<PAGE>

P R O S P E C T U S

 
 
                                                                    SMITH BARNEY
                                                                      Investment
                                                                           Grade
                                                                            Bond
                                                                            Fund
                                                               
                                                            APRIL 29, 1996,     
                                                      
                                                   as amended JUNE 20, 1996     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
LOGO  Smith Barney Mutual Funds
      Investing for your future.
      Every day.

<PAGE>
 
Smith Barney
Investment Grade Bond Fund
   
PROSPECTUS                       APRIL 29, 1996, AS AMENDED JUNE 20, 1996      
 
388 Greenwich Street
New York, New York 10013
(212) 723-9218
 
 Smith Barney Investment Grade Bond Fund (the "Fund") has an investment objec-
tive of high current income consistent with prudent investment management and
preservation of capital by investing in bonds and other income-producing secu-
rities.
 
 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 briefly sets forth 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 Barney Finan-
cial Consultant.
 
 Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated April 29, 1996, as amended or sup-
plemented 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>
 
Smith Barney
Investment Grade Bond Fund
 
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
PROSPECTUS SUMMARY                             3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                          10
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES  15
-------------------------------------------------
VALUATION OF SHARES                           20
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES            21
-------------------------------------------------
PURCHASE OF SHARES                            23
-------------------------------------------------
EXCHANGE PRIVILEGE                            34
-------------------------------------------------
REDEMPTION OF SHARES                          38
-------------------------------------------------
MINIMUM ACCOUNT SIZE                          41
-------------------------------------------------
PERFORMANCE                                   42
-------------------------------------------------
MANAGEMENT OF THE COMPANY AND THE FUND        43
-------------------------------------------------
DISTRIBUTOR                                   44
-------------------------------------------------
ADDITIONAL INFORMATION                        45
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
 
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the distributor. This Prospectus does not constitute an offer by the Fund or
the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in any such jurisdiction.
--------------------------------------------------------------------------------
 
2
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
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 the "Table of Contents."
 
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management invest-
ment company that seeks to provide as high a level of current income as is
consistent with prudent investment management and preservation of capital.
Under normal circumstances, the Fund will invest at least 65% of its assets in
bonds. 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 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. See "Purchase of Shares" and "Redemption of Shares."
 
  Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which
when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no sales charge, but will be subject to a contingent deferred sales
charge ("CDSC") of 1.00% on redemptions made within 12 months of purchase. See
"Prospectus Summary--Reduced or No Initial Sales Charge."
 
  Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first
year after purchase and by 1.00% each year thereafter to zero. This CDSC may
be waived for certain redemptions. Class B shares are subject to an annual
service fee of 0.25% and an annual distribution fee of 0.50% of the average
daily net assets of this Class. The Class B shares' distribution fee may cause
that Class to have higher expenses and pay lower dividends than Class A
shares.
 
  Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject
 
                                                                              3
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PROSPECTUS SUMMARY (CONTINUED)                                             
 
to an annual distribution fee. In addition, a certain portion of Class B shares
that have been acquired through the reinvestment of dividends and distributions
("Class B Dividend Shares") will be converted at that time. See "Purchase of
Shares--Deferred Sales Charge Alternatives."
 
  Class 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 0.45% 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. This 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 Class C shares, which when combined
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 service
or distribution fees.
 
  In deciding which class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
 
  Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject
to lower ongoing expenses over the term of the investment. As an investment
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional invested amounts may partially or wholly
offset the higher annual expenses of these Classes. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case.
 
4
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
  Finally, investors should consider the effect of the CDSC period and any con-
version 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.
 
  Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to any initial sales charge, CDSC or service or distribu-
tion fee. The maximum purchase amount for Class A shares is $4,999,999, Class B
shares is $249,999 and Class C shares is $499,999. There is no maximum purchase
amount for Class Y shares.
 
  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 pur-
chases, which when combined with current holdings of Class A shares offered
with a sales charge equal or exceed $500,000 in the aggregate, will be made at
net asset value with no initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all
Class A shares held in 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 ongo-
ing 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 each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
 
  See "Purchase of Shares" and "Management of the 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.
 
                                                                               5
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program, which is generally designed to assist plan spon-
sors in the creation and operations 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 (collec-
tively, "Participating Plans"). Class A, Class B, Class C and Class Y shares
are available as investment alternatives for Participating Plans. See "Purchase
of Shares--Smith Barney 401(k) Program."
 
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, 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. Direct purchases by certain retirement plans may be made
through the Fund's transfer agent, First Data Investing Services Group, Inc.
("FDISG"), formerly known as The Shareholder Service Group, Inc. See "Purchase
of Shares."
 
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed Retire-
ment Plan. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes is $25. The minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes through the Systematic Investment Plan
described below is $50. See "Purchase of Shares."
 
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $50. See "Pur-
chase of Shares."
 
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
 
 
6
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PROSPECTUS SUMMARY (CONTINUED)
 
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, plus any applicable sales charge dif-
ferential. 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 Smith Barney Financial Consultants. See "Valuation of Shares."
 
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are declared
daily and paid monthly. Distributions of net realized long- and short-term
capital gains, if any, are declared and paid annually after the end of the
fiscal year in which they are earned. See "Dividends, Distributions and Tax-
es."
 
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distribution 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
does not have a stated maturity policy, but will generally invest in medium-
to long-term securities, which are generally more sensitive to inter     
 
                                                                              7
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PROSPECTUS SUMMARY (CONTINUED)
   
est rate changes, market conditions and other economic news than shorter-term
securities. The Fund may employ investment techniques which involve certain
risks, including entering into repurchase agreements and reverse repurchase
agreements, lending portfolio securities, selling securities short and invest-
ing in foreign securities through the use of American Depositary Receipts. See
"Investment Objective and Management Policies--Additional Investments."     
 
THE FUND'S EXPENSES The following expense table lists the costs and expenses
that an investor will incur either directly or indirectly as a shareholder of
the Fund, based upon the maximum sales charge and maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted,
the Fund's operating expenses for its most recent fiscal year:
 
 
<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)       4.50%   None    None    None
    Maximum CDSC (as a percentage of original
      cost or redemption proceeds, whichever
      is lower)                                 None*   4.50%   1.00%   None
------------------------------------------------------------------------------
  ANNUAL FUND OPERATING EXPENSES
      (AS A PERCENTAGE OF AVERAGE NET ASSETS)
    Management fees                             0.65%   0.65%   0.65%   0.65%
    12b-1 fees**                                0.25    0.75    0.70    None
    Other expenses***                           0.21    0.21    0.21    0.21
------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES                 1.11%   1.61%   1.56%   0.86%
</TABLE>
-------------------------------------------------------------------------------
   *Purchase of Class A shares, which when combined with current holdings of
   Class A shares offered with a sales charge, equal or exceed $500,000 in the
   aggregate, 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.
  **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.
 ***For Class Y shares, "Other expenses" have been estimated based on expenses
   incurred by Class A shares because there were no Class Y shares outstanding
   during the fiscal year ended December 31, 1995.
 
  The sales charge and CDSC set forth in the above table are the maximum
charges imposed upon purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in
the case of Class B, Class C and certain Class A shares, the length of time
the shares are held and whether the shares are held through the Smith Barney
401(k) Program. See "Purchase of Shares" and "Redemption of Shares."
 
8
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PROSPECTUS SUMMARY (CONTINUED)                                             
 
Smith Barney receives an annual 12b-1 service fee of 0.25% of the value of
average daily net assets of Class A shares. Smith Barney also receives, with
respect to Class B shares, an annual 12b-1 fee of 0.75% of the value of aver-
age daily net assets of that Class, consisting of a 0.50% distribution fee and
a 0.25% service fee. For Class C shares, Smith Barney receives an annual 12b-1
fee of 0.70% of the value of average daily net assets of the Class, consisting
of a 0.45% distribution fee and a 0.25% service fee. "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
 
  EXAMPLE
 
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the table above. See "Purchase of Shares," "Redemption of Shares"
and "Management of the Company and the Fund."
 
<TABLE>
<CAPTION>
  EXAMPLE                                     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..................................  $56     $79    $103     $174
    Class B..................................   61      81      98      178
    Class C..................................   26      49      85      186
    Class Y..................................    9      27      48      106
  An investor would pay the following
  expenses on the same investment, assuming
  the same annual return and no redemption:
    Class A..................................  $56     $79    $103     $174
    Class B..................................   16      51      88      178
    Class C..................................   16      49      85      186
    Class Y..................................    9      27      48      106
------------------------------------------------------------------------------
</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.
 
                                                                              9
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
FINANCIAL HIGHLIGHTS                                                      
 
The following information for the fiscal year ended December 31, 1995 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Fund's Annual Report dated December 31, 1995. The following
information for the fiscal years ended December 31, 1988 through December 31,
1994 has been audited by other auditors. The information set out below should
be read in conjunction with the financial statements and related notes that
also appear in the Fund's Annual Report, which is incorporated by reference
into the Statement of Additional Information. No information is presented for
Class Y shares because there were no Class Y shares outstanding for the peri-
ods shown.
 
FOR A CLASS A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
                                          1995(1)   1994(1)   1993(1)  1992(2)
--------------------------------------------------------------------------------
<S>                                      <C>       <C>        <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR         $10.67    $13.01    $11.89  $11.67
--------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income                       0.83      0.74      0.88    0.14
 Net realized and unrealized gain (loss)     2.80     (1.88)     1.27    0.23
--------------------------------------------------------------------------------
Total Income (Loss) From Operations          3.63     (1.14)     2.15    0.37
--------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                      (0.89)    (0.86)    (0.88)  (0.14)
 Overdistribution of net investment
 income                                        --        --     (0.01)     --
 Net realized gains                         (0.16)    (0.31)    (0.14)     --
 Capital                                       --     (0.03)       --   (0.01)
--------------------------------------------------------------------------------
Total Distributions                         (1.05)    (1.20)    (1.03)  (0.15)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR               $13.25    $10.67    $13.01  $11.89
--------------------------------------------------------------------------------
TOTAL RETURN++                              35.29%    (8.95)%   18.45%   3.25%++
--------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)           $226,373  $181,334   $10,136    $933
--------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses(3)                                 1.11%     1.11%     1.11%   1.03%+
 Net investment income                       7.02      7.35      6.67    7.53+
--------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                        49%       18%       65%     47%
--------------------------------------------------------------------------------
</TABLE>
(1) 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 does not accord with results
    of operations.
(2) For the period from November 6, 1992 (inception data) to December 31,
    1992.
(3) For the year ended December 31, 1992, the expense ratio excludes interest
    expense. The expense ratio including interest expense would have been
    1.04% (annualized).
  ++Total return is not annualized, as it may not be representative of the
    total return for the year.
  + Annualized.
 ++ Total return represents the aggregate total return for the period
    indicated and does not reflect any applicable sales charges.
 
10
<PAGE>
 
 
 
                       (This page intentionally left blank)
 
 
                                                                              11
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
FINANCIAL HIGHLIGHTS (CONTINUED)                                           
 
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
                               1995(1)   1994(1)    1993(1)    1992       1991
---------------------------------------------------------------------------------
<S>                           <C>       <C>        <C>       <C>        <C>
NET ASSET VALUE, BEGINNING
OF YEAR                       $  10.67  $  13.01   $  11.89  $  11.80   $  10.43
---------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
 Net investment income            0.77      0.82       0.80      0.83       0.86
 Net realized and unrealized
 gain (loss)                      2.80     (2.02)      1.29      0.12       1.38
---------------------------------------------------------------------------------
Total Income (Loss) From
Operations                        3.57     (1.20)      2.09      0.95       2.24
---------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income           (0.83)    (0.80)     (0.82)    (0.83)     (0.87)
 Overdistribution of
 investment net income              --        --      (0.01)       --         --
 Net realized gains              (0.16)    (0.31)     (0.14)       --         --
 Capital                            --     (0.03)        --     (0.03)        --
---------------------------------------------------------------------------------
Total Distributions              (0.99)    (1.14)     (0.97)    (0.86)     (0.87)
---------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR  $  13.25  $  10.67   $  13.01  $  11.89   $  11.80
---------------------------------------------------------------------------------
TOTAL RETURN++                   34.63%    (9.41)%    18.06%     8.36%     22.50%
---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S)                        $288,533  $221,120   $476,088  $431,783   $413,878
---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                         1.61%     1.57%      1.58%     1.57%*     1.53%
 Net investment income            6.51      6.89       6.20      6.99       7.90
---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE             49%       18%        65%       47%        82%
---------------------------------------------------------------------------------
</TABLE>
(1) 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 does not accord with results
    of operations.
 ++Total return represents the aggregate total return for the period indicated
   and does not reflect any applicable sales charges.
 * For the year ended December 31, 1992, the expense ratio excludes interest
   expense. The expense ratio including interest expense was 1.58%.
 ** Annualized expense ratio before waiver of fees by the distributor for the
    years ended December 31, 1989 and 1988 were 1.66% and 1.57%, respectively.
 *** Net investment income before waiver of fees by the distributor would have
     been $0.86 and $0.87 for the years ended December 31, 1989 and 1988,
     respectively.
 
