As filed with the Securities and Exchange Commission
on November 25, 1997
Registration No.  2-96408 
811-4254

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

FORM N-1A

REGISTRATION STATEMENT UNDER 
THE SECURITIES ACT OF 1933    

[   ] Pre-Effective Amendment No.

[X] Post-Effective Amendment No.    47    

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

Amendment No.     48      [X]     

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

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

(212) 723-9218
(Registrant's telephone number, including Area Code)

Christina T. Sydor
Secretary

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

copies to:

Burton M. Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, NY  10022

Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment becomes 
effective.

It is proposed that this filing become effective:

[   ]  Immediately upon filing pursuant to Rule 485(b) 
   
[X]  On November 28, 1997 pursuant to Rule 485(b) 
    
[   ]  75 days after filing pursuant to Rule 485(a) 
[   ]  On ______________ pursuant to Rule 485(a)

   
The Registrant has previously filed a declaration of indefinite 
registration of its shares pursuant to Rule 24f-2 under the 
Investment Company Act of 1940.  Registrant's Rule 24f-2 Notice 
for the fiscal year ended July 31, 1997 was filed on September 17, 
1997 as Accession Number 0000091155-97-000419.
    


SMITH BARNEY INCOME FUNDS

CONTENTS OF
REGISTRATION STATEMENT

This Registration Statement contains the following pages and 
documents:

Front Cover

Contents Page

Cross-Reference Sheet

Part A - Prospectus

Part B - Statement of Additional Information

Part C - Other Information

Signature Page

Exhibits


	SMITH BARNEY INCOME FUNDS

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


Part A 
Item No. and Caption			Prospectus Caption

1.  Cover Page				Cover Page

2.  Synopsis				Prospectus Summary 

3.  Condensed Financial Information	Financial Highlights;

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

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

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

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

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

9.  Pending Legal Proceedings		Not Applicable



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

10.  Cover Page				Cover page

11.  Table of Contents			Contents

12.  General Information and History	Distributor; Additional 
					Information

13.  Investment Objectives and Policies	Investment Objectives 
and Management Policies

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

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

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

17.  Brokerage Allocation			Investment Objectives and 
					Management Policies; 
					Distributor

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

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

20.  Tax Status				Taxes

21.  Underwriters				Distributor

22.  Calculation of Performance Data	Performance Data

23.  Financial Statements			Financial Statements

SMITH BARNEY INCOME FUNDS
PART A

PROSPECTUS

                                                                    Smith Barney
                                                                     Convertible
                                                                            Fund

                                                               November 28, 1997

                                                   Prospectus begins on page one

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

--------------------------------------------------------------------------------
Prospectus                                                     November 28, 1997
--------------------------------------------------------------------------------

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

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

     This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other investment funds offered by the Trust are
described in separate prospectuses that may be obtained by calling the Trust at
the telephone number set forth above or by contacting a Smith Barney Financial
Consultant.

   
     Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 28, 1997, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
    

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.


                                                                               1
<PAGE>

--------------------------------------------------------------------------------
Table of Contents
--------------------------------------------------------------------------------

Prospectus Summary                                                             3
--------------------------------------------------------------------------------

Financial Highlights                                                          11
--------------------------------------------------------------------------------

Investment Objective and Management Policies                                  16
--------------------------------------------------------------------------------

Valuation of Shares                                                           27
--------------------------------------------------------------------------------

Dividends, Distributions and Taxes                                            28
--------------------------------------------------------------------------------

Purchase of Shares                                                            29
--------------------------------------------------------------------------------

Exchange Privilege                                                            40
--------------------------------------------------------------------------------

Redemption of Shares                                                          43
--------------------------------------------------------------------------------

Minimum Account Size                                                          46
--------------------------------------------------------------------------------

Performance                                                                   46
--------------------------------------------------------------------------------

Management of the Trust and the Fund                                          47
--------------------------------------------------------------------------------

Distributor                                                                   48
--------------------------------------------------------------------------------

Additional Information                                                        49
--------------------------------------------------------------------------------


================================================================================

     No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
================================================================================


2
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary
--------------------------------------------------------------------------------

The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."

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

ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class 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 5.00% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary --
Reduced or No Initial Sales Charge."
    

     Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.50% of the average daily net assets of the Class. The
Class B shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares.


                                                                               3
<PAGE>

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

     Class B Shares Conversion Feature. Class B shares will convert auto-
matically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."

     Class 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. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Fund shares, which when 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 duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B 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.
    

     Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. 


4
<PAGE>

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

For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature and therefore are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer-term investment outlooks.

   
     Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge held in
funds sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.
    

     Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
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 Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences among the Classes of
shares.

   
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as other types of participant-directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class Y shares are available without a sales
charge as investment alternatives under both of these programs. See "Purchase of
Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs."
    


                                                                               5
<PAGE>

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

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. In addition, certain investors, including qualified
retirement plans and certain other institutional investors may purchase shares
directly from the Fund through the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data"). See "Purchase of Shares."

   
INVESTMENT MINIMUMS Investors in Class A, Class B and Class 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 Retirement
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 minimum subsequent investment
requirement for all Classes is $25. The minimum investment requirements for
purchases of Fund shares through the Systematic Investment Plan are described
below. There is no minimum investment requirement in Class A for unitholders who
invest distributions from a unit investment trust ("UIT") sponsored by Smith
Barney. See "Purchase of Shares."

SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial investment
requirement for Class A, Class B and Class C shares and the minimum subsequent
investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."
    

REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."

MANAGEMENT OF THE TRUST AND THE FUND 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 


6
<PAGE>

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

subsidiary of Smith Barney Holdings Inc. ("Holdings"), which is in turn 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.

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

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

   
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and distributions of net realized capital gains, if any, are paid
annually. See "Dividends, Distributions and Taxes."
    

REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."

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


                                                                               7
<PAGE>

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

agreements, engaging in when-issued and delayed-delivery transactions, lending
portfolio securities, entering into options on securities and short sales
"against the box." See "Investment Objective and Management Policies."

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

   
Smith Barney Convertible Fund                 Class A  Class B  Class C  Class Y
--------------------------------------------------------------------------------
Shareholder Transaction Expenses
  Maximum sales charge imposed on purchases
   (as a percentage of offering price)          5.00%    None     None     None
  Maximum CDSC                                                           
   (as a percentage of original cost or                                  
   redemption proceeds whichever is lower)      None*    5.00%    1.00%    None
--------------------------------------------------------------------------------
Annual Fund Operating Expenses                                           
  (as a percentage of average net assets)                                
  Management fees                               0.70%    0.70%    0.70%    0.70%
  12b-1 fees**                                  0.25%    0.75%    0.70%    None
  Other expenses                                0.32%    0.32%    0.34%    0.15%
--------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES                   1.27%    1.77%    1.74%    0.85%
================================================================================
                                                                        
*  Purchases of Class A shares of $500,000 or more will be made at net asset
   value with no sales charge, but will be subject to a CDSC of 1.00% on
   redemptions made within 12 months of purchase.
    
** Upon conversion of Class B shares to Class A shares, such shares will no
   longer be subject to a distribution fee. Class C shares do not have a
   conversion feature and, therefore, are subject to an ongoing distribution
   fee. As a result, long-term shareholders of Class C shares may pay more
   than the economic equivalent of the maximum front-end sales charge
   permitted by the National Association of Securities Dealers, Inc. (the
   "NASD").

   
     Class A shares of the Fund purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.
    

     The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may


8
<PAGE>

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

   
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)
and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Smith Barney receives an annual 12b-1 service fee of 0.25% of the value
of average daily net assets of Class A shares. Smith Barney also receives, with
respect to Class B shares, an annual 12b-1 fee of 0.75% of the value of average
daily net assets of that Class, consisting of a 0.50% distribution fee and a
0.25% service fee. For Class C shares, Smith Barney receives an annual 12b-1 fee
of 0.70% of the value of average daily net assets, 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 Trust and the Fund."

Smith Barney Convertible Fund                1 Year  3 Years  5 Years  10 Years*
--------------------------------------------------------------------------------
An investor would pay the following 
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption 
at the end of each time period:
      Class A                                   $62     $88    $116     $196
      Class B                                    68      86     106      295
      Class C                                    28      55      94      205
      Class Y                                     9      27      47      105
An investor would pay the following 
expenses on the same investment, assuming
the same annual return and no redemption:
      Class A                                   $62     $88    $116     $196
      Class B                                    18      56      96      195
      Class C                                    18      55      94      205
      Class Y                                     9      27      47      105

================================================================================

* 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.


                                                                               9
<PAGE>

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

     The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. 

This example should not be considered a representation of past or future
expenses and actual expenses may be greater or less than those shown.*


10
<PAGE>

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

The following information for each of the years in the three-year period ended
July 31, 1997, has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1997.
The following information for the fiscal years ended July 31, 1988 through July
31, 1993 has been audited by other independent auditors. The information set out
below should be read in conjunction with the financial statements and related
notes that also appear in the Fund's 1997 Annual Report, which is incorporated
by reference into the Statement of Additional Information.

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

<TABLE>
<CAPTION>
Smith Barney Convertible Fund
Year Ended July 31,                  1997     1996(1)    1995      1994      1993(2)
=====================================================================================
<S>                                 <C>       <C>       <C>       <C>       <C>   
Net Asset Value, Beginning of Year  $15.66    $15.27    $14.56    $14.99    $13.82
-------------------------------------------------------------------------------------
Income From Operations:                                                     
  Net investment income               0.78      0.74      0.74      0.72      0.49
  Net realized and unrealized                                               
    gain (loss) on investments        3.28      0.38      0.70     (0.42)     1.22
-------------------------------------------------------------------------------------
Total Income From Operations          4.06      1.12      1.44      0.30      1.71
-------------------------------------------------------------------------------------
Less Distributions From:                                                    
  Net investment income              (0.75)    (0.73)    (0.73)    (0.73)    (0.51)
  Net realized gains                 (0.36)       --        --        --     (0.03)
-------------------------------------------------------------------------------------
Total Distributions                  (1.11)    (0.73)    (0.73)    (0.73)    (0.54)
-------------------------------------------------------------------------------------
Net Asset Value, End of Year        $18.61    $15.66    $15.27    $14.56    $14.99
-------------------------------------------------------------------------------------
Total Return++                       26.94%     7.41%    10.35%     1.99%    12.63%**
-------------------------------------------------------------------------------------
Net Assets, End of Year (millions)     $39       $35       $35       $ 2       $ 2
-------------------------------------------------------------------------------------
Ratios to Average Net Assets:                                               
  Expenses                            1.27%     1.40%     1.40%     1.40%     1.37%+
  Net investment income               4.61      4.68      5.13      4.80      4.86+
-------------------------------------------------------------------------------------
Portfolio Turnover Rate                 57%       59%       48%       54%       95%
-------------------------------------------------------------------------------------
Average Commissions per Share                                               
Paid on Equity Transactions(3)       $0.06     $0.06        --        --        --
=====================================================================================
</TABLE>
(1)  Per share amounts have been calculated using the monthly average shares
     method, rather than the undistributed net investment income method, because
     it more accurately reflects the per share data for the period.
(2)  For the period from November 6, 1992 (inception date) to July 31, 1993.
(3)  As of September 1995, the SEC instituted new guidelines requiring the
     disclosure of average commissions per share.
++   Total return represents aggregate total return for the period indicated and
     does not reflect any applicable sales charge.
**   Total return is not annualized as it may not be representative of the total
     return for the year. 
+    Annualized.


                                                                              11
<PAGE>

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

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

<TABLE>
<CAPTION>
Smith Barney Convertible Fund
Year Ended July 31,                   1997    1996(1)     1995      1994      1993            1992       
=========================================================================================================
<S>                                 <C>       <C>       <C>       <C>       <C>             <C>          
Net Asset Value, Beginning of Year  $15.66    $15.27    $14.56    $14.99    $13.84          $12.51       
---------------------------------------------------------------------------------------------------------
Income From Operations:                                                                                  
  Net investment income               0.69      0.66      0.67      0.65      0.61            0.64       
  Net realized and unrealized                                                                            
    gain (loss) on investments        3.28      0.39      0.70     (0.42)     1.20            1.35       
---------------------------------------------------------------------------------------------------------
Total Income From Operations          3.97      1.05      1.37      0.23      1.81            1.99       
---------------------------------------------------------------------------------------------------------
Less Distributions From:                                                                                 
  Net investment income              (0.67)    (0.66)    (0.66)    (0.66)    (0.62)          (0.64)      
  Net realized gains                 (0.36)       --        --        --     (0.04)             --       
  Capital                               --        --        --        --        --           (0.02)      
---------------------------------------------------------------------------------------------------------
Total Distributions                  (1.03)    (0.66)    (0.66)    (0.66)    (0.66)          (0.66)      
---------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year        $18.60    $15.66    $15.27    $14.56    $14.99          $13.84       
---------------------------------------------------------------------------------------------------------
Total Return++                       26.29%     6.91%     9.80%     1.50%    13.40%          16.25%      
---------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)     $43       $42       $46       $85       $75             $57       
---------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:                                                                            
  Expenses                            1.77%     1.90%     1.90%     1.88%     2.00%           1.88%      
  Net investment income               4.12      4.18      4.63      4.32      4.20            4.76       
---------------------------------------------------------------------------
Portfolio Turnover Rate                 57%       59%       48%       54%       95%             77%      
--------------------------------------------------------------------------
Average Commissions Per Share                                                                            
  Paid on Equity Transactions(2)     $0.06     $0.06        --        --        --              --       
=======================================================================
</TABLE>                                                             
(1)  Per share amounts have been calculated using the monthly average shares
     method, rather than the undistributed net investment income method, because
     it more accurately reflects the per share data for the period.
   
(2)  As of September 1995, the SEC instituted new guidelines requiring the
     disclosure of average commissions per share.
    
++   Total return represents aggregate total return for the period indicated and
     does not reflect any applicable sales charge.


12
<PAGE>

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

    1994     1993         1992        1991        1990        1989        1988
================================================================================
  $14.99   $13.84       $12.51      $12.21      $13.80      $13.04      $13.93
--------------------------------------------------------------------------------
                                                                        
    0.65     0.61         0.64        0.68        0.79        0.85        0.87
                                                                        
   (0.42)    1.20         1.35        0.33       (1.40)       0.78       (0.64)
--------------------------------------------------------------------------------
    0.23     1.81         1.99        1.01       (0.61)       1.63        0.23
--------------------------------------------------------------------------------
                                                                        
   (0.66)   (0.62)       (0.64)      (0.68)      (0.83)      (0.86)      (0.85)
      --    (0.04)          --          --       (0.11)      (0.01)      (0.27)
      --       --        (0.02)      (0.03)       (0.4)         --          --
--------------------------------------------------------------------------------
   (0.66)   (0.66)       (0.66)      (0.71)      (0.98)      (0.87)      (1.12)
--------------------------------------------------------------------------------
  $14.56   $14.99       $13.84      $12.51      $12.21      $13.80      $13.04
--------------------------------------------------------------------------------
    1.50%   13.40%       16.25%       8.86%      (4.53)      13.09%       2.22%
--------------------------------------------------------------------------------
     $85      $75          $57         $66         $97        $153        $173
--------------------------------------------------------------------------------
                                                                        
    1.88%    2.00%        1.88%       1.92%       1.85%       1.74%       1.75%
    4.32     4.20         4.76        5.81        6.10        6.41        6.74
--------------------------------------------------------------------------------
      54%      95%          77%         26%         24%         32%         45%
--------------------------------------------------------------------------------
                                                                        
      --       --           --          --          --          --          --
================================================================================


                                                                              13
<PAGE>

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

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

Smith Barney Convertible Fund
Year Ended July 31,                           1997       1996(1)     1995(2)(3)
================================================================================
Net Asset Value, Beginning of Year           $15.64      $15.27        $14.09
--------------------------------------------------------------------------------
Income From Operations:                                            
  Net investment income                        0.67        0.67          0.50
  Net realized and unrealized                                      
    gain on investments                        3.31        0.37          1.17
--------------------------------------------------------------------------------
Total Income From Operations                   3.98        1.04          1.67
--------------------------------------------------------------------------------
Less Distributions From:                                           
  Net investment income                       (0.68)      (0.67)        (0.49)
  Net realized gains                          (0.36)         --            --
--------------------------------------------------------------------------------
Total Distributions                           (1.04)      (0.67)        (0.49)
--------------------------------------------------------------------------------
Net Asset Value, End of Year                 $18.58      $15.64        $15.27
--------------------------------------------------------------------------------
Total Return**                                26.37%       6.82%        12.17%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000s)               $1,252        $641           $83
--------------------------------------------------------------------------------
Ratios to Average Net Assets:                                      
  Expenses                                     1.74%       1.86%         1.87%+
  Net investment income                        4.14        4.17          4.77+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                          57%         59%           48%
--------------------------------------------------------------------------------
Average Commissions per Share                                      
Paid on Equity Transactions (4)               $0.06       $0.06            --
================================================================================
(1)  Per share amounts have been calculated using the monthly average shares
     method, rather than the undistributed net investment income method, because
     it more accurately reflects the per share data for the period.
(2)  On November 7, 1994, the former Class D shares were renamed Class C shares.
(3)  For the period from November 7, 1994 (inception date) to July 31, 1995.
(4)  As of September 1995, the SEC instituted new guidelines requiring the
     disclosure of average commissions per share.
++   Total return is not annualized as it may not be representative of the total
     return for the year.
+    Annualized.
**   Total return represents aggregate total return for the period indicated and
     does not reflect any applicable sales charge.


14
<PAGE>

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

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

Smith Barney Convertible Fund
Year Ended July 31,                                         1997     1996(1)(2)
================================================================================
Net Asset Value, Beginning of Year                         $15.68     $16.15
--------------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income                                      0.83       0.38
  Net realized and unrealized gain (loss) on investments     3.31      (0.46)
--------------------------------------------------------------------------------
Total Income (Loss) From Operations                          4.14      (0.08)
--------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                                     (0.80)     (0.39)
  Net realized gains                                        (0.36)        --
--------------------------------------------------------------------------------
Total Distributions                                         (1.16)     (0.39)
--------------------------------------------------------------------------------
Net Asset Value, End of Year                               $18.66     $15.68
--------------------------------------------------------------------------------
Total Return                                                27.44%     (0.56)%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000s)                            $29,080     $9,189
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                                   0.85%      1.00%+
  Net investment income                                      5.04       4.98+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                                        57%        59%
--------------------------------------------------------------------------------
Average Commissions per Share
Paid on Equity Transactions (3)                             $0.06      $0.06
================================================================================
(1)  Per share amounts have been calculated using the monthly average shares
     method, rather than the undistributed net investment income method, because
     it more accurately reflects the per share data for the period.
(2)  For the period from February 7, 1996 (inception date) to July 31, 1996.
(3)  As of September 1995, the SEC instituted new guidelines requiring the
     disclosure of average commissions per share.
++   Total return is not annualized as it may not be representative of the total
     return for the year.
+    Annualized.


                                                                              15
<PAGE>

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

     The Fund's investment objective is current income and capital appreciation.
The Fund's investment objective may not be changed without the approval of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund's investment objective will be achieved.

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

     CERTAIN INVESTMENT STRATEGIES

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

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

     Short Sales Against the Box. The Fund may make short sales of common stock
if, at all times when a short position is open, the Fund owns the stock or owns


16
<PAGE>

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

preferred stocks or debt securities convertible or exchangeable, without payment
of further consideration, into the shares of common stock sold short. Short
sales of this kind are referred to as short sales "against the box." The
broker-dealer that executes a short sale generally invests cash proceeds of the
sale until they are paid to the Fund. Arrangements may be made with the
broker-dealer to obtain a portion of the interest earned by the broker on the
investment of short sale proceeds. The Fund will segregate the common stock or
convertible or exchangeable preferred stock or debt securities in a special
account with PNC Bank, National Association ("PNCBank"), the Trust's custodian.
The Fund may utilize up to 50% of its assets as collateral for short sales
against the box. The extent to which the Fund may make short sales of common
stocks may be limited by the requirements contained in the Code for
qualification as a regulated investment company. See "Dividends, Distributions
and Taxes."

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

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

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


                                                                              17
<PAGE>

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

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

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

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

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


18
<PAGE>

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

     If entering into transactions involving futures contracts and options on
futures contracts, the Fund will comply with applicable requirements of the
Commodities Futures Trading Commission (the "CFTC") which require that its
transactions in futures and options be engaged in for "bona fide hedging"
purposes or other permitted purposes, provided that aggregate initial margin
deposits and premiums required to establish positions, other than those
considered by the CFTC to be "bona fide hedging," will not exceed 5% of the
Fund's net asset value, after taking into account unrealized profits and
unrealized losses on any such contracts.

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

     ADDITIONAL INVESTMENTS

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

     U.S. Government Securities. The U.S. government securities in which the
Fund may invest include: direct obligations of the United States Treasury (such
as Treasury Bills, Treasury Notes and Treasury Bonds) and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association ("GNMA") certificates); securities that are
supported by the right of the issuer to borrow from the United States Treasury
(such as securities of Federal Home Loan Banks); and securities that are
supported by the credit of the instrumentality. Treasury Bills have maturities
of less than 1 year, Treasury Notes have maturities of 1 to 10 years and
Treasury Bonds generally have maturities of greater than 10 years at the date of
issuance. Certain U.S. government securities, such as those issued or guaranteed
by GNMA, Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC"), are 


                                                                              19
<PAGE>

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

mortgage-related securities. U.S. government securities generally do not involve
the credit risks associated with other types of interest-bearing securities,
although, as a result, the yields available from U.S. government securities are
generally lower than the yields available from interest-bearing corporate
securities.

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

     CERTAIN INVESTMENT GUIDELINES

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


20
<PAGE>

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

restrictions that cannot be changed without the approval of the majority of the
Fund's outstanding shares is contained in the Statement of Additional
Information.

     RISK FACTORS AND SPECIAL CONSIDERATIONS

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

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

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

     Unlike a convertible security which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible 


                                                                              21
<PAGE>

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

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

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

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

     Issuers of medium- and low-rated and comparable unrated securities are
often highly leveraged and may not have more traditional methods of financing
available to them so that their ability to service their debt obligations during
an economic downturn or during sustained periods of rising interest rates may be
impaired. The risk of loss due to default by such issuers is significantly
greater because medium- and low-rated and comparable unrated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness. The Fund may incur additional expenses to the extent that
it is 


22
<PAGE>

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

required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings. In addition, the markets in which medium- and
low-rated or comparable unrated securities are traded generally are more limited
than those in which higher-rated securities are traded. The existence of limited
markets for these securities may restrict the availability of securities for the
Fund to purchase and also may have the effect of limiting the ability of the
Fund to (a) obtain accurate market quotations for purposes of valuing securities
and calculating net asset value and (b) sell securities at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets. The market for medium- and low-rated and comparable
unrated securities is relatively new and has not weathered a major economic
recession. The effect that such a recession might have on such securities is not
known. Any such recession, however, could likely disrupt severely the market for
such securities and adversely affect the value of such securities. Any such
economic downturn also could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.

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

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

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

     The Fund's fixed-income security holdings (as rated by Moody's) for the
fiscal year ended July 31, 1997 were composed as follows: 2.16% rated Aa; 12.01%
rated A; 28.91% rated Baa; 17.20% rated Ba; 25.68% rated B; and 14.04% in
non-rated securities. The percentages were calculated on a dollar weighted
average basis by determining the percentage of the Fund's net assets invested in
each rating category during the most fiscal year and does not necessarily
indicate what the composition of the Fund's holdings will be in subsequent
years.


                                                                              23
<PAGE>

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

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

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

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

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


24
<PAGE>

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

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

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

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

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

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


                                                                              25
<PAGE>

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

do so. The Fund's investments in illiquid securities are subject to the risk
that should the Fund desire to sell any of these securities when a ready buyer
is not available at a price that the Fund deems representative of their value,
the value of the Fund's net assets could be adversely affected.

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

     PORTFOLIO TRANSACTIONS AND TURNOVER

     All orders for transactions in securities and options on behalf of the Fund
are placed by SBMFM with broker-dealers that SBMFM selects, including Smith
Barney and other affiliated brokers. The Fund may utilize Smith Barney or a
Smith Barney affiliated broker in connection with a purchase or sale of
securities when SBMFM believes that the broker's charge for the transactions
does not exceed usual and customary levels. In selecting a broker, including
Smith Barney, for a transaction, the primary consideration is prompt and
effective execution of orders at the most favorable prices. Subject to that
primary consideration, dealers may be selected for research, statistical or
other services to enable SBMFM to supplement its own research and analysis with
the views and information of other securities firms. = =

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

     The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of the Class outstanding. Net asset value is calculated separately for
Class A, B, C and Y.

     Generally, the Fund's investments are valued at market value, or in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Fund's Board of Trustees. Short-term
investments that mature in 60 days or less are valued at amortized cost whenever
the Trustees determine that amortized cost reflects fair value of those
instruments. Amortized cost valuation involves valuing an instrument at its cost
initially and thereafter 


26
<PAGE>

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

assuming a constant amortization to maturity of any discount or premium, regard
less of the impact of fluctuating interest rates or the market value of the
instrument. Further information regarding the Fund's valuation policies is
contained in the Statement of Additional Information. 

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

     DIVIDENDS AND DISTRIBUTIONS

     The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gain payable to shareholders. The Fund's policy is to distribute its
investment income (that is, income other than its net realized capital gains)
and net realized capital gains, if any, once a year, normally at the end of the
year in which earned or at the beginning of the next year.

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

     The per share dividends on Class B and Class C shares of the Fund may be
lower than the per share dividends on Class A and Class Y shares principally as
a result of the distribution fee applicable with respect to Class B and Class C
shares. The per share dividends on Class A shares of the Fund may be lower than
the per share dividends on Class Y shares principally as a result of the service
fee applicable to Class A shares. Distributions of capital gains, if any, will
be in the same amount for Class A, Class B, Class C and Class Y shares.

     TAXES

     The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a regulated investment company under the Code. Dividends
paid from net investment 


                                                                              27
<PAGE>

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

income and distributions of net realized short-term capital gains are taxable to
shareholders as ordinary income, regardless of how long shareholders have held
their Fund shares and whether such dividends and distributions are received in
cash or reinvested in additional Fund shares. Distributions of net realized
long-term capital gains will be taxable to shareholders as long-term capital
gains, regardless of how long shareholders have held Fund shares and whether
such distributions are received in cash or are reinvested in additional Fund
shares. Furthermore, as a general rule, a shareholder's gain or loss on a sale
or redemption of Fund shares will be a long-term capital gain or loss if the
shareholder has held the shares for more than one year and will be a short-term
capital gain or loss if the shareholder has held the shares for one year or
less. Some of the Fund's dividends declared from net investment income may
qualify for the Federal dividends-received deduction for corporations.

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

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

     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
redemptions. Class Y shares are sold without an initial sales charge or a CDSC
and are available only to investors investing a minimum of $5,000,000 (except
for purchases of Class Y shares by Smith Barney Concert Allocation Series Inc.,
for which there is no minimum purchase amount). See "Prospectus Summary --
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.

     Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group, except for investors purchasing shares of the Fund through a
qualified retirement plan who may do so directly through First Data. When
purchasing shares of the Fund, investors must specify whether the purchase is
for Class A, Class B, Class C or Class Y shares. Smith Barney and other
broker-dealers may charge their customers an annual account maintenance fee in
connection with a 


28
<PAGE>

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

brokerage account through which an investor purchases or holds shares. Accounts
held directly at First Data are not subject to a maintenance fee.

     The minimum initial investment requirement in the Fund for an account
established under the Uniform Gift to Minors Act is $250 and the minimum
subsequent investment requirement is $50.

     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
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. 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 minimum subsequent investment requirement for all Classes in
the Fund is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the minimum subsequent
investment for all Classes is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a quarterly basis, the minimum
initial investment requirement for Class A, Class B and Class 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, Trustees of the Fund and their spouses and
children and unitholders who invest distributions from a UIT sponsored by Smith
Barney. The Fund reserves the right to waive or change minimums, to decline any
order to purchase its shares and to suspend the offering of shares from time to
time. Shares purchased will be held in the shareholder's account by First Data.
Share certificates are issued only upon a shareholder's written request to First
Data.

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

     SYSTEMATIC INVESTMENT PLAN

     Plan Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.


                                                                              29
<PAGE>

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

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

     INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES

     The sales charges applicable to purchases of Class A shares of the Fund are
as follows:

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

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

     Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.

     The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Fund made at one time by "any person," which includes
an individual and his or her immediate family or a trustee or other fiduciary of
a single trust estate or single fiduciary account.

     INITIAL SALES CHARGE WAIVERS

   
     Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales of to (i) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
    


30
<PAGE>

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

   
Funds (including retired Board Members and employees); immediate families of
such persons (including the surviving spouse of a deceased Board Member or
employee and to a), pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the NASD, provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be re-sold except through redemption
or repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Smith Barney Financial Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment with Smith Barney), on the
condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the Financial
Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Fund (or Class A shares of
another Fund of the Smith Barney Mutual Funds that are offered with a sales
charge) and who wish to reinvest their redemption proceeds in the Fund, provided
the reinvestment is made within 60 calendar days of the redemption; (e)
purchases by accounts managed by registered investment advisory subsidiaries of
Travelers; (f) investments of distributions from a UIT sponsored by Smith
Barney; (g) direct rollovers by plan participants of distributions from a 401(k)
plan offered to employees of Travelers and its subsidiaries or a 401(k) plan
enrolled in the Smith Barney 401(k) Program (Note: subsequent investments will
be subject to the applicable sales charge); (h) purchases by separate accounts
used to fund certain unregistered variable annuity contracts; (i) purchases by
investors participating in a Smith Barney fee-based arrangement; and (j)
purchases of Class A shares of the Fund by Section 403(b) or Section 401(a) or
(k) accounts associated with Copeland Retirement Programs. In order to obtain
such discounts, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
    

     RIGHT OF ACCUMULATION

     Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregating
the dollar amount of the new purchase and the total net asset value of all Class
A shares of the Fund and of funds sponsored by Smith Barney which are offered
with a sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.


                                                                              31
<PAGE>

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

     GROUP PURCHASES

     Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative --Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
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 payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales-related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide 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 discretion of
Smith Barney.

     LETTER OF INTENT

     Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13-month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount
Invested" as referred to in the preceding sales charge table includes purchases
of all Class A 


32
<PAGE>

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

shares of the Fund and other funds of the Smith Barney Mutual Funds offered with
a sales charge over the 13-month period based on the total amount of intended
purchases plus the value of all Class A shares previously purchased and still
owned. An alternative is to compute the 13-month period starting up to 90 days
before the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. If the goal is not achieved within the period, the investor
must pay the difference between the sale charges applicable to the purchases
made and the charges previously paid, or an appropriate number of escrowed
shares will be redeemed. Please contact a Smith Barney Financial Consultant or
First Data to obtain a Letter of Intent application.

     Class Y shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y Shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Fund and agree to purchase a total of $5,000,000 of Class Y shares of the same
Fund within six months from the date of the Letter of Intent. If a total
investment of $5,000,000 is not made within the six-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of 0.25%)and expenses applicable
to the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund
expects that such transfer will not be subject to Federal income taxes. Please
contact a Smith Barney Financial Consultant or First Data for further
information.

     DEFERRED SALES CHARGE ALTERNATIVES

     "CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares that were purchased without an initial
sales charge but subject to a CDSC.

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

     Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the 


                                                                              33
<PAGE>

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

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 Class B
shares held under the Smith Barney 401(k) Program, as described below. See
"Purchase of Shares -- Smith Barney 401(k) and ExecChoice(TM) Programs."

        Year Since Purchase
        Payment was Made                                             CDSC
--------------------------------------------------------------------------------
        First                                                        5.00%
        Second                                                       4.00%
        Third                                                        3.00%
        Fourth                                                       2.00%
        Fifth                                                        1.00%
        Sixth and thereafter                                         0.00%
================================================================================

     Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There also will be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements
-- Class B Shares Conversion Feature."

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

     To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired five
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 


34
<PAGE>

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

4.00% (the applicable rate for Class B shares) for a total deferred sales charge
of $9.60.

     WAIVERS OF CDSC

     The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan"), provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994; (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 591 1/42; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a
shareholder who has redeemed shares from other 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 First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.

     SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS

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

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

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


                                                                              35
<PAGE>

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

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

     401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If at the
end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a
Participating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund. For Participating Plans that were originally established through a Smith
Barney retail brokerage account, the five-year period will be calculated from
the date the retail brokerage account was opened. Such Participating Plans will
be notified of the pending exchange in writing within 30 days after the fifth
anniversary of the enrollment date and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the 90th day after the
fifth anniversary date. If the Participating Plan does not qualify for the
five-year exchange to Class A shares, a review of the Participating Plan's
holdings will be performed each quarter until either the Participating Plan
qualifies or the end of the eighth year.

