barney Investment Funds Inc. 
	388 Greenwich Street 
	New York, New York  10013 
 
(2)	Mutual Management Corp.
	388 Greenwich Street 
	New York, New York  10013 
 
(3)	PNC Bank, National Association 
	17th and Chestnut Streets 
	Philadelphia, PA 
 
(4)	The Chase Manhattan Bank 
	Chase Metrotech Center 
	Brooklyn, New York 11245 
 
(5)	First Data Investor  Services Group, Inc. 
	One Exchange Place 
	Boston, Massachusetts  02109 
 
Item 31. Management Services 
 
	Not Applicable. 
 
Item 32. Undertakings 
 
(b) The Registrant hereby undertakes to file a post-effective amendment, 
which includes financial statements, within four to six month from the 
effective date of this Registration Statement. 
 
(c) The Registrant hereby undertakes to furnish to each person to whom a 
prospectus of any series of the Registrant is delivered a copy of the 
Registrant's latest annual report, upon request and without charge. 

(d) Registrant further represents pursuant to Rule 485(b)(4) that the
resignation of  Mr. Alger B. Chapman as a Director of the Registrant was
not due to any disagreement with the Registrant on any matter relating to its 
operation, policies or practices.  Mr. Chapman resigned because of a 
change in his professional obligations,

SIGNATURES 
 
Pursuant to the requirements of the Securities Act of 1933, as amended, and 
the Investment Company Act of 1940, as amended, the Registrant, SMITH BARNEY 
INVESTMENT FUNDS INC., has duly caused this Amendment to the Registration 
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, State of New York on the 27th day 
of February, 1998. 

SMITH BARNEY INVESTMENT FUNDS INC. 

 
By: /s/ Heath B. McLendon* 
      Heath B. McLendon 
      Chief Executive Officer 
 
 
	WITNESS our hands on the date set forth below. 
 
	Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated. 
 
Signature			Title				Date	 
 
/s/ Heath B. McLendon		Chairman of the Board		02/27/98 
Heath B. McLendon		(Chief Executive Officer) 
 
/s/ Lewis E. Daidone		 Senior Vice President 
Lewis E. Daidone		 and Treasurer			02/27/98 
				(Chief Financial  
				and Accounting Officer) 
 
/s/ Paul R. Ades	*		Director			02/27/98 
Paul R. Ades 
 
/s/ Herbert Barg*	 	Director			02/27/98 
Herbert Barg 
 
/s/ Dwight B. Crane*		Director			02/27/98 
Dwight B. Crane 
 
/s/ Frank Hubbard*		Director			02/27/98 
Frank Hubbard 
 
/s/ Ken Miller*			Director			02/27/98 
Ken Miller 
 
/s/ John F. White*		Director			02/27/98 
John F. White 
 
*Signed by Heath B. McLendon, their duly authorized attorney-in-fact, pursuant
to power of attorney dated November 3, 1994. 
 
/s/ Heath B. McLendon 
Heath B. McLendon