12
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
FINANCIAL HIGHLIGHTS (CONTINUED)                                           
 
 
 
<TABLE>
<CAPTION>
  1990           1989                  1988                    1987                 1986
-----------------------------------------------------------------------------------------
<S>            <C>                   <C>                   <C>                  <C>
  $11.01         $10.33                $10.55                $12.91               $12.00
-----------------------------------------------------------------------------------------
    0.86           0.87***               0.90***               0.89                 1.10
   (0.57)          0.68                 (0.24)                (1.24)                1.16
-----------------------------------------------------------------------------------------
    0.29           1.55                  0.66                 (0.35)                2.26
-----------------------------------------------------------------------------------------
   (0.87)         (0.87)                (0.88)                (1.12)               (1.10)
      --             --                    --                    --                   --
      --             --                    --                 (0.89)               (0.25)
      --             --                    --                    --                   --
-----------------------------------------------------------------------------------------
   (0.87)         (0.87)                (0.88)                (2.01)               (1.35)
-----------------------------------------------------------------------------------------
  $10.43         $11.01                $10.33                $10.55               $12.91
-----------------------------------------------------------------------------------------
    2.98%         15.57%                 6.43%                (2.83)%              19.54%
-----------------------------------------------------------------------------------------
$405,779       $483,382              $532,794              $705,561             $421,011
-----------------------------------------------------------------------------------------
    1.58%          1.63%**               1.22%**               1.62%                1.62%
    8.20           8.07                  8.74                  7.96                 7.74
-----------------------------------------------------------------------------------------
      59%           118%                   72%                   79%                 211%
-----------------------------------------------------------------------------------------
</TABLE>
 
                                                                              13
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
FINANCIAL HIGHLIGHTS (CONTINUED)                                          
 
FOR A CLASS C SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
                                           1995(1)  1994(1)   1993(1)(2)
-------------------------------------------------------------------------
<S>                                        <C>      <C>       <C>
NET ASSET VALUE, BEGINNING OF YEAR         $10.67   $13.01      $12.56
-------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income                       0.78     0.75        0.63
 Net realized and unrealized gain (loss)     2.80    (1.95)       0.65
-------------------------------------------------------------------------
Total income (Loss) From Operations          3.58    (1.20)       1.28
-------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                      (0.83)   (0.80)      (0.68)
 Overdistribution of net investment income     --       --       (0.01)
 Net realized gains                         (0.16)   (0.31)      (0.14)
 Capital                                       --    (0.03)         --
-------------------------------------------------------------------------
Total Distributions                         (0.99)   (1.14)      (0.83)
-------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR               $13.26   $10.57      $13.01
-------------------------------------------------------------------------
TOTAL RETURN++                              34.74%   (9.41)%     10.38%++
-------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)             $3,769     $999        $208
-------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                    1.56%    1.57%       1.61%+
 Net investment income                       6.55     6.89        6.17+
-------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                        49%      18%         65%
-------------------------------------------------------------------------
</TABLE>
(1) 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 does not accord with results
    of operations.
(2) For the period from February 26, 1993 (inception date) to December 31,
    1993.
++ Total return is not annualized, as it may not be representative of the
   total return for the year.
+  Annualized.
++ Total return represents the aggregate total return for the period indicated
   and does not reflect any applicable sales changes.
 
14
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES                              
 
  Set forth below is a description of the investment objective and policies of
the Fund. There can be no assurance that the Fund will achieve its investment
objective. Certain instruments and techniques discussed in this summary are
described in greater detail in this Prospectus under "Additional Investments"
and in the Statement of Additional Information. A description of the rating
systems of Moody's Investors Services Inc. ("Moody's") and Standard & Poors
Corporation ("S&P") is contained in the Appendix to the Statement of Addi-
tional Information.
 
  The Statement of Additional Information contains specific investment
restrictions which govern the Fund's investments. These restrictions 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 fundamen-
tal, all investment policies and practices described in this Prospectus 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 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" securi-
ties (which includes repurchase agreements with more than seven days to matu-
rity), and (c) investing more than 25% of the Fund's total assets in the secu-
rities of issuers in a particular industry (with exceptions for securities
guaranteed by the United States government, its agencies or instrumentalities
("U.S. government securities") and certain money market instruments).
   
  The Fund's investment objective is to provide as high a level of current
income as is consistent with prudent investment management and preservation of
capital. The Fund seeks to achieve its objective by investing primarily in
fixed income securities that are of a higher credit quality and present a
lower risk of principal loss at maturity. Such securities are typically con-
sidered "investment grade" quality, i.e. securities having a rating within one
of the four highest rating categories of their class. The Fund will invest
primarily in the following securities: corporate bonds rated Baa or better by
Moody's or BBB or better by S&P; U.S. government securities; commercial paper
issued by domestic corporations and rated Prime-1 or Prime-2 by Moody's or A-1
or A-2 by S&P, or,     
 
                                                                             15
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)                  
   
if not rated, issued by a corporation having an outstanding debt issue rated Aa
or better by Moody's or AA or better by S&P; negotiable bank certificates of
deposit and bankers' acceptances issued by domestic banks (but not their for-
eign branches) having total assets in excess of $1 billion; and high-yielding
common stocks and warrants. Obligations rated in the lowest of the top four
rating categories (Baa by Moody's or BBB by S&P) may have speculative charac-
teristics and changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments,
including a greater possibility of default or bankruptcy of the issuer, than is
the case with higher grade bonds. Subsequent to its purchase by the Fund, an
issue of securities may cease to be rated or its rating may be reduced below
the minimum required for the purchase by the Fund. In addition, it is possible
that Moody's and S&P might not timely change their ratings of a particular
issue to reflect subsequent events. None of these events will require the sale
of the securities by the Fund, although SBMFM will consider these events in
determining whether the Fund should continue to hold the securities. To the
extent that the ratings given by Moody's or S&P for securities may change as a
result of changes in the rating systems or due to a corporate reorganization of
Moody's and/or S&P, the Fund will attempt to use comparable ratings as stan-
dards for its investments in accordance with the investment objective and poli-
cies of the Fund.     
   
  The Fund's portfolio will be managed by purchasing and selling securities, as
well as holding selected securities to maturity. In managing the Fund's portfo-
lio, SBMFM analyzes the business and credit qualities of a particular issuer as
well as the economy in general to identify and monitor trends and to identify
fixed-income securities with characteristics most likely to meet the Fund's
objective. This process requires ongoing adjustments to the portfolio based on
the relative values or maturities of individual debt securities or changes in
the creditworthiness or overall investment merits of an issue.     
   
  Any such change in the Fund's portfolio may result in increases or decreases
in the Fund's current income available for distribution to shareholders. If the
Fund's expectations of changes in interest rates or its evaluation of the nor-
mal yield relationships between securities prove to be incorrect, the Fund's
income, net asset value and potential capital gain may be reduced or its poten-
tial capital loss may be increased. An increase in interest rates will gener-
ally reduce the value of portfolio investments (and, therefore, the net asset
value of the shares     
 
16
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)                  
   
of the Fund), and a decline in interest rates will generally increase their
value. The average weighted maturity of a bond fund can be used to measure the
fund's sensitivity to interest rate movements. The longer the Fund's average
weighted maturity, the more sensitive the net asset value is to interest rate
changes. The Fund has no stated maturity policy, but generally invests
inmedium- to long-term securities. At times, the Fund's portfolio may have an
average weighted maturity exceeding 25 years which would result in the Fund's
net asset value being extremely sensitive to interest rate movements. Since
all investments, including securities with a higher credit quality, have
inherent market risks and fluctuations in value due to changing economic con-
ditions and other factors, the Fund, of course, cannot assure that its invest-
ment objective will be achieved.     
 
  The Fund may enter into repurchase agreements, reverse repurchase agree-
ments, firm commitment agreements, "short sales against the box" and may lend
its portfolio securities. Except when in a temporary defensive investment
position, the Fund intends to maintain at least 65% of its assets invested in
bonds.
       
  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.
 
 ADDITIONAL INVESTMENTS
 
  U.S. Government Securities. U.S. government securities are obligations of,
or are guaranteed by, the United States government, its agencies or instrumen-
talities. 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 U.S.
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 Gov-
 
                                                                             17
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)                  
 
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 price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. The
value of the underlying securities will be at least equal at all times to the
total amount of the repurchase obligation, including interest. The 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 exercis-
ing its rights to dispose of the collateral securities, including the risk of a
possible decline in the value of the underlying securities during the period
while 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, review on an ongoing basis the creditworthiness and the
value of the collateral of those banks and dealers with which the Fund enters
into repurchase agreements to evaluate potential risks.
 
  Reverse Repurchase Agreements. A reverse repurchase agreement involves the
sale of a money market instrument by the Fund and its agreement to repurchase
the instrument at a specified time and price. The Fund will maintain a segre-
gated account consisting of U.S. government securities or cash or cash equiva-
lents to cover its obligations under reverse repurchase agreements with broker-
dealers (but not banks). The Fund will invest the proceeds in other money mar-
ket instruments or repurchase agreements maturing not later than the expiration
of the reverse repurchase agreement. Under the Investment Com-
 
18
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)                  
 
pany Act of 1940, as amended (the "1940 Act"), reverse repurchase agreements
may be considered borrowings by the seller; accordingly, the Fund will limit
its investments in reverse repurchase agreements and other borrowings to no
more than 33 1/3% of its total assets.
 
  Firm Commitment Agreements and When-Issued Purchases. Firm commitment agree-
ments and when-issued purchases call for the purchase of securities at an
agreed-upon price on a specified future date, and would be used, for example,
when a decline in the yield of securities of a given issuer is anticipated.
The Fund as purchaser assumes the risk of any decline in value of the security
beginning on the date of the agreement or purchase. The Fund will not use such
transactions for leveraging purposes, and accordingly will segregate U.S. gov-
ernment securities, cash or cash equivalents in an amount sufficient to meet
its purchase obligations under the agreement.
 
  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. The risks in lending portfolio securities, as with
other extensions of secured credit, consists of possible delays 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 in good standing and will not be made
unless, in the judgement of SBMFM, the consideration to be earned from such
loans would justify the risk.
 
  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.
 
 
                                                                             19
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)                  
 
  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.
 
 PORTFOLIO TRANSACTIONS AND TURNOVER
 
  SBMFM arranges for the purchase and sale of the Fund's securities and selects
broker-dealers (including Smith Barney) which, in its best judgment, provide
prompt and reliable execution at favorable prices and reasonable commission
rates. SBMFM may select broker-dealers which provide it with research services
and may cause the Fund to pay such broker-dealers commissions which exceed
those other broker-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 total number of shares of
the Class outstanding.
 
  A security that is primarily traded on a United States or foreign stock
exchange is valued at the last sale price on that exchange or, if there were no
sales during the day, at the current quoted bid price. In cases where securi-
ties are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Directors as the
primary market. Fund securities which are primarily traded on foreign
 
20
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
VALUATION OF SHARES (CONTINUED)                                           
 
exchanges may be valued with the assistance of a pricing service and are gen-
erally valued at the preceding closing values of such securities on their
respective exchanges, 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. Unlisted foreign securi-
ties are valued at the mean between the last available bid and offer price
prior to the time of valuation. U.S. over-the-counter securities will be val-
ued on the basis of the bid price at the close of business on each day. Secu-
rities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors. 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. 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.
 