     401(k) Plans Opened Prior to June 21, 1996. In any year after the date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if a
Participating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $500,000 as of the calendar year-end, the
Participating Plan will be offered the opportunity to exchange all of its Class
C shares for Class A shares of a Fund. Such Plans will be notified in writing
within 30 days after the last business day of the calendar year and, unless the
exchange offer has been rejected in writing, the exchange will occur on or about
the last business day of the following March.

     Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM)
Programs, whether opened before or after June 21, 1996, that has not previously
qualified for an exchange into Class A shares will be offered the opportunity to
exchange all of its Class C shares for Class A shares of a Fund, regardless of
asset size, at the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) or ExecChoice(TM) Programs. Such Plans will
be notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth anniversary
date. Once an exchange has occurred, a Participating Plan will not be eligible
to acquire additional Class C shares of the Fund but instead may acquire Class A
shares of the Fund. Any Class C shares not converted will continue to be subject
to the distribution fee.

     Participating Plans wishing to acquire shares of a Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase


36
<PAGE>

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

such shares directly from First Data. For further information regarding these
Programs, investors should contact a Smith Barney Financial Consultant.

     Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Fund are not available for purchase by Participating Plans opened on or after
June 21, 1996, but may continue to be purchased by any Participating Plan opened
prior to such date and originally investing in such Class. Class B shares
acquired are subject to a CDSC of 3.00% of redemption proceeds, if the
Participating Plan terminates within eight years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.

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

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

     The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination 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 591 1/42 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) redemption of shares in connection with a loan made by the Participating
Plan to an employee.


                                                                              37
<PAGE>

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

     Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following Smith Barney Mutual Funds, to the extent shares are offered for sale
in the shareholder's state of residence. Exchanges of Class A, Class B and Class
C shares are subject to minimum investment requirements and all shares are
subject to the other requirements of the Fund into which exchanges are made.

FUND NAME
--------------------------------------------------------------------------------
Growth Funds
      Smith Barney Aggressive Growth Fund Inc.
      Smith Barney Appreciation Fund Inc.
      Smith Barney Disciplined Small Cap Fund, Inc.
      Smith Barney Fundamental Value Fund Inc.
      Smith Barney Growth  Opportunity Fund
      Smith Barney Large Capitalization Growth Fund
      Smith Barney Managed Growth  Fund
      Smith Barney Natural Resources Fund, Inc.
      Smith Barney Special Equities Fund

Growth and Income Funds
      Concert Social Awareness 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. -- Short-Term U.S. Treasury Securities Portfolio
      Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
      Smith Barney Government Securities Fund
      Smith Barney High Income Fund
      Smith Barney Investment Grade Bond Fund
      Smith Barney Managed Governments Fund Inc.

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


38
<PAGE>

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

      Smith Barney Muni Funds -- Georgia Portfolio
   ** Smith Barney Muni Funds -- Limited Term Portfolio
      Smith Barney Muni Funds -- National Portfolio
      Smith Barney Muni Funds -- New York Portfolio
      Smith Barney Muni Funds -- Pennsylvania Portfolio
      Smith Barney New Jersey Municipals Fund Inc.
      Smith Barney Oregon Municipals Fund

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

Money Market Funds
    + Smith Barney Exchange Reserve Fund
   ++ Smith Barney Money Funds, Inc. -- Cash Portfolio
   ++ Smith Barney Money Funds, Inc. -- Government Portfolio
  *** Smith Barney Money Funds, Inc. -- Retirement Portfolio
  +++ Smith Barney Municipal Money Market Fund, Inc.
  +++ Smith Barney Muni Funds -- California Money Market Portfolio
  +++ Smith Barney Muni Funds -- New York Money Market Portfolio
----------
*    Available for exchange with Class A and Class B shares of the Fund. In
     addition, shareholders who own Class C shares of the Fund through the Smith
     Barney 401(k) Program may exchange those shares for Class C shares of this
     Fund.
**   Available for exchange with Class A, Class C and Class Y shares of the
     Fund.
   
***  Available for exchange with Class A shares of the Fund.
+    Available for exchange with Class B and Class C shares of the Fund.
++   Available for exchange with Class A and Class Y shares of the Fund. In
     addition, participating plans opened prior to June 21, 1996 and investing
     in Class C shares may exchange Fund shares for Class C shares of this Fund.
    
+++  Available for exchange with Class A and Class Y shares of the Fund.

     Class B Exchanges. In the event a Class B shareholder (unless such
shareholder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her shares in any
of the funds imposing a higher CDSC than that imposed by the Fund, the exchanged
Class B shares will be subject to the higher applicable CDSC. Upon an exchange,


                                                                              39
<PAGE>

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

the new Class B shares will be deemed to have been purchased on the same date as
the Class B shares of the Fund that have been exchanged.

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

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

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

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


40
<PAGE>

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

     The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.

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

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

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

     A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or on a written
redemption request in excess of $2,000 must be guaranteed by an eligible
guarantor institution such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal Reserve System or member firm
of a national securities exchange. 


                                                                              41
<PAGE>

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

Written redemption requests of $2,000 or less do not require a signature
guarantee unless more than one such redemption request is made in any 10-day
period or the redemption proceeds are to be sent to an address other than the
address of record. Unless otherwise directed, redemption proceeds will be mailed
to an investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.

     TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

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

     Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset value
next determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.

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


42
<PAGE>

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

     Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.

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

     AUTOMATIC CASH WITHDRAWAL PLAN

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

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

     The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, however,
will not redeem shares based solely on market reductions in net asset value.
Before the Fund exercises such right, shareholders will receive written notice
and will be permitted 60 days to bring accounts up to the minimum to avoid
involuntary liquidation.


                                                                              43
<PAGE>

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

     YIELD

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

     TOTAL RETURN

     From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales 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 historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.


44
<PAGE>

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

     BOARD OF TRUSTEES

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

     INVESTMENT ADVISER

     SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. SBMFM is a wholly owned subsidiary of Smith
Barney Holdings Inc. ("Holdings"). SBMFM (through its predecessor entities) has
been in the investment counseling business since 1934 and is a registered
investment adviser. SBMFM renders investment advice to investment companies that
had aggregate assets under management as of September 30, 1997 in excess of $81
billion.

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

     PORTFOLIO MANAGEMENT

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

     Mr. Swab's management discussions and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1997 are
included in the Annual Report dated July 31, 1997. A copy of the Annual Report
may be obtained upon request and without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.

     ADMINISTRATOR

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


                                                                              45
<PAGE>

--------------------------------------------------------------------------------
Distributor
--------------------------------------------------------------------------------

     Smith Barney is located at 388 Greenwich Street, New York, New York, 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an annual service
fee with respect to Class A, Class B and Class 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 an annual 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
automatically convert to Class A shares eight years after the date of original
purchase will no longer be subject to distribution fees. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder accounts
and, in the case of Class B and Class C 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 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, utility,
communications and sales promotion expenses.

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

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

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

     The Trust was organized on March 12, 1985, under the laws of the
Commonwealth of Massachusetts and is an entity commonly known as a
"Massachusetts business trust." The Trust offers shares of beneficial interest
of separate series having a $.001 per share par value. When matters are
submitted for 


46
<PAGE>

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

shareholder vote, shareholders of each Class of each Fund will have one vote for
each full share owned and a proportionate, fractional vote for any fractional
share held of that Class.

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

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

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

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

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

                        The Fund sends its shareholders a semi-annual report and
an audited annual report, which include listings of the investment securities
held by the Fund at the end of the period covered. In an effort to reduce the
Fund's printing and mailing costs, the Trust plans to consolidate the mailing of
the Fund's semi-annual and annual reports by household. This consolidation means
that a household having multiple accounts with the identical address of record
will receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their accounts should contact their Smith Barney
Financial Consultants or First Data.


                                                                              47
<PAGE>

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

                                               A Member of Travelers Group[LOGO]

                                                                    Smith Barney
                                                                     Convertible
                                                                            Fund

                                                            388 Greenwich Street
                                                       New York, New York  10013

                                                                    FD1210 11/97
P R O S P E C T U S
 
 
                                                                    SMITH BARNEY
                                                                     Diversified
                                                                       Strategic
                                                                          Income
                                                                            Fund
                                                             
                                                          NOVEMBER 28, 1997     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
LOGO Smith Barney Mutual Funds
     Investing for your future.
     Everyday.


<PAGE>
 
PROSPECTUS                                                   
                                                          NOVEMBER 28, 1997
                                                                 
Smith Barney Diversified Strategic Income Fund     
388 Greenwich Street
New York, New York 10013
   
(800) 451-2010     
 
  Smith Barney Diversified Strategic Income Fund (the "Fund"), a diversified
fund, seeks high current income primarily through investment in fixed-income
securities. The Fund attempts to achieve this objective by allocating and real-
locating its assets primarily among various types of fixed-income securities
selected by its investment adviser on the basis of an analysis of economic and
market conditions and the relative risks and opportunities of those types of
fixed-income securities. The Fund is one of a number of funds, each having dis-
tinct investment objectives and policies, making up the Smith Barney Income
Funds (the "Trust"). The Trust is an open-end, management investment company
commonly referred to as a mutual fund.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the tele-
phone number set forth above or by contacting a Smith Barney Financial Consul-
tant.
   
  Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated November 28, 1997, as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The Statement of Addi-
tional Information has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated by reference into this Prospectus in its
entirety.     
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
 
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Sub-Investment Adviser
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                           10
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   14
-------------------------------------------------
VALUATION OF SHARES                            28
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             29
-------------------------------------------------
PURCHASE OF SHARES                             30
-------------------------------------------------
EXCHANGE PRIVILEGE                             40
-------------------------------------------------
REDEMPTION OF SHARES                           43
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           46
-------------------------------------------------
PERFORMANCE                                    46
-------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND           47
-------------------------------------------------
DISTRIBUTOR                                    49
-------------------------------------------------
ADDITIONAL INFORMATION                         50
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
   
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.     
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
PROSPECTUS SUMMARY
 
 
  The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
 
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management invest-
ment company that seeks high current income primarily through investment in
fixed-income securities. The Fund attempts to achieve this objective by allo-
cating and reallocating its assets primarily among various types of fixed-
income securities selected by its investment adviser on the basis of an analy-
sis of economic and market conditions and the relative risks and opportunities
of those types of fixed-income securities. See "Investment Objective and Man-
agement Policies."
 
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class 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. In addition, a fifth Class, Class Z shares, which is offered pur-
suant to a separate prospectus, is offered exclusively to (a) tax-exempt
employee benefit and retirement plans of Smith Barney Inc. ("Smith Barney")
and its affiliates and (b) unit investment trusts ("UITs") sponsored by Smith
Barney and its affiliates. See "Purchase of Shares" and "Redemption of
Shares."
   
  Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of
$500,000 or more will be made at net asset value with no initial sales charge,
but will be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary--
Reduced or No Initial Sales Charge."     
 
  Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first
year after purchase and 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual serv-
ice fee of 0.25% and an annual distribution fee of 0.50% of the average daily
net assets of the Class. The Class B shares' distribution fee may cause that
Class to have higher expenses and pay lower dividends than Class A shares.
 
  Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the
 
                                                                              3
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
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 distribu-
tions ("Class B Dividend Shares") will be converted at that time. See "Pur-
chase 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 Fund shares, which when com-
bined with current holdings of Class C shares of the Fund equal or exceed
$500,000 in the aggregate, should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase.
 
  Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any serv-
ice or distribution fees.
 
  In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
   
  Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B 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.     
   
  Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares they do not have a conversion feature and therefore are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer-term investment outlooks.     
   
  Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be     
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
immediately invested in the Fund. In addition, Class A share purchases of
$500,000 or more will be made at net asset value with no initial sales charge
but will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney listed under "Exchange Privilege." Class A share
purchases may also be eligible for a reduced initial sales charge. See "Pur-
chase of Shares." Because the ongoing expenses of Class A shares may be lower
than those for Class B and Class C shares, purchasers eligible to purchase
Class A shares at net asset value or at a reduced sales charge should consider
doing so.     
 
  Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.
 
  See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees
for each Class of shares and "Valuation of Shares," "Dividends, Distributions
and Taxes" and "Exchange Privilege" for other differences between the Classes
of shares.
   
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant-directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without a
sales charge as investment alternatives under both of these programs. See
"Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."     
 
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith Bar-
ney on a fully disclosed basis (an "Introducing Broker") or an investment
dealer in the selling group. In addition, certain investors, including quali-
fied retirement plans and certain other institutional investors, may purchase
shares directly from the Fund through the Fund's transfer agent, First Data
Investor Services Group, Inc. ("First Data"). See "Purchase of Shares."
 
INVESTMENT MINIMUMS Investors in Class A, Class B and Class 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 Retirement 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
 
                                                                              5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
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 minimum subsequent
investment requirement for all Classes is $25. The minimum investment require-
ments for purchases of Fund shares through the Systematic Investment Plan are
described below. There is no minimum investment required in Class A shares for
unitholders who invest distributions from a UIT sponsored by Smith Barney. See
"Purchase of Shares." See "Purchases of Shares."     
   
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for Fund shares. The minimum initial investment
requirement for Class A, Class B and Class C shares and the minimum subsequent
investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."     
 
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
 
MANAGEMENT OF THE FUND 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.
 
  Smith Barney Global Capital Management Inc. ("Global Capital Management")
serves as a sub-investment adviser to the Fund. Global Capital Management is a
wholly owned subsidiary of Holdings. See "Management of the Trust and the
Fund."
 
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respec-
tive net asset values next determined. See "Exchange Privilege."
   
VALUATION OF SHARES Net asset value of the Fund for the prior day is generally
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."     
   
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and distributions of net realized capital gains, if any, are paid
annually. See "Dividends, Distributions and Taxes."     
 
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution rein-
vestments will become eligible for conversion to Class A shares on a pro rata
basis. See "Dividends, Distributions and Taxes."
 
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. General changes in interest rates
will result in increases or decreases in the market value of the obligations
held by the Fund. The Fund may invest up to 35% of its assets in corporate
fixed-income securities of domestic issuers rated Ba or lower by Moody's
Investors Service, Inc. ("Moody's") or BB or lower by Standard & Poor's Ratings
Group ("S&P") or in nonrated securities deemed by SBMFM to be of comparable
quality. The Fund may invest in fixed-income securities rated as low as Caa by
Moody's or CCC by S&P. Securities that are rated Ba by Moody's or BB by S&P
have speculative characteristics with respect to capacity to pay interest and
repay principal. Securities that are rated B generally lack characteristics of
a desirable investment and assurance of interest and principal payments over
any long period of time may be small. Securities that are rated Caa or CCC are
of poor standing. These issues may be in default or present elements of danger
may exist with respect to principal or interest. Although medium- or low-rated
securities offer a higher current yield than the yield offered by higher rated
securities, they involve greater volatility of price and risk of loss of income
and principal, including the probability of default by or bankruptcy of the
issuers of such securities. Medium- and low-rated and comparable unrated secu-
rities (a) will likely have some quality and protective characteristics that,
in the judgment of the rating organization, are outweighed by large uncertain-
ties of major risk exposures to adverse conditions and (b) are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. The Fund's investing
in the securities of foreign issuers involves special risks and considerations
not typically associated with investing in domestic issuers. These risks
include differences in accounting, auditing and financial reporting standards,
generally higher commission rates on foreign portfolio transactions, the possi-
bility of expropriation or confiscatory taxation, adverse changes in investment
or exchange control regulations, political instability that could affect domes-
tic investments in foreign countries and potential restrictions on the flow of
international capital. Foreign securities often trade with less frequency and
volume than domestic securities and therefore may exhibit greater price vola-
tility and changes in foreign exchange rates will affect the value of those
securities held by the Fund that are denominated or quoted in currencies other
than the U.S. dollar. Certain of the investments held by the Fund and certain
of the investment
 
                                                                               7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
strategies that the Fund may employ might expose it to certain risks. The
investments presenting the Fund with risks are mortgage-related securities,
medium- or low-rated securities, as described above, foreign securities, as
described above, and securities of unseasoned issuers. The investment strate-
gies presenting the Fund with risks are entering in repurchase agreements and
reverse repurchase agreements, entering into forward roll transactions, pur-
chasing or selling securities on a when-issued or delayed-delivery basis, lend-
ing portfolio securities, entering into transactions involving options and
futures contracts and entering into currency transactions. See "Investment
Objective and Management Policies."
 
THE FUND'S EXPENSES  The following expense table lists the costs and expenses
an investor will incur either directly or indirectly as a shareholder of the
Fund, based on the maximum sales charge or maximum CDSC that may be incurred at
the time of purchase or redemption and the Fund's operating expenses for its
most recent fiscal year:
 
<TABLE>   
<CAPTION>
  SMITH BARNEY DIVERSIFIED STRATEGIC INCOME
  FUND                                         CLASS A CLASS B CLASS 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                              0.13    0.11    0.11    0.05
------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES                 1.03%   1.51%   1.46%   0.70%
------------------------------------------------------------------------------
</TABLE>    
   
   * Purchases of Class A shares of $500,000 or more will be made at net asset
     value with no sales charge, but will be subject to a CDSC of 1.00% on
     redemptions made within 12 months of purchase.     
  ** Prior to August 9, 1995, Global Capital Management voluntarily waived 50%
     of its sub-investment advisory fee. On August 9, 1995, the Board of
     Trustees of the Fund approved the elimination of this fee waiver.
   
 *** Upon conversion of Class B shares to Class A shares, such shares will no
     longer be subject to a distribution fee. Class C shares do not have a
     conversion feature and, therefore, are subject to an ongoing distribution
     fee. As a result, long-term shareholders of Class C shares may pay more
     than the economic equivalent of the maximum front-end sales charge
     permitted by the National Association of Securities Dealers, Inc. (the
     "NASD").     
   
  Class A shares of the Fund purchased through the Smith Barney AssetOne Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.     
 
 
8
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
  The sales charge and CDSC set forth in the above table are the maximum
charges imposed upon purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class 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)
and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Smith Barney receives an annual 12b-1 service fee of 0.25% of the
value of average daily net assets of Class A shares. Smith Barney also
receives, with respect to Class B shares, an annual 12b-1 fee of 0.75% of the
value of the average daily net assets of that Class, consisting of a 0.50% dis-
tribution fee and a 0.25% service fee. For Class C shares, Smith Barney
receives an annual 12b-1 fee of .70% of the value of average daily net assets
of this Class, consisting of a 0.45% distribution fee and a 0.25% service fee.
"Other expenses" in the above table include fees for shareholder services, cus-
todial fees, legal and accounting fees, printing costs and registration fees.
    
 EXAMPLE
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
 
<TABLE>   
<CAPTION>
  SMITH BARNEY DIVERSIFIED STRATEGIC INCOME
  FUND                                        1 YEAR 3 YEARS 5 YEARS 10 YEARS*
------------------------------------------------------------------------------
  <S>                                         <C>    <C>     <C>     <C>
  An investor would pay the following
  expenses on a $1,000 investment, assuming
  (1) 5.00% annual return and (2) redemption
  at the end of each time period:
    Class A..................................  $55     $76     $99     $165
    Class B..................................   60      73      87      167
    Class C..................................   25      46      80      175
    Class Y..................................    7      22      39       87
  An investor would pay the following
  expenses on the same investment, assuming
  the same annual return and no redemption:
    Class A..................................   55      76      99      165
    Class B..................................   15      48      82      167
    Class C..................................   15      46      80      175
    Class Y..................................    7      22      39       87
------------------------------------------------------------------------------
</TABLE>    
* Ten-year figures assume conversion of Class B shares to Class A shares at the
  end of the eighth year following the date of purchase.
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                               9
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
  The following information for each of the years in the three-year period
ended July 31, 1997 has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Fund's Annual Report dated July
31, 1997. The following information for the fiscal years ended July 31, 1990
through July 31, 1994 has been audited by other independent auditors. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's 1997 Annual Report,
which is incorporated by reference into the Statement of Additional Informa-
tion.     
 
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>   
<CAPTION>
SMITH BARNEY DIVERSIFIED STRATEGIC
INCOME FUND
YEAR ENDED JULY 31,                  1997    1996    1995    1994   1993(1)
-----------------------------------------------------------------------------
<S>                                 <C>     <C>     <C>     <C>     <C>
NET ASSET VALUE, BEGINNING OF YEAR  $ 7.82  $ 7.85  $ 7.76  $ 8.41  $ 8.24
-----------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income(2)             0.62    0.61    0.94    0.63    0.47
 Net realized and unrealized gain
 (loss)                               0.24    0.03   (0.18)  (0.52)   0.27
-----------------------------------------------------------------------------
Total Income From Operations          0.86    0.64    0.76    0.11    0.74
-----------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income               (0.67)  (0.62)  (0.48)  (0.62)  (0.45)
 Net realized gains                     --      --      --   (0.10)  (0.12)
 Capital                                --   (0.05)  (0.19)  (0.04)     --
-----------------------------------------------------------------------------
Total Distributions                  (0.67)  (0.67)  (0.67)  (0.76)  (0.57)
-----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR        $ 8.01  $ 7.82  $ 7.85  $ 7.76  $ 8.41
-----------------------------------------------------------------------------
TOTAL RETURN++                       11.36%   8.39%  10.35%   1.16%   9.30%++
-----------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS)    $267    $203    $177  $   76  $   48
-----------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS:
 Expenses(2)                          1.03%   1.04%   1.09%   1.10%   1.10%+
 Net investment income                7.75    7.85    8.15    7.67%   8.26+
-----------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                 85%     90%     83%     93%    116%
-----------------------------------------------------------------------------
</TABLE>    
 (1) For the period from November 6, 1992 (inception date) to July 31, 1993.
    
 (2) The investment adviser waived part of its fees for the years ended July
     31,1995 and 1994. If such fees had not been waived, the per share effect
     on net investment income and the ratios of expenses to average net assets
     would have been as follows:     
<TABLE>   
<CAPTION>
               PER SHARE DECREASES    EXPENSE RATIOS WITHOUT
             IN NET INVESTMENT INCOME       FEE WAIVERS
  -----------------------------------------------------------
                1995         1994        1995        1994
             ------------------------ ----------- -----------
   <S>       <C>         <C>          <C>         <C>
   Class A         $0.01       $0.00*       1.14%       1.12%
</TABLE>    
    
 ++ Total return represents aggregate total return for the period indicated
    and does not reflect any applicable sales charge.     
        
  ++Total return is not annualized as it may not be representative of the
    total return for the year.
  + Annualized.
        
           
  * Amount represents less than $0.01 per share.     
 
10
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
   
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
    
<TABLE>   
<CAPTION>
SMITH BARNEY
DIVERSIFIED STRATEGIC
INCOME FUND
YEAR ENDED JULY 31,         1997    1996    1995    1994    1993    1992    1991   1990(1)
--------------------------------------------------------------------------------------------
<S>                        <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
NET ASSET VALUE,
BEGINNING OF YEAR          $ 7.83  $ 7.86  $ 7.76  $ 8.41  $ 8.55  $ 7.98  $ 8.06  $ 8.00
--------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income (2)   0.59    0.58    0.70    0.59    0.65    0.68    0.71    0.41
 Net realized and
 unrealized gain (loss)      0.23    0.01    0.02   (0.51)  (0.07)   0.64    0.07    0.05
--------------------------------------------------------------------------------------------
Total Income From
Operations                   0.82    0.59    0.72    0.08    0.58    1.32    0.78    0.46
--------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income      (0.62)  (0.57)  (0.44)  (0.60)  (0.58)  (0.68)  (0.71)  (0.40)
 Net realized gains            --      --      --   (0.10)  (0.14)     --   (0.06)     --
 Capital                       --   (0.05)  (0.18)  (0.03)     --   (0.07)  (0.09)     --
--------------------------------------------------------------------------------------------
Total Distributions         (0.62)  (0.62)  (0.62)  (0.73)  (0.72)  (0.75)  (0.86)  (0.40)
--------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR                       $ 8.03  $ 7.83  $ 7.86  $ 7.76  $ 8.41  $ 8.55  $ 7.98  $ 8.06
--------------------------------------------------------------------------------------------
TOTAL RETURN++              10.89%   7.80%  10.00%   0.66%   7.28%  17.12%  10.42%   6.00%++
--------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS)                 $2,440  $2,380  $2,367  $2,469  $2,105  $1,465  $  503  $  179
--------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses (2)                1.51%   1.52%   1.56%   1.57%   1.59%   1.62%   1.63%   1.74%+
 Net investment income       7.34    7.36    6.82    7.20    7.77    7.99    9.21    9.59+
--------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE        85%     90%     83%     93%    116%    125%    131%     56%
--------------------------------------------------------------------------------------------
</TABLE>    
 (1) For the period from December 28, 1989. (commencement of operations) to
     July 31, 1990.
    
 (2) The investment adviser waived part of its fees for the years ended July
     31,1995 and 1994. If such fees had not been waived, the per share effect
     on net investment income and the ratios of expenses to average net assets
     would have been as follows:     
<TABLE>   
<CAPTION>
               PER SHARE DECREASES    EXPENSE RATIOS WITHOUT
            IN NET INVESTMENT INCOME        FEE WAIVERS
  -----------------------------------------------------------
                1995         1994        1995        1994
            ------------ ------------ ----------- -----------
   <S>      <C>          <C>          <C>         <C>
   Class B        $0.00*       $0.00*       1.61%       1.59%
</TABLE>    
    
 ++ Total return represents the aggregate total return for the period
    indicated and does not reflect any applicable sales charge.     
        
  ++Total return is not annualized as it may not be representative of the
 total return for the year.
  + Annualized.
           
  * Amount represents less than $0.01 per share.     
 
                                                                              11
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
   
FOR A CLASS C SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
    
<TABLE>   
<CAPTION>
SMITH BARNEY DIVERSIFIED STRATEGIC
INCOME FUND
YEAR ENDED JULY 31,                  1997    1996    1995(1)   1994   1993(2)
-------------------------------------------------------------------------------
<S>                                 <C>     <C>      <C>      <C>     <C>
NET ASSET VALUE, BEGINNING OF YEAR  $ 7.81   $ 7.84   $ 7.76  $ 8.41  $ 8.36
-------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income (3)            0.58     0.52     1.16    0.55    0.22
 Net realized and unrealized gain
 (loss)                               0.24     0.07    (0.46)  (0.47)   0.06
-------------------------------------------------------------------------------
Total Income From Operations          0.82     0.59     0.70    0.08    0.28
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income               (0.62)   (0.57)   (0.44)  (0.60)  (0.20)
 Net realized gains                     --       --       --   (0.10)  (0.03)
 Capital                                --    (0.05)   (0.18)  (0.03)     --
-------------------------------------------------------------------------------
Total Distributions                  (0.62)   (0.62)   (0.62)  (0.73)  (0.23)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR        $ 8.01   $ 7.81   $ 7.84  $ 7.76  $ 8.41
-------------------------------------------------------------------------------
TOTAL RETURN++                       10.92%    7.82%    9.73%   0.66%   3.41%++
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)         $84  $42,222  $12,730  $1,065  $   11
-------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS
 Expenses (3)                         1.46%    1.47%    1.46%   1.57%   1.50%+
 Net investment income                7.19     7.61    10.23    7.20    7.87+
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                 85%      90%      83%     93%    116%
-------------------------------------------------------------------------------
</TABLE>    
 (1) On November 7, 1994, the former Class D shares were renamed Class C
     shares.
 (2) For the period from March 19, 1993 (inception date) to July 31, 1993.
    
 (3) The investment adviser waived part of its fees for the years ended July
     31,1995 and 1994. If such fees had not been waived, the per share effect
     on net investment income and the ratios of expenses to average net assets
     would have been as follows:     
<TABLE>   
<CAPTION>
               PER SHARE DECREASES    EXPENSE RATIOS WITHOUT
            IN NET INVESTMENT INCOME        FEE WAIVERS
  -----------------------------------------------------------
                1995         1994        1995        1994
            ------------ ------------ ----------- -----------
   <S>      <C>          <C>          <C>         <C>
   Class C        $0.00*       $0.00*       1.51%       1.58%
</TABLE>    
    
 ++ Total return represents aggregate total return for the period indicated
    and does not reflect any applicable sales charge.     
  ++Total return is not annualized as it may not be representative of the
    total return for the year.
  + Annualized.
        
           
  * Amount represents less than $0.01 per share.     
 
12
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
   
FOR A CLASS Y SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
    
<TABLE>   
<CAPTION>
SMITH BARNEY DIVERSIFIED STRATEGIC
INCOME FUND
YEAR ENDED JULY 31,                  1997    1996(1)
-------------------------------------------------------
<S>                                 <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR   $ 7.82   $ 7.89
-------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income                 0.64     0.50
 Net realized and unrealized gain      0.24     0.01
-------------------------------------------------------
Total Income From Operations           0.88     0.51
-------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                (0.70)   (0.53)
 Capital                                 --    (0.05)
-------------------------------------------------------
Total Distributions                   (0.70)   (0.58)
-------------------------------------------------------
NET ASSET VALUE, END OF YEAR         $ 8.00   $ 7.82
-------------------------------------------------------
TOTAL RETURN                          11.64%    6.65%++
-------------------------------------------------------
NET ASSETS, END OF YEAR (000S)      $80,479  $26,940
-------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                              0.70%    0.69%+
 Net investment income                 7.84     8.54+
-------------------------------------------------------
PORTFOLIO TURNOVER RATE                  85%      90%
-------------------------------------------------------
</TABLE>    
 (1) For the period from October 10, 1995 (inception date) to July 31, 1996.
    
  ++Total return is not annualized, as it may not be representative of the
    total return for the year.     
        
        
  + Annualized.
        
       
                                                                              13
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
 
  The Fund's investment objective is high current income primarily through
investment in fixed-income securities. In attempting to achieve its objective,
the Fund allocates and reallocates its assets primarily among various types of
fixed-income securities selected by SBMFM. The types of fixed-income securi-
ties among which the Fund's assets will be primarily allocated are: obliga-
tions issued or guaranteed as to principal and interest by the United States
government ("U.S. government securities"); mortgage-related securities issued
by various governmental and non-governmental entities; domestic and foreign
corporate securities; and foreign government securities. The Fund's investment
objective may be changed only with the approval of the holders of a majority
of the Fund's outstanding shares. There can be no assurance that the Fund will
achieve its investment objective.
 
  The allocation and reallocation of the Fund's assets will be undertaken by
SBMFM on the basis of its analysis of economic and market conditions and the
relative risks and opportunities of particular types of fixed-income securi-
ties. In general, the particular types of fixed-income securities selected for
investment by the Fund at any given time will be those that, in the view of
SBMFM, offer the highest income available at the time. The Fund typically
would not invest in fixed-income securities offering the highest income poten-
tial if SBMFM determined that the income potential is not sufficient to jus-
tify the higher risks associated with the securities.
 
  At any given time, the Fund may be entirely or only partially invested in a
particular type of fixed-income security. Under normal conditions, at least
65% of the Fund's assets will be invested in fixed-income securities, which
for this purpose will include non-convertible preferred stocks. The Fund gen-
erally will invest in intermediate- and long-term fixed-income securities with
the result that, under normal market conditions, the weighted average maturity
of the Fund's securities is expected to be between five and 12 years. Up to
20% of the Fund's assets may be invested in common stock or other equity-
related securities, including convertible securities, preferred stock, war-
rants and rights.
   
  Mortgage-related securities in which the Fund may invest include mortgage
obligations collateralized by mortgage loans or mortgage pass-through certifi-
cates. Under current market conditions, the Fund's holdings of mortgage-
related securities may be expected to consist primarily of securities issued
or guaranteed by Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corpora-
tion ("FHLMC"). The composition of the Fund's investments in mortgage-related
securities, however, will vary from time to time based upon the determination
of SBMFM as to how best to achieve the Fund's investment objective taking into
account factors such as the liquidity and yield of various mortgage-related
securities. Mortgage-related securities held by the Fund generally will be
rated no lower than Aa by Moody's or AA by S&P or, if not rated, will be of
equivalent investment quality as determined by     
 
14
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
SBMFM. SBMFM also may consider the ratings, if any, assigned to mortgage-
related securities by recognized rating agencies other than Moody's and S&P.
   
  The Fund typically will purchase a corporate debt security if SBMFM believes
that the yield and, to a lesser extent, the potential for capital appreciation
of the security are sufficiently attractive in light of the risks of ownership
of the security. In determining whether the Fund should invest in particular
debt securities, SBMFM will consider factors such as: the price, coupon and
yield to maturity; the credit quality of the issuer; the issuer's available
cash flow and the related coverage ratios; the property, if any, securing the
obligation; and the terms of the debt securities, including the subordination,
default, sinking fund and early redemption provisions. SBMFM also will review
the ratings, if any, assigned to the securities by Moody's, S&P or other rec-
ognized rating agencies. SBMFM's judgment as to credit quality of a debt secu-
rity may differ, however, from that suggested by the ratings published by a
rating service.     
 
  The Fund may invest up to 35% of its assets in corporate fixed-income secu-
rities of domestic issuers rated Ba or lower by Moody's or BB or lower by S&P
or in nonrated securities deemed by SBMFM to be of comparable quality. The
Fund may invest in fixed-income securities rated as low as Caa by Moody's or
CCC by S&P.
 
  Corporate fixed-income securities of foreign issuers in which the Fund may
invest will include securities of companies, wherever organized, that have
their principal business activities and interests outside the United States.
Foreign government securities in which the Fund may invest consist of fixed-
income securities issued by foreign governments. In general, the Fund may
invest in debt securities issued by foreign governments or any of their polit-
ical subdivisions that are considered stable by Global Capital Management. Up
to 5% of the Fund's assets, however, may be invested in foreign securities
issued by countries with developing economies.
 
  The Fund may invest in fixed-income securities issued by supranational orga-
nizations, which are entities designated or supported by a government or gov-
ernmental entity to promote economic development, and include, among others,
the Asian Development Bank, the European Coal and Steel Community, the Euro-
pean Economic Community and the World Bank. These organizations have no taxing
authority and are dependent upon their members for payments of interest and
principal. Moreover, the lending activities of supranational entities are lim-
ited to a percentage of their total capital (including "callable capital" con-
tributed by members at an entity's call), reserves and net income.
 
  The Fund may also invest in zero coupon securities and payment-in-kind
bonds.
 
 ADDITIONAL INVESTMENTS
  Money Market Instruments. Up to 20% of the Fund's assets may be invested in
cash and money market instruments at any time. In addition, when SBMFM
 
                                                                             15
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
believes that market conditions warrant, the Fund may invest in short-term
instruments without limitation for temporary defensive purposes. Short-term
instruments in which the Fund may invest include: U.S. government securities;
certain bank obligations (including certificates of deposit, time deposits and
bankers' acceptances of domestic or foreign banks, domestic savings and loan
associations and similar institutions); commercial paper rated no lower than
Prime-2 by Moody's or A-2 by S&P or the equivalent from another major rating
service or, if unrated, of an issuer having an outstanding, unsecured debt
issue then rated within the three highest rating categories; and repurchase
agreements with respect to the securities in which the Fund may invest. The
Fund will invest in obligations of a foreign bank or foreign branch of a domes-
tic bank only if SBMFM determines that the obligations present minimum credit
risks. These obligations may be traded in the United States or outside the
United States, but will be denominated in U.S. dollars.
   
  U.S. Government Securities. The U.S. government securities in which the Fund
may invest include direct obligations of the United States Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds) and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as GNMA cer-
tificates); securities that are supported by the right of the issuer to borrow
from the United States Treasury (such as securities of Federal Home Loan
Banks); and securities that are supported by the credit of the instrumentality
(such as FNMA and FHLMC bonds). Treasury Bills have maturities of less than one
year, Treasury Notes have maturities of one to 10 years and Treasury Bonds gen-
erally have maturities of greater than 10 years at the date of issuance. Cer-
tain U.S. government securities, such as those issued or guaranteed by GNMA,
FNMA and FHLMC, are mortgage-related securities. U.S. government securities
generally do not involve the credit risks associated with other types of inter-
est-bearing securities, although, as a result, the yields available from U.S.
government securities are generally lower than the yields available from inter-
est-bearing corporate securities.     
 
  Zero Coupon Securities. A zero coupon bond pays no interest in cash to its
holder during its life, although interest is accrued during that period. Its
value to an investor consists of the difference between its face value at the
time of maturity and the price for which it was acquired, which is generally an
amount significantly less than its face value (sometimes referred to as a "deep
discount" price). Because such securities usually trade at a deep discount,
they will be subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities which
make periodic distributions of interest. On the other hand, because there are
no periodic interest payments to be reinvested prior to maturity, zero coupon
securities eliminate reinvestment risk and lock in a rate of return to maturi-
ty.
 
16
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
 CERTAIN INVESTMENT STRATEGIES
  In attempting to achieve its investment objective, the Fund may employ, among
others, one or more of the strategies set forth below. More detailed informa-
tion concerning these strategies and their related risks is contained in the
Statement of Additional Information.
 
  Repurchase Agreements. The Fund may engage in repurchase agreement transac-
tions with certain member banks of the Federal Reserve System and with certain
dealers on the Federal Reserve Bank of New York's list of reporting dealers.
Under the terms of a typical repurchase agreement, the Fund would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining
the yield during the Fund's holding period. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during the Fund's
holding period. The value of the underlying securities will be at least equal
at all times to the total amount of the repurchase obligation, including inter-
est. Repurchase agreements could involve certain risks in the event of default
or insolvency of the other party, including possible delays or restrictions
upon the Fund's ability to dispose of the underlying securities, the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. SBMFM or Global Capital Management, act-
ing under the supervision of the Trust's Board of Trustees, reviews on an ongo-
ing basis the value of the collateral and the creditworthiness of those banks
and dealers with which the Fund may enter into repurchase agreements to evalu-
ate potential risks.
 
  Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreement transactions with member banks of the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is con-
sidered a borrowing by the Fund, involves a sale by the Fund of securities that
it holds concurrently with an agreement by the Fund to repurchase the same
securities at an agreed-upon price and date. The Fund typically will invest the
proceeds of a reverse repurchase agreement in money market instruments or
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as leverage. The Fund
will enter into a reverse repurchase agreement for leverage purposes only when
the interest income to be earned from the investment of the proceeds is greater
than the interest expense of the transaction. The Fund also may use the pro-
ceeds of reverse repurchase agreements to provide liquidity to meet redemp-
tion requests when the sale of the Fund's securities is considered to be dis-
advantageous.
 
  Forward Roll Transactions. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage-related securi-
ties
 
                                                                              17
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
issued by GNMA, FNMA and FHLMC. In a forward roll transaction, the Fund sells
a mortgage security to a financial institution, such as a bank or broker-deal-
er, and simultaneously agrees to repurchase a similar security from the insti-
tution at a later date at an agreed-upon price. The mortgage securities that
are repurchased will bear the same interest rate as those sold, but generally
will be collateralized by different pools of mortgages with different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, the Fund will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in short-
term instruments, particularly repurchase agreements, and the income from
these investments, together with any additional fee income received on the
sale will generate income for the Fund exceeding the yield on the securities
sold. Forward roll transactions involve the risk that the market value of the
securities sold by the Fund may decline below the repurchase price of those
securities. At the time the Fund enters into forward roll transactions, it
will place in a segregated account with the Fund's custodian cash, U.S. gov-
ernment securities, equity securities or debt securities of any grade having a
value equal to or greater than the Fund's purchase commitments, provided such
securities have been determined by SBMFM to be liquid and unencumbered and are
marked to market daily pursuant to guidelines established by the Trustees. The
Fund will subsequently monitor the account to insure that such equivalent
value is maintained.     
   
  When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or
sell securities on a when-issued or delayed-delivery basis. The Fund will
enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage. In such transactions delivery
of the securities occurs beyond the normal settlement periods, but no payment
or delivery is made by the Fund prior to the actual delivery or payment by the
other party to the transaction. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on those securities may be higher or lower than the yields available
in the market on the dates when the investments are actually delivered to the
buyers. The Fund will establish with its custodian a segregated account con-
sisting of cash, U.S. government securities, equity securities or debt securi-
ties of any grade having a value equal to or greater than the Fund's purchase
commitments, provided such securities have been determined by SBMFM to be liq-
uid and unencumbered and are marked to market daily pursuant to guidelines
established by the Trustees. Placing securities rather than cash in the segre-
gated account may have a leveraging effect on the Fund's net assets.     
 
  Lending of Portfolio Securities. The Fund has the ability to lend portfolio
securities to brokers, dealers and other financial organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets taken at value.
Loans of portfolio securities by the Fund will be collateralized by cash, let-
ters of credit or U.S. govern-
 
18
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
ment securities that are maintained at all times in an amount at least equal to
the current market value of the loaned securities. Any gain or loss in the mar-
ket price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund. The Fund will segregate common stock or
convertible or exchangeable preferred stock or debt securities in a special
account with its custodian.     
 
  Covered Option Writing. The Fund may purchase and sell put, call and other
types of option securities that are traded on domestic or foreign exchanges or
the over-the-counter market including, but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options. The Fund may realize fees (referred to as "premiums") for granting the
rights evidenced by the options. A put option embodies the right of its pur-
chaser to compel the writer of the option to purchase from the option holder an
underlying security at a specified price at any time during the option period.
In contrast, a call option embodies the right of its purchaser to compel the
writer of the option to sell to the option holder an underlying security at a
specified price at any time during the option period. Thus, the purchaser of a
put option written by the Fund has the right to compel the Fund to purchase
from it the underlying security at the agreed-upon price for a specified time
period, while the purchaser of a call option written by the Fund has the right
to purchase from the Fund the underlying security owned by the Fund at the
agreed-upon price for a specified time period.
 
  Upon the exercise of a call option written by the Fund, the Fund may suffer a
loss equal to the excess of the security's market value at the time of the
option exercise over the option's exercise price, less the premium received for
writing the option.
 
  The Fund will write only covered options. Thus, whenever the Fund writes a
call option, it will continue to own or have the present right to acquire the
underlying security for as long as it remains obligated as the writer of the
option. To support its obligation to purchase the underlying security if a put
option is exercised, the Fund will either (a) deposit with its custodian in a
segregated account cash or other eligible assets having a value at least equal
to the exercise price of the underlying securities or (b) continue to own an
equivalent number of puts of the same "series" (that is, puts on the same
underlying security having the same exercise prices and expiration dates as
those written by the Fund), or an equivalent number of puts of the same "class"
(that is, puts on the same underlying security) with exercise prices greater
than those that it has written (or, if the exercise prices of the puts that it
holds are less than the exercise prices of those that it has written, it will
deposit the difference with its custodian in a segregated account).
 
  Purchasing Put and Call Options on Securities. The Fund may utilize up to 15%
of its assets to purchase options and may do so at or about the same time that
it purchases the underlying security or at a later time. In purchasing option
securi-
 
                                                                              19
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
ties, the Fund will trade only with counterparties of high standing in terms of
credit quality and commitment to the market. Risks associated with options
transactions and foreign futures contracts are described below under "Special
Considerations."
   
  Futures Contracts and Options on Futures Contracts. The Fund may enter into
futures contracts or related options that are traded on domestic and foreign
exchanges or boards of trade as well as the over-the-counter market with
respect to options on such futures contracts. A futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified debt security at a specified price, date, time and place.
The Fund may enter into futures contracts to sell debt securities when SBMFM
believes that the value of the Fund's debt securities will decrease. The Fund
may enter into futures contracts to purchase debt securities when SBMFM antici-
pates purchasing the underlying debt securities on behalf of the Fund and
believes that prices will rise before the purchases will be made. When the Fund
enters into a futures contract to purchase an underlying security, an amount of
cash or other eligible segregated assets, equal to the market value of the con-
tract, will be deposited in a segregated account with the Fund's custodian to
collateralize the position, thereby insuring that the use of the contract is
unleveraged. The Fund will not enter into futures contracts for speculation and
will enter into futures contracts that are traded on a domestic or foreign
exchange or board of trade as well as the over-the-counter market.     
 
  An option on a futures contact, as contrasted with the direct investment in a
futures contract, gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract at a specified exercise price
at any time prior to the expiration date of the option. A call option gives the
purchaser of the option the right to enter into a futures contract to buy and
obliges the writer to enter into a futures contract to sell the underlying debt
securities. A put option gives the purchaser the right to sell and obliges the
writer to buy the underlying contract.
 
  The Fund may purchase put options on futures contracts to hedge its portfolio
of debt securities against the risk of rising interest rates, and may purchase
call options on futures contracts to hedge against a decline in interest rates.
The Fund may write put and call options on futures contracts in entering into
closing sale transactions and to increase its ability to hedge against changes
in interest rates. The Fund will write put and call options on futures con-
tracts that are traded on a domestic or foreign exchange or board of trade as
well as the over-the-counter market.
 
  Currency Exchange Transactions and Options on Foreign Currencies. The Fund
will conduct its currency exchange transactions either on a spot (that is,
cash) basis at the rate prevailing in the currency exchange market or through
entering into forward contracts to purchase or sell currencies. The Fund's
dealings in for-
 
20
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
ward currency exchange and options on foreign currencies are limited to hedg-
ing involving either specific transactions or portfolio positions.
 
  A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the par-
ties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might result should the value of the
currency increase.
 
  The Fund may purchase and sell put, call and other types of options on for-
eign currencies that are traded on domestic or foreign exchanges or in the
over-the-counter market, including but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options.
 
  The Fund may purchase put options on a foreign currency in which securities
held by the Fund are denominated to protect against a decline in the value of
the currency in relation to the currency in which the exercise price is denom-
inated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the pur-
chaser, in return for a premium, the right to sell, in the case of a put, and
buy, in the case of a call, the underlying currency at a specified price dur-
ing the term of the option. Although the purchase of an option on a foreign
currency may constitute an effective hedge by the Fund against fluctuations in
the exchange rates, in the event of rate movements adverse to the Fund's posi-
tion, the Fund may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies purchased by the Fund may be
traded on domestic and foreign exchanges or over-the-counter.
 
 CERTAIN INVESTMENT GUIDELINES
   
  The Fund may invest up to 15% of its total assets in securities with con-
tractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities
greater than seven days, (b) futures contracts and related options for which a
liquid secondary market does not exist and (c) time deposits maturing in more
than seven calendar days. The above restriction does not apply to securities
subject to Rule 144A of the Securities Act of 1933, as amended (the "1933
Act") ("Rule 144A Securities"). In addition, the Fund may invest up to 5% of
its assets in the securities of issuers that have been in continuous operation
for less than three years. The Fund also may borrow from banks for temporary
or emergency purposes, but not for investment purposes, in an amount up to 10%
of its total assets, and may pledge its assets to the same extent     
 
                                                                             21
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
in connection with such borrowings. Whenever these borrowings exceed 5% of the
value of the Fund's total assets, the Fund will not make any additional invest-
ments. Immediately after any borrowing (including reverse repurchase agreements
and forward roll transactions) by the Fund, the Fund will maintain an asset
coverage of at least 300% with respect to all of its borrowings. Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the Trust's
Board of Trustees. A complete list of investment restrictions that identifies
additional restrictions that cannot be changed without the approval of a major-
ity of the Fund's outstanding shares is contained in the Statement of Addi-
tional Information.
       
 RISK FACTORS AND SPECIAL CONSIDERATIONS
  Medium-, Low- and Unrated Securities. The Fund may invest in medium- or low-
rated securities and unrated securities of comparable quality. Generally, these
securities offer a higher current yield than the yield offered by higher-rated
securities but involve greater volatility of price and risk of loss of income
and principal, including the probability of default by or bankruptcy of the
issuers of such securities. Medium- and low-rated and comparable unrated secu-
rities (a) will likely have some quality and protective characteristics that,
in the judgment of the rating organization, are outweighed by large uncertain-
ties or major risk exposures to adverse conditions and (b) are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. Thus, it is possible
that these types of factors could, in certain instances, reduce the value of
securities held by the Fund with a commensurate effect on the value of the
Fund's shares. Therefore, an investment in the Fund should not be considered as
a complete investment program and may not be appropriate for all investors.
 
  While the market values of medium- and low-rated and comparable unrated secu-
rities tend to react less to fluctuations in interest rate levels than do those
of higher-rated securities, the market values of certain of these securities
also tend to be more sensitive to individual corporate developments and changes
in economic conditions than higher-rated securities. In addition, medium- and
low-rated and comparable unrated securities generally present a higher degree
of credit risk. Issuers of medium- and low-rated and comparable unrated securi-
ties are often highly leveraged and may not have more traditional methods of
financing available to them so that their ability to service their debt obliga-
tions during an economic downturn or during sustained periods of rising inter-
est rates may be impaired. The risk of loss due to default by such issuers is
significantly greater because medium- and low-rated and comparable unrated
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Fund may incur additional expenses to the
extent that it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings. In addition, the markets in
 
22
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
which medium- and low-rated or comparable unrated securities are traded gener-
ally are more limited than those in which higher-rated securities are traded.
The existence of limited markets for these securities may restrict the avail-
ability of securities for the Fund to purchase and also may have the effect of
limiting the ability of the Fund to (a) obtain accurate market quotations for
purposes of valuing securities and calculating net asset value and (b) sell
securities at their fair value either to meet redemption requests or to respond
to changes in the economy or the financial markets. The market for medium- and
low-rated and comparable unrated securities is relatively new and has not fully
weathered a major economic recession. Any such recession, however, could likely
disrupt severely the market for such securities and adversely affect the value
of such securities. Any such economic downturn also could adversely affect the
ability of the issuers of such securities to repay principal and pay interest
thereon.
 
  Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding securi-
ty, resulting in a decreased return to the Fund.
 
  Securities that are rated Ba by Moody's or BB by S&P have speculative charac-
teristics with respect to capacity to pay interest and repay principal. Securi-
ties that are rated B generally lack characteristics of a desirable investment
and assurance of interest and principal payments over any long period of time
may be small. Securities that are rated Caa or CCC are of poor standing. These
issues may be in default or present elements of danger may exist with respect
to principal or interest.
 
  In light of the risks described above, SBMFM, in evaluating the creditworthi-
ness of an issue, whether rated or unrated, will take various factors into con-
sideration, which may include, as applicable, the issuer's financial resources,
its sensitivity to economic conditions and trends, the operating history of and
the community support for the facility financed by the issue, the ability of
the issuer's management and regulatory matters.
   
  The Fund's fixed-income security holdings (as rated by S&P or Moody's,
respectively) for the fiscal year ended July 31, 1997 were composed as follows:
0.0% rated BBB or Baa; 6.95% rated BB or Ba; 17.45% rated B or B; 17.57% rated
CCC or Caa; 20.00% in unrated securities; 0.0% in common stocks and 21.00% in
preferred stocks. The percentages were calculated on a dollar weighted average
basis by determining monthly the percentage of the Fund's net assets invested
in each rating category and does not necessarily indicate what the composition
of the Fund's holdings will be in subsequent years.     
 
  Securities of Unseasoned Issuers. Securities in which the Fund may invest may
have limited marketability and, therefore, may be subject to wide fluctuations
in
 
                                                                              23
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
market value. In addition, certain securities may lack a significant operating
history and be dependent on products or services without an established market
share.
 
  Foreign Securities. There are certain risks involved in investing in securi-
ties of companies and governments of foreign nations that are in addition to
the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and eco-
nomic developments and the possible imposition of limitations on the repatria-
tion of currencies or other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers and the lack of uniform
accounting, auditing and financial reporting standards or of other regulatory
practices and requirements comparable to those applicable to domestic compa-
nies. The yield of the Fund may be adversely affected by fluctuations in value
of one or more foreign currencies relative to the U.S. dollar. Moreover, secu-
rities of many foreign companies and their markets may be less liquid and
their prices more volatile than those of securities of comparable domestic
companies. In addition, with respect to certain foreign countries, the possi-
bility exists of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Fund,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that could reduce the yield on such securities.
Because the Fund will invest in securities denominated or quoted in currencies
other than the U.S. dollar, changes in foreign currency exchange rates may
adversely affect the value of portfolio securities and the appreciation or
depreciation of investments. Investment in foreign securities also may result
in higher expenses due to the cost of converting foreign currency to U.S. dol-
lars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on domestic exchanges, the expense of
maintaining securities with foreign custodians, and the imposition of transfer
taxes or transaction charges associated with foreign exchanges.
 
  The Fund may also purchase American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or other
securities representing underlying shares of foreign companies. ADRs are pub-
licly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of
the depositary's transaction fees, whereas under an unsponsored arrangement,
the foreign issuer assumes no obligation and the depositary's transaction fees
are paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR, and the
financial information about a company may not be as reliable for an
unsponsored ADR as it is for a sponsored ADR. The Fund may invest in ADRs
through both sponsored and unsponsored arrangements.
 
  Corporate securities in which the Fund may invest include corporate fixed-
income securities of both domestic and foreign issuers, such as bonds, deben-
tures,
 
24
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
notes, equipment lease certificates, equipment trust certificates, and pre-
ferred stock. The Fund's investments in each of equipment lease or equipment
trust certificates will not exceed 5% of its assets.
 
  Certain of the corporate fixed-income securities in which the Fund may
invest may involve equity characteristics. The Fund may, for example, invest
in warrants for the acquisition of stock of the same or of a different issuer
or in corporate fixed-income securities that have conversion or exchange
rights permitting their holder to convert or exchange the securities at a
stated price within a specified period of time into a specified number of
shares of common stock. In addition, the Fund may invest in participations
that are based on revenues, sales or profits of an issuer or in common stock
offered as a unit with corporate fixed-income securities.
 
  Mortgage-Related Securities. Mortgage-related securities provide a monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees
or costs that may be incurred. Prepayments of principal on mortgage-related
securities may tend to increase due to refinancing of mortgages as interest
rates decline. Mortgage pools created by private organizations generally offer
a higher rate of interest than government and government-related pools because
no direct or indirect guarantees of payments are applicable with respect to
the former pools. Timely payment of interest and principal in these pools,
however, may be supported by various forms of private insurance or guarantees,
including individual loan, title, pool and hazard insurance. There can be no
assurance that the private insurers can meet their obligations under the poli-
cies. Prompt payment of principal and interest on GNMA mortgage pass-through
certificates is backed by the full faith and credit of the United States. FNMA
guaranteed mortgage pass-through certificates and FHLMC participation certifi-
cates are solely the obligations of those entities but are supported by the
discretionary authority of the United States government to purchase the agen-
cies' obligations. Collateralized mortgage obligations are a type of bond
secured by an underlying pool of mortgages or mortgage pass-through certifi-
cates that are structured to direct payments on underlying collateral to dif-
ferent series or classes of the obligations.
 
  To the extent that the Fund purchases mortgage-related securities at a pre-
mium, mortgage foreclosures and prepayments of principal by mortgagors (which
may be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The Fund's yield may
be affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related mort-
gage pools, generally will fluctuate in response to market interest rates.
 
 
                                                                             25
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
  Securities of Developing Countries. A developing country generally is consid-
ered to be a country that is in the initial stages of its industrialization
cycle. Investing in the equity and fixed-income markets of developing countries
involves exposure to economic structures that are generally less diverse and
mature, and to political systems that can be expected to have less stability,
than those of developed countries. Historical experience indicates that the
markets of developing countries have been more volatile than the markets of the
more mature economies of developed countries; however, such markets often have
provided higher rates of return to investors.
 
  Non-Publicly Traded and Illiquid Securities. The Fund's sale of securities
that are not publicly traded is typically restricted under the Federal securi-
ties laws. As a result, the Fund may be forced to sell these securities at less
than fair market value or may not be able to sell them when SBMFM believes it
desirable to do so. The Fund's investments in illiquid securities are subject
to the risk that should the Fund desire to sell any of these securities when a
ready buyer is not available at a price that the Fund deems representative of
their value, the value of the Fund's net assets could be adversely affected.
   
  Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional buy-
ers" pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities are
freely transferable among qualified institutional buyers, a liquid market may
exist among such buyers. The Board of Trustees has adopted guidelines and dele-
gated to SBMFM the daily function of determining and monitoring liquidity of
Rule 144A Securities. However, the Board of Trustees maintains sufficient over-
sight and is ultimately responsible for the liquidity determinations. Invest-
ments in restricted securities such as Rule 144A Securities could have the
effect of increasing the level of illiquidity in the Fund to the extent that
there is temporarily no market for these securities among qualified institu-
tional buyers.     
 
  Options. Because option premiums paid or received by the Fund are small in
relation to the market value of the investments underlying the options, buying
and selling options can result in large amounts of leverage. The leverage
offered by trading in options may cause the Fund's net asset value to be sub-
ject to more frequent and wider fluctuation than would be the case if the Fund
did not invest in options.
 
  Upon the exercise of a put option written by the Fund, the Fund may suffer a
loss equal to the difference between the price at which the Fund is required to
purchase the underlying security and its market value at the time of the option
exercise, less the premium received for writing the option. Upon the exercise
of a call option written by the Fund, the Fund may suffer a loss equal to the
excess of the security's market value at the time of the option exercise over
the exercise price of the option less the premium received for writing the
option.
 
 
26
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
  The Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option that the Fund has written, an
option of the same series as that on which the Fund desired to terminate its
obligation. The obligation of the Fund under an option that it has written
would be terminated by a closing purchase transaction, but the Fund would not
be deemed to own an option as a result of the transaction. No assurance can be
given that the Fund will be able to effect closing transactions at a time when
it wishes to do so. If the Fund cannot enter into a closing transaction, the
Fund may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security and could
face higher transaction costs, including brokerage commissions.
   
  The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options on financial futures only if there
appears to be a liquid secondary market for the options or futures sold or pur-
chased, for some options or futures, no such secondary market may exist or the
market may cease to exist.     
 
  Futures and Options on Futures. Investments in futures and options on futures
made by the Fund will be made solely for the purpose of hedging against the
effects of changes in the value of its portfolio securities due to anticipated
changes in interest rates and when the transactions are economically appropri-
ate to the reduction of risks inherent in the management of the Fund. In enter-
ing into transactions involving futures contracts and options on futures con-
tracts, the Fund will comply with applicable requirements of the Commodities
Futures Trading Commission (the "CFTC") which require that its transactions in
futures and options be engaged in for "bona fide hedging" purposes or other
permitted purposes, provided that aggregate initial margin deposits and premi-
ums required to establish positions, other than those considered by the CFTC to
be "bona fide hedging," will not exceed 5% of the Fund's net asset value, after
taking into account unrealized profits and unrealized losses on any such con-
tracts.
 
  The use of futures contracts and options on futures contracts as a hedging
device involves several risks. No assurance can be given that a correlation
will exist between price movements in the underlying securities on the one
hand, and price movements in the securities which are the subject of the hedge,
on the other hand. Positions in futures contracts and options on futures con-
tracts may be closed out only on the exchange or board of trade on which they
were entered into, and no assurance can be given that an active market will
exist for a particular contract or option at any particular time. Losses
incurred in hedging transactions and the costs of these transactions will
affect the Fund's performance.
 
 
                                                                              27
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
  Foreign Commodity Exchanges. Unlike trading on domestic commodity exchanges,
trading on foreign commodity exchanges is not regulated by the Commodity
Futures Trading Commission and may be subject to greater risks than trading on
domestic exchanges. For example, some foreign exchanges may be principal mar-
kets so that no common clearing facility exists and a trader may look only to
the broker for performance of the contract. In addition, unless the Fund hedges
against fluctuations in the exchange rate between the U.S. dollar and the cur-
rencies in which trading is done on foreign exchanges, any profits that the
Fund might realize in trading could be eliminated by adverse changes in the
exchange rate, or the Fund could incur losses as a result of those changes.
 
  Foreign Currency. Although the foreign currency market may not necessarily be
more volatile than the market in other commodities, the foreign currency market
offers less protection against defaults in the forward trading of currencies
than is available when trading in currencies occurs on an exchange. Because a
forward currency contract is not guaranteed by an exchange or clearing house, a
default on the contract would deprive the Fund of unrealized profits or force
the Fund to cover its commitments for purchase or resale, if any, at the cur-
rent market price.
 
 PORTFOLIO TRANSACTIONS
  Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Smith Barney and certain of
its affiliated brokers. The Fund may use Smith Barney or a Smith Barney affili-
ated broker in connection with a purchase or sale of securities when SBMFM
believes that the charge for the transaction does not exceed usual and custom-
ary levels. The Fund also may use Smith Barney as a commodities broker in con-
nection with entering into futures contracts and commodity options. Smith Bar-
ney has agreed to charge the Fund commodity commissions at rates comparable to
those charged by Smith Barney to its most favored clients for comparable trades
in comparable accounts.
 
  In selecting a broker for a transaction, including Smith Barney or its affil-
iates, the primary consideration is prompt and effective execution of orders at
the most favorable price. Subject to that primary consideration, dealers may be
selected for research, statistical or other services to enable SBMFM to supple-
ment its own research and analysis with the views and information of other
securities firms.
 
VALUATION OF SHARES
 
 
  The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
 
 
28
<PAGE>
 
   
VALUATION OF SHARES (CONTINUED)     
 
  Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfo-
lio securities which are traded primarily on foreign exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was
so established is likely to have changed such value, then the fair market
value of those securities will be determined by consideration of other factors
by or under the direction of the Board of Trustees or its delegates. A secu-
rity that is traded primarily on a domestic or foreign stock exchange is val-
ued at the last sale price on that exchange or, if there were no sales during
the day, at the current quoted bid price. Over-the-counter securities are val-
ued on the basis of the bid price at the close of business on each day.
Investments in U.S. government securities (other than short-term securities)
are valued at the average of the quoted bid and asked prices in the over-the-
counter market. Short-term investments that mature in 60 days or less are val-
ued at amortized cost whenever the Trustees determine that amortized cost
reflects fair value of those investments. An option generally is valued at the
last sale price or, in the absence of the last sale price, the last offer
price. The value of a futures contract equals the unrealized gain or loss on
the contract, which is determined by marking the contract to the current set-
tlement price for a like contract acquired on the day on which the futures
contract is being valued. A settlement price may not be used if the market
makes a limit move with respect to a particular commodity or if the underlying
securities market experiences significant price fluctuations after the deter-
mination of the settlement price. In such event, the futures contract will be
valued at a fair market price to be determined by or under the direction of
the Board of Trustees. Further information regarding the Trust's valuation
policies with respect to the Fund is contained in the Statement of Additional
Information.
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
  The Fund will be treated separately from the Trust's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
   
  If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. Dividends
and distributions are treated the same for tax purposes whether taken in cash
or reinvested in additional shares. The Fund declares and pays dividends
monthly, consisting of estimated daily net investment income. Any net realized
gains, after utilization of capital loss carryforwards, will be distributed at
least annually, with the distribution of dividends from net investment income,
and net realized short-term capital gains (includ     -
 
                                                                             29
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
   
ing short-term capital gains from options transactions, if any) may be paid
more frequently.     
 
  The per share dividends on Class B and Class C shares of the Fund may be
lower than the per share dividends on Class A and Class Y shares principally as
a result of the distribution fee applicable with respect to Class B and Class C
shares. The per share dividends on Class A shares of the Fund may be lower than
the per share dividends on Class Y shares principally as a result of the serv-
ice fee applicable to Class A shares. Distributions of capital gains, if any,
will be in the same amount for Class A, Class B, Class C and Class Y shares.
 
  In addition, as determined by the Board of Trustees, distributions of the
Fund may include a return of capital. Shareholders will be notified of the
amount of any distribution that represents a return of capital. In order to
comply with a calendar year distribution requirement under the Code, it may be
necessary for the Fund to make distributions at times other than those set
forth above.
 
 TAXES
  The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined on a fund by fund basis, rather than on a
Trust wide basis. The Fund intends to qualify each year as a regulated invest-
ment company under Subchapter M of the Code. To meet those requirements, the
Fund may need to restrict the degree to which it engages in short-term trading
and transactions in options. If the Fund qualifies as a regulated investment
company and meets certain distribution requirements, the Fund will not be sub-
ject to Federal income tax on its net investment income and net capital gains
that it distributes to its shareholders.
 
  Dividends paid by the Fund from investment income and distributions of short-
term capital gain will be taxable to shareholders as ordinary income for Fed-
eral income tax purposes, whether received in cash or reinvested in additional
shares. Distributions of long-term capital gain will be taxable to shareholders
as long-term capital gain, whether paid in cash or reinvested in additional
shares, and regardless of the length of time the investor has held his or her
shares of the Fund. Dividends and distributions paid by the Fund will not qual-
ify for the Federal dividends-received deduction for corporate shareholders.
   
  Income received by the Fund from sources within foreign countries may be sub-
ject to withholding and other foreign taxes. The payment of these taxes will
reduce the amount of dividends and distributions paid to the Fund's sharehold-
ers. Each shareholder of the Fund will receive a statement annually from the
Trust, which will set forth separately the aggregate dollar amount of dividends
and capital gains distributed to the shareholder by the Fund with respect to
the prior calendar year and identify the portion of capital gains eligible for
the 20% maximum capital gains tax rate.     
   
  Shareholders should consult their tax advisers about the status of the Fund's
dividends and distributions for Federal, state and local tax liabilities.     
 