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 declares dividends daily consisting of estimated daily net invest-
ment income, and pays dividends monthly. Any net realized long-term capital
gains, after utilization of capital loss carryforwards, will be distributed at
least annually. Net realized short-term capital gains may be paid with the
distribution of dividends from net investment income.
 
  If a shareholder does not otherwise instruct, dividends and capital gains
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 applica-
tion of a 4% nondeductible excise tax on certain undistributed amounts of
ordinary income and capital gains, the Fund may make an additional distribu-
tion shortly before December 31 in each year of any undistributed ordinary
income or capi-
 
                                                                             21
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)                             
 
tal gains and expects to pay any other dividends and distributions necessary to
avoid the application of this tax.
 
  If, for any full fiscal year, the Fund's total distributions exceed current
and accumulated earnings and profits, the excess distributions may be treated
as a taxable dividend or as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a tax-
free return of capital will reduce a shareholder's adjusted basis in his or her
shares. Pursuant to the requirements of the 1940 Act and other applicable laws,
a notice will accompany any distribution paid from sources other then net
investment income. In the event the Fund distributes amounts in excess of its
net investment income and net realized capital gains, such distributions may
have the effect of decreasing the Fund's total assets, which may increase the
Fund's expense ratio.
 
  The per share dividends and distributions on Class B and Class C shares 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 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 regulated invest-
ment company, the Fund will be required to meet various Code requirements.
 
 
22
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)                            
 
  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.
 
  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 capi-
tal 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 less 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.
Dividends, if any, consisting of interest from U.S. government securities may
be exempt from all state and local income taxes. Investors should consult
their tax advisors for specific information on the tax consequences of partic-
ular 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-
 
                                                                             23
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                            
 
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 Series, Inc., for which
there is no minimum purchase amount). See "Prospectus Summary -- Alternative
Purchase Arrangements" for a discussion of factors to consider in selecting
which Class of shares to purchase.
 
  Shares may be purchased through a brokerage account maintained with Smith
Barney. Shares may also be purchased through an Introducing Broker or an
investment dealer in the selling group. In addition, certain investors,
including qualified retirement plans and certain other institutional invest-
ors, may purchase shares directly through FDISG. When purchasing shares of the
Fund, investors must specify whether the purchase is for Class A, Class B,
Class C or Class Y shares. No maintenance fee will be charged by the Fund in
connection with a brokerage account through which an investor purchases or
holds shares.
 
  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 the Fund's Systematic Investment Plan, the minimum
initial investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $50. There are no minimum
investment requirements for Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, Directors of the Company and their
spouses and children. The Fund reserves the right to waive or change minimums,
to decline any order to purchase its shares and to suspend the offering of
shares from time to time. Shares purchased will be held in the shareholder's
account by the Company's transfer agent, FDISG. Share certificates are issued
only upon a shareholder's written request to FDISG.
 
  Purchase orders received by Smith Barney prior to the close of regular trad-
ing on the NYSE, on any day the Fund calculates its net asset value, are
priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular trad-
ing on the NYSE on
 
24
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                            
 
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
Smith Barney prior to Smith Barney's close of business (the "trade date"). For
shares purchased through Smith Barney or an Introducing Broker 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 pur-
chase order.
 
 SYSTEMATIC INVESTMENT PLAN
 
  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or FDISG is authorized through preau-
thorized transfers of $50 or more to charge the regular bank account or other
financial institution indicated by the shareholder on a monthly or quarterly
basis to provide systematic additions to the shareholder's 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 FDISG. 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 informa-
tion is available from the Fund or a Smith Barney Financial Consultant.
 
 INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
 
  The sales charge applicable to purchases of Class A shares of the Fund are
as follows:
 
<TABLE>
<CAPTION>
                                                                     DEALERS
      AMOUNT OF         SALES CHARGE AS     SALES CHARGE AS      REALLOWANCE AS
      INVESTMENT      % OF OFFERING PRICE % OF AMOUNT INVESTED % OF OFFERING PRICE
----------------------------------------------------------------------------------
  <S>                 <C>                 <C>                  <C>
  Less than $25,000          4.50%               4.71%                4.05%
  $25,000--$49,999           4.00%               4.17%                3.60%
  $50,000--$99,999           3.50%               3.63%                3.15%
  $100,000--$249,999         2.50%               2.56%                2.25%
  $250,000--$499,999         1.50%               1.52%                1.35%
  $500,000 and over            *                   *                    *
----------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
  Class A shares offered with a sales charge, equal or exceed $500,000 in the
  aggregate, 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
 
                                                                             25
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                          
 
 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, his or her spouse and children, or a trustee or other fiduciary of
a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value
of all Class A shares held in funds sponsored by Smith Barney that are offered
with a sales charge listed under "Exchange Privileges."
 
 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) Directors, Trustees
and employees of Travelers and its subsidiaries and any of the Smith Barney
Mutual Funds; the immediate families of such persons; and to a pension, prof-
it-sharing or other benefit plan for such persons and (ii) employees of mem-
bers of the National Association of Securities Dealers, Inc., provided such
sales are made upon the assurance of the purchaser that the purchase is made
for investment purposes and that the securities will not be resold except
through redemption or repurchase; (b) offers of Class A shares to any other
investment company in connection with the combination of such company with 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 Consul-
tant's employment with Smith Barney), on the condition the purchase of Class A
shares is made with the proceeds of the redemption of shares of a mutual fund
which (i) was sponsored by the Financial Consultant's prior employer, (ii) was
sold to the client by the Financial Consultant and (iii) was subject to a
sales charge; (d) shareholders who have redeemed Class A shares in the Fund
(or Class A shares of another fund of the Smith Barney Mutual Funds that are
offered with a sales charge equal to or greater than the maximum sales charge
of the Fund) and who wish
 
26
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                            
 
to reinvest their redemption proceeds in the Fund, provided the reinvestment
is made within 60 calendar days of the redemption; and (e) accounts managed by
registered investment advisory subsidiaries of Travelers. In order to obtain
such discounts, the purchaser must provide sufficient information at the time
of purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
 
 RIGHT OF ACCUMULATION
 
  Class A shares of 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 informa-
tion at the time of purchase to permit verification that the purchase quali-
fies for the reduced sales charge. The right of accumulation is subject to
modification or discontinuance at any time with respect to all shares pur-
chased thereafter.
 
 GROUP PURCHASES
 
  Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of the Smith Barney Mutual Funds
offered with a sales charge to, and share holdings of, all members of the
group. To be eligible for such reduced sales charges or to purchase at net
asset value, all purchases must be pursuant to an employer- or partnership-
sanctioned plan meeting certain requirements. One such requirement is that the
plan must be open to specified partners or employees of the employer and its
subsidiaries, if any. Such plan may, but is not required to, provide for pay-
roll deductions, IRAs or investments pursuant to retirement plans under Sec-
tions 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.
 
                                                                             27
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                            
 
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 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 previ-
ously purchased and still owned. An alternative is to compute the 13 month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay the difference between
the sale charges applicable to the purchases made and the charges previously
paid, or an appropriate number of escrowed shares will be redeemed. Please con-
tact a Smith Barney Financial Consultant or FDISG 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
 
28
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                            
 
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%. Please contact a
Smith Barney Financial Consultant or FDISG 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, which when combined with Class A shares
offered with a sales charge currently held by an investor, equal or exceed
$500,000 in the aggregate.
 
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the time of
redemption. 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 that 12 months after their purchase.
 
  Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case
of purchases by Participating Plans, as described below. See "Purchase of
Shares--Smith Barney 401(k) Program."
 
                                                                             29
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                             
 
 
<TABLE>
<CAPTION>
      YEAR
      SINCE
      PURCHASE
      PAYMENT
      WAS MADE   CDSC
----------------------
      <S>        <C>
      First      4.50%
      Second     4.00%
      Third      3.00%
      Fourth     2.00%
      Fifth      1.00%
      Sixth      0.00%
      Seventh    0.00%
      Eighth     0.00%
----------------------
</TABLE>
 
  Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There also will be converted at that time such pro-
portion of Class B Dividend Shares owned by the shareholder as the total number
of his or her Class B shares converting at the time bears to the total number
of Class B shares (other than Class B Dividend Shares) owned by the sharehold-
er. Shareholders who held Class B shares of Smith Barney Shearson Short-Term
World Income Fund (the "Short-Term World Income Fund") on July 15, 1994 and who
subsequently exchange those shares for Class B shares of the Fund will be
offered the opportunity to exchange all such Class B shares for Class A shares
of the Fund four years after the date on which those shares were deemed to have
been purchased. Holders of such Class B shares will be notified of the pending
exchange in writing approximately 30 days before the fourth anniversary of the
purchase date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the fourth anniversary date. See "Prospectus
Summary--Alternative Purchase Arrangements--Class B Shares Conversion Feature."
 
  The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other applicable Smith Barney Mutual Funds, and Fund
shares being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital 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 real-
ized on redemption. The amount of any CDSC will be paid to Smith Barney.
 
  To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 addi-
 
30
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                            
 
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
 
 WAIVERS OF CDSC
 
  The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b) au-
tomatic 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 in connection with a combination of the Fund with any
investment company by merger, acquisition of assets or otherwise. In addition,
a shareholder who has redeemed shares from other 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) PROGRAM
 
  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 opera-
tion of retirement plans under Section 401(a) of the Code. To the extent appli-
cable,
 
                                                                              31
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                            
 
the same terms and conditions are offered to all Participating Plans in the
Smith Barney 401(k) Program.
 
  The Fund offers to Participating Plans Class A, Class B, Class C and Class Y
shares as investment alternatives under the Smith Barney 401(k) Program. Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different
sales charge and CDSC schedules than, the Class A, Class B and Class C shares
acquired by other investors. Similar to those available to other investors,
Class Y shares acquired through the Smith Barney 401(k) Program are not sub-
ject to any initial sales charge, CDSC or service or distribution fee. Once a
Participating Plan has made an initial investment in the fund, all of its sub-
sequent 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 initial
sales charge to any Participating Plan that purchases from $500,000 to
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney 401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of redemption proceeds, if the
Participating Plan terminates within four years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
 
  Class B Shares. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds of the Smith Bar-
ney Mutual Funds. Class B shares acquired through the Smith Barney 401(k) Pro-
gram are subject to a CDSC of 3.00% of redemption proceeds, if the Participat-
ing Plan terminates within eight years of the date the Participating Plan
first enrolled in the Smith Barney 401(k) Program.
 
  Eight years after the date the Participating Plan enrolled in the Smith Bar-
ney 401(k) Program, it will be offered the opportunity to exchange all of its
Class B shares for Class A shares of the Fund. Such Plans will be notified of
the pending exchange in writing approximately 60 days before the eighth anni-
versary of the enrollment date and, unless the exchange has been rejected in
writing, the exchange will occur on or about the eighth anniversary date. Once
the exchange has occurred, a Participating Plan will not be eligible to
acquire additional Class B shares of the Fund but instead may acquire Class A
shares of the Fund. If the Participating Plan elects not to exchange all of
its Class B shares at
 
32
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                            
 
that time each Class B share held by the Participating Plan will have the same
conversion feature as Class B shares held by other investors. See "Purchase of
Shares--Deferred Sales Charge Alternatives."
 
  Class C Shares. Class C shares of the Fund are offered to any Participating
Plan that purchases from $250,000 to $499,999 of one or more funds of the Smith
Barney Mutual Funds. Class C shares acquired through the Smith Barney 401(k)
Program after November 7, 1994 will be subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of the date
the Participating Plan first enrolled in the Smith Barney 401(k) Program. In
any year after the date a Participating Plan enrolled in the Smith Barney
401(k) Program if its total Class C holdings 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.
Once the exchange has occurred, a Participating Plan will not be eligible to
acquire Class C shares of the Fund but instead may acquire Class A shares of
the Fund. Class C shares not converted will continue to be subject to the dis-
tribution fee.
 