30
<PAGE>
 
PURCHASE OF SHARES
 
 
 GENERAL
   
  The Fund offers five Classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class Y shares are sold without an initial sales charge or CDSC and are
available only to investors investing a minimum of $5,000,000 (except for pur-
chases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). Class Z shares are offered without
a sales charge, CDSC, or service or distribution fee, exclusively to: (a) tax-
exempt employee benefit and retirement plans of Smith Barney and its affiliates
and (b) certain UITs sponsored by Smith Barney and its affiliates. Investors
meeting either of these criteria who are interested in acquiring Class Z shares
should contact a Smith Barney Financial Consultant for a Class Z Prospectus.
See "Prospectus Summary--Alternative Purchase Arrangements" for a discussion of
factors to consider in selecting which Class of shares to purchase.     
   
  Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group, except for investors purchasing shares of the Fund through a qualified
retirement plan who may do so directly through First Data. When purchasing
shares of the Fund, investors must specify whether the purchase is for Class A,
Class B, Class C or Class Y shares. Smith Barney and other broker-dealers may
charge their customers an annual account maintenance fee in connection with a
brokerage account through which an investor purchases or holds shares. Accounts
held directly at First Data are not subject to a maintenance fee.     
   
  Investors in Class A, Class B and Class C shares may open an account by mak-
ing an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan, in the Fund. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000. Sub-
sequent investments of at least $50 may be made for all Classes. For partici-
pants in retirement plans qualified under Section 403(b)(7) or Section 401(a)
of the Code, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes in
the Fund is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares, and the minimum subsequent
investment requirement for all Classes is $25. For shareholders purchasing
shares of the Fund through the Systematic Investment Plan on a quarterly basis,
the minimum initial investment requirement for Class A, Class B and Class C
shares and the minimum subsequent investment requirement for all Classes is
$50. There are no minimum investment requirements for Class A shares for
employees of Travelers and its subsidiaries, including Smith Barney, or Trust-
ees of the Trust and their spouses and children and     
 
                                                                              31
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
unitholders who invest distributions from a UIT sponsored by Smith Barney. The
Fund reserves the right to waive or change minimums, to decline any order to
purchase its shares and to suspend the offering of shares from time to time.
Shares purchased will be held in the shareholder's account by First Data. Share
certificates are issued only upon a shareholder's written request to First
Data.
   
  The minimum initial investment requirement in the Fund for an account estab-
lished under the Uniform Gift to Minors Act is $250 and the minimum subsequent
investment requirement is $50.     
   
  Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Fund calculates its net asset value
are priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular trad-
ing on the NYSE on any day the Fund calculates its net asset value are priced
according to the net asset value determined on that day, provided the order is
received by the Fund or Smith Barney prior to Smith Barney's close of business
(the "trade date"). For shares purchased through Smith Barney or Introducing
Brokers purchasing through Smith Barney, payment for Fund shares is due on the
third business day after the trade date. In all other cases, payment must be
made with the purchase order.     
 
 SYSTEMATIC INVESTMENT PLAN
   
  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial institu-
tion indicated by the shareholder, to provide systematic additions to the
shareholder's Fund account. A shareholder who has insufficient funds to com-
plete the transfer will be charged a fee of up to $25 by Smith Barney or First
Data. The Systematic Investment Plan also authorizes Smith Barney to apply cash
held in the shareholder's Smith Barney brokerage account or redeem the share-
holder's shares of a Smith Barney money market fund to make additions to the
account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.     
 
32
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
 INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
  The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
                                SALES CHARGE
                       ------------------------------
                                                           DEALERS'
  AMOUNT OF                 % OF           % OF       REALLOWANCE AS % OF
  INVESTMENT           OFFERING PRICE AMOUNT INVESTED   OFFERING PRICE
-------------------------------------------------------------------------
  <S>                  <C>            <C>             <C>
  Less than  $ 25,000       4.50%          4.71%             4.00%
  $ 25,000 - $ 49,999       4.00%          4.17%             3.60%
  $ 50,000 - $ 99,999       3.50%          3.63%             3.15%
  $100,000 - $249,999       2.50%          2.56%             2.25%
  $250,000 - $499,999       1.50%          1.52%             1.35%
  $500,000 and over          *               *                 *
-------------------------------------------------------------------------
</TABLE>
   
* Purchases of Class A shares of $500,000 or more, will be made at net asset
  value without any initial sales charge, but will be subject to a CDSC of
  1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
  shares is payable to Smith Barney, which compensates Smith Barney Financial
  Consultants and other dealers whose clients make purchases of $500,000 or
  more. The CDSC is waived in the same circumstances in which the CDSC
  applicable to Class B and Class C shares is waived. See "Deferred Sales
  Charge Alternatives" and "Waivers of CDSC."     
   
  Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the 1933 Act.     
   
  The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of
a single trust estate or single fiduciary account.     
 
 INITIAL SALES CHARGE WAIVERS
   
  Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and of any of the Smith Barney
Mutual Funds (including retired Board Members and employees); the immediate
families of such persons (including the surviving spouse of a deceased Board
Member or employee) and to a pension, profit-sharing or other benefit plan for
such persons and (ii) employees of members of the NASD, provided such sales are
made upon the assurance of the purchaser that the purchase is made for invest-
ment purposes and that the securities will not be re-sold except through
redemption or repurchase; (b) offers of Class A shares to any other investment
company to effect the combination of such company with the Fund by merger,
acquisition of assets or otherwise; (c) purchases of Class A shares by any cli-
ent of a newly employed Smith Barney Financial Consultant (for a period up to
90 days from the commencement of the Financial Consultant's employment with
Smith Barney), on the condition the purchase of Class A shares is made with the
proceeds of the redemption of shares of a mutual fund which (i) was sponsored
by the Financial Consultant's prior employer,     
 
                                                                              33
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
(ii) was sold to the client by the Financial Consultant and (iii) was subject
to a sales charge; (d) purchases by shareholders who have redeemed Class A
shares in the Fund (or Class A shares of another fund of the Smith Barney
Mutual Funds that are offered with a sales charge) and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made within
60 calendar days of the redemption; (e) purchases by accounts managed by regis-
tered investment advisory subsidiaries of Travelers; (f) investments from a UIT
sponsored by Smith Barney; (g) direct rollovers by plan participants of distri-
butions from a 401(k) plan offered to employees of Travelers or its subsidiar-
ies or a 401(K) plan enrolled in the Smith Barney 401(k) Program (Note: subse-
quent investments will be subject to the applicable sales charge); (h) pur-
chases by separate accounts used to fund certain unregistered variable annuity
contracts; (i) purchases by investors participating in a Smith Barney fee-based
arrangement; and (j) purchases of Class A shares of the Fund by Section 403(b)
or Section 401(a) or (k) accounts associated with Copeland Retirement Programs.
In order to obtain such discounts, the purchaser must provide sufficient infor-
mation at the time of purchase to permit verification that the purchase would
qualify for the elimination of the sales charge.     
       
 RIGHT OF ACCUMULATION
   
  Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
offered with a sales charge listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
    
 GROUP PURCHASES
  Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan meet-
ing certain require-
 
34
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
ments. One such requirement is that the plan must be open to specified part-
ners or employees of the employer and its subsidiaries, if any. Such plan may,
but is not required to, provide for payroll deductions, IRAs or investments
pursuant to retirement plans under Sections 401 or 408 of the Code. Smith Bar-
ney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales-related expenses. An indi-
vidual 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 cri-
teria 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 discretion of Smith Barney.     
 
 LETTER OF INTENT
   
  Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13-month period, provided that the investor refers to such
Letter 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 sales charges applicable to the purchases made and the charges previously
paid, or an appropriate number of escrowed shares will be redeemed. Please
contact a Smith Barney Financial Consultant or First Data to obtain a Letter
of Intent application.     
 
  Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must
 
                                                                             35
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
make an initial minimum purchase of $1,000,000 in Class Y shares of the Fund
and agree to purchase a total of $5,000,000 of Class Y shares of the same Fund
within six months from the date of the Letter. If a total investment of
$5,000,000 is not made within the six-month period, all Class Y shares pur-
chased to date will be transferred to Class A shares, where they will be sub-
ject to all fees (including a service fee of 0.25%) and expenses applicable to
the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund expects
that such transfer will not be subject to Federal income taxes. Please contact
a Smith Barney Financial Consultant or First Data for further information.
 
 DEFERRED SALES CHARGE ALTERNATIVES
   
  "CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.     
 
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC to the
extent that the value of such shares represents: (a) capital appreciation of
Fund assets; (b) reinvestment of dividends or capital gain distributions; (c)
with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class C shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
   
  Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
Class B shares held under the Smith Barney 401(k) Program, as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."     
 
36
<PAGE>
 
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 and thereafter  0.00%
---------------------------------
</TABLE>
   
  Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There also will be converted at that time such por-
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. See "Prospectus Summary--Alternative Purchase Arrangements--Class
B Shares Conversion Feature."     
 
  The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other applicable Smith Barney Mutual Funds, and Fund
shares being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will
reduce the gain or increase the loss, as the case may be, on the amount real-
ized on redemption. The amount of any CDSC will be paid to Smith Barney.
   
  To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired five addi-
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.     
    
 WAIVERS OF CDSC     
   
  The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b) 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     
 
                                                                              37
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
shareholder's shares will be permitted for withdrawal plans that were estab-
lished prior to November 7, 1994; (c) redemptions of shares within 12 months
following the death or disability of the shareholder; (d) redemptions of
shares made in connection with qualified distributions from retirement plans
or IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and
(f) redemptions of shares to effect a combination of the Fund with any invest-
ment 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 First Data in the
case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
 
 SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
  Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below are offered to all plans par-
ticipating ("Participating Plans") in the Programs.
 
  The Fund offers to Participating Plans Class A and Class C shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class C shares acquired through the Participating Plans are sub-
ject to the same service and/or distribution fees as the Class A and Class C
shares acquired by other investors; however, they are not subject to any ini-
tial sales charge or CDSC. Once a Participating Plan has made an initial
investment in a Fund, all of its subsequent investments in the Fund must be in
the same Class of shares, except as otherwise described below.
 
  Class A Shares. Class A shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
 
  Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000
of Class C shares of one or more funds of the Smith Barney Mutual Funds.
   
  401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at the
end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a Par-
ticipating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of
the Fund. For Participating Plans that were originally established through a
Smith Barney retail brokerage account, the five-year period will be calculated
from the date the retail     
 
38
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
brokerage account was opened. Such Participating Plans will be notified of the
pending exchange in writing within 30 days after the fifth anniversary of the
enrollment date and, unless the exchange offer has been rejected in writing,
the exchange will occur on or about the 90th day after the fifth anniversary
date. If the Participating Plan does not qualify for the five-year exchange to
Class A shares, a review of the Participating Plan's holdings will be per-
formed each quarter until either the Participating Plan qualifies or the end
of the eighth year.     
 
  401(k) Plans Opened Prior to June 21, 1996. In any year after the date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if its total
Class C holdings in all non-money market Smith Barney Mutual Funds equal at
least $500,000 as of the calendar year-end, the Participating Plan will be
offered the opportunity to exchange all of its Class C shares for Class A
shares of the Fund. Such Plans will be notified in writing within 30 days
after the last business day of the calendar year and, unless the exchange
offer has been rejected in writing, the exchange will occur on or about the
last business day of the following March.
   
  Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Pro-
grams, whether opened before or after June 21, 1996, that has not previously
qualified for an exchange into Class A shares will be offered the opportunity
to exchange all of its Class C shares for Class A shares of the Fund, regard-
less of asset size, at the end of the eighth year after the date the Partici-
pating Plan enrolled in the Smith Barney 401(k) or ExecChoice(TM) Programs.
Such Plans will be notified of the pending exchange in writing approximately
60 days before the eighth anniversary of the enrollment date and, unless the
exchange has been rejected in writing, the exchange will occur on or about the
eighth anniversary date. Once an exchange has occurred, a Participating Plan
will not be eligible to acquire additional Class C shares of the Fund but
instead may acquire Class A shares of the Fund. Any Class C shares not con-
verted will continue to be subject to the distribution fee.     
 
  Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from First Data. For further information regarding these
Programs, investors should contact a Smith Barney Financial Consultant.
 
  Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Fund are not available for purchase by Participating Plans opened on or after
June 21, 1996, but may continue to be purchased by any Participating Plan
opened prior to such date and originally investing in such Class. Class B
shares acquired are subject to a CDSC of 3.00% of redemption proceeds, if the
Participating Plan terminates within eight years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
 
  At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, the Participating Plan will be offered the
opportu-
 
                                                                             39
<PAGE>
 
   
PURCHASE OF SHARES (CONTINUED)     
 
nity 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 anniversary of the enrollment date and, unless the exchange
has been rejected in writing, the exchange will occur on or about the eighth
anniversary date. Once the exchange has occurred, a Participating Plan will not
be eligible to acquire additional Class B shares of the Fund but instead may
acquire Class A shares of the Fund. If the Participating Plan elects not to
exchange all of its Class B shares at that time, each Class B share held by the
Participating Plan will have the same conversion feature as Class B shares held
by other investors. See "Purchase of Shares--Deferred Sales Charge Alterna-
tives."
 
  No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
 
  The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee in the Participating Plan; (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemptions of shares in connection with a loan made by the Par-
ticipating Plan to an employee.
 
EXCHANGE PRIVILEGE
 
 
  Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class 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.
 
 
40
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
 FUND NAME
 
--------------------------------------------------------------------------------
  Growth Funds
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
       
    Smith Barney Disciplined Small Cap Fund, Inc.     
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Growth Opportunity Fund
       
    Smith Barney Large Capitalization Growth Fund     
    Smith Barney Managed Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Special Equities Fund
    Smith Barney Telecommunications Growth Fund
 
  Growth and Income Funds
       
    Concert Social Awareness Fund     
    Smith Barney Convertible Fund
    Smith Barney Funds, Inc.--Equity Income Portfolio
    Smith Barney Growth and Income Fund
    Smith Barney Premium Total Return Fund
    Smith Barney Strategic Investors Fund
    Smith Barney Utilities Fund
 
  Taxable Fixed--Income Funds
    *Smith Barney Adjustable Rate Government Income Fund
          
    Smith Barney Funds, Inc.--Monthly Payment Government 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 Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
 
  Tax-Exempt Funds
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
   **Smith Barney Intermediate Maturity California Municipals Fund
   **Smith Barney Intermediate Maturity New York Municipals Fund
    Smith Barney Managed Municipals Fund Inc.
    Smith Barney Massachusetts Municipals Fund
       
    Smith Barney Municipal High Income Fund     
    Smith Barney Muni Funds--Florida Portfolio
    Smith Barney Muni Funds--Georgia Portfolio
   **Smith Barney Muni Funds--Limited Term Portfolio
    Smith Barney Muni Funds--National Portfolio
 
                                                                              41
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
    Smith Barney Muni Funds--New York Portfolio
    Smith Barney Muni Funds--Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund
           
  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 Allocation Series Inc.     
       
    Smith Barney Concert Allocation Series Inc.--Balanced Portfolio     
       
    Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
           
    Smith Barney Concert Allocation Series Inc.--Growth Portfolio     
       
    Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
           
    Smith Barney Concert Allocation Series Inc.--Income Portfolio     
 
  Money Market Funds
   ++Smith Barney Exchange Reserve Fund
  +++Smith Barney Money Funds, Inc.--Cash Portfolio
  +++Smith Barney Money Funds, Inc.--Government Portfolio
  ***Smith Barney Money Funds, Inc.--Retirement Portfolio
    +Smith Barney Municipal Money Market Fund, Inc.
    +Smith Barney Muni Funds--California Money Market Portfolio
    +Smith Barney Muni Funds--New York Money Market Portfolio
-------------------------------------------------------------------------------
   
  * Available for exchange with Class A and Class B shares of the Fund. In
    addition, shareholders who own Class C shares of the Fund through the
    Smith Barney 401(k) Program may exchange those shares for Class C shares
    of this fund.     
 ** Available for exchange with Class A, Class C and Class Y shares of the
    Fund.
*** Available for exchange with Class A shares of the Fund.
  + Available for exchange with Class A and Class Y shares of the Fund.
 ++ Available for exchange with Class B and Class C shares of the Fund.
   
+++ Available for exchange with Class A and Class Y shares of the Fund. In
    addition, Participating Plans opened prior to June 21, 1996 and investing
    in Class C shares may exchange Fund shares for Class C shares of this
    fund.     
   
  Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Fund that have been exchanged.     
 
  Class 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.
 
 
42
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
  Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the respec-
tive Class in any of the funds identified above may do so without imposition of
any charge.
   
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. SBMFM may deter-
mine that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by a share-
holder. Upon such a determination, the Fund will provide notice in writing or
by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15-day period the shareholder will be
required to (a) redeem his or her shares in the Fund or (b) remain invested in
the Fund or exchange into any of the funds of the Smith Barney Mutual Funds
ordinarily available, which position the shareholder would be expected to main-
tain for a significant period of time. All relevant factors will be considered
in determining what constitutes an abusive pattern of exchanges.     
 
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures dis-
cussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the reg-
istration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
   
REDEMPTION OF SHARES     
 
 
  The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
 
  If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until First Data receives further
instructions from Smith Barney, or if the shareholder's account is not with
Smith Barney, from the
 
                                                                              43
<PAGE>
 
   
REDEMPTION OF SHARES (CONTINUED)     
 
shareholder directly. The redemption proceeds will be remitted on or before
the third business day following receipt of proper tender, except on any days
on which the NYSE is closed or as permitted under the 1940 Act in extraordi-
nary circumstances. Generally, if the redemption proceeds are remitted to a
Smith Barney brokerage account, these funds will not be invested for the
shareholder's benefit without specific instruction and Smith Barney will bene-
fit from the use of temporarily uninvested funds. Redemption proceeds for
shares purchased by check, other than a certified or official bank check, will
be remitted upon clearance of the check, which may take up to ten days or
more.
 
  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than
those held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
 
  Smith Barney Diversified Strategic Income Fund
  Class A, B, C or Y (please specify)
  c/o First Data Investor Services Group, Inc.
     
  P.O. Box 5128     
     
  Westborough, Massachusetts 01581-5128     
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed
stock power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or a
written redemption request in excess of $2,000 must be guaranteed by an eligi-
ble guarantor institution such as a domestic bank, savings and loan institu-
tion, domestic credit union, member bank of the Federal Reserve System or mem-
ber firm of a national securities exchange. Written redemption requests of
$2,000 or less do not require a signature guarantee unless more than one such
redemption request is made in any 10-day period or the redemption proceeds are
to be sent to an address other than the address of record. Unless otherwise
directed, redemption proceeds will be mailed to an investor's address of rec-
ord. First Data may require additional supporting documents for redemptions
made by corporations, executors, administrators, trustees or guardians. A
redemption request will not be deemed properly received until First Data
receives all required documents in proper form.
    
 AUTOMATIC CASH WITHDRAWAL PLAN     
   
  The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive     
 
44
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
   
cash payments of at least $50 monthly or quarterly. Retirement plan accounts
are eligible for automatic cash withdrawal plans only where the shareholder is
eligible to receive qualified distributions and has an account value of at
least $5,000. The withdrawal plan will be carried over on exchanges between
funds or Classes of the Fund. Any applicable CDSC will not be waived on amounts
withdrawn by a shareholder that exceed 1.00% per month of the value of the
shareholder's shares subject to the CDSC at the time the withdrawal plan com-
mences. For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.     
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
   
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
is entitled to participate in this program, he or she should contact First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization Form, along with a signature guaran-
tee that will be provided by First Data upon request. Alternatively, an
investor may authorize telephone redemption on the new account application with
the applicant's signature guarantee when making his or her initial investment
in the Fund.     
 
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
   
  A shareholder will have the option of having the redemption proceeds mailed
to his or her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must com-
plete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.     
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be
 
                                                                              45
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the
net asset value next determined.
   
  Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven days' prior notice to shareholders.     
       
MINIMUM ACCOUNT SIZE
   
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.     
 
PERFORMANCE
 
 
 YIELD
  From time to time, the Fund advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last
day of the period. This income is "annualized" by assuming the amount of
income is generated each month over a one-year period and is compounded semi-
annually. The annualized income is then shown as a percentage of the net asset
value.
 
 TOTAL RETURN
  From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types
of sales literature. These figures are computed separately for Class A, Class
B, Class C and Class Y shares of the Fund. These figures are based on histori-
cal earnings and are
 
46
<PAGE>
 
PERFORMANCE (CONTINUED)
 
not intended to indicate future performance. Total return is computed for a
specified period of time assuming deduction of the maximum sales charge, if
any, from the initial amount invested and reinvestment of all income dividends
and capital gain distributions on the reinvestment dates at prices calculated
as stated in this Prospectus, then dividing the value of the investment at the
end of the period so calculated by the initial amount invested and subtracting
100%. The standard average annual total return, as prescribed by the SEC, is
derived from this total return, which provides the ending redeemable value.
Such standard total return information may also be accompanied with nonstan-
dard total return information for differing periods computed in the same man-
ner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the
last day of the period for which current dividend return is presented. The
current dividend return for each Class may vary from time to time depending on
market conditions, the composition of its investment portfolio and operating
expenses. These factors and possible differences in the methods used in calcu-
lating current dividend return should be considered when comparing a Class'
current return to yields published for other investment companies and other
investment vehicles. The Fund may also include comparative performance infor-
mation in advertising or marketing its shares. Such performance information
may include data from Lipper Analytical Services, Inc. and other financial
publications.
 
MANAGEMENT OF THE TRUST AND THE FUND
 
 
 BOARD OF TRUSTEES
  Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
sub-investment adviser, administrator, custodian and transfer agent. The day-
to-day operations of the Fund are delegated to the Fund's investment adviser
and Administrator and sub-investment adviser. The Statement of Additional
Information contains background information regarding each Trustee and execu-
tive officer of the Fund.
    
 INVESTMENT ADVISER     
   
  SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. SBMFM (through its predecessors) has been in
the investment counseling business since 1934 and is a registered investment
adviser. SBMFM renders investment advice to investment companies that had
aggregate assets under management as of September 30, 1997 in excess of $81
billion.     
 
 
                                                                             47
<PAGE>
 
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
 
  Subject to the supervision and direction of the Trust's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers
and securities analysts who provide research service to the Fund. For advisory
services rendered to the Fund, the Fund pays SBMFM a fee at the annual rate of
0.45% of the value of the Fund's average daily net assets. From its fee, SBMFM
pays Global Capital Management a fee of 0.10% of the value of the Fund's aver-
age daily net assets for its services as sub-investment adviser.
    
 SUB-INVESTMENT ADVISER     
   
  Global Capital Management, located at 10 Piccadilly, London W1V 9LA, United
Kingdom, serves as the Fund's sub-investment adviser pursuant to a sub-
investment advisory agreement dated August 31, 1995. Global Capital Management
has been in the investment counseling business since 1988 and renders advice
to client companies with aggregate assets under management, as of September
30, 1997 in excess of $2.3 billion.     
 
  In its capacity as a sub-investment adviser, Global Capital Management is
responsible for, and selects, the Fund's investments in foreign securities and
selects the brokers and dealers that execute the Fund's investments in foreign
securities.
 
 PORTFOLIO MANAGEMENT
  John C. Bianchi and James E. Conroy, both Managing Directors of Smith
Barney, have served as Vice Presidents and Investment Officers of the Fund
since it commenced operations. Along with Victor S. Filatov, an Investment
Officer of the Fund since March 21, 1994 and President of Global Capital Man-
agement, they manage the day-to-day operations of the Fund, including making
all domestic investment decisions.
   
  Victor Filatov, Managing Director of Smith Barney and a Director of Global
Capital Management, serves as an Investment Officer of the Fund. Mr. Filatov
is responsible for managing the day-to-day operations of the Fund's invest-
ments in foreign securities. Prior to 1993, Mr. Filatov was a Vice President
of J.P. Morgan Securities, Inc.     
   
  Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1997 are included in
the Annual Report dated July 31, 1997. A copy of the Annual Report may be
obtained upon request and without charge from a Smith Barney Financial Consul-
tant or by writing or calling the Fund at the address or phone number listed
on page one of this Prospectus.     
 
 
48
<PAGE>
 
   
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)     
    
 ADMINISTRATOR     
   
  SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration and operation. For administration services rendered to
the Fund, the Fund pays SBMFM a fee at the annual rate of 0.20% of the value of
the Fund's average daily net assets.     
 
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 purchase
will no longer be subject to distribution fees. The fees are used by Smith Bar-
ney 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
expenses; the cost of printing and mailing prospectuses to potential investors;
payments to and expenses of Smith Barney Financial Consultants and other per-
sons 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, utility,
communications and sales promotion expenses.
 
  The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
   
  Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Trust's Board of Trust-
ees will evaluate the appropriateness of the Plan and its payment terms on a
continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.     
 
                                                                              49
<PAGE>
 
ADDITIONAL INFORMATION
 
 
  The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." The Trust may issue an unlimited number of shares of benefi-
cial interest, of separate series with a par value of $.001 per share. The Fund
offers shares of beneficial interest currently classified into five Classes--A,
B, C, Y and Z.
 
  Each Class of shares represents identical interests in the Fund's investment
portfolio. As a result, the Classes have the same rights, privileges and pref-
erences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees, if any, borne by each Class pursuant to the Plan; (d) the
expenses allocable exclusively to each Class; (e) voting rights on matters
exclusively affecting a single Class; (f) the exchange privilege of each Class;
and (g) the conversion feature of the Class B shares. The Trust's Board of
Trustees does not anticipate that there will be any conflicts among the inter-
ests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any such conflict exists and, if so, take appro-
priate action.
 
  When matters are submitted for shareholder vote, shareholders of each Class
of each Fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Shares of the
Trust will be voted generally on a Trust-wide basis on all matters except mat-
ters affecting the interests of one Fund or one Class of shares.
 
  Normally there will be no meetings of shareholders for the purpose of elect-
ing Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a
Trustee through a declaration in writing or by vote cast in person or by proxy
at a meeting called for that purpose. The Trustees will call a meeting for any
purpose upon written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Fund will assist shareholders in calling such a
meeting as required by the 1940 Act.
          
  The Chase Manhattan Bank, located at Chase MetroTech Center, Brooklyn, New
York 11245, serves as custodian of the Fund's investments.     
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Trust's transfer agent.
   
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the reporting period. In an effort to reduce the Fund's printing and
mailing costs, the Trust plans to consolidate the mailing of the Fund's semi-
annual and annual reports by household. This consolidation means that a house-
hold having multiple accounts with the identical address of record will receive
a single copy of each report. Shareholders who do not want this consolidation
to apply to their accounts should contact a Smith Barney Financial Consultant
or First Data.     
 
50
<PAGE>
 
 
 
 
 
                      [This page intentionally left blank]
 
 
<PAGE>
 
 
 
 
 
                      [This page intentionally left blank]
 
 
<PAGE>
 

                                               Smith Barney
                                               ---------------------------------

                                               A Member of TravelersGroup [LOGO]
 
 
 
 
                                                                                

                                                                    SMITH BARNEY
                                                           DIVERSIFIED STRATEGIC
                                                                     INCOME FUND
 
                                                            388 Greenwich Street
                                                        New York, New York 10013


                                                                 
                                                              FD 1209 11/97     
<PAGE>

P R O S P E C T U S 
 
 
                                                                    SMITH BARNEY
 
                                               Diversified Strategic Income Fund
                                                             Class Z Shares Only
                                                             
                                                          NOVEMBER 28, 1997     
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 


[LOGO] Smith Barney Mutual Funds
       INVESTING FOR YOUR FUTURE.
       EVERY DAY.
<PAGE>
 
PROSPECTUS                                                  
                                                         NOVEMBER 28, 1997     
   
Smith Barney Diversified Strategic Income Fund--Class Z Shares     
388 Greenwich Street
New York, New York 10013
   
(800) 451-2010     
 
  Smith Barney Diversified Strategic Income Fund (the "Fund"), a diversified
fund, seeks high current income primarily through investment in fixed-income
securities. The Fund attempts to achieve this objective by allocating and real-
locating its assets primarily among various types of fixed-income securities
selected by its investment adviser on the basis of an analysis of economic and
market conditions and the relative risks and opportunities of those types of
fixed-income securities.
 
  The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up Smith Barney Income Funds (the "Trust"). The
Trust is an open-end, management investment company commonly referred to as a
mutual fund.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Trust, including expenses, that prospective investors will find helpful in
making an investment decision. Investors are encouraged to read this Prospectus
carefully and retain it for future reference.
 
  The Class Z shares described in this Prospectus (previously designated as
Class C shares) are currently offered exclusively for sale to tax-exempt
employee benefit and retirement plans of Smith Barney Inc. ("Smith Barney") or
any of its affiliates ("Qualified Plans") and to certain unit investment trusts
sponsored by Smith Barney or any of its affiliates ("Smith Barney UITs").
   
  Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated November 28, 1997, as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The Statement of Addi-
tional Information has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated by reference into this Prospectus in its
entirety.     
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
 
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Sub-Investment Adviser
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
THE FUND'S EXPENSES                             3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            4
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    5
-------------------------------------------------
VALUATION OF SHARES                            20
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             20
-------------------------------------------------
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES    22
-------------------------------------------------
PERFORMANCE                                    23
-------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND           24
-------------------------------------------------
ADDITIONAL INFORMATION                         26
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
   
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.     
--------------------------------------------------------------------------------
 
2
<PAGE>
 
THE FUND'S EXPENSES
 
  The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of Class Z shares of the
Fund, based on the Fund's operating expenses for its most recent fiscal year:
 
<TABLE>   
<CAPTION>
  SMITH BARNEY DIVERSIFIED
  STRATEGIC INCOME FUND--CLASS Z       AS A % OF
  SHARES                           AVERAGE NET ASSETS
-----------------------------------------------------
  <S>                              <C>
  ANNUAL FUND OPERATING EXPENSES
    Management fees*                      0.65%
    Other expenses                        0.04
-----------------------------------------------------
  TOTAL FUND OPERATING EXPENSES           0.69%
-----------------------------------------------------
</TABLE>    
 
  The nature of the services for which the Fund pays management fees is
described under "Management of the Trust and the Fund." "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
 
 EXAMPLE
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase, Exchange and Redemption of Shares" and
"Management of the Trust and the Fund."
 
<TABLE>   
<CAPTION>
  SMITH BARNEY DIVERSIFIED STRATEGIC INCOME
  FUND--CLASS Z SHARES                          1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
  <S>                                           <C>    <C>     <C>     <C>
  An investor would pay the following expenses
  on a $1,000 investment in Class Z shares of
  the Fund, assuming (1) 5% annual return and
  (2) redemption at the end of each time
  period:                                        $ 7     $22     $38     $86
-------------------------------------------------------------------------------
</TABLE>    
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
 
                                                                               3
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
  The following information for each of the years in the three-year period
ended July 31, 1997 has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Fund's Annual Report dated July
31, 1997. The following information for the fiscal years ended July 31, 1993
and July 31, 1994 has been audited by other independent auditors. The informa-
tion set forth below should be read in conjunction with the financial state-
ments and related notes that also appear in the Fund's 1997 Annual Report,
which is incorporated by reference into the Statement of Additional Informa-
tion.     
 
FOR A CLASS Z SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>   
<CAPTION>
SMITH BARNEY DIVERSIFIED
STRATEGIC INCOME FUND--CLASS Z
SHARES
YEAR ENDED JULY 31,              1997     1996    1995(1)   1994    1993(2)
------------------------------------------------------------------------------
<S>                             <C>      <C>      <C>      <C>      <C>
NET ASSET VALUE, BEGINNING OF
YEAR                             $ 7.82   $ 7.85   $ 7.76   $ 8.41   $ 8.24
------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income(3)          0.65     0.64     0.84     0.68     0.51
 Net realized and unrealized
 gain (loss)                       0.23     0.02    (0.06)   (0.54)    0.25
------------------------------------------------------------------------------
Total Income From Operations       0.88     0.66     0.78     0.14     0.76
------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income            (0.69)   (0.63)   (0.49)   (0.65)   (0.47)
 Net realized gains                 --       --       --     (0.10)   (0.12)
 Capital                            --     (0.06)   (0.20)   (0.04)     --
------------------------------------------------------------------------------
Total Distributions               (0.69)   (0.69)   (0.69)   (0.79)   (0.59)
------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR     $ 8.01   $ 7.82   $ 7.85   $ 7.76   $ 8.41
------------------------------------------------------------------------------
TOTAL RETURN                      11.69%    8.72%   10.94%    1.43%    9.47%++
------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)  $20,397  $16,270  $14,361  $11,552  $11,803
------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses(3)                       0.69%    0.70%    0.75%    0.75%    0.80%+
 Net investment income             8.08     8.19     8.30     8.02     8.56+
------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE             85%       90%      83%      93%     116%
------------------------------------------------------------------------------
</TABLE>    
 (1) On November 7, 1994, the former Class C shares were renamed Class Z
     shares.
 (2) For the period from November 6, 1992 (inception date) to July 31, 1993.
    