  Class Y Shares. Class Y shares of the Fund are offered without any service or
distribution fees, sales charge or CDSC to any Participating Plan that pur-
chases $5,000,000 or more of Class Y shares of one or more funds of the Smith
Barney Mutual Funds.
 
  No CDSC is imposed on redemptions of CDSC 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 gains dis-
tributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the preceding year and, with respect to Class B shares, increases in the net
asset value of the shareholder's Class B shares above the purchase payments
made during the preceding eight years. Whether or not the CDSC applies
 
                                                                              33
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                            
 
to a Participating Plan depends on the number of years since the Participating
Plan first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to other shareholders, which depends on the number
of years since those shareholders made the purchase payment from which the
amount is being redeemed.
 
  The CDSC will be waived on redemptions of CDSC 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.
 
  Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from FDISG. For fur-
ther information regarding the Smith Barney 401(k) Program, investors should
contact a Smith Barney Financial Consultant.
 
EXCHANGE PRIVILEGE                                                        
 
 
  Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the fol-
lowing funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchange 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 and a sales charge differential may apply.
 
 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
 
34
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
EXCHANGE PRIVILEGE (CONTINUED)                                             
 
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Special Equities Fund
           
 Growth and Income Funds
    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 Strategic Investors 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.--Income Return Account Portfolio
    +++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 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 Limited Term Portfolio
    Smith Barney Muni Funds--Florida Portfolio
    Smith Barney Muni Funds--Georgia Portfolio
    *Smith Barney Muni Funds--Limited Term Portfolio
    Smith Barney Muni Funds--New York Portfolio
    Smith Barney Muni Funds--Ohio Portfolio
    Smith Barney Muni Funds--Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund
    Smith Barney Tax-Exempt Income Fund
 
                                                                              35
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
EXCHANGE PRIVILEGE (CONTINUED)                                             
 
 
 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 Series Inc.--High Growth Portfolio
    Smith Barney Concert Series Inc.--Growth Portfolio
    Smith Barney Concert Series Inc.--Balanced Portfolio
    Smith Barney Concert Series Inc.--Conservative Portfolio
    Smith Barney Concert 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, Class B and Class Y 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, 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 and Class Y shares of the Fund.
 
  Class A Exchanges. Class A shares of the Smith Barney Mutual Funds sold
without a sales charge or with a maximum sales charge of less than the maximum
charged by other Smith Barney Mutual Funds will be subject to the appropriate
"sales charge differential" upon the exchange of such shares for Class A
shares of a fund sold with a higher sales charge. The "sales charge differen-
tial" is limited to a percentage rate no greater than the excess of the sales
charge rate
 
36
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
EXCHANGE PRIVILEGE (CONTINUED)                                            
 
applicable to purchases of shares of the mutual fund being acquired in the
exchange over the sales charge rate(s) actually paid on the mutual fund shares
relinquished in the exchange and on any predecessor of those shares. For pur-
poses of the exchange privilege, shares obtained through automatic reinvest-
ment of dividends and capital gains distributions, are treated as having paid
the same sales charges applicable to the shares on which the dividends or dis-
tributions were paid; however, except in the case of the Smith Barney 401(k)
Program, if no sales charge was imposed upon the initial purchase of shares,
any shares obtained through automatic reinvestment will be subject to a sales
charge differential upon exchange.
 
  Class B Exchanges. In the event a Class B shareholder (unless such share-
holder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her shares in any
of the funds imposing a higher CDSC than that imposed by the Fund, the
exchanged Class B shares will be subject to the higher applicable CDSC. Upon
an exchange, the new Class B shares will be deemed to have been purchased on
the same date as the Class B shares of the Fund that have been exchanged.
 
  Class 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 Y Exchanges. Class Y shareholders of the Fund who wish to exchange all
or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
 
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. SBMFM may
determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Fund's other shareholders. In this event, SBMFM will
notify Smith Barney and Smith Barney may, at its discretion, decide to limit
additional purchases and/or exchanges by a shareholder. Upon such a determina-
tion, Smith Barney 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 posi-
 
                                                                             37
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
EXCHANGE PRIVILEGE (CONTINUED)                                             
 
tion the shareholder would be expected to maintain for a significant period of
time. All relevant factors will be considered in determining what constitutes
an abusive pattern of exchanges.
 
  Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares, Telephone Redemption and Exchange Program".
 
  Exchanges will be processed at the net asset value next determined, plus any
applicable sales charge differential. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the
shares of the fund exchanged, no signature guarantee is required. A capital
gain or loss for tax purposes will be realized upon the exchange, depending
upon the cost or other basis of shares redeemed. Before exchanging shares,
investors should read the current prospectus describing the shares to be
acquired. The Fund reserves the right to modify or discontinue exchange privi-
leges upon 60 days' prior notice to shareholders.
 
REDEMPTION OF SHARES
 
  The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
 
  If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third day following receipt of
proper tender, except on any days on which the NYSE is closed or as permitted
under the Investment Company Act of 1940 as amended ("1940 Act"), in extraordi-
nary circumstances. Generally, if the redemption proceeds are remitted to a
Smith
 
38
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
REDEMPTION OF SHARES (CONTINUED)                                           
 
Barney brokerage account, these funds will not be invested for the sharehold-
er's benefit without specific instruction and Smith Barney will benefit from
the use of temporarily uninvested funds. Redemption proceeds for shares pur-
chased by check, other than a certified or official bank check, will be remit-
ted upon clearance of the check, with may take up to ten days or more.
 
  Shares other than those hold by Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, Introducing Broker or dealer in
the selling group or by submitting a written request for redemption to:
 
   Smith Barney Investment Grade Bond Fund Class A, B, C, or Y (please
   specify) c/o First Data Investor Services Group, Inc. P.O. Box 9134
   Boston, Massachusetts 02205-9134
 
  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 FDISG together with the redemption
request. Any signature appearing on a written redemption request in excess of
$2,000, share certificate or stock power must be guaranteed by an eligible
guarantor institution such as a domestic bank, savings and loan Institution,
domestic credit union, member bank of the Federal Reserve System or member
firm of a national securities exchange. Written redemption requests of $2,000
or less do not require a signature guarantee unless more than one such redemp-
tion request is made in any 10-day period or the redemption proceeds are 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. FDISG
may require additional supporting documents for redemptions made by corpora-
tions, executors, administrators, trustees or guardians. A redemption request
will not be deemed properly received until FDISG receives all required docu-
ments in proper form.
 
 AUTOMATIC CASH WITHDRAWAL PLAN
 
  The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect
 
                                                                             39
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
REDEMPTION OF SHARES (CONTINUED)                                           
 
to receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the share-
holder is eligible to receive qualified distributions and has an account value
of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. For further information regarding the automatic cash withdrawal
plan, shareholders should contact a Smith Barney Financial Consultant.
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
 
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
is entitled to participate in this program, he or she should contact FDISG 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 FDISG 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 FDISG at 1-
800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
 
  A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent with a member
bank. The Fund reserves the right to charge shareholders a nominal fee for each
 
40
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
REDEMPTION OF SHARES (CONTINUED)                                          
 
wire redemption. Such changes, 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 FDISG at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the
net asset value next determined.
 
  Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine. The
Fund and its agents will employ procedures designed to verify the identity of
the caller and legitimacy of instructions (for example, a shareholder's name
and account number will be required and phone calls may be recorded. The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time follow-
ing at least seven (7) days' prior notice to shareholders.
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in 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, however, each account must satisfy the minimum account size.) The
Fund, however, will not redeem shares based solely on market reductions in net
asset value. Before the Fund exercises such right, shareholders will receive
written notice and will be permitted 60 days to bring accounts up to the mini-
mum to avoid automatic redemption.
 
 
                                                                              41
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PERFORMANCE                                                               
 
 YIELD
 
  From time to time, the Fund may advertise its 30 day "yield" for each Class
of Shares. The yield of a Class refers to the income generated by an invest-
ment in such Class over the 30 day period identified in the advertisement, and
is computed by dividing the net investment income per share earned by the
Class during the period by the net asset value per share on the last day of
the period. This income is "annualized" by assuming that the amount of income
is generated each month over a one year period and is compounded semi-annual-
ly. The annualized income is then shown as a percentage of the net asset val-
ue.
 
 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 not intended to indicate future performance. Total return
is computed for a specific period of time assuming deduction of the maximum
sales charge, if any, from the initial amount invested and reinvestment of all
income dividends and capital gains distributions on the reinvestment dates at
prices calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount
invested and subtracting 100%. The standard average annual total return, as
prescribed by the SEC, is derived from this total return which provides the
ending redeemable value. Such standard total return information may also be
accompanied with nonstandard total return information for differing periods
computed in the same manner but without annualizing the total return or taking
sales charges into account. The Fund calculates current dividend return for
each Class by annualizing the most recent monthly distribution and dividing by
the net asset value or the maximum public offering price (including sales
charge) on the last day of the period for which current dividend return is
presented. The current dividend return for each Class may vary from time to
time depending on market conditions, the composition of its investment portfo-
lio 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 perfor-
mance informa-
 
42
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
PERFORMANCE (CONTINUED)                                                    
 
tion may include data from Lipper Analytical Services, Inc. or similar indepen-
dent services that monitor the performance of mutual funds or other industry
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 Fund and companies that furnish services to
the Fund, including agreements with the Fund's distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains general and background information
regarding each Director and executive officer of the Company.
 
 INVESTMENT ADVISER--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 investment companies that had aggregate assets under management as of Janu-
ary 31, 1996 in excess of $74 billion.
 
  Subject to the supervision and direction of the Fund'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. Under
an investment advisory agreement, the Fund pays SBMFM a monthly fee at the
annual rate of 0.45% of the value of the Fund's average daily net assets up to
$500 million and 0.42% of the value of average daily net assets thereafter. For
the fiscal year ended December 31, 1995, SBMFM was paid investment advisory
fees equal to 0.45% of the value of the Fund's average daily net assets.
 
 
                                                                              43
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
MANAGEMENT OF THE COMPANY AND THE FUND (CONTINUED)                        
 
 PORTFOLIO MANAGEMENT
 
  George E. Mueller, Jr., Managing Director of SBMFM, has served as the
Investment Officer of the Fund since January 1, 1985, 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, 1995 is included
in the Annual Report dated December 31, 1995. A copy of the Annual Report may
be obtained upon request and without charge from a Smith Barney Financial Con-
sultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
 
 ADMINISTRATOR--SBMFM
 
  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 paid an administration fee at the annual rate of 0.20% of the value
of the Fund's average daily net assets.
 
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 0.50% and 0.45%, respectively, of the average
daily net assets attributable to those Classes. Class B shares which automati-
cally convert to Class A shares eight years after the date of original pur-
chase will not longer be subject to distribution fees. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder
accounts and, in the case of Class B and Class C shares, to cover expenses
primarily intended to result in the sale of those shares. These expenses
include: advertising
 
44
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
DISTRIBUTOR (CONTINUED)                                                   
 
expenses; the cost of printing and mailing prospectuses to potential invest-
ors; payments to and expenses of Smith Barney Financial Consultants and other
persons who provide support services in connection with the distribution of
shares; interest and/or carrying charges; and indirect and overhead costs of
Smith Barney associated with the sale of Fund shares, including lease, utili-
ty, communications and sales promotion expenses.
 
  The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class 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 pay-
ments 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 doing so will consider all relevant fac-
tors, 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 four
Classes, A, B, C and Y, 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, if any, 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 of
shares of the Fund. The Directors, on an ongoing
 
                                                                             45
<PAGE>
 
Smith Barney
Investment Grade Bond Fund
 
ADDITIONAL INFORMATION (CONTINUED)                                        
 
basis, will consider whether any such conflict exists and, if so, take appro-
priate action.
 
  PNC Bank, located at 17th & Chestnut Streets, Philadelphia, PA 19103, serves
as custodian of the Company's investments.
 