 (3) The investment adviser waived part of its fees for the years ended July
     31, 1995 and 1994. If such fees had not been waived, the per share effect
     on net investment income and the expense ratios would have been as fol-
     lows:     
<TABLE>
<CAPTION>
               PER SHARE DECREASES        EXPENSE RATIOS
            IN NET INVESTMENT INCOME    WITHOUT FEE WAIVERS
  -----------------------------------------------------------
                1995          1994        1995       1994
            ------------  ------------  ---------  ---------
   <S>      <C>           <C>           <C>        <C>
   Class Z         $0.00*        $0.00*      0.80%      0.77%
</TABLE>
       
   * Amount represents less than $0.01 per share.
   ++Total return is not annualized, as it may not be representative of the
     total return for the year.
   + Annualized.
 
4
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
  The investment objective of the Fund is high current income primarily
through investment in fixed-income securities. In attempting to achieve its
objective, the Fund allocates and reallocates its assets primarily among vari-
ous types of fixed-income securities selected by Smith Barney Mutual Funds
Management Inc. ("SBMFM"). The types of fixed-income securities among which
the Fund's assets will be primarily allocated are: obligations issued or guar-
anteed as to principal and interest by the United States government ("U.S.
government securities"); mortgage-related securities issued by various govern-
mental and non-governmental entities; domestic and foreign corporate securi-
ties; and foreign government securities. The Fund's investment objective may
be changed only with the approval of the holders of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund will achieve its
investment objective.
 
  The allocation and reallocation of the Fund's assets will be undertaken by
SBMFM on the basis of its analysis of economic and market conditions and the
relative risks and opportunities of particular types of fixed-income securi-
ties. In general, the particular types of fixed-income securities selected for
investment by the Fund at any given time will be those that, in the view of
SBMFM, offer the highest income available at the time. The Fund typically
would not invest in fixed-income securities offering the highest income poten-
tial if SBMFM determined that the income potential is not sufficient to jus-
tify the higher risks associated with the securities.
 
  At any given time, the Fund may be entirely or only partially invested in a
particular type of fixed-income security. Under normal conditions, at least
65% of the Fund's assets will be invested in fixed-income securities, which
for this purpose will include non-convertible preferred stocks. The Fund gen-
erally will invest in intermediate- and long-term fixed-income securities with
the result that, under normal market conditions, the weighted average maturity
of the Fund's securities is expected to be between five and 12 years. Up to
20% of the Fund's assets may be invested in common stock or other equity-
related securities, including convertible securities, preferred stock, war-
rants and rights.
   
  Mortgage-related securities in which the Fund may invest include mortgage
obligations collateralized by mortgage loans or mortgage pass-through certifi-
cates. Under current market conditions, the Fund's holdings of mortgage-
related securities may be expected to consist primarily of securities issued
or guaranteed by Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corpora-
tion ("FHLMC"). The composition of the Fund's investments in mortgage-related
securities, however, will vary from time to time based upon the determination
of SBMFM as to how best to achieve the Fund's investment objective taking into
account factors such as the liquidity and yield of various mortgage-related
securities. Mortgage-related securities held by the Fund generally will be
rated no lower than Aa by Moody's Invest     -
 
                                                                              5
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
ors Service, Inc. ("Moody's") or AA by Standard & Poor's Ratings Group ("S&P")
or, if not rated, will be of equivalent investment quality as determined by
SBMFM. SBMFM also may consider the ratings, if any, assigned to mortgage-
related securities by recognized rating agencies other than Moody's and S&P.
   
  The Fund typically will purchase a corporate debt security if SBMFM believes
that the yield and, to a lesser extent, the potential for capital appreciation
of the security are sufficiently attractive in light of the risks of ownership
of the security. In determining whether the Fund should invest in particular
debt securities, SBMFM will consider factors such as: the price, coupon and
yield to maturity; the credit quality of the issuer; the issuer's available
cash flow and the related coverage ratios; the property, if any, securing the
obligation; and the terms of the debt securities, including the subordination,
default, sinking fund and early redemption provisions. SBMFM also will review
the ratings, if any, assigned to the securities by Moody's, S&P or other rec-
ognized rating agencies. SBMFM's judgment as to credit quality of a debt secu-
rity may differ, however, from that suggested by the ratings published by a
rating service.     
 
  The Fund may invest up to 35% of its assets in corporate fixed-income secu-
rities of domestic issuers rated Ba or lower by Moody's or BB or lower by S&P
or in nonrated securities deemed by SBMFM to be of comparable quality. The
Fund may invest in fixed-income securities rated as low as Caa by Moody's or
CCC by S&P.
 
  Corporate fixed-income securities of foreign issuers in which the Fund may
invest will include securities of companies, wherever organized, that have
their principal business activities and interests outside the United States.
Foreign government securities in which the Fund may invest consist of fixed-
income securities issued by foreign governments. In general, the Fund may
invest in debt securities issued by foreign governments or any of their polit-
ical subdivisions that are considered stable by Smith Barney Global Capital
Management Inc. ("Global Capital Management"). Up to 5% of the Fund's assets,
however, may be invested in foreign securities issued by countries with devel-
oping economies.
 
  The Fund may invest in fixed-income securities issued by supranational orga-
nizations, which are entities designated or supported by a government or gov-
ernmental entity to promote economic development, and include, among others,
the Asian Development Bank, the European Coal and Steel Community, the Euro-
pean Economic Community and the World Bank. These organizations have no taxing
authority and are dependent upon their members for payments of interest and
principal. Moreover, the lending activities of supranational entities are lim-
ited to a percentage of their total capital (including "callable capital" con-
tributed by members at an entity's call), reserves and net income.
 
  The Fund may also invest in zero coupon securities and payment-in-kind
bonds.
 
6
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
 ADDITIONAL INVESTMENTS
  Money Market Instruments. Up to 20% of the Fund's assets may be invested in
cash and money market instruments at any time. In addition, when SBMFM believes
that market conditions warrant, the Fund may invest in short-term instruments
without limitation for temporary defensive purposes. Short-term instruments in
which the Fund may invest include: U.S. government securities; certain bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loan associa-
tions and similar institutions); commercial paper rated no lower than Prime-2
by Moody's or A-2 by S&P or the equivalent from another major rating service
or, if unrated, of an issuer having an outstanding, unsecured debt issue then
rated within the three highest rating categories; and repurchase agreements
with respect to the securities in which the Fund may invest. The Fund will
invest in obligations of a foreign bank or foreign branch of a domestic bank
only if SBMFM determines that the obligations present minimum credit risks.
These obligations may be traded in the United States or outside the United
States, but will be denominated in U.S. dollars.
   
  U.S. Government Securities. The U.S. government securities in which the Fund
may invest include direct obligations of the United States Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds) and obligations issued by
U.S. government agencies and instrumentalities, including: securities that are
supported by the full faith and credit of the United States (such as GNMA cer-
tificates); securities that are supported by the right of the issuer to borrow
from the United States Treasury (such as securities of Federal Home Loan
Banks); and securities that are supported by the credit of the instrumentality
(such as FNMA and FHLMC bonds). Treasury Bills have maturities of less than one
year, Treasury Notes have maturities of one to 10 years and Treasury Bonds gen-
erally have maturities of greater than 10 years at the date of issuance. Cer-
tain U.S. government securities, such as those issued or guaranteed by GNMA,
FNMA and FHLMC, are mortgage-related securities. U.S. government securities
generally do not involve the credit risks associated with other types of inter-
est-bearing securities, although, as a result, the yields available from U.S.
government securities are generally lower than the yields available from inter-
est-bearing corporate securities.     
 
  Zero Coupon Securities. A zero coupon bond pays no interest in cash to its
holder during its life, although interest is accrued during that period. Its
value to an investor consists of the difference between its face value at the
time of maturity and the price for which it was acquired, which is generally an
amount significantly less than its face value (sometimes referred to as a "deep
discount" price). Because such securities usually trade at a deep discount,
they will be subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities which
make periodic distributions of interest. On the other hand, because there are
no periodic interest payments to be reinvested prior to
 
                                                                               7
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
maturity, zero coupon securities eliminate reinvestment risk and lock in a rate
of return to maturity.
 
 CERTAIN INVESTMENT STRATEGIES
  In attempting to achieve its investment objective, the Fund may employ, among
others, one or more of the strategies set forth below. More detailed informa-
tion concerning these strategies and their related risks is contained in the
Statement of Additional Information.
 
  Repurchase Agreements. The Fund may engage in repurchase agreement transac-
tions with certain member banks of the Federal Reserve System and with certain
dealers on the Federal Reserve Bank of New York's list of reporting dealers.
Under the terms of a typical repurchase agreement, the Fund would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining
the yield during the Fund's holding period. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during the Fund's
holding period. The value of the underlying securities will be at least equal
at all times to the total amount of the repurchase obligation, including inter-
est. Repurchase agreements could involve certain risks in the event of default
or insolvency of the other party, including possible delays or restrictions
upon the Fund's ability to dispose of the underlying securities, the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. SBMFM or Global Capital Management, act-
ing under the supervision of the Trust's Board of Trustees, reviews on an ongo-
ing basis the value of the collateral and the creditworthiness of those banks
and dealers with which the Fund may enter into repurchase agreements to evalu-
ate potential risks.
 
  Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreement transactions with member banks of the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is con-
sidered a borrowing by the Fund, involves a sale by the Fund of securities that
it holds concurrently with an agreement by the Fund to repurchase the same
securities at an agreed-upon price and date. The Fund typically will invest the
proceeds of a reverse repurchase agreement in money market instruments or
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as leverage. The Fund
will enter into a reverse repurchase agreement for leverage purposes only when
the interest income to be earned from the investment of the proceeds is greater
than the interest expense of the transaction. The Fund also may use the pro-
ceeds of reverse repurchase agreements to provide liquidity to meet redemption
requests when the sale of the Fund's securities is considered to be disadvanta-
geous.
 
8
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
  Forward Roll Transactions. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage-related securi-
ties issued by GNMA, FNMA and FHLMC. In a forward roll transaction, the Fund
sells a mortgage security to a financial institution, such as a bank or broker-
dealer, and simultaneously agrees to repurchase a similar security from the
institution at a later date at an agreed-upon price. The mortgage securities
that are repurchased will bear the same interest rate as those sold, but gener-
ally will be collateralized by different pools of mortgages with different pre-
payment histories than those sold. During the period between the sale and
repurchase, the Fund will not be entitled to receive interest and principal
payments on the securities sold. Proceeds of the sale will be invested in
short-term instruments, particularly repurchase agreements, and the income from
these investments, together with any additional fee income received on the sale
will generate income for the Fund exceeding the yield on the securities sold.
Forward roll transactions involve the risk that the market value of the securi-
ties sold by the Fund may decline below the repurchase price of those securi-
ties. At the time the Fund enters into forward roll transactions, it will place
in a segregated account with the Fund's custodian cash, U.S. government securi-
ties, equity securities or debt securities of any grade having a value equal to
or greater than the Fund's purchase commitments, provided such securities have
been determined by SBMFM to be liquid and unencumbered and are marked to market
daily pursuant to guidelines established by the Trustees. The Fund will subse-
quently monitor the account to insure that such equivalent value is maintained.
       
  When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
securities on a when-issued or delayed-delivery basis. The Fund will enter into
a when-issued transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage. In such transactions delivery of the securi-
ties occurs beyond the normal settlement periods, but no payment or delivery is
made by the Fund prior to the actual delivery or payment by the other party to
the transaction. Due to fluctuations in the value of securities purchased or
sold on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers. The Fund
will establish with its custodian a segregated account consisting of cash, U.S.
government securities, equity securities or debt securities of any grade having
a value equal to or greater than the Fund's purchase commitments, provided such
securities have been determined by SBMFM to be liquid and unencumbered and are
marked to market daily pursuant to guidelines established by the Trustees.
Placing securities rather than cash in the segregated account may have a
leveraging effect on the Fund's net assets.     
 
  Lending of Portfolio Securities. The Fund has the ability to lend portfolio
securities to brokers, dealers and other financial organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets taken at value. Loans
of portfolio
 
                                                                               9
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
securities by the Fund will be collateralized by cash, letters of credit or
U.S. government securities that are maintained at all times in an amount at
least equal to the current market value of the loaned securities. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Fund. The Fund will segregate
common stock or convertible or exchangeable preferred stock or debt securities
in a special account with its custodian.     
 
  Covered Option Writing. The Fund may purchase and sell put, call and other
types of option securities that are traded on domestic or foreign exchanges or
the over-the-counter market including, but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options. The Fund may realize fees (referred to as "premiums") for granting
the rights evidenced by the options. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option
holder an underlying security at a specified price at any time during the
option period. In contrast, a call option embodies the right of its purchaser
to compel the writer of the option to sell to the option holder an underlying
security at a specified price at any time during the option period. Thus, the
purchaser of a put option written by the Fund has the right to compel the Fund
to purchase from it the underlying security at the agreed-upon price for a
specified time period, while the purchaser of a call option written by the
Fund has the right to purchase from the Fund the underlying security owned by
the Fund at the agreed-upon price for a specified time period.
 
  Upon the exercise of a call option written by the Fund, the Fund may suffer
a loss equal to the excess of the security's market value at the time of the
option exercise over the option's exercise price, less the premium received
for writing the option.
 
  The Fund will write only covered options. Thus, whenever the Fund writes a
call option, it will continue to own or have the present right to acquire the
underlying security for as long as it remains obligated as the writer of the
option. To support its obligation to purchase the underlying security if a put
option is exercised, the Fund will either (a) deposit with its custodian in a
segregated account cash or other eligible segregated assets having a value at
least equal to the exercise price of the underlying securities or (b) continue
to own an equivalent number of puts of the same "series" (that is, puts on the
same underlying security having the same exercise prices and expiration dates
as those written by the Fund), or an equivalent number of puts of the same
"class" (that is, puts on the same underlying security) with exercise prices
greater than those that it has written (or, if the exercise prices of the puts
that it holds are less than the exercise prices of those that it has written,
it will deposit the difference with its custodian in a segregated account).
 
  Purchasing Put and Call Options on Securities. The Fund may utilize up to
15% of its assets to purchase options and may do so at or about the same time
that it
 
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
purchases the underlying security or at a later time. In purchasing option
securities, the Fund will trade only with counterparties of high standing in
terms of credit quality and commitment to the market. Risks associated with
options transactions and foreign futures contracts are described below under
"Special Considerations."
   
  Futures Contracts and Options on Futures Contracts. The Fund may enter into
futures contracts or related options that are traded on domestic and foreign
exchanges or boards of trade as well as the over-the-counter market with
respect to options on such futures contracts. A futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified debt security at a specified price, date, time and place.
The Fund may enter into futures contracts to sell debt securities when SBMFM
believes that the value of the Fund's debt securities will decrease. The Fund
may enter into futures contracts to purchase debt securities when SBMFM antici-
pates purchasing the underlying debt securities on behalf of the Fund and
believes that prices will rise before the purchases will be made. When the Fund
enters into a futures contract to purchase an underlying security, an amount of
cash or other eligible segregated asset equal to the market value of the con-
tract, will be deposited in a segregated account with the Fund's custodian to
collateralize the position, thereby insuring that the use of the contract is
unleveraged. The Fund will not enter into futures contracts for speculation and
will enter into futures contracts that are traded on a domestic or foreign
exchange or board of trade as well as the over-the-counter market.     
 
  An option on a futures contact, as contrasted with the direct investment in a
futures contract, gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract at a specified exercise price
at any time prior to the expiration date of the option. A call option gives the
purchaser of the option the right to enter into a futures contract to buy and
obliges the writer to enter into a futures contract to sell the underlying debt
securities. A put option gives the purchaser the right to sell and obliges the
writer to buy the underlying contract.
 
  The Fund may purchase put options on futures contracts to hedge its portfolio
of debt securities against the risk of rising interest rates, and may purchase
call options on futures contracts to hedge against a decline in interest rates.
The Fund may write put and call options on futures contracts in entering into
closing sale transactions and to increase its ability to hedge against changes
in interest rates. The Fund will write put and call options on futures con-
tracts that are traded on a domestic or foreign exchange or board of trade as
well as the over-the-counter market.
 
  Currency Exchange Transactions and Options on Foreign Currencies. The Fund
will conduct its currency exchange transactions either on a spot (that is,
cash) basis at the rate prevailing in the currency exchange market or through
entering into forward contracts to purchase or sell currencies. The Fund's
dealings in forward
 
                                                                              11
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
currency exchange and options on foreign currencies are limited to hedging
involving either specific transactions or portfolio positions.
 
  A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the par-
ties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might result should the value of the
currency increase.
 
  The Fund may purchase and sell put, call and other types of options on for-
eign currencies that are traded on domestic or foreign exchanges or in the
over-the-counter market, including but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options.
 
  The Fund may purchase put options on a foreign currency in which securities
held by the Fund are denominated to protect against a decline in the value of
the currency in relation to the currency in which the exercise price is denom-
inated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the pur-
chaser, in return for a premium, the right to sell, in the case of a put, and
buy, in the case of a call, the underlying currency at a specified price dur-
ing the term of the option. Although the purchase of an option on a foreign
currency may constitute an effective hedge by the Fund against fluctuations in
the exchange rates, in the event of rate movements adverse to the Fund's posi-
tion, the Fund may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies purchased by the Fund may be
traded on domestic and foreign exchanges or traded over-the-counter.
 
 CERTAIN INVESTMENT GUIDELINES
   
  The Fund may invest up to 15% of its total assets in securities with con-
tractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities
greater than seven days, (b) futures contracts and related options for which a
liquid secondary market does not exist and (c) time deposits maturing in more
than seven calendar days. The above restriction does not apply to securities
subject to Rule 144A of the Securities Act of 1933, as amended (the "1933
Act") ("Rule 144A Securities"). In addition, the Fund may invest up to 5% of
its assets in the securities of issuers that have been in continuous operation
for less than three years. The Fund also may borrow from banks for temporary
or emergency purposes, but not for investment purposes, in an     
 
12
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
amount up to 10% of its total assets, and may pledge its assets to the same
extent in connection with such borrowings. Whenever these borrowings exceed 5%
of the value of the Fund's total assets, the Fund will not make any additional
investments. Immediately after any borrowing (including reverse repurchase
agreements and forward roll transactions) by the Fund, the Fund will maintain
an asset coverage of at least 300% with respect to all of its borrowings.
Except for the limitations on borrowing, the investment guidelines set forth in
this paragraph may be changed at any time without shareholder consent by vote
of the Trust's Board of Trustees. A complete list of investment restrictions
that identifies additional restrictions that cannot be changed without the
approval of the majority of the Fund's outstanding shares is contained in the
Statement of Additional Information.
       
 RISK FACTORS AND SPECIAL CONSIDERATIONS
  Medium-, Low- and Unrated Securities. The Fund may invest in medium- or low-
rated securities and unrated securities of comparable quality. Generally, these
securities offer a higher current yield than the yield offered by higher-rated
securities but involve greater volatility of price and risk of loss of income
and principal, including the probability of default by or bankruptcy of the
issuers of such securities. Medium- and low-rated and comparable unrated secu-
rities (a) will likely have some quality and protective characteristics that,
in the judgment of the rating organization, are outweighed by large uncertain-
ties or major risk exposures to adverse conditions and (b) are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. Thus, it is possible
that these types of factors could, in certain instances, reduce the value of
securities held by the Fund with a commensurate effect on the value of the
Fund's shares. Therefore, an investment in the Fund should not be considered as
a complete investment program and may not be appropriate for all investors.
 
  While the market values of medium- and low-rated and comparable unrated secu-
rities tend to react less to fluctuations in interest rate levels than do those
of higher-rated securities, the market values of certain of these securities
also tend to be more sensitive to individual corporate developments and changes
in economic conditions than higher-rated securities. In addition, medium- and
low-rated and comparable unrated securities generally present a higher degree
of credit risk. Issuers of medium- and low-rated and comparable unrated securi-
ties are often highly leveraged and may not have more traditional methods of
financing available to them so that their ability to service their debt obliga-
tions during an economic downturn or during sustained periods of rising inter-
est rates may be impaired. The risk of loss due to default by such issuers is
significantly greater because medium- and low-rated and comparable unrated
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Fund may incur additional expenses to the
extent that it is required to seek recovery upon a default in the
 
                                                                              13
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
payment of principal or interest on its portfolio holdings. In addition, the
markets in which medium- and low-rated or comparable unrated securities are
traded generally are more limited than those in which higher-rated securities
are traded. The existence of limited markets for these securities may restrict
the availability of securities for the Fund to purchase and also may have the
effect of limiting the ability of the Fund to (a) obtain accurate market quota-
tions for purposes of valuing securities and calculating net asset value and
(b) sell securities at their fair value either to meet redemption requests or
to respond to changes in the economy or the financial markets. The market for
medium- and low-rated and comparable unrated securities is relatively new and
has not fully weathered a major economic recession. Any such recession, howev-
er, could likely disrupt severely the market for such securities and adversely
affect the value of such securities. Any such economic downturn also could
adversely affect the ability of the issuers of such securities to repay princi-
pal and pay interest thereon.
 
  Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding securi-
ty, resulting in a decreased return to the Fund.
 
  Securities that are rated Ba by Moody's or BB by S&P have speculative charac-
teristics with respect to capacity to pay interest and repay principal. Securi-
ties that are rated B generally lack characteristics of a desirable investment
and assurance of interest and principal payments over any long period of time
may be small. Securities that are rated Caa or CCC are of poor standing. These
issues may be in default or present elements of danger may exist with respect
to principal or interest.
 
  In light of the risks described above, SBMFM, in evaluating the creditworthi-
ness of an issue, whether rated or unrated, will take various factors into con-
sideration, which may include, as applicable, the issuer's financial resources,
its sensitivity to economic conditions and trends, the operating history of and
the community support for the facility financed by the issue, the ability of
the issuer's management and regulatory matters.
   
  The Fund's fixed-income security holdings (as rated by S&P or Moody's,
respectively) for the fiscal year ended July 31, 1997 were composed as follows:
0.0% rated BBB or Baa; 6.95% rated BB or Ba; 17.45% rated B or B; 17.57% rated
CCC or Caa; 20.00% in non-rated securities; 0.0% in common stocks and 21.06% in
preferred stock. The percentages were calculated on a dollar weighted average
basis by determining monthly the percentage of the Fund's net assets invested
in each rating category and does not necessarily indicate what the composition
of the Fund's holdings will be in subsequent years.     
 
14
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide fluctua-
tions in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an estab-
lished market share.
       
  Foreign Securities. There are certain risks involved in investing in securi-
ties of companies and governments of foreign nations that are in addition to
the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and eco-
nomic developments and the possible imposition of limitations on the repatria-
tion of currencies or other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers and the lack of uniform
accounting, auditing and financial reporting standards or of other regulatory
practices and requirements comparable to those applicable to domestic compa-
nies. The yield of the Fund may be adversely affected by fluctuations in value
of one or more foreign currencies relative to the U.S. dollar. Moreover, secu-
rities of many foreign companies and their markets may be less liquid and
their prices more volatile than those of securities of comparable domestic
companies. In addition, with respect to certain foreign countries, the possi-
bility exists of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Fund,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that could reduce the yield on such securities.
Because the Fund will invest in securities denominated or quoted in currencies
other than the U.S. dollar, changes in foreign currency exchange rates may
adversely affect the value of portfolio securities and the appreciation or
depreciation of investments. Investment in foreign securities also may result
in higher expenses due to the cost of converting foreign currency to U.S. dol-
lars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on domestic exchanges, the expense of
maintaining securities with foreign custodians, and the imposition of transfer
taxes or transaction charges associated with foreign exchanges.
 
  The Fund may also purchase American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or other
securities representing underlying shares of foreign companies. ADRs are pub-
licly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of
the depositary's transaction fees, whereas under an unsponsored arrangement,
the foreign issuer assumes no obligation and the depositary's transaction fees
are paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR, and the
financial information about a company may not be as reliable for an
unsponsored ADR as it is for a
 
                                                                             15
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
sponsored ADR. The Fund may invest in ADRs through both sponsored and
unsponsored arrangements.
 
  Corporate securities in which the Fund may invest include corporate fixed-
income securities of both domestic and foreign issuers, such as bonds, deben-
tures, notes, equipment lease certificates, equipment trust certificates, and
preferred stock. The Fund's investments in each of equipment lease or equipment
trust certificates will not exceed 5% of its assets.
 
  Certain of the corporate fixed-income securities in which the Fund may invest
may involve equity characteristics. The Fund may, for example, invest in war-
rants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights per-
mitting their holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
 
  Mortgage-Related Securities. Mortgage-related securities provide a monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees or
costs that may be incurred. Prepayments of principal on mortgage-related secu-
rities may tend to increase due to refinancing of mortgages as interest rates
decline. Mortgage pools created by private organizations generally offer a
higher rate of interest than governmental and government-related pools because
no direct or indirect guarantees of payments are applicable with respect to the
former pools. Timely payment of interest and principal in these pools, however,
may be supported by various forms of private insurance or guarantees, including
individual loan, title, pool and hazard insurance. There can be no assurance
that the private insurers can meet their obligations under the policies. Prompt
payment of principal and interest on GNMA mortgage pass-through certificates is
backed by the full faith and credit of the United States. FNMA guaranteed mort-
gage pass-through certificates and FHLMC participation certificates are solely
the obligations of those entities but are supported by the discretionary
authority of the United States government to purchase the agencies' obliga-
tions. Collateralized mortgage obligations are a type of bond secured by an
underlying pool of mortgages or mortgage pass-through certificates that are
structured to direct payments on underlying collateral to different series or
classes of the obligations.
 
  To the extent that the Fund purchases mortgage-related securities at a premi-
um, mortgage foreclosures and prepayments of principal by mortgagors (which may
be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The Fund's yield may be
affected by reinvestment of prepayments at higher or lower rates than the orig-
inal investment.
 
16
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
In addition, like other debt securities, the values of mortgage-related secu-
rities, including government and government-related mortgage pools, generally
will fluctuate in response to market interest rates.
 
  Securities of Developing Countries. A developing country generally is con-
sidered to be a country that is in the initial stages of its industrialization
cycle. Investing in the equity and fixed-income markets of developing coun-
tries involves exposure to economic structures that are generally less diverse
and mature, and to political systems that can be expected to have less stabil-
ity, than those of developed countries. Historical experience indicates that
the markets of developing countries have been more volatile than the markets
of the more mature economies of developed countries; however, such markets
often have provided higher rates of return to investors.
 
  Non-Publicly Traded and Illiquid Securities. The Fund's sale of securities
that are not publicly traded is typically restricted under the Federal securi-
ties laws. As a result, the Fund may be forced to sell these securities at
less than fair market value or may not be able to sell them when SBMFM
believes it desirable to do so. The Fund's investments in illiquid securities
are subject to the risk that should the Fund desire to sell any of these secu-
rities when a ready buyer is not available at a price that the Fund deems rep-
resentative of their value, the value of the Fund's net assets could be
adversely affected.
   
  Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities
are freely transferable among qualified institutional buyers, a liquid market
may exist among such buyers. The Board of Trustees has adopted guidelines and
delegated to SBMFM the daily function of determining and monitoring liquidity
Rule 144A Securities. However, the Board of Trustees maintains sufficient
oversight and is ultimately responsible for the liquidity determinations.
Investments in restricted securities such as Rule 144A Securities could have
the effect of increasing the level of illiquidity in the Fund to the extent
that there is temporarily no market for these securities among qualified
institutional buyers.     
 
  Options. Because option premiums paid or received by the Fund are small in
relation to the market value of the investments underlying the options, buying
and selling options can result in large amounts of leverage. The leverage
offered by trading in options may cause the Fund's net asset value to be sub-
ject to more frequent and wider fluctuation than would be the case if the Fund
did not invest in options.
 
  Upon the exercise of a put option written by the Fund, the Fund may suffer a
loss equal to the difference between the price at which the Fund is required
to purchase the underlying security and its market value at the time of the
option
 
                                                                             17
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
exercise, less the premium received for writing the option. Upon the exercise
of a call option written by the Fund, the Fund may suffer a loss equal to the
excess of the security's market value at the time of the option exercise over
the exercise price of the option less the premium received for writing the
option.
   
  The Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option that the Fund has written, an
option of the same series as that on which the Fund desired to terminate its
obligation. The obligation of the Fund under an option that it has written
would be terminated by a closing purchase transaction, but the Fund would not
be deemed to own an option as a result of the transaction. No assurance can be
given that the Fund will be able to effect closing transactions at a time when
it wishes to do so. If the Fund cannot enter into a closing transaction, the
Fund may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security and could
face higher transaction costs, including brokerage commissions.     
   
  The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options on financial futures only if there
appears to be a liquid secondary market for the options or futures sold or pur-
chased, for some options or futures no such secondary market may exist or the
market may cease to exist.     
 
  Futures and Options on Futures. Investments in futures and options on futures
made by the Fund will be made solely for the purpose of hedging against the
effects of changes in the value of its portfolio securities due to anticipated
changes in interest rates and when the transactions are economically appropri-
ate to the reduction of risks inherent in the management of the Fund. In enter-
ing into transactions involving futures contracts and options on futures con-
tracts, the Fund will comply with applicable requirements of the Commodities
Futures Trading Commission (the "CFTC") which require that its transactions on
futures and options be engaged in for "bona fide hedging" purposes or other
permitted purposes, provided that aggregate initial margin deposits and premi-
ums required to establish positions, other than those considered by the CFTC to
be "bona fide hedging," will not exceed 5% of the Fund's net asset value, after
taking into account unrealized profits and unrealized losses on any such con-
tracts.
 
  The use of futures contracts and options on futures contracts as a hedging
device involves several risks. No assurance can be given that a correlation
will exist between price movements in the underlying securities on the one
hand, and price movements in the securities which are the subject of the hedge,
on the other hand.
 
18
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
Positions in futures contracts and options on futures contracts may be closed
out only on the exchange or board of trade on which they were entered into, and
no assurance can be given that an active market will exist for a particular
contract or option at any particular time. Losses incurred in hedging transac-
tions and the costs of these transactions will affect the Fund's performance.
 
  Foreign Commodity Exchanges. Unlike trading on domestic commodity exchanges,
trading on foreign commodity exchanges is not regulated by the Commodity
Futures Trading Commission and may be subject to greater risks than trading on
domestic exchanges. For example, some foreign exchanges may be principal mar-
kets so that no common clearing facility exists and a trader may look only to
the broker for performance of the contract. In addition, unless the Fund hedges
against fluctuations in the exchange rate between the U.S. dollar and the cur-
rencies in which trading is done on foreign exchanges, any profits that the
Fund might realize in trading could be eliminated by adverse changes in the
exchange rate, or the Fund could incur losses as a result of those changes.
 
  Foreign Currency. Although the foreign currency market may not necessarily be
more volatile than the market in other commodities, the foreign currency market
offers less protection against defaults in the forward trading of currencies
than is available when trading in currencies occurs on an exchange. Because a
forward currency contract is not guaranteed by an exchange or clearing house, a
default on the contract would deprive the Fund of unrealized profits or force
the Fund to cover its commitments for purchase or resale, if any, at the cur-
rent market price.
 
 PORTFOLIO TRANSACTIONS
  Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Smith Barney. The Fund may
use Smith Barney in connection with a purchase or sale of securities when SBMFM
believes that the charge for the transaction does not exceed usual and custom-
ary levels. The Fund also may use Smith Barney as a commodities broker in con-
nection with entering into futures contracts and commodity options. Smith Bar-
ney has agreed to charge the Fund commodity commissions at rates comparable to
those charged by Smith Barney to its most favored clients for comparable trades
in comparable accounts.
 
  In selecting a broker for a transaction, including Smith Barney or its affil-
iates, the primary consideration is prompt and effective execution of orders at
the most favorable price. Subject to that primary consideration, dealers may be
selected for research, statistical or other services to enable SBMFM to supple-
ment its own research and analysis with the views and information of other
securities firms.
 
                                                                              19
<PAGE>
 
   
VALUATION OF SHARES     
 
 
  The net asset value per share of Class Z shares is determined as of the close
of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), on each
day that the NYSE is open, by dividing the value of the Fund's net assets
attributable to Class Z by the number of shares of the Class outstanding. The
per share net asset value of Class Z shares may be higher than those of other
Classes because of the lower expenses attributable to Class Z shares.
 
  Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfo-
lio securities which are traded primarily on foreign exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. A security that
is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trustees
determine that amortized cost reflects fair value of those investments. An
option generally is valued at the last sale price or, in the absence of the
last sale price, the last offer price. The value of a futures contract equals
the unrealized gain or loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract acquired on the
day on which the futures contract is being valued. A settlement price may not
be used if the market makes a limit move with respect to a particular commodity
or if the underlying securities market experiences significant price fluctua-
tions after the determination of the settlement price. In such event, the
futures contract will be valued at a fair market price to be determined by or
under the direction of the Board of Trustees. Further information regarding the
Trust's valuation policies with respect to the Fund is contained in the State-
ment of Additional Information.
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
  The Fund will be treated separately from the Trust's other funds in determin-
ing the amounts of dividends from investment income and distributions of capi-
tal gains payable to shareholders. Dividends and distributions will be rein-
vested automatically for each shareholder's account at net asset value in addi-
tional Class Z shares
 
20
<PAGE>
 
   
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)     
 
of the Fund, unless the shareholder instructs the Fund to pay dividends and
distributions in cash. Dividends from net investment income, if any, of the
Fund will be declared monthly and will be paid on the last Friday of the month.
Distributions of any net long-term capital gains earned by the Fund will be
made annually after the close of the fiscal year in which they are earned. Dis-
tributions of short-term capital gains may be paid more frequently with divi-
dends from net investment income. The Fund is subject to a 4% nondeductible
excise tax measured with respect to certain undistributed amounts of net
investment income and capital gains. If it is in the best interests of share-
holders, the Fund expects to make such additional distributions shortly before
December 31 in each year as may be necessary to avoid the application of this
tax.
 
  If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions gen-
erally will be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. Pursuant to the requirements of the Investment Company Act of 1940, as
amended (the "1940 Act"), and other applicable laws, a notice will accompany
any distribution paid from sources other than net investment income. In the
event the Fund distributes amounts in excess of its net investment income and
net realized capital gains, such distributions may have the effect of decreas-
ing the Fund's total assets, which may increase the Fund's expense ratio.
 
 TAXES
  The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined on a fund by fund basis, rather than on a
Trust-wide basis. The Fund has qualified and intends to continue to qualify
each year as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. To meet those requirements, the Fund may need
to restrict the degree to which it engages in short-term trading and transac-
tions in options. If the Fund qualifies as a regulated investment company and
meets certain distribution requirements, the Fund will not be subject to Fed-
eral income tax on its net investment income and net capital gains that it dis-
tributes to its shareholders.
 
  Dividends paid by the Fund from investment income and distributions of short-
term capital gains will be taxable to shareholders as ordinary income for Fed-
eral income tax purposes, whether received in cash or reinvested in additional
shares. Distributions of long-term capital gain will be taxable to shareholders
as long-term capital gain, whether paid in cash or reinvested in additional
shares, and regardless of the length of time the investor has held his or her
shares of the Fund.
 
                                                                              21
<PAGE>
 
   
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)     
   
  Income received by the Fund from sources within foreign countries may be
subject to withholding and other foreign taxes. The payment of these taxes
will reduce the amount of dividends and distributions paid to the Fund's
shareholders. Each shareholder of the Fund will receive a statement annually
from the Trust, which will set forth separately the aggregate dollar amount of
dividends and capital gains distributed to the shareholder by the Fund with
respect to the prior calendar year and identify the portion of capital gains
eligible for the 20% maximum capital gains tax rate.     
   
  Shareholders should consult their plan document or tax advisers about the
tax consequences associated with participating in a Qualified Plan or Smith
Barney UIT.     
 
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
 
 
  Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Smith Barney UIT. Purchases are effected at the
net asset value next determined after a purchase order is received by Smith
Barney (the "trade date"). Payment is due to Smith Barney on the third busi-
ness day (the "settlement date") after the trade date. Investors who make pay-
ment prior to the settlement date may designate a temporary investment (such
as a money market fund of the Smith Barney Mutual Funds) for such payment
until settlement date. The Fund reserves the right to reject any purchase
order and to suspend the offering of shares for a period of time. There are no
minimum investment requirements for Class Z shares; however, the Fund reserves
the right to vary this policy at any time.
 
  Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, currently 4:00 p.m., New York time, on any day
that the Fund's calculates its net asset value, are priced according to the
net asset value determined on that day. See "Valuation of Shares." Certifi-
cates for Fund shares are issued upon request to the Trust's transfer agent.
 
  Shareholders may redeem their shares on any day the Fund calculates its net
asset value. See "Valuation of Shares." Redemption requests received in proper
form prior to the close of regular trading on the NYSE are priced at the net
asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value as next determined. Shareholders acquiring Class Z shares through a
Smith Barney Qualified Plan or a Smith Barney UIT should consult the terms of
their respective plans for redemption provisions.
 
  Holders of Class Z shares should consult their Qualified Plans for informa-
tion about exchange options.
 
22
<PAGE>
 
   
PERFORMANCE     
 
 
 YIELD
  From time to time, the Fund advertises the 30 day "yield" of its Class Z
shares. The Fund's yield refers to the income generated by an investment in
the Fund over the 30 day period identified in the advertisement, and is com-
puted by dividing the net investment income per share earned by the Fund with
respect to the Class during the period by the maximum public offering price
per share on the last day of the period. This income is "annualized" by assum-
ing that the amount of income is generated each month over a one-year period
and is compounded semi-annually. The annualized income is then shown as a per-
centage of the net asset value.
 
 TOTAL RETURN
  From time to time the Fund may include its total return, average annual
total return and current dividend return for Class Z shares in advertisements
and/or in other types of sales literature. These figures are based on histori-
cal earnings and are not intended to indicate future performance. Total return
is computed for a specified period of time assuming deduction of the maximum
sales charge, if any, from the initial amount invested and reinvestment of all
income dividends and capital gain distributions on the reinvestment dates at
prices calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount
invested and subtracting 100%. The standard average annual total return, as
prescribed by the SEC, is derived from this total return, which provides the
ending redeemable value. Such standard total return information may also be
accompanied with nonstandard total return information for differing periods
computed in the same manner but without annualizing the total return or taking
sales charges into account. The Fund calculates current dividend return for
Class Z shares by annualizing the most recent monthly distribution and divid-
ing by the net asset value on the last day of the period for which current
dividend return is presented. The current dividend return may vary from time
to time depending on market conditions, the composition of its investment
portfolio and operating expenses. These factors and possible differences in
the methods used in calculating current dividend return should be considered
when comparing the Fund's current return to yields published for other invest-
ment companies and other investment vehicles. The Fund may also include com-
parative performance information in advertising or marketing the Class Z
shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
 
  Class Z shares' average annual total return was as follows for the periods
indicated:
     
  11.69% for the one-year period beginning August 1, 1996 through July 31,
  1997.     
     
  8.88% per annum during the period from commencement of operations (Novem-
  ber 6, 1992) through July 31, 1997.     
 
                                                                             23
<PAGE>
 
PERFORMANCE (CONTINUED)
 
  Class Z shares' aggregate total return was as follows for the periods
indicated:
     
  11.69% for the one-year period beginning on August 1, 1996 through July
  31, 1997.     
     
  49.57% for the period from commencement of operations (November 6, 1992)
  through July 31, 1997.     
       
MANAGEMENT OF THE TRUST AND THE FUND
 
 
 BOARD OF TRUSTEES
  Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
sub-investment adviser, administrator, custodian and transfer agent. The day-
to-day operations of the Fund are delegated to the Fund's investment adviser
and administrator and sub-investment adviser. The Statement of Additional
Information contains background information regarding each Trustee and execu-
tive officer of the Trust.
    
 INVESTMENT ADVISER     
   
  SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. 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 seg-
ments: Investment Services, Consumer Finance Services, Life Insurance Services
and Property & Casualty Insurance Services. SBMFM (through predecessor enti-
ties) has been in the investment counseling business since 1934 and is a reg-
istered investment adviser. SBMFM renders investment advice to investment com-
panies that had aggregate assets under management as of September 30, 1997 in
excess of $81 billion.     
 
  Subject to the supervision and direction of the Trust's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers
and securities analysts who provide research service to the Fund. For invest-
ment advisory services rendered to the Fund, the Fund pays SBMFM a fee at the
annual rate of 0.45% of the value of the Fund's average daily net assets.
 
  From its fee, SBMFM pays Global Capital Management a fee of 0.10% of the
value of the Fund's average daily net assets for its services as sub-invest-
ment adviser.
 
24
<PAGE>
 
          
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)     
    
 SUB-INVESTMENT ADVISER     
   
  Global Capital Management, located at 10 Piccadilly, London W1V 9LA, United
Kingdom, serves as the Fund's sub-investment adviser pursuant to a sub-invest-
ment advisory agreement dated August 31, 1995. Global Capital Management has
been in the investment counseling business since 1988 and renders advice to
client companies with total assets under management, as of September 30, 1997,
in excess of $2.3 billion.     
 
  In its capacity as a sub-investment adviser, Global Capital Management is
responsible for and selects the Fund's investments in foreign securities and
selects the brokers and dealers that execute the Fund's investments in foreign
securities.
 
 PORTFOLIO MANAGEMENT
  John C. Bianchi and James E. Conroy, both Managing Directors of Smith Barney,
have served as Vice Presidents and Investment Officers of the Fund since it
commenced operations. Along with Victor S. Filatov, an Investment Officer of
the Fund since March 21, 1994 and President of Global Capital Management, they
manage the day-to-day operations of the Fund, including making all domestic
investment decisions.
   
  Victor Filatov, Managing Director of Smith Barney and Director of Global
Capital Management serves as an Investment Officer of the Fund. Mr. Filatov is
responsible for managing the day-to-day operations of the Fund's investments in
foreign securities. Prior to 1993, Mr. Filatov was a Vice President of J.P.
Morgan Securities, Inc.     
   
  Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1997 are included in
the Annual Report dated July 31, 1997. A copy of the Annual Report may be
obtained upon request and without charge from a Smith Barney Financial Consul-
tant or by writing or calling the Fund at the address or phone number listed on
page one of this Prospectus.     
    
 ADMINISTRATOR     
   
  SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration and operation. For administration services rendered to
the Fund, the Fund pays SBMFM a fee at the annual rate of 0.20% of the value of
the Fund's average daily net assets.     
    
 DISTRIBUTOR     
  Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary
of Travelers.
 
                                                                              25
<PAGE>
 
ADDITIONAL INFORMATION
 
 
  The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust."
 
  The Trust offers shares of beneficial interest of separate series having a
par value of $.001 per share. Shares of beneficial interest of the Fund are
currently classified into five Classes--A, B, C, Y and Z. Each Class represents
an identical pro rata 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, if any, for each Class; (c) the distribution and/or service
fees, if any, borne by each Class pursuant to a Plan adopted by the Fund pursu-
ant to Rule 12b-1 under the 1940 Act; (d) the expenses allocable exclusively to
each Class; (e) voting rights on matters exclusively affecting a single Class;
(f) the exchange privilege of each Class; and (g) the conversion feature of the
Class B shares. The Trust's Board of Trustees does not anticipate that there
will be any conflicts among the interests of the holders of different Classes
of shares of the Fund. The Trustees, on an ongoing basis, will consider whether
any such conflict exists and, if so, take appropriate action.
 
  When matters are submitted for shareholder vote, shareholders of each Class
of each Fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Shares of the
Trust will be voted generally on a Trust-wide basis on all matters except mat-
ters affecting the interests of one Fund or one Class of shares.
 
  Normally there will be no meetings of shareholders for the purpose of elect-
ing Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a
Trustee through a declaration in writing or by vote cast in person or by proxy
at a meeting called for that purpose. The Trustees will call a meeting for any
purpose upon written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Fund will assist shareholders in calling such a
meeting as required by the 1940 Act.
 
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Trust plans to consolidate the mailing of the Fund's semi-
annual and annual reports by household. This consolidation means that a house-
hold having multiple accounts with the identical address of record will receive
a single copy of each report. In addition, the Trust also plans to consolidate
the mailing of the Fund's Prospectus so that a shareholder having multiple
accounts (that is, individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their
 
26
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
   
accounts should contact a Smith Barney Financial Consultant or the Fund's
transfer agent, First Data Investor Services Group, Inc. ("First Data").     
          
  The Chase Manhattan Bank, located at Chase MetroTech Center, Brooklyn,
New York 11245, serves as custodian of the Fund's investments.     
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Trust's transfer agent.
 
  Shareholders may seek information regarding the Fund from their Smith Barney
Financial Consultants.
 
27
<PAGE>
 
 
 
 
 
                      [This page intentionally left blank]
 
 
<PAGE>
 
 
                                              SMITH BARNEY
                                              ----------------------------------
                                              A Member of TravelersGroup  [LOGO]
 
 
 
 
 
 
 
 
 
 
                                                                    SMITH BARNEY
                                                           DIVERSIFIED STRATEGIC
                                                                     INCOME FUND
 
 
                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                
                                                             FD 01216 11/97     
<PAGE>
 
 
                                                                    SMITH BARNEY
                                                                        Exchange
                                                                         Reserve
                                                                            Fund
                                                             
                                                          NOVEMBER 28, 1997     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 
[LOGO] Smith Barney Mutual Funds
       INVESTING FOR YOUR FUTURE.
       EVERYDAY.

<PAGE>
 
   
PROSPECTUS                                              NOVEMBER 28, 1997     
   
Smith Barney Exchange Reserve Fund     
388 Greenwich Street
New York, New York 10013
   
(800) 451-2010     
 
  Smith Barney Exchange Reserve Fund (the "Fund"), a diversified fund, seeks to
maximize current income to the extent consistent with the preservation of capi-
tal and the maintenance of liquidity by investing in a diversified portfolio of
high quality money market instruments.
 
  SHARES OF THE FUND ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
 
  The Fund is one of a number of funds, each having distinct investment objec-
tives and policies making up the Smith Barney Income Funds (the "Trust"). The
Trust is an open-end management investment company commonly referred to as a
mutual fund. Shares of other funds offered by the Trust are described in sepa-
rate prospectuses that may be obtained by calling the Trust at the telephone
number set forth above or by contacting a Smith Barney Financial Consultant.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Trust, including distribution fees and expenses, which prospective invest-
ors will find helpful in making an investment decision. Investors are encour-
aged to read this Prospectus carefully and retain it for future reference.
   
  Additional information about the Fund is contained in a Statement of Addi-
tional Information dated November 28, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Trust at the telephone number or address set forth above, or by
contacting your Smith Barney Financial Consultant. The Statement of Additional
Information has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated by reference into this Prospectus in its entirety.
    
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            8
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   11
-------------------------------------------------
VALUATION OF SHARES                            15
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             15
-------------------------------------------------
PURCHASE OF SHARES                             17
-------------------------------------------------
EXCHANGE PRIVILEGE                             22
-------------------------------------------------
REDEMPTION OF SHARES                           24
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           26
-------------------------------------------------
YIELD INFORMATION                              26
-------------------------------------------------
MANAGEMENT OF THE FUND AND THE TRUST           27
-------------------------------------------------
DISTRIBUTOR                                    28
-------------------------------------------------
ADDITIONAL INFORMATION                         28
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
 
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
 
INVESTMENT OBJECTIVE The Fund is an open-end diversified management investment
company that seeks to maximize current income to the extent consistent with
the preservation of capital and the maintenance of liquidity by investing in
high quality short-term money market instruments. See "Investment Objective
and Management Policies."
   
PURCHASE OF SHARES Shares of the Fund may be acquired by the general public
only through the exchange of Class B or Class C shares of other Smith Barney
Mutual Funds. Class B or Class C shares of the Fund acquired through exchange
are subject to the contingent deferred sales charge ("CDSC"), if any, of the
shares with which the exchange is made. All Class B and Class C shares are
subject to an annual distribution fee of 0.50% of the value of average daily
net assets of the Fund. Eight years after the date of their original purchase,
Class B shares will be automatically redeemed at net asset value and the
redemption proceeds will be reinvested, at net asset value, in Class A shares
of Smith Barney Money Funds Inc.--Cash Portfolio ("Cash Portfolio"). Upon this
conversion, the shares will no longer be subject to the annual distribution
fee.     
 
  Shares may be purchased through the Fund's distributor, Smith Barney Inc.
("Smith Barney"), a broker that clears securities 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 Investor Services Group, Inc.
("First Data"). See "Purchase of Shares."
   
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant-directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. See "Purchase of Shares--Smith Barney 401(k) and
ExecChoice(TM) Programs."     
 
INVESTMENT MINIMUMS Investors may open an account by making an initial invest-
ment of at least $1,000 for each account, or $250 for an individual retirement
account ("IRA") or a Self-Employed Retirement Plan. Subsequent investments of
at least $50 may be made for both Classes. For participants in retirement
plans
 
                                                                              3
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
qualified under Section 403(b)(7) or Section 401(a) of the Code, the minimum
initial and subsequent investment requirement is $25. See "Purchase of
Shares."
 
REDEMPTION OF SHARES Shares may be redeemed on each day that the New York
Stock Exchange, Inc. ("NYSE") is open for business. See "Redemption of
Shares."
 
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. (the "Manag-
er") serves as the Fund's investment adviser and administrator. 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 diversi-
fied 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 Trust and the Fund."
   
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of 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."     
 
DIVIDENDS AND DISTRIBUTIONS Dividends are declared daily and paid monthly from
net investment income. See "Dividends, Distributions and Taxes."
   
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of the
Fund will be reinvested automatically in additional shares at current net
asset value unless otherwise specified by an investor. Shares acquired by div-
idend and distribution reinvestment will not be subject to any CDSC. Class B
shares acquired through dividend and distribution reinvestments will become
eligible for conversion to Class A shares of the Cash Portfolio. See "Divi-
dends, Distributions and Taxes."     
 
SPECIAL CONSIDERATIONS AND RISK FACTORS There is no assurance that the Fund
will achieve its investment objective. In light of the fees and CDSC imposed
on Class B and Class C shares, an investment in the Fund should be viewed as
part of a long-term investment in the Smith Barney Mutual Funds. Investors
seeking only to invest in a money market fund and who do not expect to re-
exchange Fund shares for Class B shares of other Smith Barney Mutual Funds
should consider more suitable investments, including other money market funds
offered to the public by Smith Barney. See "Investment Objective and Manage-
ment Policies" and "Purchase of Shares."
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
THE FUND'S EXPENSES The following expense table lists the costs and expenses
that an investor will incur, either directly or indirectly, as a shareholder of
the Fund, based on the maximum CDSC that may be incurred at the time of redemp-
tion and the Fund's operating expenses for its most recent year:
 
<TABLE>   
<CAPTION>
  SMITH BARNEY EXCHANGE RESERVE FUND                   CLASS B  CLASS C
-----------------------------------------------------------------------
  <S>                                                  <C>      <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Maximum CDSC (as a percentage of original cost or
      redemption
      proceeds, whichever is lower)                     4.50%*   None*
-----------------------------------------------------------------------
  ANNUAL FUND OPERATING EXPENSES
    (as a percentage of average daily net assets)
    Management fees                                     0.50%    0.50%
    12b-1 fee**                                         0.50     0.50
    Other expenses                                      0.16     0.16
-----------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES                         1.16%    1.16%
-----------------------------------------------------------------------
</TABLE>    
   
 * Class B or Class C shares of the Fund acquired through exchanges with shares
   of other Smith Barney Mutual Funds are subject to the CDSC, if any, of the
   shares with which the exchange is made, which may be more or less than
   4.50%, in the case of Class B shares or may be 1.00%, in the case of Class C
   shares depending on the date such shares were purchased. Class B shares
   acquired by plans participating in the Smith Barney 401(k) Program are
   subject to a CDSC of 3.00%. See "Purchase of Shares--Smith Barney 401(k) and
   ExecChoice(TM) Programs."     
   
** Upon conversion, Class B shares will no longer be subject to a distribution
   fee. Class C shares do not have a conversion feature and, therefore, are
   subject to an ongoing distribution fee. As a result, long-term shareholders
   of Class C shares may pay more than the economic equivalent of the maximum
   front-end sales charge permitted by the National Association of Securities
   Dealers, Inc. (the "NASD").     
   
  Class A shares of the Fund purchased through the Smith Barney AssetOne Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.     
   
  The CDSC set forth in the above table is the maximum CDSC imposed by the Fund
on Class B shares purchased by certain qualified and non-qualified retirement
plans. See "Purchase of Shares--Deferred Sales Charge." Investors may pay
actual charges of less than 4.50% depending on the CDSC of the shares exchanged
for shares of the Fund or for plans participating in the Smith Barney 401(k)
and ExecChoice(TM) Programs. See "Purchase of Shares--Smith Barney 401(k) and
ExecChoice(TM) Programs." Smith Barney receives an annual 12b-1 distribution
fee of .50% of the Fund's average daily net assets. "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.     
 
                                                                               5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
 EXAMPLE
   
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the above table. See "Purchase of Shares" and "Management of the
Fund and the Trust."     
 
<TABLE>   
<CAPTION>
  SMITH BARNEY EXCHANGE RESERVE FUND          1 YEAR 3 YEARS 5 YEARS 10 YEARS*
------------------------------------------------------------------------------
  <S>                                         <C>    <C>     <C>     <C>
  Assumes complete redemption at maximum
  applicable CDSC at end of each time period
    Class B..................................  $57     $67     $74     $141
    Class C..................................   12      37      64      141
  Assumes no redemption
    Class B..................................  $12     $37     $64     $141
    Class C..................................   12      37      64      141
------------------------------------------------------------------------------
</TABLE>    
   
* Ten year figures assume exchange of Class B shares for Class A shares of
  Smith Barney Money Funds, Inc.--Cash Portfolio at the end of the eighth year
  following the date of original purchase of such Class B shares. Accordingly,
  the expenses reflected above utilize the expenses of a Class A share of the
  Cash Portfolio.     
 
  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.
 
6
<PAGE>
 
 
 
 
                      [This page intentionally left blank]
 
                                                                               7
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
  The following information for each of the years in the three-year period
ended July 31, 1997 has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Fund's Annual Report dated July
31, 1997. The following information for the fiscal years ended July 31, 1988
through July 31, 1994 has been audited by other independent auditors. This
information should be read in conjunction with the financial statements and
related notes that also appear in the Fund's 1997 Annual Report, which is
incorporated by reference into the Statement of Additional Information.     
 
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>   
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND
YEAR ENDED JULY 31,                  1997     1996     1995     1994     1993
--------------------------------------------------------------------------------
<S>                                 <C>      <C>      <C>      <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR  $  1.00  $  1.00  $  1.00  $  1.00  $  1.00
--------------------------------------------------------------------------------
 Net investment income                0.043    0.044    0.044    0.022    0.021
 Dividends from net investment
 income                              (0.043)  (0.044)  (0.044)  (0.022)  (0.021)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR        $  1.00  $  1.00  $  1.00  $  1.00  $  1.00
--------------------------------------------------------------------------------
TOTAL RETURN++                         4.43%    4.53%    4.49%    2.18%    2.15%
--------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS)  $   117  $   150  $   160  $   252  $   166
--------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                              1.16%    1.17%    1.24%    1.26%    1.25%
 Net investment income                 4.34     4.45     4.35     2.24     2.16
--------------------------------------------------------------------------------
</TABLE>    
   
++ Total return represents aggregate total return for the period indicated and
  does not reflect any applicable sales charge.     
 
8
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
<TABLE>   
<CAPTION>
 1992             1991                   1990                    1989                    1988
------------------------------------------------------------------------------------------------
<S>              <C>                    <C>                    <C>                     <C>
$  1.00          $  1.00                $  1.00                $   1.00                $   1.00
------------------------------------------------------------------------------------------------
  0.040            0.062                  0.074                  0.0802                  0.0566
 (0.040)          (0.062)                (0.074)                (0.0802)                (0.0566)
------------------------------------------------------------------------------------------------
$  1.00          $  1.00                $  1.00                $   1.00                $   1.00
------------------------------------------------------------------------------------------------
   4.06%            6.36%                  7.62%                   8.32%                   5.85%
------------------------------------------------------------------------------------------------
$   225          $   427                $   687                $    830                $    216
------------------------------------------------------------------------------------------------
   1.22%            1.17%                  1.15%                   1.22%                   1.46%
   4.13             6.27                   7.42                    8.36                    5.69
------------------------------------------------------------------------------------------------
</TABLE>    
 
                                                                               9
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
   
FOR A CLASS C SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
    
<TABLE>   
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND
YEAR ENDED JULY 31,                    1997     1996    1995(1)
------------------------------------------------------------------
<S>                                   <C>      <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR    $  1.00  $  1.00  $  1.00
------------------------------------------------------------------
 Net investment income                  0.043    0.044    0.035
 Dividends from net investment income  (0.043)  (0.044)  (0.035)
------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR          $  1.00  $  1.00  $  1.00
------------------------------------------------------------------
TOTAL RETURN                             4.42%    4.51%    3.52%++
------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)       $ 5,808  $ 9,445  $ 2,850
------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                1.16%    1.17%    1.21%+
 Net investment income                   4.34     4.39     4.76+
------------------------------------------------------------------
</TABLE>    
(1) For the period from November 7, 1994 (inception date) to July 31, 1995.
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
       
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
   
  The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity. This investment
objective may not be changed without the approval of the holders of a majority
of the Fund's outstanding shares. There can be no assurance that the Fund's
investment objective will be achieved.     
 
  The Fund attempts to achieve its investment objective by investing in short-
term money market instruments, including: securities issued or guaranteed by
the United States government, its agencies and instrumentalities ("U.S. govern-
ment securities"); repurchase agreements with respect to the foregoing; bank
time deposits, certificates of deposit and bankers' acceptances; and high grade
commercial paper. The following is a brief description of the kinds of instru-
ments in which the Fund may invest:
 
  U.S. Government Securities in which the Fund may invest include: direct obli-
gations of the United States Treasury such as Treasury Bills, Treasury Notes
and Treasury Bonds; obligations which are supported by the full faith and
credit of the United States such as Government National Mortgage Association
pass-through certificates; obligations which are supported by the right of the
issuer to borrow from the United States Treasury, such as securities of Federal
Home Loan Banks; and obligations which are supported by the credit of the
instrumentality, such as Federal National Mortgage Association and Federal Home
Loan Mortgage Association bonds. Because the United States government is not
obligated by law to provide support for an instrumentality that it sponsors,
the Fund will invest in obligations issued by such an instrumentality only when
the Fund's investment adviser determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
 
  Certificates of Deposit, Time Deposits and Bankers' Acceptances in which the
Fund may invest generally are limited to those instruments issued by domestic
and foreign banks, including branches of such banks, savings and loan associa-
tions and other banking institutions having total assets in excess of $1 bil-
lion. Certificates of deposit ("CDs") are short-term negotiable obligations of
commercial banks; time deposits ("TDs") are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated interest rates;
and bankers' acceptances are time drafts drawn on commercial banks by borrowers
usually in connection with international transactions. The Fund may invest in
U.S. dollar-denominated bank obligations, such as CDs, bankers' acceptances and
TDs, including instruments issued or supported by the credit of domestic or
foreign banks or savings institutions having total assets at the time of pur-
chase in excess of $1 billion. The Fund generally will invest at least 25% of
its assets in these securities. The Fund will invest in an obligation of a for-
eign bank or foreign branch of a domestic bank only if the Fund's investment
adviser deems the obligation to present minimal credit risks. Nevertheless,
this kind of obligation entails risks that are different from those
 
                                                                              11
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
of investments in domestic obligations of domestic banks due to differences in
political, regulatory and economic systems and conditions. The Fund will not
purchase TDs maturing in more than six months and will limit to no more than
10% of its assets its investment in TDs maturing from two business days
through six months.
 
  Commercial Paper in which the Fund may invest is limited to debt obligations
of domestic and foreign issuers that at the time of purchase are Eligible
Securities (as defined below under "Fund Quality and Diversification") that
are (a) rated by at least one nationally recognized statistical rating organi-
zation ("NRSRO") in the highest rating category for short-term debt securities
or (b) comparable unrated securities. The Fund also may invest in variable
rate master demand notes, which are unsecured demand notes typically purchased
directly from large corporate issuers providing for variable amounts of prin-
cipal indebtedness and periodic adjustments in the interest rate according to
the terms of the instrument. Demand notes normally are not traded in a second-
ary market. However, the Fund may demand payment of principal and accrued
interest in full at any time without penalty. In addition, while demand notes
generally are not rated, their issuers must satisfy the same criteria as those
set forth above for issuers of commercial paper. The Manager will consider the
earning power, cash flow and other liquidity ratios of issuers of demand notes
and continually will monitor their financial ability to meet payment on
demand.
 
 CERTAIN INVESTMENT POLICIES
 
  Price and Portfolio Maturity. The Fund invests only in securities which are
purchased with and payable in U.S. dollars and which have (or, pursuant to
regulations adopted by the SEC, will be deemed to have) remaining maturities
of thirteen months or less at the date of purchase by the Fund. For this pur-
pose, variable rate master demand notes (as described above under "Commercial
Paper"), which are payable on demand or, under certain conditions, at speci-
fied periodic intervals not exceeding thirteen months, in either case on not
more than 30 days' notice, will be deemed to have remaining maturities of
thirteen months or less. The Fund maintains a dollar-weighted average portfo-
lio maturity of 90 days or less. The Fund follows these policies to maintain a
constant net asset value of $1.00 per share, although there is no assurance
that it can do so on a continuing basis.
 
  Fund Quality and Diversification. The Fund will limit its investments to
securities that the Trust's Board of Trustees determines present minimal
credit risks and which are "Eligible Securities" at the time of acquisition by
the Fund. The term Eligible Securities includes securities rated by the "Req-
uisite NRSROs" in one of the two highest short-term rating categories, securi-
ties of issuers that have received such ratings with respect to other short-
term debt securities and comparable unrated securities. "Requisite NRSROs"
means (a) any two NRSROs that have issued a rating with respect to a security
or class of debt obligations of an issuer, or (b) one NRSRO, if only one NRSRO
has issued such a rating at the time that the Fund
 
12
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
acquires the security. If the Fund acquires securities that are unrated or
that have been rated by a single NRSRO, the acquisition must be approved or
ratified by the Trust's Board of Trustees. The NRSROs currently designated as
such by the SEC are Standard & Poor's Ratings Group, Moody's Investors Serv-
ice, Inc., Thomson BankWatch, Fitch Investors Services, L.P., Duff & Phelps
Credit Rating Co. and IBCA Limited and its affiliate, IBCA, Inc. A discussion
of the ratings categories of the NRSROs is contained in the Appendix to the
Statement of Additional Information.     
 
  The Fund generally may not invest more than 5% of its total assets in the
securities of any one issuer, except for U.S. government securities. In addi-
tion, the Fund may not invest more than 5% of its total assets in Eligible
Securities that have not received the highest rating from the Requisite NRSROs
and comparable unrated securities ("Second Tier Securities") and may not
invest more than 1% of its total assets in the Second Tier Securities of any
one issuer. The Fund may invest more than 5% (but no more than 25%) of the
then-current value of the Fund's total assets in the securities of a single
issuer for a period of up to three business days, provided that (a) the secu-
rities are rated by the Requisite NRSROs in the highest short-term rating cat-
egory, are securities of issuers that have received such rating with respect
to other short-term debt securities or are comparable unrated securities, and
(b) the Fund does not make more than one such investment at any one time.
 
  Repurchase Agreements. The Fund may engage in repurchase agreement transac-
tions. Under the terms of a typical repurchase agreement, the Fund would
acquire a U.S. government security for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Fund's holding period. The Fund will enter into repurchase agree-
ments with banks which are the issuers of instruments acceptable for purchase
by the Fund and certain dealers on the Federal Reserve Bank of New York's list
of reporting dealers. Under each repurchase agreement the selling institution
will be required to maintain the value of the securities subject to the repur-
chase agreement at not less than their repurchase price. Repurchase agreements
could involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities, the risk of a possible decline in the
value of the underlying securities during the period in which the Fund seeks
to assert its rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or part of the income from
the agreement. The Fund's investment adviser or administrator, acting under
the supervision of the Trust's Board of Trustees, reviews on an ongoing basis
the value of the collateral and the creditworthiness of those banks and deal-
ers with which the Fund enters into repurchase agreements to evaluate poten-
tial risks.
 
 
                                                                             13
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
  Mortgage- and Asset-Backed Securities. The Fund may purchase fixed or adjust-
able rate mortgage-backed securities issued by the Government National Mortgage
Association, Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation. In addition, the Fund may purchase other asset-backed
securities, including securities backed by automobile loans, equipment leases
or credit card receivables. These securities directly or indirectly represent a
participation in, or are secured by and payable from, fixed or adjustable rate
mortgage or other loans which may be secured by real estate or other assets.
Unlike traditional debt instruments, payments on these securities include both
interest and a partial payment of principal. Prepayments of the principal of
underlying loans may shorten the effective maturities of these securities and
may result in the Fund having to reinvest proceeds at a lower interest rate.
    