  FDISG, 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 by shareholders. The Directors will call a meeting for any pur-
pose upon written request of shareholders holding at least 10% of the
Company's outstanding shares and the Company will assist shareholders in call-
ing such a meeting as required by the 1940 Act. When matters are submitted for
shareholder vote, a 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 Compa-
ny-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
printing 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 mul-
tiple 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 FDISG.
 
46
<PAGE>
 
 
 
                      (This page intentionally left blank)
<PAGE>
 
                                                                   SMITH BARNEY
                                                                   ------------
                                               A Member of Travelers Group[ART]

                                                                   SMITH BARNEY
                                                                     INVESTMENT
                                                                     GRADE BOND

                                                                      FUND 
 
                                                           388 Greenwich Street
                                                       New York, New York 10013

                                                              FD 0233 4/96



<PAGE>
 
SMITH BARNEY INVESTMENT FUNDS INC.
Investment Grade Bond Fund
   
PROSPECTUS   APRIL 29, 1996, AS AMENDED JUNE 20, 1996     
 
--------------------------------------------------------------------------------
3100 Breckinridge Blvd., Bldg. 200
Duluth, Georgia 30199-0062
(800) 544-5445
 
  Smith Barney Investment Grade Bond Fund (the "Fund") has an investment objec-
tive of high current income consistent with prudent investment management and
preservation of capital by investing in bonds and other income-producing secu-
rities.
 
  The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up Smith Barney Investment Funds Inc. (the
"Company"). 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 Company
and the Fund, 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.
 
  Additional information about the Fund and the Company is contained in a
Statement of Additional Information dated April 29, 1996, 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 an Investments Representative of PFS Investments Inc.
("PFS Investments"). The Statement of Additional Information has been filed
with the Securities and Exchange Commission (the "SEC") and is incorporated by
reference into this Prospectus in its entirety.
 
PFS DISTRIBUTORS, 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.
 
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
TABLE OF CONTENTS                               
 
<TABLE>   
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            9
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   12
-------------------------------------------------
VALUATION OF SHARES                            17
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             18
-------------------------------------------------
PURCHASE OF SHARES                             20
-------------------------------------------------
EXCHANGE PRIVILEGE                             26
-------------------------------------------------
REDEMPTION OF SHARES                           28
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           30
-------------------------------------------------
PERFORMANCE                                    30
-------------------------------------------------
MANAGEMENT OF THE FUND                         32
-------------------------------------------------
DISTRIBUTOR                                    33
-------------------------------------------------
ADDITIONAL INFORMATION                         34
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the distributor. This Prospectus does not constitute an offer by the Fund or
the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in any such jurisdiction.
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
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 the "Table of Contents".
 
INVESTMENT OBJECTIVE. The Fund is an open-end, diversified management
investment company that seeks to provide as high a level of current income as
is consistent with prudent investment management and preservation of capital.
Under normal circumstances, the Fund will invest at least 65% of its assets in
bonds. See "Investment Objective and Management Policies".
 
ALTERNATIVE PURCHASE ARRANGEMENTS. The Fund offers two classes of shares
("Classes") to investors purchasing through PFS Investments Representatives
designed to provide them with the flexibility of selecting an investment best
suited to their needs--the two Classes of shares available are: Class A shares
and Class B shares. See "Purchase of Shares" and "Redemption of Shares". In
addition to Class A and Class B shares, the Fund offers Class C and Class Y
shares to investors purchasing through Smith Barney Inc. ("Smith Barney"), a
distributor of the Fund. Those shares have different sales charges and other
expenses than Class A and Class B shares which may affect performance.
 
  Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which
when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no initial sales charge, but will be subject to a contingent
deferred sales charge ("CDSC") of 1.00% on redemptions made within 12 months of
purchase. See "Prospectus Summary--Reduced or No Initial Sales Charge".
 
  Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.25% and an annual distribution fee of 0.50% of the average daily net
assets of this Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.
 
                                                                               3
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
PROSPECTUS SUMMARY (CONTINUED)                                    
 
 
  Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives".
 
  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 shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional invested amounts may partially or wholly
offset the higher annual expenses of this Class. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case.
 
  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, which when combined with current holdings of Class A shares offered
with a sales charge equal or exceed $500,000 in the aggregate, will be made at
net asset value with no initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all
Class A shares held in funds sponsored by Smith Barney listed under "Exchange
Privilege". Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares". Because the ongoing expenses of Class
A shares may be lower than those for Class B shares, purchasers eligible to
purchase Class A shares at net asset value or at a reduced sales charge should
consider doing so.
 
  PFS Investments Representatives may receive different compensation for sell-
ing each Class of shares. Investors should understand that the purpose of the
 
4
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
PROSPECTUS SUMMARY (CONTINUED)                                      
 
CDSC on the Class B 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.
 
PURCHASE OF SHARES. Shares may be purchased through the Fund's distributor, PFS
Distributors, Inc. ("PFS"). See "Purchase of Shares".
 
INVESTMENT MINIMUMS. Investors in Class A and Class B shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. The initial investment amount will be waived for accounts establishing a
Systematic Investment Plan. Subsequent investments of at least $50 may be made
for both Classes. The minimum initial and subsequent investment requirement for
both Classes through the Systematic Investment Plan described below is $25. See
"Purchase of Shares".
 
SYSTEMATIC INVESTMENT PLAN. The Fund offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Fund shares in an amount of at least
$25. 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. (the
"Manager") serves as the Fund's investment adviser. The Manager provides
investment advisory and management services to investment companies affiliated
with Smith Barney. The Manager is a wholly owned subsidiary of Smith Barney
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers
Group Inc. ("Travelers"), a diversified financial services holding company
engaged, through its subsidiaries, principally in four business segments:
Investment Services, Consumer Finance Services, Life Insurance Services and
Property & Casualty Insurance Services. The Manager also serves as the Fund's
administrator. See "Management of the Fund".
 
                                                                               5
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
PROSPECTUS SUMMARY (CONTINUED)                                       
 
 
EXCHANGE PRIVILEGE. Shares of a Class may be exchanged for shares of the same
class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined, plus any applicable sales charge
differential. 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 PFS Shareholder Services (the "Sub-Transfer Agent"). See "Valuation of
Shares".
 
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income are declared
monthly and paid on the last Friday of each month. Distributions of net
realized long- and short-term 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 in additional shares of the same Class
at current net asset value unless otherwise specified by an investor. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes".
   
RISK FACTORS AND SPECIAL CONSIDERATIONS. 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
does not have a stated maturity policy, but will generally invest in medium- to
long-term securities, which are generally more sensitive to interest rate
changes, market conditions and other economic news than shorter-term
securities. The Fund may employ investment techniques which involve certain
risks, including entering into repurchase agreements and reverse repurchase
agreements, lending portfolio securities, selling securities short and
investing in foreign securities through the use of American Depositary
Receipts. See "Investment Objective and Management Policies--Additional
Investments".     
 
6
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
PROSPECTUS SUMMARY (CONTINUED)                                    
 
 
THE FUND'S EXPENSES. The following expense table lists the costs and estimated
expenses that an investor will incur either directly or indirectly as a
shareholder of the Fund, based on the maximum sales charge or maximum CDSC
that may be incurred at the time of purchase or redemption and the Fund's
operating expenses for its most recent fiscal year:
 
<TABLE>
<CAPTION>
                                                                CLASS A CLASS B
-------------------------------------------------------------------------------
<S>                                                             <C>     <C>
 SHAREHOLDER TRANSACTION EXPENSES
<CAPTION>
 Maximum sales charge imposed on purchases
   (as a percentage of offering price).........................  4.50%   NONE
 Maximum CDSC (as a percentage of original cost or redemption
   proceeds, whichever is lower)...............................  NONE*   4.50%
-------------------------------------------------------------------------------
<S>                                                             <C>     <C>
 ANNUAL FUND OPERATING EXPENSES
  (as a percentage of average net assets)
  Management fees............................................... 0.65%   0.65%
  12b-1 fees**.................................................. 0.25    0.75
  Other expenses................................................ 0.21    0.21
-------------------------------------------------------------------------------
   Total Fund Operating Expenses................................ 1.11%   1.61%
</TABLE>
-------------------------------------------------------------------------------
  * Purchase of Class A shares, which when combined with current holdings of
    Class A shares offered with a sales charge, equal or exceed $500,000 in
    the aggregate, 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.
 ** Upon conversion of Class B shares to Class A shares, such shares will no
    longer be subject to a distribution fee.
 
  The sales charge and CDSC set forth in the above table are the maximum
charges imposed upon purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in
the case of Class B and certain Class A shares, the length of time the shares
are held. See "Purchase of Shares" and "Redemption of Shares". PFS receives an
annual 12b-1 service fee of 0.25% of the value of average daily net assets of
Class A shares. With respect to Class B shares, PFS receives an annual 12b-1
fee of 0.75% of the value of average daily net assets of that Class, consist-
ing of a 0.25% service fee and a 0.50% distribution fee. "Other expenses" in
the above table include fees for shareholder services, custodial fees, legal
and accounting fees, printing costs and registration fees.
 
                                                                              7
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
 EXAMPLE.
 
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the table above. See "Purchase of Shares", "Redemption of Shares"
and "Management of the 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.....................................  $56     $79    $103     $174
 Class B.....................................   61      81      98      178
An investor would pay the following expenses
  on the same investment, assuming the same
  annual return and no redemption:
 Class A.....................................  $56     $79    $103     $174
 Class B.....................................   16      51      88      178
------------------------------------------------------------------------------
</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>
 
SMITH BARNEY
Investment Grade Bond Fund
 
FINANCIAL HIGHLIGHTS
 
The following information for the fiscal year ended December 31, 1995 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Fund's Annual Report dated December 31, 1995. The following
information for the fiscal years ended December 31, 1986 through December 31,
1994 has been audited by other auditors. The information set out below should
be read in conjunction with the financial statements and related notes that
also appear in the Fund's Annual Report, which is incorporated by reference
into the Statement of Additional Information.
 
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
                                          1995(1)   1994(1)   1993(1)  1992(2)
--------------------------------------------------------------------------------
<S>                                      <C>       <C>        <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR         $10.67    $13.01    $11.89  $11.67
--------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income                       0.83      0.74      0.88    0.14
 Net realized and unrealized gain (loss)     2.80     (1.88)     1.27    0.23
--------------------------------------------------------------------------------
Total Income (Loss) From Operations          3.63     (1.14)     2.15    0.37
--------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                      (0.89)    (0.86)    (0.88)  (0.14)
 Overdistribution of net investment
 income                                        --        --     (0.01)     --
 Net realized gains                         (0.16)    (0.31)    (0.14)     --
 Capital                                       --     (0.03)       --   (0.01)
--------------------------------------------------------------------------------
Total Distributions                         (1.05)    (1.20)    (1.03)  (0.15)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR               $13.25    $10.67    $13.01  $11.89
--------------------------------------------------------------------------------
TOTAL RETURN++                              35.29%    (8.95)%   18.45%   3.25%#
--------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)           $226,373  $181,334   $10,136    $933
--------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses(3)                                 1.11%     1.11%     1.11%   1.03%+
 Net investment income                       7.02      7.35      6.67    7.53+
--------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                        49%       18%       65%     47%
--------------------------------------------------------------------------------
</TABLE>
(1) 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 does not accord will results
    of operations.
(2) For the period from November 6, 1992 (inception data) to December 31,
    1992.
(3) For the year ended December 31, 1992, the expense ratio excludes interest
    expense. The expense ratio including interest expense would have been
    1.04% (annualized).
  # Total return is not annualized, as it may not be representative of the
    total return for the year.
  + Annualized.
 ++ Total return represents the aggregate total return for the period
    indicated and does not reflect any applicable sales charges.
 