 CERTAIN INVESTMENT GUIDELINES
   
  The Fund will concentrate its investments in the banking industry except dur-
ing temporary defensive periods. Up to 25% of the assets of the Fund may be
invested at any time in the obligations of issuers conducting their principal
business activities in any industry other than banking. The Fund may not
acquire more than 10% of the voting or any other class of securities of any one
issuer, except that U.S. government securities may be purchased without regard
to these limits. In addition, the Fund may invest up to an aggregate of 10% of
its total assets in illiquid securities with contractual or other restrictions
on resale (excluding (i) securities subject to Rule 144A of the Securities Act
of 1933, as amended (the "1933 Act") provided at least two dealers make a mar-
ket in such securities and (ii) certain privately issued commercial paper eli-
gible for resale to institutional investors without registration pursuant to
Section 4(2) of the 1933 Act) and other instruments which are not readily mar-
ketable, including: (a) repurchase agreements providing for settlement in more
than seven days after notice by the Fund and (b) TDs maturing from two business
days through six months. The Fund also is authorized to borrow in an amount of
up to 10% of its total assets for temporary or emergency purposes, but not for
leverage, and to pledge its assets to the same extent in connection with such
borrowings. Whenever borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any additional investments. A more detailed
description of these policies, together with an enumeration of additional
investment restrictions which the Fund has adopted and which cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
shares, is contained in the Statement of Additional Information.     
 
 SPECIAL CONSIDERATIONS AND RISK FACTORS
  The Fund will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Fund. The market value of the obligations held by the Fund can be expected to
vary inversely to changes in the prevailing interest rates. Investors also
should recognize that, in
 
14
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
periods of declining interest rates, the Fund's yield will tend to be somewhat
higher than prevailing market rates and, in periods of rising interest rates,
the Fund's yield will tend to be somewhat lower. Also, when interest rates are
falling, the inflow of net new money to the Fund from the continuous sale of
its shares will likely be invested in instruments producing lower yields than
the balance of its portfolio, thereby reducing the Fund's current yield. In
periods of rising interest rates, the opposite can be expected to occur. In
addition, securities in which the Fund will invest may not yield as high a
level of current income as might be achieved by investing in securities with
less liquidity and safety and longer maturities.
 
  Investments in foreign banks or foreign issuers present certain risks,
including those resulting from fluctuations in currency exchange rates, reval-
uation of currencies, future political and economic developments and the pos-
sible imposition of currency exchange blockages or other foreign governmental
laws or restrictions and reduced availability of public information. Foreign
issuers generally are not subject to uniform accounting, auditing and finan-
cial reporting standards or to other regulatory practices and requirements
applicable to domestic issuers. In addition, there may be less publicly avail-
able information about a foreign bank than about a domestic bank.
 
VALUATION OF SHARES
 
 
  The Fund's net asset value per share is determined as of the close of regu-
lar trading on the NYSE, and is computed by dividing the value of the Fund's
net assets attributable to each Class by the total number of shares of the
Class outstanding. The Fund employs the amortized cost method of valuing port-
folio securities and intends to use its best efforts to continue to maintain a
constant net asset value of $1.00 per share.
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 DIVIDENDS AND DISTRIBUTIONS
 
  The Fund will be treated separately from the Trust's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
 
  The Fund declares dividends daily consisting of substantially all of its net
investment income, and pays dividends monthly. Any net realized gains will be
distributed at least annually. 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 CDSC. Dividends and
distributions are treated the same for tax purposes whether taken in cash or
reinvested in additional shares.
 
                                                                             15
<PAGE>
 
   
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)     
 
 
 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 Trust-wide basis.
The Fund intends to continue to qualify as a regulated investment company
under Subchapter M of the Code. In any taxable year in which the Fund so qual-
ifies 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 investment
company, the Fund will be required to meet various Code requirements.
 
  Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. In
order to avoid application of the excise tax, the Fund intends to make its
distributions in accordance with this requirement.
 
  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 gain dividends are taxable to shareholders as long-term
capital gain regardless of the length of time a shareholder may have held
shares of the Fund.
 
  Dividends (including capital gain 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 gain 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 gain 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 obligations of the United States government
and certain of its agencies and
 
16
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
   
instrumentalities may be exempt from all state and local income taxes. Share-
holders should consult their tax advisers for specific information on the tax
consequences of particular types of distributions.     
 
PURCHASE OF SHARES
 
  Fund shares may be acquired only through exchanges with Class B and Class C
shares of other Smith Barney Mutual Funds, except that Class C shares may be
acquired directly by participants in the Smith Barney 401(k) Program or the
Smith Barney ExecChoice(TM) Program ("Participating Plans") and Class B shares
may be acquired directly by certain qualified and non-qualified retirement
programs (collectively with Participating Plans, "Benefit Plans"). Investors
purchasing shares of the Fund through a Benefit Plan may do so directly
through First Data. Class B shares or Class C shares acquired through exchange
are subject to the CDSC, if any, of the shares with which the exchange is
made. Class B shares acquired directly by a Benefit Plan other than a Partici-
pating Plan will be subject to the CDSC as set forth below.
 
  In light of the distribution fee imposed on Class B shares and Class C
shares, an investment in the Fund should be viewed as part of a long-term
investment in the Smith Barney Mutual Funds. Investors seeking only to invest
in a money market fund and who do not expect to exchange Fund shares for
shares of other funds of the Smith Barney Mutual Funds should consider more
suitable investments, including other money market funds offered by Smith Bar-
ney.
 
  The Fund employs a distribution method which differs from that of certain
other mutual funds that invest in money market instruments. Before investing
in the Fund, among other things, investors should consider that certain other
funds with an investment objective and policies similar to those of the Fund
do not pay distribution expenses or impose any sales charge.
   
  The minimum initial investment requirement in the Fund for an account estab-
lished under the Uniform Gift to Minors Act is $250 and the subsequent invest-
ment requirement is $50.     
   
  Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Fund calculates its net asset value
are priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular trad-
ing on the NYSE on any day the Fund calculates its net asset value are priced
according to the net asset value determined on that day, provided the order is
received by the Fund or Smith Barney prior to Smith Barney's close of business
(the "trade date"). Payment for Fund shares is due on the third business day
after the trade date.     
 
                                                                             17
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
 DEFERRED SALES CHARGE
 
  Class B shares sold directly to Benefit Plans other than a Participating Plan
will be assessed a CDSC 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. Such
shares that are redeemed will not be subject to a CDSC to the extent that the
value of such shares represents: (a) capital appreciation of Fund assets; (b)
reinvestment of dividends or capital gain distributions; and (c) shares
redeemed more than five years after their purchase. The amount of the CDSC will
depend on the number of years since the shareholder made the purchase payment
from which the amount is being redeemed. Solely for the purpose 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 Benefit Plans other
than Participating Plans.
 
<TABLE>
<CAPTION>
      YEAR SINCE PURCHASE
      PAYMENT WAS MADE      CDSC
---------------------------------
      <S>                   <C>
      First                 4.50%
      Second                4.00%
      Third                 3.00%
      Fourth                2.00%
      Fifth                 1.00%
      Sixth and thereafter  0.00%
---------------------------------
</TABLE>
   
  Class B shares will convert automatically to Class A shares of Cash Portfolio
eight years after the date on which they were purchased and will thereafter no
longer be subject to any distribution fees. There will also be converted at
that time such proportion of Class B Dividend Shares owned by the shareholder
as the total number of his or her Class B shares converting at the time bears
to the total number of outstanding Class B shares (other than Class B Dividend
Shares) owned by the shareholder.     
 
  The length of time that Class B or Class C shares subject to a CDSC have been
held will be calculated from the date that the shares were initially acquired
in the Fund or one of the other Smith Barney Mutual Funds, and Fund shares
being redeemed will be considered to represent, as applicable, capital appreci-
ation or dividend and capital gain distribution reinvestments in such other
funds. For Federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.
 
18
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
 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) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the Fund
with any investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.     
   
  CDSC waivers will be granted subject to confirmation (by Smith Barney in case
of shareholders who are also Smith Barney clients or by First Data in the case
of all other shareholders) of the shareholder's status or holdings, as the case
may be.     
 
 SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
  Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all Participat-
ing Plans in these programs. Participating Plans may acquire shares of the Fund
only through an exchange from shares of another fund in the Smith Barney Mutual
Funds or through direct investment only if they hold Class C shares of another
of the Smith Barney Mutual Funds.
 
  The Fund offers to Participating Plans Class C shares as an investment choice
under the Smith Barney 401(k) and ExecChoice(TM) Programs. Class C shares
acquired through the Participating Plans are subject to the same service and/or
distribution fees as the Class C shares acquired by other investors; however,
they are not subject to any initial sales charge or CDSC.
   
  401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If, at the
end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a Par-
ticipating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Cash Portfolio. For Participating Plans that were originally established
through a Smith Barney retail brokerage account, the five-year period will be
calculated from the date the retail brokerage account was opened. Such Partici-
pating Plans will be notified of the pending exchange in writing within 30 days
after the fifth anniversary of the     
 
                                                                              19
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
enrollment date and, unless the exchange offer has been rejected in writing,
the exchange will occur on or about the 90th day after the anniversary date. If
the Participating Plan does not qualify for the five-year exchange to Class A
shares, a review of the Participating Plan's holdings will be performed each
quarter until either the Participating Plan qualifies or the end of the eighth
year.     
 
  401(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if a Participating
Plan's total Class C holdings in all non-money market Smith Barney Mutual Funds
equal at least $500,000 as of the calendar year-end, the Participating Plan
will be offered the opportunity to exchange all of its Class C shares for Class
A shares of the Cash Portfolio. Such Plans will be notified in writing within
30 days after the last business day of the calendar year and, unless the
exchange offer has been rejected in writing, the exchange will occur on or
about the last business day of the following March.
   
  Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Programs,
whether opened before or after June 21, 1996, that has not previously qualified
for an exchange into Class A shares will be offered the opportunity to exchange
all of its Class C shares for Class A shares of the Cash Portfolio, regardless
of asset size, at the end of the eighth year after the date the Participating
Plan enrolled in the Smith Barney 401(k) or ExecChoice(TM) Programs. Such Plans
will be notified of the pending exchange in writing approximately 60 days
before the eighth anniversary of the enrollment date and, unless the exchange
has been rejected in writing, the exchange will occur on or about the eighth
anniversary date. Once an exchange has occurred, a Participating Plan will not
be eligible to acquire additional Class C shares of the Fund but instead may
acquire Class A shares of the Cash Portfolio. Any Class C shares not converted
will continue to be subject to the distribution fee.     
 
  Participating Plans wishing to acquire shares of a Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from the Transfer Agent. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
 
  Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Smith Barney Mutual Funds are not available for purchase by Participating Plans
opened on or after June 21, 1996, but may continue to be purchased by any Par-
ticipating Plan in the Smith Barney 401(k) Program opened prior to such date
and originally investing in such Class. Class B shares acquired are subject to
a CDSC of 3.00% of redemption proceeds, if the Participating Plan terminates
within eight years of the date the Participating Plan first enrolled in the
Smith Barney 401(k) Program.
   
  At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, the Participating Plan will be offered the
opportunity to exchange all of its Class B shares for Class A shares of the
Cash Portfolio.     
 
20
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
Such Participating Plan will be notified of the pending exchange in writing
approximately 60 days before the eighth anniversary of the enrollment date and,
unless the exchange has been rejected in writing, the exchange will occur on or
about the eighth anniversary date. Once the exchange has occurred, a Partici-
pating Plan will not be eligible to acquire additional Class B shares of the
Fund but instead may acquire Class A shares of the Cash Portfolio. If the Par-
ticipating Plan elects not to exchange all of its Class B shares at that time,
each Class B share held by the Participating Plan will have the same conversion
feature as Class B shares held by other investors. See "Purchase of Shares--
Deferred Sales Charge".
 
  No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
 
  The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee in the Participating Plan; (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemption of shares in connection with a loan made by the Partic-
ipating Plan to an employee.
 
                                                                              21
<PAGE>
 
EXCHANGE PRIVILEGE
 
 
  Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following Smith Barney Mutual Funds, to the
extent shares are offered for sale in the shareholder's state of residence.
Exchanges are subject to minimum investment requirements and 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 Disciplined Small Cap Fund, Inc.     
   Smith Barney Fundamental Value Fund Inc.
   Smith Barney Growth Opportunity Fund
      
   Smith Barney Large Capitalization Growth Fund     
   Smith Barney Managed Growth Fund
   Smith Barney Natural Resources Fund Inc.
   Smith Barney Special Equities Fund
 
  Growth and Income Funds
      
   Concert Social Awareness Fund     
   Smith Barney Convertible Fund
   Smith Barney Funds, Inc.--Equity Income Portfolio
   Smith Barney Growth and Income Fund
   Smith Barney Premium Total Return Fund
          
   Smith Barney Utilities Fund
 
  Taxable Fixed-Income Funds
    *Smith Barney Adjustable Rate Government Income Fund
   Smith Barney Diversified Strategic Income Fund
          
   Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
   Smith Barney Government Securities Fund
   Smith Barney High Income Fund
   Smith Barney Investment Grade Bond Fund
   Smith Barney Managed Governments Fund Inc.
 
  Tax-Exempt Funds
   Smith Barney Arizona Municipals Fund Inc.
   Smith Barney California Municipals Fund Inc.
   **Smith Barney Intermediate Maturity California Municipals Fund
   **Smith Barney Intermediate Maturity New York Municipals Fund
   Smith Barney Managed Municipals Fund Inc.
   Smith Barney Massachusetts Municipals Fund
      
   Smith Barney Municipal High Income Fund     
   Smith Barney Muni Funds--Florida Portfolio
 
22
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
   Smith Barney Muni Funds--Georgia Portfolio
   **Smith Barney Muni Funds--Limited Term Portfolio
   Smith Barney Muni Funds--National Portfolio
   Smith Barney Muni Funds--New York Portfolio
   Smith Barney Muni Funds--Pennsylvania Portfolio
   Smith Barney New Jersey Municipals Fund Inc.
   Smith Barney Oregon Municipals Fund
          
  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
-------------------------------------------------------------------------------
 * Available for exchange with Class B and Class C shares of the Fund. In
   addition, shareholders who own Class C shares of the Fund in a Smith Barney
   401(k) Program may exchange those shares for Class C shares of this fund.
** Available for exchange with Class C shares of the Fund.
   
  Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a CDSC higher
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.
   
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will
be made upon receipt of all supporting documents in proper form. If the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged, no signature guarantee
is required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.     
 
                                                                             23
<PAGE>
 
REDEMPTION OF SHARES
 
 
  The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
 
  If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until First Data receives further
instructions from Smith Barney, or if the shareholder's account is not with
Smith Barney, from the shareholder directly. The redemption proceeds will be
remitted on or before the third business day following receipt of proper ten-
der, except on a day on which the NYSE is closed or as permitted under the 1940
Act in extraordinary circumstances. Generally, if the redemption proceeds are
remitted to a Smith Barney brokerage account, these funds will not be invested
for the shareholder's benefit without specific instruction and Smith Barney
will benefit from the use of temporarily uninvested funds. Redemption proceeds
for shares purchased by check, other than a certified or official bank check,
will be remitted upon clearance of the check, which may take up to ten days or
more.
 
  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
 
  Smith Barney Exchange Reserve Fund
  Class B or Class C (please specify)
  c/o First Data Investor Services Group, Inc.
     
  P.O. Box 5128     
     
  Westborough, Massachusetts 01581-5128     
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or a writ-
ten 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. Writ-
ten redemption requests of $2,000 or less do not require a signature guarantee
unless more than one such redemption request is made in any
 
24
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
10-day period or the redemption proceeds are to be sent to an address other
than the address of record. Unless otherwise directed, redemption proceeds
will be mailed to an investor's address of record. First Data may require
additional supporting documents for redemptions made by corporations, execu-
tors, administrators, trustees or guardians. A redemption request will not be
deemed properly received until First Data receives all required documents in
proper form.
    
 AUTOMATIC CASH WITHDRAWAL PLAN     
   
  The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive 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. 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 com-
mences. 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 eligi-
ble to redeem and exchange Fund shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee that will be provided by First Data upon request. Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with the applicant's signature guarantee when making his or her
initial investment in the Fund.     
 
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value next determined. Redemptions of shares (i) by retirement plans or (ii)
for which certificates have been issued are not permitted under this program.
   
  A shareholder will have the option of having the redemption proceeds mailed
to his or her address of record or wired to a bank account predesignated by
the shareholder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The     
 
                                                                             25
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 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 instructions com-
municated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time fol-
lowing at least seven days' prior notice to shareholders.     
       
MINIMUM ACCOUNT SIZE
   
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
involuntary liquidation redemption.     
 
YIELD INFORMATION
   
  From time to time, the Fund may advertise its yield and effective yield of
Class B and Class C shares. These yield figures are based on historical earn-
ings and are not intended to indicate future performance. The yield of a Class
refers to the net investment income generated by an investment in the Class
over a specific seven-day period (which will be stated in the advertisement).
This net investment income     
 
26
<PAGE>
 
YIELD INFORMATION (CONTINUED)
 
is then annualized. The effective yield is calculated similarly but, when
annualized, the income earned by an investment in the Class is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of the assumed reinvestment.
 
MANAGEMENT OF THE FUND AND THE TRUST
 
 
 BOARD OF TRUSTEES
 
  Overall responsibility for management and supervision of the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees approve all signif-
icant agreements between the Trust and the companies that furnish services to
the Fund, including agreements with its investment adviser, administrator, cus-
todian and transfer agent. The day-to-day operations of the Fund are delegated
to its investment adviser and administrator. The Statement of Additional Infor-
mation contains general background information regarding each Trustee and exec-
utive officer of the Fund.
 
 INVESTMENT ADVISER
   
  The Manager is located at 388 Greenwich Street, New York, New York 10013, and
serves as the Fund's investment adviser pursuant to an advisory agreement dated
August 31, 1995. The Manager (through its predecessors) has been in the invest-
ment 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 September 30, 1997 in excess of $81 billion.     
 
  Subject to the supervision and direction of the Trust's Board of Trustees,
the Manager manages the Fund in accordance with the Fund's stated investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities on behalf of the Fund and employs professional
portfolio managers and securities analysts who provide research services to the
Fund. For investment services rendered, the Fund pays the Manager a fee at the
annual rate of 0.30% of the Fund's average daily net assets.
 
 ADMINISTRATOR
   
  The Manager also serves as the Fund's administrator and oversees all aspects
of the Fund's administration and operation. For administration services ren-
dered, the Fund pays the Manager a fee at the annual rate of 0.20% of the
Fund's average daily net assets.     
 
 PORTFOLIO MANAGEMENT
 
  Phyllis M. Zahorodny, Managing Director of Smith Barney and Investment Offi-
cer of the Fund, is responsible for managing the day-to-day operations of the
Fund including making all investment decisions.
 
                                                                              27
<PAGE>
 
MANAGEMENT OF THE FUND AND THE TRUST (CONTINUED)
   
  Ms. Zahorodny's management discussion and analysis, and additional perfor-
mance information regarding the Fund during the fiscal year ended July 31, 1997
are included in the Annual Report dated July 31, 1997. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.     
 
DISTRIBUTOR
   
  Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as a 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 Act (the "Plan"), Smith Barney is paid a distribution fee
with respect to Class B and Class C shares of the Fund at the annual rate of
0.50% of the average daily net assets of each respective Class' shares. Class B
shares that automatically convert to Class A shares of the Cash Portfolio eight
years after the date of original purchase will no longer be subject to distri-
bution fees. The fees are used by Smith Barney to pay its Financial Consultants
to cover expenses primarily intended to result in the sale of shares. These
expenses include: advertising expenses; the cost of printing and mailing pro-
spectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in connec-
tion with the distribution of shares; interest and/or carrying charges; and
indirect and overhead costs of Smith Barney associated with the sale of Fund
shares, including lease, utility, communications and sales promotion expenses.
       
  Payments under the Plan are not tied exclusively to the distribution expenses
actually incurred by Smith Barney, and such payments may exceed distribution
expenses actually incurred by Smith Barney. The Board of Trustees evaluates the
appropriateness of the Plan and its payment terms on a continuing basis and in
doing so considers all relevant factors, including expenses borne by Smith Bar-
ney and amounts received under the Plan and the proceeds of CDSC.     
 
ADDITIONAL INFORMATION
 
 
  The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest of separate series hav-
ing a $.001 per share par value. When matters are submitted for shareholder
vote, shareholders of each fund of the Trust will have one vote for each full
share owned and a proportionate, fractional vote for any fractional share held.
Shares of the
 
28
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
 
Trust will be voted generally on a Trust-wide basis on all matters except mat-
ters affecting the interests of one Fund or one Class of shares.
 
  The Trust does not hold annual meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. The Trustees will
call a meeting for any purpose upon the written request of holders of at least
10% of the Fund's outstanding shares and the Fund will assist shareholders in
calling such a meeting as required by the 1940 Act.
 
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, PA 19103, serves as custodian of the Fund's investments.
   
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Trust's transfer agent.     
   
  The Fund sends to each shareholder a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Trust. In an effort to reduce the Fund's printing and mailing costs, the Fund
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.
Any shareholder who does not want this consolidation to apply to his or her
account should contact his or her Financial Consultant or the Trust's transfer
agent.     
 
                                                                              29
<PAGE>
 
 
                                              SMITH BARNEY
                                              ----------------------------------
                                              A Member of TravelersGroup  [LOGO]
 
 
 
 
 
                                                                    SMITH BARNEY
                                                                EXCHANGE RESERVE
                                                                            FUND
 
                                                            388 Greenwich Street
                                                        New York, New York 10013


                                                                 
                                                              FD 1208 11/97     
<PAGE>
 
   
PROSPECTUS                              NOVEMBER 28, 1997     
 
--------------------------------------------------------------------------------
Smith Barney
Exchange Reserve Fund
3100 Breckinridge Blvd., Bldg. 200
   
Duluth, Georgia 30099-0062     
(800) 544-5445
 
  Smith Barney Exchange Reserve Fund (the "Fund"), a diversified fund, seeks to
maximize current income to the extent consistent with the preservation of capi-
tal and the maintenance of liquidity by investing in a diversified portfolio of
high quality money market instruments.
 
  SHARES OF THE FUND ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
 
  The Fund is one of a number of funds, each having distinct investment objec-
tives and policies making up the Smith Barney Income Funds (the "Trust"). The
Trust is an open-end management investment company commonly referred to as a
mutual fund.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Trust, including distribution fees and expenses, which prospective invest-
ors will find helpful in making an investment decision. Investors are encour-
aged to read this Prospectus carefully and retain it for future reference.
   
  Additional information about the Fund is contained in a Statement of Addi-
tional Information dated November 28, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Trust at the telephone number or address set forth above, or by
contacting a Registered Representative of PFS Investments Inc. ("PFS Invest-
ments"). The Statement of Additional Information has been filed with the Secu-
rities 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.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
 
<TABLE>
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            6
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    8
-------------------------------------------------
VALUATION OF SHARES                            12
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             12
-------------------------------------------------
PURCHASE OF SHARES                             14
-------------------------------------------------
EXCHANGE PRIVILEGE                             15
-------------------------------------------------
REDEMPTION OF SHARES                           16
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           17
-------------------------------------------------
YIELD INFORMATION                              18
-------------------------------------------------
MANAGEMENT OF THE FUND AND THE TRUST           18
-------------------------------------------------
DISTRIBUTOR                                    19
-------------------------------------------------
ADDITIONAL INFORMATION                         20
-------------------------------------------------
</TABLE>
 
--------------------------------------------------------------------------------
 
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
 
INVESTMENT OBJECTIVE The Fund is an open-end diversified management investment
company that seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity by investing in high
quality short-term money market instruments. See "Investment Objective and Man-
agement Policies."
   
PURCHASE OF SHARES Shares of the Fund may be acquired by the general public
only through the exchange of Class B shares of other Smith Barney Mutual Funds.
Class B shares of the Fund acquired through exchange are subject to the contin-
gent deferred sales charge ("CDSC"), if any, of the shares with which the
exchange is made. All Class B shares are subject to an annual distribution fee
of 0.50% of the value of average daily net assets of the Fund. Eight years
after the date of their original purchase, Class B shares will be automatically
redeemed at net asset value and the redemption proceeds will be reinvested, at
net asset value, in Class A shares of Smith Barney Money Funds Inc.--Cash Port-
folio ("Cash Portfolio"). Upon this conversion, the shares will no longer be
subject to the annual distribution fee. In addition to Class B shares, the Fund
offers Class C shares to investors exchanging Class C shares of another Smith
Barney Fund purchased through Smith Barney Inc. ("Smith Barney"), a distributor
of the Fund.     
 
  Shares may be exchanged through the Fund's distributor, PFS Distributors,
Inc. ("PFS") See "Purchase of Shares."
 
INVESTMENT MINIMUMS Investors may open an account by making an initial invest-
ment of at least $1,000 for each account, or $250 for an individual retirement
account ("IRA") or a Self-Employed Retirement Plan. Subsequent investments of
at least $50 may be made for Class B shares. For participants in retirement
plans qualified under Section 403(b)(7) or Section 401(a) of the Code, the min-
imum initial and subsequent investment requirement is $25. See "Purchase of
Shares."
 
REDEMPTION OF SHARES Shares may be redeemed on each day that the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Redemption of Shares."
 
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. (the "Manag-
er") serves as the Fund's investment adviser and administrator. 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 diversi-
fied financial services holding company engaged, through its subsidiaries,
principally in four business segments: Investment Services, Consumer
 
                                                                               3
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
Finance Services, Life Insurance Services and Property & Casualty Insurance
Services. See "Management of the Trust and the Fund."
   
EXCHANGE PRIVILEGE Shares may be exchanged for Class B shares of certain other
funds of the Smith Barney Mutual Funds at the net asset value next determined.
See "Exchange Privilege."     
 
DIVIDENDS AND DISTRIBUTIONS Dividends are declared daily and paid monthly from
net investment income. See "Dividends, Distributions and Taxes."
   
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of the
Fund will be reinvested automatically in additional shares at current net asset
value unless otherwise specified by an investor. Shares acquired by dividend
and distribution reinvestment will not be subject to any CDSC. Class B shares
acquired through dividend and distribution reinvestments will become eligible
for conversion to Class A shares of the Cash Portfolio. See "Dividends, Distri-
butions and Taxes."     
 
RISK FACTORS AND SPECIAL CONSIDERATIONS There is no assurance that the Fund
will achieve its investment objective. In light of the fees and CDSC imposed on
Class B shares, an investment in the Fund should be viewed as part of a long-
term investment in the Smith Barney Mutual Funds. Investors seeking only to
invest in a money market fund and who do not expect to re-exchange Fund shares
for Class B shares of other Smith Barney Mutual Funds should consider more
suitable investments, including other money market funds offered to the public
by PFS. See "Investment Objective and Management Policies" and "Purchase of
Shares."
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
THE FUND'S EXPENSES The following expense table lists the costs and expenses
that an investor will incur, either directly or indirectly, as a shareholder of
the Fund, based on the maximum CDSC that may be incurred at the time of redemp-
tion and, unless otherwise noted, the Fund's operating expenses for its most
recent year:
 
 SMITH BARNEY EXCHANGE RESERVE FUND
<TABLE>   
----------------------------------------------------------------------------------
  <S>                                                                        <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Maximum CDSC
     (as a percentage of original cost or redemption proceeds, whichever is
       lower)                                                                None*
----------------------------------------------------------------------------------
  ANNUAL FUND OPERATING EXPENSES
    (as a percentage of average daily net assets)
    Management fees                                                          0.50%
    12b-1 fee**                                                              0.50
    Other expenses***                                                        0.16
----------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES                                              1.16%
----------------------------------------------------------------------------------
</TABLE>    
  * Class B shares of the Fund acquired through exchanges with shares of other
    Funds of the Smith Barney Mutual Funds are subject to the CDSC, if any, of
    the shares with which the exchange is made.
   
 ** Upon conversion, Class B shares will no longer be subject to a distribution
    fee. Smith Barney receives an annual 12b-1 distribution fee of 0.50% of the
    Fund's average daily net assets.     
*** "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 above table. See "Purchase of Shares," and "Management of the Fund
and the Trust."
 
<TABLE>   
<CAPTION>
  SMITH BARNEY EXCHANGE RESERVE FUND          1 YEAR 3 YEARS 5 YEARS 10 YEARS*
------------------------------------------------------------------------------
  <S>                                         <C>    <C>     <C>     <C>
  Assumes complete redemption at maximum
  applicable CDSC at end of each time period   $12     $37     $64     $141
  Assumes no redemption                        $12     $37     $64     $141
</TABLE>    
--------------------------------------------------------------------------------
   
* Ten year figures assume exchange of Class B shares for Class A shares of
  Smith Barney Money Funds, Inc.--Cash Portfolio at the end of the eighth year
  following the date of original purchase of such Class B shares. Accordingly,
  the expenses reflected above utilize the expenses of a Class A share of the
  Cash Portfolio.     
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                               5
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
  The following information for each of the years in the three-year period
ended July 31, 1997 has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Fund's Annual Report dated July
31, 1997. The following information for the fiscal years ended July 31, 1988
through July 31, 1994 has been audited by other independent auditors. This
information should be read in conjunction with the financial statements and
related notes that also appear in the Fund's 1997 Annual Report, which is
incorporated by reference into the Statement of Additional Information.     
 
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>   
<CAPTION>
SMITH BARNEY EXCHANGE RESERVE FUND
YEAR ENDED JULY 31,                    1997     1996     1995     1994
-------------------------------------------------------------------------
<S>                                   <C>      <C>      <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR    $  1.00  $  1.00  $  1.00  $  1.00
-------------------------------------------------------------------------
 Net investment income                  0.043    0.044    0.044    0.022
 Dividends from net investment income  (0.043)  (0.044)  (0.044)  (0.022)
-------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR          $  1.00  $  1.00  $  1.00  $  1.00
-------------------------------------------------------------------------
TOTAL RETURN                             4.43%    4.53%    4.49%    2.18%
-------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS)    $   117  $   150  $   160  $   252
-------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                1.16%    1.17%    1.24%    1.26%
 Net investment income                   4.34     4.45     4.35     2.24
-------------------------------------------------------------------------
</TABLE>    
 
 
6
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
 
<TABLE>   
<CAPTION>
 1993          1992             1991             1990              1989              1988
--------------------------------------------------------------------------------------------
<S>           <C>              <C>              <C>              <C>               <C>
$  1.00       $  1.00          $  1.00          $  1.00          $   1.00          $   1.00
--------------------------------------------------------------------------------------------
  0.021         0.040            0.062            0.074            0.0802            0.0566
 (0.021)       (0.040)          (0.062)          (0.074)          (0.0802)          (0.0566)
--------------------------------------------------------------------------------------------
$  1.00       $  1.00          $  1.00          $  1.00          $   1.00          $   1.00
--------------------------------------------------------------------------------------------
   2.15%         4.06%            6.36%            7.62%             8.32%             5.85%
--------------------------------------------------------------------------------------------
$   166       $   225          $   427          $   687          $    830          $    216
--------------------------------------------------------------------------------------------
   1.25%         1.22%            1.17%            1.15%             1.22%             1.46%
   2.16          4.13             6.27             7.42              8.36              5.89
--------------------------------------------------------------------------------------------
</TABLE>    
 
 
                                                                               7
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
   
  The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity. This investment
objective may not be changed without the approval of the holders of a majority
of the Fund's outstanding shares. There can be no assurance that the Fund's
investment objective will be achieved.     
 
  The Fund attempts to achieve its investment objective by investing in short-
term money market instruments, including: securities issued or guaranteed by
the United States government, its agencies and instrumentalities ("U.S. govern-
ment securities"); repurchase agreements with respect to the foregoing; bank
time deposits, certificates of deposit and bankers' acceptances; and high grade
commercial paper. The following is a brief description of the kinds of instru-
ments in which the Fund may invest:
   
  U.S. government securities in which the Fund may invest include: direct obli-
gations of the United States Treasury such as Treasury Bills, Treasury Notes
and Treasury Bonds; obligations which are supported by the full faith and
credit of the United States such as Government National Mortgage Association
pass-through certificates; obligations which are supported by the right of the
issuer to borrow from the United States Treasury, such as securities of Federal
Home Loan Banks; and obligations which are supported by the credit of the
instrumentality, such as Federal National Mortgage Association and Federal Home
Loan Mortgage Association bonds. Because the United States government is not
obligated by law to provide support for an instrumentality that it sponsors,
the Fund will invest in obligations issued by such an instrumentality only when
the Fund's investment adviser determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.     
 