                                                                              9
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>
<CAPTION>
                               1995(1)   1994(1)    1993(1)    1992       1991
---------------------------------------------------------------------------------
<S>                           <C>       <C>        <C>       <C>        <C>
NET ASSET VALUE, BEGINNING
OF YEAR                       $  10.67  $  13.01   $  11.89  $  11.80   $  10.43
---------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
 Net investment income            0.77      0.82       0.80      0.83       0.86
 Net realized and unrealized
 gain (loss)                      2.80     (2.02)      1.29      0.12       1.38
---------------------------------------------------------------------------------
Total Income (Loss) From
Operations                        3.57     (1.20)      2.09      0.95       2.24
---------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income           (0.83)    (0.80)     (0.82)    (0.83)     (0.87)
 Overdistribution of
 investment net income              --        --      (0.01)       --         --
 Net realized gains              (0.16)    (0.31)     (0.14)       --         --
 Capital                            --     (0.03)        --     (0.03)        --
---------------------------------------------------------------------------------
Total Distributions              (0.99)    (1.14)     (0.97)    (0.86)     (0.87)
---------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR  $  13.25  $  10.67   $  13.01  $  11.89   $  11.80
---------------------------------------------------------------------------------
TOTAL RETURN++                   34.63%    (9.41)%    18.06%     8.36%     22.50%
---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S)                        $288,533  $221,120   $476,088  $431,783   $413,878
---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                         1.61%     1.57%      1.58%     1.57%*     1.53%
 Net investment income            6.51      6.89       6.20      6.99       7.90
---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE             49%       18%        65%       47%        82%
---------------------------------------------------------------------------------
</TABLE>
(1) 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 does not accord with results
    of operations.
 ++Total return represents the aggregate total return for the period indicated
   and does not reflect any applicable sales charges.
 * For the year ended December 31, 1992, the expense ratio excludes interest
   expense. The expense ratio including interest expense was 1.58%.
 ** Annualized expense ratio before waiver of fees by the distributor for the
    years ended December 31, 1989 and 1988 were 1.66% and 1.57%, respectively.
 *** Net investment income before waiver of fees by the distributor would have
     been $0.86 and $0.87 for the years ended December 31, 1989 and 1988,
     respectively.
 
10
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
 
 
<TABLE>
<CAPTION>
  1990           1989                  1988                  1987                 1986
-----------------------------------------------------------------------------------------
<S>            <C>                   <C>                   <C>                  <C>
  $11.01         $10.33                $10.55                $12.91               $12.00
-----------------------------------------------------------------------------------------
    0.86           0.87***               0.90***               0.89                 1.10
   (0.57)          0.68                 (0.24)                (1.24)                1.16
-----------------------------------------------------------------------------------------
    0.29           1.55                  0.66                 (0.35)                2.26
-----------------------------------------------------------------------------------------
   (0.87)         (0.87)                (0.88)                (1.12)               (1.10)
      --             --                    --                    --                   --
      --             --                    --                 (0.89)               (0.25)
      --             --                    --                    --                   --
-----------------------------------------------------------------------------------------
   (0.87)         (0.87)                (0.88)                (2.01)               (1.35)
-----------------------------------------------------------------------------------------
  $10.43         $11.01                $10.33                $10.55               $12.91
-----------------------------------------------------------------------------------------
    2.98%         15.57%                 6.43%                (2.83)%              19.54%
-----------------------------------------------------------------------------------------
$405,779       $483,382              $532,794              $705,561             $421,011
-----------------------------------------------------------------------------------------
    1.58%          1.63%**               1.22%**               1.62%                1.62%
    8.20           8.07                  8.74                  7.96                 7.74
-----------------------------------------------------------------------------------------
      59%           118%                   72%                   79%                 211%
-----------------------------------------------------------------------------------------
</TABLE>
 
                                                                              11
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
  Set forth below is a description of the investment objective and policies of
the Fund. There can be no assurance that the Fund will achieve its investment
objective. Certain instruments and techniques discussed in this summary are
described in greater detail in this Prospectus under "Additional Investments"
and in the Statement of Additional Information. A description of the rating
systems of Moody's Investors Services Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P") is contained in the Appendix to the Statement of Addi-
tional Information.
 
  The Statement of Additional Information contains specific investment
restrictions which govern the Fund's investments. These restrictions 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 fundamen-
tal, all investment policies and practices described in this Prospectus 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 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" securi-
ties (which includes repurchase agreements with more than seven days to matu-
rity), and (c) investing more than 25% of the Fund's total assets in the secu-
rities of issuers in a particular industry (with exceptions for securities
guaranteed by the United States government, its agencies or instrumentalities
("U.S. government securities") and certain money market instruments).
   
  The Fund's investment objective is to provide as high a level of current
income as is consistent with prudent investment management and preservation of
capital. The Fund seeks to achieve its objective by investing primarily in
fixed-income securities that are of a higher credit quality and present a
lower risk of principal loss at maturity. Such securities are typically con-
sidered "investment grade" quality, i.e. securities having a rating within one
of the four highest rating categories of their class. The Fund will invest
primarily in any of the following securities; corporate bonds rated Baa or
better by Moody's or BBB or better by S&P; U.S. government securities; commer-
cial paper issued by domestic corporations and rated 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
an outstanding debt issue rated Aa or better by Moody's or AA or better by
S&P; negotiable bank certifi     
 
12
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)                  
   
cates of deposit and bankers' acceptances issued by domestic banks (but not
their foreign branches) having total assets in excess of $1 billion; and high-
yielding common stocks and warrants. Obligations rated in the lowest of the top
four rating categories (Baa by Moody's or BBB by S&P) may have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest pay-
ments, including a greater possibility of default or bankruptcy of the issuer,
than is the case with higher grade bonds. Subsequent to its purchase by the
Fund, an issue of securities may cease to be rated or its rating may be reduced
below the minimum required for the purchase by the Fund. In addition, it is
possible that Moody's and S&P might not timely change their ratings of a par-
ticular issue to reflect subsequent events. None of these events will require
the sale of the securities by the Fund, although the Manager will consider
these events in determining whether the Fund should continue to hold the secu-
rities. To the extent that the ratings given by Moody's or S&P for securities
may change as a result of changes in the rating systems or due to a corporate
reorganization of Moody's and/or S&P, the Fund will attempt to use comparable
ratings as standards for its investments in accordance with the investment
objective and policies of the Fund.     
   
  The Fund's portfolio will be managed by purchasing and selling securities, as
well as holding selected securities to maturity. In managing the Fund's portfo-
lio, the Manager analyzes the business and credit qualities of a particular
issuer as well as the economy in general to identify and monitor trends and to
identify fixed-income securities with characteristics most likely to meet the
Fund's objective. This process requires ongoing adjustments to the portfolio
based on the relative values or maturities of individual debt securities or
changes in the creditworthiness or overall investment merits of an issue.     
   
  Any such change in the Fund's portfolio may result in increases or decreases
in the Fund's current income available for distribution to shareholders. If the
Fund's expectations of changes in interest rates or its evaluation of the nor-
mal yield relationships between securities prove to be incorrect, the Fund's
income, net asset value and potential capital gain may be reduced or its poten-
tial capital loss may be increased. An increase in interest rates will gener-
ally reduce the value of portfolio investments (and, therefore, the net asset
value of the shares of the Fund), and a decline in interest rates will gener-
ally increase their value. The average weighted maturity of a bond fund can be
used to measure the fund's sensitivity to interest rate movements. The longer
the Fund's average weighted maturity, the more sensitive the net asset value is
to interest rate     
 
                                                                              13
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
   
changes. The Fund has no stated maturity policy, but generally invests
inmedium- to long-term securities. At times, the Fund's portfolio may have an
average weighted maturity exceeding 25 years which would result in the Fund's
net asset value being extremely sensitive to interest rate movements. Since
all investments, including securities with a higher credit quality, have
inherent market risks and fluctuations in value due to changing economic con-
ditions and other factors, the Fund, of course, cannot assure that its invest-
ment objective will be achieved.     
 
  The Fund may enter into repurchase agreements, reverse repurchase agree-
ments, firm commitment agreements, "short sales against the box" and may lend
its portfolio securities. Except when in a temporary defensive investment
position, the Fund intends to maintain at least 65% of its assets invested in
bonds.
       
  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.
 
 ADDITIONAL INVESTMENTS
 
  U.S. Government Securities. U.S. government securities are obligations of,
or are guaranteed by, the United States government, its agencies or instrumen-
talities. 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 U.S.
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 
Certificates"), which are mortgage-backed securities representing part 
ownership of a pool of mortgage loans on which timely payment of interest and 
principal is
 
14
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)              
 
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 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 price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. The
value of the underlying securities will be at least equal at all times to the
total amount of the repurchase obligation, including interest. The 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 exercis-
ing its rights to dispose of the collateral securities, including the risk of a
possible decline in the value of the underlying securities during the period
while the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. The Manager, acting under the supervi-
sion of the Board of Directors, review on an ongoing basis the creditworthiness
and the value of the collateral of those banks and dealers with which the Fund
enters into repurchase agreements to evaluate potential risks.
 
  Reverse Repurchase Agreements. A reverse repurchase agreement involves the
sale of a money market instrument by the Fund and its agreement to repurchase
the instrument at a specified time and price. The Fund will maintain a segre-
gated account consisting of U.S. government securities or cash or cash equiva-
lents to cover its obligations under reverse repurchase agreements with broker-
dealers (but not banks). The Fund will invest the proceeds in other money mar-
ket instruments or repurchase agreements maturing not later than the expiration
of the reverse repurchase agreement. Under the Investment Company Act of 1940,
as amended (the "1940 Act"), reverse repurchase agreements may be considered
borrowings by the seller; accordingly, the Fund will limit its investments in
reverse repurchase agreements and other borrowings to no more than 33 1/3% of
its total assets. Firm Commitment Agreements and When-Issued
 
                                                                              15
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)                 
 
Purchases. Firm commitment agreements and when-issued purchases call for the
purchase of securities at an agreed-upon price on a specified future date, and
would be used, for example, when a decline in the yield of securities of a
given issuer is anticipated. The Fund as purchaser assumes the risk of any
decline in value of the security beginning on the date of the agreement or pur-
chase. The Fund will not use such transactions for leveraging purposes, and
accordingly will segregate U.S. government securities, cash or cash equivalents
in an amount sufficient to meet its purchase obligations under the agreement.
 
  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. The risks in lending portfolio securities, as with other extensions
of secured credit, consists of possible delays in receiving additional collat-
eral or in the recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Loans will be made to firms
deemed by the Manager to be in good standing and will not be made unless, in
the judgement of the Manager, the consideration to be earned from such loans
would justify the risk.
 
  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.
 
 
16
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
                                                                          
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
 
 PORTFOLIO TRANSACTIONS AND TURNOVER
 
  The Manager arranges for the purchase and sale of the Fund's securities and
selects broker-dealers (including Smith Barney) which, in its best judgment,
provide prompt and reliable execution at favorable prices and reasonable com-
mission rates. The Manager may select broker-dealers which provide it with
research services and may cause the Fund to pay such broker-dealers commis-
sions which exceed those other broker-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 regu-
lar 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 total number of
shares of the Class outstanding.
 
  A security that is primarily traded on a United States or foreign stock
exchange is valued at the last sale price on that exchange or, if there were
no sales during the day, at the current quoted bid price. In cases where secu-
rities are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Directors as the
primary market. Fund securities which are primarily traded on foreign
exchanges may be valued with the assistance of a pricing service and are gen-
erally valued at the preceding closing values of such securities on their
respective exchanges, 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. Unlisted foreign securi-
ties are valued at the mean between the last available bid and offer price
prior to the time of valua-
 
                                                                             17
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
                                                                       
VALUATION OF SHARES (CONTINUED)     
 
tion. U.S. over-the-counter securities will be valued on the basis of the bid
price at the close of business on each day. Securities and assets for which
market quotations are not readily available are valued at fair value as deter-
mined in good faith by or under the direction of the Board of Directors. Not-
withstanding 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. 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 cur-
rencies against U.S. dollars as last quoted by any recognized dealer.
 
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 declares dividends monthly
consisting of estimated daily net investment income, and pays dividends month-
ly. Any net realized long-term capital gains, after utilization of capital
loss carryforwards, will be distributed at least annually. Net realized short-
term capital gains may be paid with the distribution of dividends from net
investment income.
 
  If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the
same Class at net asset value subject to no sales charge or CDSC. In order to
avoid the application of a 4.00% nondeductible excise tax on certain undis-
tributed amounts of ordinary income and capital gains, the Fund may make an
additional distribution shortly before December 31 in each year of any undis-
tributed ordinary income or capital gains and expects to pay any other divi-
dends and distributions necessary to avoid the application of this tax.
 
  If, for any full fiscal year, the Fund's total distributions exceed current
and accumulated earnings and profits, the excess distributions may be treated
as a taxable dividend or as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his
or her shares. Pursuant to the requirements of the 1940 Act and other applica-
ble laws, a notice will accompany any distribution paid from sources other
then net invest-
 
18
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)                           
 
ment income. In the event the Fund distributes amounts in excess of its net
investment income and net realized capital gains, such distributions may have
the effect of decreasing the Fund's total assets, which may increase the
Fund's expense ratio.
 
  The per share dividends on Class B shares may be lower than the per share
dividends on Class A shares principally as a result of the distribution fee
applicable with respect to Class B shares. Distributions of capital gains, if
any, will be in the same amount for Class A and Class B 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.
 
  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 capi-
tal assets in
 
                                                                             19
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
                                                                       
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)     
 
the shareholder's hands, and generally will be long-term or short-term depend-
ing 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 less 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
advisors for specific information on the tax consequences of particular types
of distributions.
 
PURCHASE OF SHARES
 
 
 GENERAL
 
  The Fund offers two Classes of shares to investors purchasing through PFS
Investments Representatives. Class A shares are sold to investors with an ini-
tial sales charge and Class B shares are sold without an initial sales charge
but are subject to a CDSC payable upon certain redemptions. See "Prospectus
Summary--Alternative Purchase Arrangements" for a discussion of factors to con-
sider in selecting which Class of shares to purchase.
 
  Initial purchases of Fund shares must be made through a PFS Investments Rep-
resentative by completing the appropriate application found in the prospectus.
The completed application should be forwarded to the Sub-Transfer Agent, 3100
Breckinridge Blvd., Bldg 200, Duluth, Georgia 30199-0062. Checks drawn on for-
eign banks must be payable in U.S. dollars and have the routing number of the
U.S. bank encoded on the check. Subsequent investments may be sent directly to
the Sub-Transfer Agent.
 
  Investors in Class A and Class B shares may open an account by making an ini-
tial investment of at least $1,000 for each account, or $250 for an IRA or a
Self-Employed Retirement Plan in the Fund. The initial investment amount will
be waived for accounts establishing a Systematic Investment Plan. Subsequent
investments of at least $50 may be made for both Classes. For participants in
 
20
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                            
 
retirement plans qualified under Section 403(b)(7) of the Code, the minimum
initial and subsequent investment requirement for both Classes in the Fund is
$25. There are no minimum investment requirements for Class A shares for
employees of Travelers and its subsidiaries, including Smith Barney, Directors
of the Company and their spouses and children. The Fund reserves the right to
waive or change minimums, to decline any order to purchase its shares and to
suspend the offering of shares from time to time. Shares purchased will be
held in the shareholder's account by the Sub-Transfer Agent. Share certifi-
cates are issued only upon a shareholder's written request to the Sub-Transfer
Agent.
 
  Purchase orders received by the Sub-Transfer Agent 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.
 
 SYSTEMATIC INVESTMENT PLAN
 
  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, the Sub-Transfer Agent is authorized through pre-
authorized transfers of $25 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or quar-
terly basis to provide systematic additions to the shareholder's Fund account.
A shareholder who has insufficient funds to complete the transfer will be
charged a fee of up to $25 by PFS or the Sub-Transfer Agent.
 
                                                                             21
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                           
 
 
 INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
 
  The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
 
<TABLE>
<CAPTION>
                                  SALES CHARGE
                         ------------------------------      DEALERS'
                              % OF           % OF       REALLOWANCE AS % OF
  AMOUNT OF INVESTMENT   OFFERING PRICE AMOUNT INVESTED   OFFERING PRICE
---------------------------------------------------------------------------
  <S>                    <C>            <C>             <C>
  LESS THAN   $ 25,000        4.50%          4.71%             4.05%
  $ 25,000 - $ 49,999         4.00%          4.17%             3.60%
  $ 50,000 - $ 99,999         3.50%          3.63%             3.15%
  $100,000 - $249,999         2.50%          2.56%             2.25%
  $250,000 - $499,999         1.50%          1.52%             1.35%
  $500,000 - AND OVER          *               *                 *
---------------------------------------------------------------------------
</TABLE>
* PURCHASES OF CLASS A SHARES, WHICH WHEN COMBINED WITH CURRENT HOLDINGS OF
  CLASS A SHARES OFFERED WITH A SALES CHARGE, EQUAL OR EXCEED $500,000 IN THE
  AGGREGATE, 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 PFS, WHICH IN TURN
  PAYS PFS INVESTMENTS TO COMPENSATE ITS INVESTMENTS REPRESENTATIVES 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 SHARES IS WAIVED. SEE
  "DEFERRED SALES CHARGE ALTERNATIVES" AND "WAIVERS OF CDSC".
 
 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) Directors, Trustees
and employees of Travelers and its subsidiaries and any of the Smith Barney
Mutual Funds; the immediate families of such persons; and to a pension, prof-
it-sharing or other benefit plan for such persons and (ii) employees of mem-
bers of the National Association of Securities Dealers, Inc., provided such
sales are made upon the assurance of the purchaser that the purchase is made
for investment purposes and that the securities will not be resold except
through redemption or repurchase; (b) offers of Class A shares to any other
investment company in connection with the combination of such company with the
Fund by merger, acquisition of assets or otherwise; (c) shareholders who have
redeemed Class A shares in the Fund (or Class A shares of another fund in the
Smith Barney Mutual Funds that are offered with a sales charge equal to or
greater than the maximum sales charge of the Fund) and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made
within 60 calendar days of the redemption; (d) accounts managed by registered
investment advisory subsidiaries of Travelers; and (e) sales through PFS
Investments Representatives where the amounts invested represent the redemp-
tion proceeds from investment
 
22
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)                                           
 
companies distributed by an entity other than PFS, on the condition that (i)
the redemption has occurred no more than 60 days prior to the purchase of the
shares, (ii) the shareholder paid an initial sales charge on such redeemed
shares and (iii) the shares redeemed were not subject to a deferred sales
charge. PFS Investments may pay its Investments Representatives an amount equal
to 0.40% of the amount invested if the purchase represents redemption proceeds
from an investment company distributed by an entity other than PFS. 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.
 
 VOLUME DISCOUNTS
 
  The "Amount of Investment" referred to in the sales charge table set forth
above under "Initial Sales Charge Alternative--Class A Shares" includes the
purchase of Class A shares in the Fund and of other funds sponsored by Smith
Barney that are offered with a sales charge listed under "Exchange Privilege".
A person eligible for a volume discount includes an individual; members of a
family unit comprising a husband, wife and minor children; a trustee or other
fiduciary purchasing for a single fiduciary account including pension, profit-
sharing and other employee benefit trusts qualified under Section 401(a) of the
Code, or multiple custodial accounts where more than one beneficiary is
involved if purchases are made by salary reduction and/or payroll deduction for
qualified and nonqualified accounts and transmitted by a common employer enti-
ty. Employer entity for payroll deduction accounts may include trade and craft
associations and any other similar organizations.
 
 LETTER OF INTENT
 
  A Letter of Intent for amounts of $50,000 or more provides an opportunity for
an investor to obtain a reduced sales charge by aggregating investments over a
13 month period, provided that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the "Amount of Investment" as
referred to in the preceding sales charge table includes purchases of all Class
A shares of the Fund and other funds of the Smith Barney Mutual Funds that are
offered with a sales charge listed under "Exchange Privilege" over a 13 month
period based on the total amount of intended purchases plus the value of all
Class A shares previously purchased and still owned. An alternative is to com-
pute 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
 
                                                                              23
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)
 
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 sale charges applicable to the purchases made and the charges pre-
viously paid, or an appropriate number of escrowed shares will be redeemed.
 
 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; and (b)
Class A shares, which when combined with Class A shares offered with a sales
charge currently held by an investor, equal or exceed $500,000 in the
aggregate.
 
  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 A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
 
  Class A shares that are CDSC Shares are subject to a 1.00% CDSC if redeemed
within 12 months of purchase. In circumstances in which the CDSC is imposed on
Class B shares, the amount of the charge will depend on the number of years
since the shareholder made the purchase payment from which the amount is being
redeemed. Solely for purposes of determining the number of years since a pur-
chase 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.
 
24
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
PURCHASE OF SHARES (CONTINUED)
 
 
<TABLE>
<CAPTION>
     YEAR SINCE PURCHASE
     PAYMENT WAS MADE      CDSC
--------------------------------
     <S>                   <C>
     First                 4.50%
     Second                4.00%
     Third                 3.00%
     Fourth                2.00%
     Fifth                 1.00%
     Sixth                 0.00%
     Seventh               0.00%
     Eighth                0.00%
--------------------------------
</TABLE>
 
  Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fee. There will also 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
outstanding Class B shares (other than Class B Dividend Shares) owned by the
shareholder.
 
  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 gains distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that CDSC Shares acquired through an
exchange have been held will be calculated from the date that the shares
exchanged were initially acquired in one of the other Smith Barney Mutual
Funds, and 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 PFS.
 
  To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 addi-
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
 
 
                                                                              25
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
                                                                          
PURCHASE OF SHARES (CONTINUED)     
 
 WAIVERS OF CDSC
 
  The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Redemption of Shares-Automatic Cash Withdrawal Plan"); (c) re-
demption 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) redemption of shares in connection with a
combination of the Fund with any investment company by merger, acquisition of
assets or otherwise. In addition, a shareholder who has redeemed shares from
other 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 PFS of the share-
holder's status or holdings, as the case may be.
 
EXCHANGE PRIVILEGE
 
 
  Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the fol-
lowing funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class A
and Class B shares are subject to minimum investment requirements and all
shares are subject to the other requirements of the fund into which exchanges
are made and a sales charge differential may apply.
 
 FUND NAME
  .  Smith Barney Concert Series Inc.--High Growth Portfolio
  .  Smith Barney Concert Series Inc.--Growth Portfolio
  .  Smith Barney Concert Series Inc.--Balanced Portfolio
  .  Smith Barney Concert Series Inc.--Conservative Portfolio
  .  Smith Barney Concert Series Inc.--Income Portfolio
  .  Smith Barney Appreciation Fund Inc.
  .  Smith Barney Growth Opportunity Fund
  *
  .  Smith Barney Money Funds, Inc.--Cash Portfolio
 **
  .  Smith Barney Exchange Reserve Fund
 
 * Available for exchange with Class A shares of the Fund
** Available for exchange with Class B shares of the Fund
 
 
26
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
EXCHANGE PRIVILEGE (CONTINUED)
 
  Class A Exchanges. Class A shares of Smith Barney Mutual Funds sold without
a sales charge or with a maximum sales charge of less than the maximum charged
by other Smith Barney Mutual Funds will be subject to the appropriate "sales
charge differential" upon the exchange of their shares for Class A shares of a
fund sold with a higher sales charge. The "sales charge differential" is lim-
ited to a percentage rate no greater than the excess of the sales charge rate
applicable to purchases of shares of the mutual fund being acquired in the
exchange over the sales charge rate(s) actually paid on the mutual fund shares
relinquished in the exchange and on any predecessor of those shares. For pur-
poses of the exchange privilege, shares obtained through automatic reinvest-
ment of dividends and capital gains distributions, are treated as having paid
the same sales charges applicable to the shares on which the dividends or dis-
tributions were paid; however, if no sales charge was imposed upon the initial
purchase of shares, any shares obtained through automatic reinvestment will be
subject to a sales charge differential upon exchange.
 
  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.
 
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary
to the best interests of the Fund's other shareholders. In this event, the
Manager will notify PFS that the Fund and PFS may, at its discretion, decide
to limit additional purchases and/or exchanges by a shareholder. Upon such a
determination by the Fund, PFS 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 Smith Barney Mutual Funds listed under "Exchange Privilege",
which position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
 
  Exchanges will be processed at the net asset value next determined, plus any
applicable sales charge differential. Redemption procedures discussed below
are
 
                                                                             27
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
                                                                          
EXCHANGE PRIVILEGE (CONTINUED)     
 
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the
shares of the fund exchanged, no signature guarantee is required. A capital
gain or loss for tax purposes will be realized upon the exchange, depending
upon the cost or other basis of shares redeemed. Before exchanging shares,
investors should read the current prospectus describing the shares to be
acquired. The Fund reserves the right to modify or discontinue exchange privi-
leges upon 60 days' prior notice to shareholders.
 
REDEMPTION OF SHARES
 
 
  Shareholders may redeem for cash some or all of their shares of the Fund at
any time by sending a written request in proper form directly to the Sub-
Transfer Agent, PFS Shareholder Services, at 3100 Breckinridge Blvd., Bldg.
200, Duluth, Georgia 30199-0062. If you should have any questions concerning
how to redeem your account after reviewing the information below, please con-
tact the Sub-Transfer Agent at (800) 544-5445, Spanish-speaking representa-
tives (800) 544-7278 or TDD Line for the Hearing Impaired (800) 824-1721.
 
  As described under "Purchase of Shares", redemptions of Class B shares are
subject to a contingent deferred sales charge.
 
  The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account regis-
tration. If the proceeds of the redemption exceed $50,000, or if the proceeds
are not to be paid to the record owner(s) at the record address, if the share-
holder(s) has had an address change in the past 45 days, or if the sharehold-
er(s) is a corporation, sole proprietor, partnership, trust or fiduciary, sig-
natures must be guaranteed by one of the following: a bank or trust company; a
broker-dealer; a credit union; a national securities exchange, registered
securities association or clearing agency; a savings and loan association; or
a federal savings bank.
 
  Generally, a properly completed Redemption Form with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, in the case of shareholders
holding certificates, the certificates for the shares being redeemed must
accom-
pany the redemption request. Additional documentary evidence of authority is
 
28
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
REDEMPTION OF SHARES (CONTINUED)
 
also required by the Sub-Transfer Agent in the event redemption is requested by
a corporation, partnership, trust, fiduciary, executor or administrator. Addi-
tionally, if a shareholder requests a redemption from a Retirement Plan account
(IRA, SEP or 403(b)(7)), such request must state whether or not federal income
tax is to be withheld from the proceeds of the redemption check.
 
  A shareholder may utilize the Sub-Transfer Agent's FAX to redeem their
account as long as a signature guarantee or other documentary evidence is not
required. Redemption requests should be properly signed by all owners of the
account and faxed to the Sub-Transfer Agent at (800) 554-2374. Facsimile
redemptions may not be available if the shareholder cannot reach the Sub-
Transfer Agent by FAX, whether because all telephone lines are busy or for any
other reason; in such case, a shareholder would have to use the Fund's regular
redemption procedure described above. Facsimile redemptions received by the
Sub-Transfer Agent prior to 4:00 p.m. Eastern time on a regular business day
will be processed at the net-asset value per share determined that day.
 
  In all cases, the redemption price is the net asset value per share of the
Fund next determined after the request for redemption is received in proper
form by the Sub-Transfer Agent. Payment for shares redeemed will be made by
check mailed within three days after acceptance by the Sub-Transfer Agent of
the request and any other necessary documents in proper order. Such payment may
be postponed or the right of redemption suspended as provided by the rules of
the SEC. If the shares to be redeemed have been recently purchased by check or
draft, the Sub-Transfer Agent may hold the payment of the proceeds until the
purchase check or draft has cleared, usually a period of up to 15 days. Any
taxable gain or loss will be recognized by the shareholder upon redemption of
shares.
 
  After following the above-stated redemption guidelines, a shareholder(s) may
elect to have the redemption proceeds wire-transferred directly to the share-
holder's bank account of record (defined as a currently established pre-autho-
rized draft on the shareholder's account with no changes within the previous 45
days), as long as the bank account is registered in the same name(s) as the
account with the Fund. If the proceeds are not to be wired to the bank account
of record, or mailed to the registered owner(s), a signature guarantee will be
required from all shareholder(s). A $25 service fee will be charged by the Sub-
Transfer Agent to help defray the administrative expense of executing a wire
redemption. Redemption proceeds will normally be wired to the designated bank
account on the next business day following the redemption, and should ordinar-
ily be credited to your bank account by your bank within 48 to 72 hours.
 
 
                                                                              29
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
PERFORMANCE (CONTINUED)
 
 AUTOMATIC CASH WITHDRAWAL PLAN
 
  The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. Retire-
ment 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 the Sub-Transfer Agent.
 
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 automatic redemption.
 
PERFORMANCE
 
 
 YIELD
 
  From time to time, the Fund may advertise its 30 day "yield" for each Class
of shares. The yield of a Class refers to the income generated by an invest-
ment in such Class over the 30 day period identified in the advertisement, and
is computed by dividing the net investment income per share earned by the
Class during the period by the net asset value per share on the last day of
the period. This income is "annualized" by assuming that the amount of income
is generated each month over a one year period and is compounded semi-annual-
ly. The annualized income is then shown as a percentage of the net asset val-
ue.
 
 
30
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
   
PERFORMANCE (CONTINUED)     
 
 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 and
Class B shares of the Fund. These figures are based on historical earnings and
are not intended to indicate future performance. Total return is computed for
a specific period of time assuming deduction of the maximum sales charge, if
any, from the initial amount invested and reinvestment of all income dividends
and capital gains distributions on the reinvestment dates at prices calculated
as stated in this Prospectus, then dividing the value of the investment at the
end of the period so calculated by the initial amount invested and subtracting
100%. The standard average annual total return, as prescribed by the Securi-
ties and Exchange Commission, is derived from this total return which provides
the ending redeemable value. Such standard total return information may also
be accompanied with nonstandard total return information for differing periods
computed in the same manner but without annualizing the total return or taking
sales charges into account. The Fund calculates current dividend return for
each Class by annualizing the most recent monthly distribution and dividing by
the net asset value or the maximum public offering price (including sales
charge) on the last day of the period for which current dividend return is
presented. The current dividend return for each Class may vary from time to
time depending on market conditions, the composition of its investment portfo-
lio 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 perfor-
mance information may include data from Lipper Analytical Services, Inc. and
other financial publications.
 
  The Fund may from time to time illustrate the benefits of tax-deferral by
comparing taxable investments to investments made through tax-deferred retire-
ment plans and the Fund may illustrate in graph or chart form, or otherwise,
the benefits of the Systematic Investment Plan by comparing investment made
pursuant to a systematic investment plan to investments made in a rising mar-
ket.
 
                                                                             31
<PAGE>
 
SMITH BARNEY
Investment Grade Bond 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 Fund and companies that furnish services to
the Fund, including agreements with its distributor, investment adviser, cus-
todian and transfer agent. The day-to-day operations of the Fund are delegated
to the Fund's investment manager. The Statement of Additional Information con-
tains general and background information regarding each Director of the Fund
and executive officer of the Company.
 
 INVESTMENT ADVISER
 
  The Manager, located at 388 Greenwich Street, New York, New York 10013,
serves as the Fund's investment adviser. The Manager (through its predecessors
entities) has been in the investment counseling business since 1934 and is a
registered investment adviser. The Manager renders investment advice to
investment companies that had aggregate assets under management as of January
31, 1996 in excess of $74 billion.
 
  Subject to the supervision and direction of the Fund's Board of Directors,
the Manager manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfo-
lio managers and securities analysts who provide research services to the
Fund. Under an investment advisory agreement, the Fund pays the Manager a
monthly fee at the annual rate of 0.45% of the value of the Fund's average
daily net assets up to $500 million and 0.42% of the value of average daily
net assets thereafter. For the fiscal year ended December 31, 1995, the Man-
ager was paid investment advisory fees equal to 0.45% of the value of the
Fund's average daily net assets.
 
 PORTFOLIO MANAGEMENT
 
  George E. Mueller, Jr., Managing Director of the Manager, has served as the
Investment Officer of the Fund since January 1, 1985, 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, 1995 is included
in the Annual Report dated December 31, 1995. A copy of the Annual Report may
be obtained upon request and without charge from the Sub-Transfer Agent or by
writing or calling the Fund at the address or phone number listed on page one
of this Prospectus.
 
 
32
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
   
MANAGEMENT OF THE FUND (CONTINUED)     
 
 ADMINISTRATOR
 
  The Manager also serves as the Fund's administrator and oversees all aspects
of the Fund's administration. For administration services rendered, the Fund
paid an administration fee at the annual rate of 0.20% of the value of the
Fund's average daily net assets.
 
DISTRIBUTOR
 
 
  PFS is located at 3100 Breckinridge Boulevard, Duluth, Georgia 30199-0062.
PFS distributes shares of the Fund as principal underwriter and as such con-
ducts a continuous offering pursuant to a "best efforts" arrangement requiring
PFS 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"), PFS is paid an annual service fee with respect to
Class A and Class B shares of the Fund at the annual rate of 0.25% of the
average daily net assets of the respective Class. PFS is also paid an annual
distribution fee with respect to Class B shares at the annual rate of 0.50%,
of the average daily net assets attributable to that Class. Class B shares
that automatically convert to Class A shares eight years after the date of
original purchase will no longer be subject to distribution fees. The fees are
paid to PFS which, in turn pays PFS Investments to pay its Investments Repre-
sentatives for servicing shareholder accounts and, in the case of Class B
shares, to cover expenses primarily intended to result in the sale of those
shares. These expenses include: advertising expenses; the cost of printing and
mailing prospectuses to potential investors; payments to and expenses of
Investment Representatives and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of PFS Investments associated with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses.
 
  The payments to PFS Investments Representatives for selling shares of a
Class include a commission or fee paid by the investor or PFS at the time of
sale and a continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. Investments Representatives may
receive different levels of compensation for selling different Classes of
shares.
 
  PFS Investments may be deemed to be an underwriter for purposes of the Secu-
rities Act of 1933, as amended. From time to time, PFS or its affiliates may
also pay for certain non-cash sales incentives provided to PFS Investments Rep-
 
                                                                             33
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
   
DISTRIBUTOR (CONTINUED)     
 
resentatives. Such incentives do not have any effect on the net amount invest-
ed. In addition to the reallowances from the applicable public offering price
described above, PFS may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other compensa-
tion to PFS Investments Representatives that sell shares of the Fund.
 
  Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by PFS and the payments may
exceed distribution expenses actually incurred. The Company's Board of Direc-
tors will evaluate the appropriateness of the Plan and its payment terms on a
continuing basis and in doing so will consider all relevant factors, including
expenses borne by PFS, 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 to investors purchasing through PFS shares of common stock currently
classified into two Classes, A and B, with a par value of $.001 per share. Each
Class represents an identical interest in the Fund's investment portfolio. As a
result, the Classes have the same rights, privileges and preferences, except
with respect to: (a) the designation of each Class; (b) the effect of the
respective sales charges for each Class; (c) the distribution and/or service
fees borne by each Class pursuant to the Plan; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The 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, National Association, is located at 17th and Chestnut Streets,
Philadelphia, PA 10103 and serves as custodian of the Fund's investments.
 
  First Data Investor Services Group, Inc. is located at Exchange Place, Bos-
ton, Massachusetts 02109, and serves as the Company's transfer agent.
 
  PFS Shareholder Services is located at 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30199-0062 and serves as the Fund's Sub-Transfer Agent.
 
 
34
<PAGE>
 
SMITH BARNEY
Investment Grade Bond Fund
 
DISTRIBUTOR (CONTINUED)
 
  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 its shareholders a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the 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 the Sub-
Transfer Agent.
 
 
                                                                              35
<PAGE>
 
--------------------------------------------------------------------------------
 
 
 
 
 
 
                                                Smith Barney
                                                Investment
                                                Grade Bond
                                                Fund
                                            
                                                3100 Breckinridge Blvd, Bldg 200
                                                Duluth, Georgia 30199-0062
                                            
                                                FDXXXX XX