  Certificates of Deposit, Time Deposits and Bankers' Acceptances in which the
Fund may invest generally are limited to those instruments issued by domestic
and foreign banks, including branches of such banks, savings and loan associa-
tions and other banking institutions having total assets in excess of $1 bil-
lion. Certificates of deposit ("CDs") are short-term negotiable obligations of
commercial banks; time deposits ("TDs") are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated interest rates;
and bankers' acceptances are time drafts drawn on commercial banks by borrowers
usually in connection with international transactions. The Fund may invest in
U.S. dollar-denominated bank obligations, such as CDs, bankers' acceptances and
TDs, including instruments issued or supported by the credit of domestic or
foreign banks or savings institutions having total assets at the time of pur-
chase in excess of $1 billion. The Fund generally will invest at least 25% of
its assets in these securities. The Fund will invest in an obligation of a for-
eign bank or foreign branch of a domestic bank only if the Fund's investment
adviser deems the obligation to present minimal credit risks. Nevertheless,
this kind of obligation entails risks that are different from those
 
8
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
of investments in domestic obligations of domestic banks due to differences in
political, regulatory and economic systems and conditions. The Fund will not
purchase TDs maturing in more than six months and will limit to no more than
10% of its assets its investment in TDs maturing from two business days
through six months.
 
  Commercial Paper in which the Fund may invest is limited to debt obligations
of domestic and foreign issuers that at the time of purchase are Eligible
Securities (as defined below under "Fund Quality and Diversification") that
are (a) rated by at least one nationally recognized statistical rating organi-
zation ("NRSRO") in the highest rating category for short-term debt securities
or (b) comparable unrated securities. The Fund also may invest in variable
rate master demand notes, which are unsecured demand notes typically purchased
directly from large corporate issuers providing for variable amounts of prin-
cipal indebtedness and periodic adjustments in the interest rate according to
the terms of the instrument. Demand notes normally are not traded in a second-
ary market. However, the Fund may demand payment of principal and accrued
interest in full at any time without penalty. In addition, while demand notes
generally are not rated, their issuers must satisfy the same criteria as those
set forth above for issuers of commercial paper. The Manager will consider the
earning power, cash flow and other liquidity ratios of issuers of demand notes
and continually will monitor their financial ability to meet payment on
demand.
 
 CERTAIN INVESTMENT POLICIES
 
  Price and Portfolio Maturity. The Fund invests only in securities which are
purchased with and payable in U.S. dollars and which have (or, pursuant to
regulations adopted by the SEC, will be deemed to have) remaining maturities
of thirteen months or less at the date of purchase by the Fund. For this pur-
pose, variable rate master demand notes (as described above under "Commercial
Paper"), which are payable on demand or, under certain conditions, at speci-
fied periodic intervals not exceeding thirteen months, in either case on not
more than 30 days' notice, will be deemed to have remaining maturities of
thirteen months or less. The Fund maintains a dollar-weighted average portfo-
lio maturity of 90 days or less. The Fund follows these policies to maintain a
constant net asset value of $1.00 per share, although there is no assurance
that it can do so on a continuing basis.
 
  Fund Quality and Diversification. The Fund will limit its investments to
securities that the Trust's Board of Trustees determines present minimal
credit risks and which are "Eligible Securities" at the time of acquisition by
the Fund. The term Eligible Securities includes securities rated by the "Req-
uisite NRSROs" in one of the two highest short-term rating categories, securi-
ties of issuers that have received such ratings with respect to other short-
term debt securities and comparable unrated securities. "Requisite NRSROs"
means (a) any two NRSROs that have issued a rating with respect to a security
or class of debt obligations of an issuer, or (b) one
 
                                                                              9
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
NRSRO, if only one NRSRO has issued such a rating at the time that the Fund
acquires the security. If the Fund acquires securities that are unrated or
that have been rated by a single NRSRO, the acquisition must be approved or
ratified by the Trust's Board of Trustees. The NRSROs currently designated as
such by the SEC are Standard & Poor's Ratings Group, Moody's Investors Serv-
ice, Inc., Thomson BankWatch, Fitch Investors Services L.P., Duff & Phelps
Credit Rating Co. and IBCA Limited and its affiliate, IBCA, Inc. A discussion
of the ratings categories of the NRSROs is contained in the Appendix to the
Statement of Additional Information.     
 
  The Fund generally may not invest more than 5% of its total assets in the
securities of any one issuer, except for U.S. government securities. In addi-
tion, the Fund may not invest more than 5% of its total assets in Eligible
Securities that have not received the highest rating from the Requisite NRSROs
and comparable unrated securities ("Second Tier Securities") and may not
invest more than 1% of its total assets in the Second Tier Securities of any
one issuer. The Fund may invest more than 5% (but no more than 25%) of the
then-current value of the Fund's total assets in the securities of a single
issuer for a period of up to three business days, provided that (a) the secu-
rities are rated by the Requisite NRSROs in the highest short-term rating cat-
egory, are securities of issuers that have received such rating with respect
to other short-term debt securities or are comparable unrated securities, and
(b) the Fund does not make more than one such investment at any one time.
 
  Repurchase Agreements. The Fund may engage in repurchase agreement transac-
tions. Under the terms of a typical repurchase agreement, the Fund would
acquire a U.S. government security for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Fund's holding period. The Fund will enter into repurchase agree-
ments with banks which are the issuers of instruments acceptable for purchase
by the Fund and certain dealers on the Federal Reserve Bank of New York's list
of reporting dealers. Under each repurchase agreement the selling institution
will be required to maintain the value of the securities subject to the repur-
chase agreement at not less than their repurchase price. Repurchase agreements
could involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities, the risk of a possible decline in the
value of the underlying securities during the period in which the Fund seeks
to assert its rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or part of the income from
the agreement. The Fund's investment adviser or administrator, acting under
the supervision of the Trust's Board of Trustees, reviews on an ongoing basis
the value of the collateral and the
 
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks.
   
  Mortgage- and Asset-Backed Securities--The Fund may purchase fixed or adjust-
able rate mortgage-backed securities issued by the Government National Mortgage
Association, Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation. In addition, the Fund may purchase other asset-backed
securities, including securities backed by automobile loans, equipment leases
or credit card receivables. These securities directly or indirectly represent a
participation in, or are secured by and payable from fixed or adjustable rate
mortgage or other loans which may be secured by real estate or other assets.
Unlike traditional debt instruments, payments on these securities include both
interest and a partial payment of principal. Prepayments of the principal of
underlying loans may shorten the effective maturities of these securities and
may result in the Fund having to reinvest proceeds at a lower interest rate.
    
 CERTAIN INVESTMENT GUIDELINES
 
  The Fund will concentrate its investments in the banking industry except dur-
ing temporary defensive periods. Up to 25% of the assets of the Fund may be
invested at any time in the obligations of issuers conducting their principal
business activities in any industry other than banking. The Fund may not
acquire more than 10% of the voting or any other class of securities of any one
issuer, except that U.S. government securities may be purchased without regard
to these limits. In addition, the Fund may invest up to an aggregate of 10% of
its total assets in illiquid securities with contractual or other restrictions
on resale (excluding (i) securities subject to Rule 144A of the Securities Act
of 1933, as amended (the "1933 Act"), provided at least two dealers make a mar-
ket in such securities and (ii) certain privately issued commercial paper eli-
gible for resale to institutional investors without registration pursuant to
Section 4(2) of the 1933 Act) and other instruments which are not readily mar-
ketable, including: (a) repurchase agreements providing for settlement in more
than seven days after notice by the Fund and (b) TDs maturing from two business
days through six months. The Fund also is authorized to borrow in an amount of
up to 10% of its total assets for temporary or emergency purposes, but not for
leverage, and to pledge its assets to the same extent in connection with such
borrowings. Whenever borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any additional investments. A more detailed
description of these policies, together with an enumeration of additional
investment restrictions which the Fund has adopted and which cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
shares, is contained in the Statement of Additional Information.
 
                                                                              11
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
 SPECIAL CONSIDERATIONS AND RISK FACTORS
 
  The Fund will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Fund. The market value of the obligations held by the Fund can be expected to
vary inversely to changes in the prevailing interest rates. Investors also
should recognize that, in periods of declining interest rates, the Fund's
yield will tend to be somewhat higher than prevailing market rates and, in
periods of rising interest rates, the Fund's yield will tend to be somewhat
lower. Also, when interest rates are falling, the inflow of net new money to
the Fund from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of its portfolio, thereby
reducing the Fund's current yield. In periods of rising interest rates, the
opposite can be expected to occur. In addition, securities in which the Fund
will invest may not yield as high a level of current income as might be
achieved by investing in securities with less liquidity and safety and longer
maturities.
 
  Investments in foreign banks or foreign issuers present certain risks,
including those resulting from fluctuations in currency exchange rates, reval-
uation of currencies, future political and economic developments and the pos-
sible imposition of currency exchange blockages or other foreign governmental
laws or restrictions and reduced availability of public information. Foreign
issuers generally are not subject to uniform accounting, auditing and finan-
cial reporting standards or to other regulatory practices and requirements
applicable to domestic issuers. In addition, there may be less publicly avail-
able information about a foreign bank than about a domestic bank.
 
VALUATION OF SHARES
 
 
  The Fund's net asset value per share is determined as of the close of regu-
lar trading on the NYSE, and is computed by dividing the value of the Fund's
net assets attributable to each Class B share by the total number of Class B
shares outstanding. The Fund employs the amortized cost method of valuing
portfolio securities and intends to use its best efforts to continue to main-
tain a constant net asset value of $1.00 per share.
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
 
  The Fund will be treated separately from the Trust's other funds in deter-
mining the amount of dividends from net investment income and distributions of
capital gains payable to shareholders.
 
12
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
 
  The Fund declares dividends daily consisting of substantially all of its net
investment income, and pays dividends monthly. Any net realized gains will be
distributed at least annually. If a shareholder does not otherwise instruct,
dividends and capital gains will be reinvested automatically in additional
shares of Class B at net asset value subject to no CDSC. Dividends and distri-
butions are treated the same for tax purposes whether taken in cash or rein-
vested in additional 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 Trust-wide basis.
The Fund intends to continue to qualify as a regulated investment company
under Subchapter M of the Code. In any taxable year in which the Fund so qual-
ifies 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 investment
company, the Fund will be required to meet various Code requirements.
 
  Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. In
order to avoid application of the excise tax, the Fund intends to make its
distributions in accordance with this requirement.
 
  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 gain dividends are taxable to shareholders as long-term
capital gain regardless of the length of time a shareholder may have held
shares of the Fund.
 
  Dividends (including capital gain 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 gain dividends received by the
shareholder with respect to such shares.
 
 
                                                                             13
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
   
  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 gain 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 obligations of the United States government
and certain of its agencies and instrumentalities may be exempt from all state
and local income taxes. Shareholders should consult their tax advisers for
specific information on the tax consequences of particular types of distribu-
tions.     
 
PURCHASE OF SHARES
 
 
  Fund shares may be acquired only through exchanges with Class B shares of
other Smith Barney Mutual Funds. Class B shares acquired through exchange are
subject to the CDSC, if any, of the shares with which the exchange is made.
 
  In light of the distribution fee imposed on Class B shares, an investment in
the Fund should be viewed as part of a long-term investment in the Smith
Barney Mutual Funds. Investors seeking only to invest in a money market fund
and who do not expect to exchange Fund shares for shares of other Smith Barney
Mutual Funds should consider more suitable investments, including other money
market funds offered by PFS.
 
  The Fund employs a distribution method which differs from that of certain
other mutual funds that invest in money market instruments. Before investing
in the Fund, among other things, investors should consider that certain other
funds with an investment objective and policies similar to those of the Fund
do not pay distribution expenses or impose any sales charge.
   
  Class B shares will convert automatically to Class A shares of the Cash
Portfolio eight years after the date on which they were purchased and will
thereafter no longer be subject to any distribution fees. There will also be
converted at that time such proportion of Class B Dividend Shares owned by the
shareholder as the total number of his or her Class B shares converting at the
time bears to the total number of outstanding Class B shares (other than Class
B Dividend Shares) owned by the shareholder.     
   
  The minimum initial investment requirement in the Fund for an account estab-
lished under the Uniform Gift to Minors Act is $250 and the minimum subsequent
investment requirement is $50.     
 
 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
 
14
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
(see "Automatic Cash Withdrawal Plan"); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares in connection with a combination of
the Fund with any investment company by merger, acquisition of assets or other-
wise. In addition, a shareholder who has redeemed shares from other Smith Bar-
ney 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 sharehold-
er's status or holdings, as the case may be.
 
EXCHANGE PRIVILEGE
   
  Except as otherwise noted below, Class B shares may be exchanged for Class B
shares in the following Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges are subject
to minimum investment requirements and other requirements of the fund into
which exchanges are made.     
 
 FUND NAME
     
  .Smith Barney Appreciation Fund Inc.     
     
  .Smith Barney Concert Social Awareness Fund     
     
  .Smith Barney Concert Allocation Series Inc.--Balanced Portfolio     
     
  .Smith Barney Concert Allocation Series Inc.--Conservative Portfolio     
     
  .Smith Barney Concert Allocation Series Inc.--Growth Portfolio     
     
  .Smith Barney Concert Allocation Series Inc.--High Growth Portfolio     
     
  .Smith Barney Concert Allocation Series Inc.--Income Portfolio     
     
  .Smith Barney Growth Opportunity Fund     
     
  .Smith Barney Investment Grade Bond Fund     
 
  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 CDSC higher 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 pur-
chased on the same date as the Class B shares of the Fund that have been
exchanged.
 
  Exchanges will be processed at the net asset value next determined after the
redemption proceeds are available. 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 pro-
 
                                                                              15
<PAGE>
 
REDEMPTION OF SHARES
 
spectus describing the shares to be acquired. The Fund reserves the right to
modify or discontinue exchange privileges upon 60 days' prior notice to share-
holders.
   
  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 PFS Share-
holder Services, the Fund's Sub-Transfer Agent (the "Sub-Transfer Agent"), at
3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30099-0062. If you should
have any questions concerning how to redeem your account after reviewing the
information below, please contact the Sub-Transfer Agent at (800) 544-5445,
Spanish-speaking representatives (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 registra-
tion. 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 sharehold-
er(s) has had an address change in the past 45 days, or if the shareholder(s)
is a corporation, sole proprietor, partnership, trust or fiduciary, signa-
ture(s) must be guaranteed by one of the following: a bank or trust company; a
broker-dealer; a credit union; a national securities exchange, registered secu-
rities 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
accompany the redemption request. Additional documentary evidence of authority
is also required by the Sub-Transfer Agent in the event redemption is requested
by a corporation, partnership, trust, fiduciary, executor or administrator.
Additionally, 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 his or her
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-Trans-
fer 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.
 
16
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
 
  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 business 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.
 
 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. Retirement
plan accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds. Any applicable CDSC will not be waived on amounts withdrawn by a
shareholder that exceed 1.00% per month of the value of the shareholder's
shares subject to the CDSC at the time the withdrawal plan commences. For fur-
ther information regarding the automatic cash withdrawal plan, shareholders
should contact 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
the Fund, each account must satisfy the minimum account size.) The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. Before the Fund
 
                                                                              17
<PAGE>
 
MINIMUM ACCOUNT SIZE (CONTINUED)
 
exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring accounts up to the minimum to avoid involuntary
liquidation.
 
YIELD INFORMATION
 
 
  From time to time the Fund may advertise its yield and effective yield of
Class B shares. These yield figures are based on historical earnings and are
not intended to indicate future performance. The yield of a Class B share
refers to the net investment income generated by an investment in that Class
over a specific seven-day period (which will be stated in the advertisement).
This net investment income is then annualized. The effective yield is calcu-
lated similarly but, when annualized, the income earned by an investment in
the Class is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of the assumed rein-
vestment.
 
MANAGEMENT OF THE FUND AND THE TRUST
 
 
 BOARD OF TRUSTEES
 
  Overall responsibility for management and supervision of the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees approve all sig-
nificant agreements between the Trust and the companies that furnish services
to the Fund, including agreements with its investment adviser, administrator,
custodian, transfer and sub-transfer agents. The day-to-day operations of the
Fund are delegated to its investment adviser and administrator. The Statement
of Additional Information contains general background information regarding
each Trustee and executive officer of the Fund.
 
 INVESTMENT ADVISER
   
  The Manager is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's investment adviser. The Manager (through its prede-
cessors) 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 Septem-
ber 30, 1997 in excess of $81 billion.     
 
  Subject to the supervision and direction of the Trust's Board of Trustees,
the Manager manages the Fund in accordance with the Fund's stated investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities on behalf of the Fund and employs professional
portfolio managers and securities analysts who provide research services to
the Fund. For investment services rendered, the Fund pays the Manager a fee at
the annual rate of 0.30% of the Fund's average daily net assets.
 
18
<PAGE>
 
MANAGEMENT OF THE FUND AND THE TRUST (CONTINUED)
 
 
 ADMINISTRATOR
   
  The Manager also serves as the Fund's administrator and oversees all aspects
of the Fund's administration and operation. For administration services ren-
dered, the Fund pays the Manager a fee at the annual rate of 0.20% of the
Fund's average daily net assets.     
 
 PORTFOLIO MANAGEMENT
 
  Phyllis M. Zahorodny, Managing Director of Smith Barney and Investment Offi-
cer of the Fund is responsible for managing the day-to-day operations of the
Fund including making all investment decisions.
   
  Ms. Zahorodny's management discussion and analysis and additional performance
information regarding the Fund during the fiscal year ended July 31, 1997 are
included in the Annual Report dated July 31, 1997. A copy of the Annual Report
may be obtained upon request and without charge from a Registered Representa-
tive of PFS or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.     
 
DISTRIBUTOR
   
  PFS is located at 3100 Breckinridge Boulevard, Duluth, Georgia 30199-0001 and
distributes shares of the Fund as a principal underwriter and as such conducts
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 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 of
Cash Portfolio 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 Registered Representatives to cover expenses primar-
ily intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to poten-
tial investors; payments to and expenses of PFS Registered 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, util-
ity, communications and sales promotion expenses.     
   
  PFS Investments may be deemed to be an underwriter for purposes of the 1933
Act. From time to time, PFS or its affiliates may also pay for certain non-cash
sales incentives provided to PFS Registered Representatives. Such incentives do
not have any effect on the net amount invested. In addition to the reallowances
from the applicable public offering price described above, PFS may, from time
to time, pay or     
 
                                                                              19
<PAGE>
 
DISTRIBUTOR (CONTINUED)
   
allow additional reallowances or promotional incentives, in the form of cash or
other compensation to PFS Registered Representatives that sell shares of the
Fund.     
 
  Payments under the Plan are not tied exclusively to the distribution expenses
actually incurred and the payments may exceed distribution expenses actually
incurred. The Board of Trustees will evaluate the appropriateness of the Plan
and its payment terms on a continuing basis and in so doing will consider all
relevant factors, including expenses borne by PFS, amounts received under the
Plan and proceeds of the CDSC.
 
ADDITIONAL INFORMATION
 
 
  The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest of separate series hav-
ing a $.001 per share par value. When matters are submitted for shareholder
vote, shareholders of each fund of the Trust will have one vote for each full
share owned and a proportionate, fractional vote for any fractional share held.
Shares of the Trust will be voted generally on a Trust-wide basis on all mat-
ters except matters affecting the interests of one Fund or one Class of shares.
 
  The Trust does not hold annual meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. The Trustees will
call a meeting for any purpose upon the written request of holders of at least
10% of the Fund's outstanding shares and the Fund will assist shareholders in
calling such a meeting as required by the 1940 Act.
 
  PNC Bank, National Association, is located at 17th and Chestnut Streets,
Philadelphia, PA 19103, and serves as custodian of the Trust's investments.
 
  First Data Investor Services Group, Inc. is located at Exchange Place, Bos-
ton, Massachusetts 02109, and serves as the Trust's transfer agent.
   
  PFS Shareholder Services is located at 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30099-0002, and serves as the Fund's Sub-Transfer Agent.     
   
  The Fund sends to each shareholder a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Trust. In an effort to reduce the Fund's printing and mailing costs, the Fund
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.
Any shareholder who does not want this consolidation to apply to his or her
account should contact the Sub-Transfer Agent.     
 
20
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
   
  Also available at the shareholder's request is an Account Transcript identi-
fying every financial transaction in an account since it was opened. To defray
administrative expenses involved with providing multiple years worth of infor-
mation, there is a $25 charge for each Account Transcript requested.     
   
  Additional copies of tax forms are available at the shareholder's request. A
$10 fee for each tax form will be assessed.     
   
  Additional information regarding the Sub-Transfer Agent's services may be
obtained by contacting the Client Services Department at (800) 554-5445.     
 
                                                                              21
<PAGE>
 
 
 
 
                      [This page intentionally left blank]
<PAGE>
 
 
                                               SMITH BARNEY
                                               ---------------------------------
                                               A Member of TravelersGroup [LOGO]
 
 
 
 
 
                                                                   SMITH BARNEY

                                                                       EXCHANGE
                                                                        RESERVE
                                                                           FUND
 
                                                           388 Greenwich Street
                                                       New York, New York 10013
 


                                                                         FUND 26
                                                                
                                                             FD 01234 11/97     
--------------------------------------------------------------------------------

PROSPECTUS

                                                                    SMITH BARNEY
                                                                            High
                                                                          Income
                                                                            Fund

                                                               November 28, 1997

                                                   Prospectus begins on page one

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

--------------------------------------------------------------------------------
Prospectus                                                     November 28, 1997
--------------------------------------------------------------------------------

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

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

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

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

      This Prospectus sets forth concisely certain information about the Fund
and the Trust, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference. Shares of other investment funds offered by the Trust
are described in separate prospectuses that may be obtained by calling the Trust
at the telephone number set forth above or by contacting a Smith Barney
Financial Consultant.

   
      Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 28, 1997, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
    

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.


                                                                               1
<PAGE>

--------------------------------------------------------------------------------
Table of Contents
--------------------------------------------------------------------------------

Prospectus Summary                                                             3
--------------------------------------------------------------------------------
Financial Highlights                                                          10
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                  14
--------------------------------------------------------------------------------
Valuation of Shares                                                           26
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                            26
--------------------------------------------------------------------------------
Purchase of Shares                                                            28
--------------------------------------------------------------------------------
Exchange Privilege                                                            39
--------------------------------------------------------------------------------
Redemption of Shares                                                          42
--------------------------------------------------------------------------------
Minimum Account Size                                                          45
--------------------------------------------------------------------------------
Performance                                                                   45
--------------------------------------------------------------------------------
Management of the Trust and the Fund                                          46
--------------------------------------------------------------------------------
Distributor                                                                   47
--------------------------------------------------------------------------------
Additional Information                                                        48
--------------------------------------------------------------------------------

================================================================================
      No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
================================================================================


2
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary
--------------------------------------------------------------------------------

The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in this
Prospectus. See "Table of Contents."

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

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

   
      Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary --
Reduced or No Initial Sales Charge."
    


                                                                               3
<PAGE>

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

      Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and 1.00% each year thereafter to zero. This CDSC may be waived
for certain redemptions. Class B shares are subject to an annual service fee of
0.25% and an annual distribution fee of 0.50% of the average daily net assets of
the Class. The Class B shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.

      Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."

      Class 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. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Fund shares, which when 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 fee.

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

   
      Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
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
    


4
<PAGE>

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

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.

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

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more may be made at net asset value with no initial
sales charge but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge held in
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 and Class C shares, purchasers eligible to purchase Class A
shares at net asset value or at a reduced sales charge should consider doing so.
    

      Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
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 Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences among the Classes of
shares.

   
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as other types of participant-directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
    


                                                                               5
<PAGE>

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

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

PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained with 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. In addition, certain investors,
including qualified retirement plans and certain other institutional investors,
may purchase shares directly from the Fund through the Fund's transfer agent,
First Data Investor Services Group, Inc. ("First Data"). See "Purchase of
Shares."

   
INVESTMENT MINIMUMS Investors in Class A, Class B and Class 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 Retirement
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 minimum subsequent investment
requirement for all Classes is $25. The minimum investment requirements for
purchases of Fund shares through the Systematic Investment Plan are described
below. There is no minimum investment requirement for Class A for unitholders
who invest distributions from a UIT sponsored by Smith Barney. See "Purchase of
Shares."

SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial invest ment
requirement for Class A, Class B and Class C shares and the minimum subsequent
investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."
    

REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."

   
MANAGEMENT OF THE FUND 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
    


6
<PAGE>

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

   
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 Trust and the Fund."
    

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

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

DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and distributions of net realized capital gains, if any, are paid
annually. See "Dividends, Distributions and Taxes."
    

REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."

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


                                                                               7
<PAGE>

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

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

   
Smith Barney High Income Fund              Class A   Class B    Class C  Class Y
--------------------------------------------------------------------------------
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                         0.70%      0.70%      0.70%     0.70%
   12b-1 fees**                            0.25       0.75       0.70      None
   Other expenses                          0.11       0.10       0.08      0.03
--------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES              1.06%      1.55%      1.48%     0.73%
================================================================================
*     Purchases of Class A shares of $500,000 or more will be made at net asset
      value with no sales charge, but will be subject to a CDSC of 1.00% on
      redemptions made within 12 months of purchase.
    

**    Upon conversion of Class B shares to Class A shares, such shares will no
      longer be subject to a distribution fee. Class C shares do not have a
      conversion feature and, therefore, are subject to an ongoing distribution
      fee. As a result, long-term shareholders of Class C shares may pay more
      than the economic equivalent of the maximum front-end sales charge
      permitted by the National Association of Securities Dealers, Inc. (the
      "NASD").

   
      Class A shares of the Fund purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.

      The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges depending on the amount purchased and, in the
case of Class B, Class 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)
and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Smith Barney receives an annual 12b-1 service fee of 0.25% of the value
of average daily net assets of Class A shares. Smith Barney also receives, with
respect to Class B shares, an annual 12b-1 fee of 0.75% of the value of average
daily net
    


8
<PAGE>

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

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 this Class, consisting of a 0.45%
distribution fee and a 0.25% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.

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

Smith Barney High Income Fund          1 year    3 years    5 years    10 years*
--------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and
(2) redemption at the end of each
time period:
   Class A                              $55         $77        $101        $169
   Class B                               61          79          94         171
   Class C                               25          47          81         177
   Class Y                                7          23          41          91
                                                                          
An investor would pay the following                                       
expenses on the same investment,                                          
assuming the same annual return                                           
and no redemption:                                                        
   Class A                               55          77         101         169
   Class B                               16          49          84         171
   Class C                               15          47          81         177
   Class Y                                8          24          42          93
--------------------------------------------------------------------------------
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.

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


                                                                               9
<PAGE>

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

   
The following information for each of the years in the three-year period ended
July 31, 1997 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1997.
The following information for the fiscal years ended July 31, 1988 through July
31, 1994 has been audited by other independent auditors. The information set out
below should be read in conjunction with the financial statements and related
notes that also appear in the Fund's 1997 Annual Report, which is incorporated
by reference into the Statement of Additional Information.

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

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

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


10
<PAGE>

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

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

<TABLE>
<CAPTION>
   
Smith Barney High Income Fund
Year Ended July 31,              1997       1996       1995       1994       1993       1992
===============================================================================================
<S>                             <C>        <C>        <C>        <C>        <C>        <C>   
Net Asset Value,
  Beginning of Year             $10.99     $11.11     $11.16     $12.01     $11.15     $10.05
-----------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income           1.03       1.02       1.03       1.02       1.08       1.11
  Net realized and unrealized
    gain (loss) on investments    0.83      (0.12)     (0.02)     (0.81)      0.88       1.16
-----------------------------------------------------------------------------------------------
Total Income From Operations      1.86       0.90       1.01       0.21       1.96       2.27
-----------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income          (1.02)     (1.02)     (0.99)     (1.06)     (1.10)     (1.11)
  Overdistribution of net 
    investment income               --         --         --      (0.06)     (0.05)        -- 
  Capital                           --         --      (0.07)        --         --      (0.06)
-----------------------------------------------------------------------------------------------
Total Distributions              (1.02)     (1.02)     (1.06)     (1.06)     (1.10)     (1.17)
-----------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year                   $11.83     $10.99     $11.11     $11.16     $12.01     $11.15
-----------------------------------------------------------------------------------------------
Total Return                     17.72%      8.41%      9.77%      1.60%     18.55%     23.86%
-----------------------------------------------------------------------------------------------
Net Assets,
  End of Year (millions)          $681       $560       $478       $510       $449       $304
-----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                        1.55%      1.59%      1.61%      1.60%      1.66%      1.65%#
  Net investment income           9.07       9.16       9.52       8.77       9.02      10.52
-----------------------------------------------------------------------------------------------
Portfolio Turnover Rate             78%        72%        60%        98%        95%       137%
===============================================================================================
</TABLE>
#     The annualized operating expense ratio excludes interest expense. The
      annualized operating expense ratio including interest expense was 1.66%
      for the year ended July 31, 1992.
    
       


                                                                              11
<PAGE>

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

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

   
Smith Barney High Income Fund
Year Ended July 31,                   1991       1990     1989      1988
================================================================================
Net Asset Value, Beginning of Year   $10.59    $13.36    $14.01    $14.26
--------------------------------------------------------------------------------
Income From Operations:
  Net investment income                1.27      1.53      1.61      1.53
  Net realized and unrealized
    gain (loss) on investments        (0.52)    (2.68)    (0.73)    (0.20)
--------------------------------------------------------------------------------
Total Income (Loss) From Operations    0.75     (1.15)     0.88      1.33
--------------------------------------------------------------------------------
Less Distributions From:
  Net investment income               (1.27)    (1.61)    (1.53)    (1.58)
  Overdistribution of net
    investment income                    --        --        --     (0.04)
  Capital                             (0.02)    (0.01)       --        --
--------------------------------------------------------------------------------
Total Distributions                   (1.29)    (1.62)    (1.53)    (1.58)
--------------------------------------------------------------------------------
Net Asset Value, End of Year         $10.05    $10.59    $13.36    $14.01
--------------------------------------------------------------------------------
Total Return                           8.82%    (8.66)%    6.60%    10.06%
--------------------------------------------------------------------------------
Net Assets, End of Year (millions)     $239      $323      $610      $434
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                             1.75%     1.68%     1.63%     1.64%
  Net investment income               13.30     12.93     11.93     11.12
--------------------------------------------------------------------------------
Portfolio Turnover Rate                 112%       43%       74%        5%
================================================================================
    
       


12
<PAGE>

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

   
For a Class C share and a Class Y share of beneficial interest outstanding
throughout each year:
    
                              
<TABLE>
<CAPTION>
   
Smith Barney High Income Fund                 Class C Shares                 Class Y Shares
Year Ended July 31,                    1997     1996   1995(1)(2)      1997      1996     1995(3)
===================================================================================================
<S>                                  <C>       <C>       <C>         <C>        <C>       <C>   
Net Asset Value, Beginning of Year   $11.00    $11.11    $10.90      $10.99     $11.10    $10.88
---------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income                1.04      1.03      0.95        1.12       0.92      0.09
  Net realized and unrealized
  gain (loss) on investments           0.83     (0.11)     0.23        0.84      (0.11)     0.23
---------------------------------------------------------------------------------------------------
Total Income From Operations           1.87      0.92      1.18        1.96       0.81      0.32
---------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income               (1.03)    (1.03)    (0.90)      (1.11)     (0.92)    (0.03)
  Capital                                --        --     (0.07)         --         --     (0.07)
---------------------------------------------------------------------------------------------------
Total Distributions                   (1.03)    (1.03)    (0.97)      (1.11)     (0.92)    (0.10)
---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year         $11.84    $11.00    $11.11      $11.84     $10.99    $11.10
---------------------------------------------------------------------------------------------------
Total Return                          17.77%     8.56%    11.50%++    18.68%      9.32%     2.91%++
---------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)      $44       $21        $6        $139        $35       $10
---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                             1.48%     1.51%     1.56%+      0.73%      0.76%     0.86%+
  Net investment income                9.14      9.23      9.58+       9.90       9.98     10.28+
---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                  78%       72%       60%         78%        72%       60%
===================================================================================================
</TABLE>
    
(1)   On November 7, 1994 the former Class D shares were renamed Class C shares.
(2)   For the period from August 24, 1994 (inception date) to July 31, 1995. (3)
      For the period from April 28, 1995 (inception date) to July 31, 1995.
++    Total return is not annualized as it may not be representative of the
      total return for the year.
+     Annualized.
       


                                                                              13
<PAGE>

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

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

      CERTAIN INVESTMENT STRATEGIES

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

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


14
<PAGE>

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

the Fund has the right to purchase from the Fund the underlying security owned
by the Fund at the agreed-upon price for a specified time period.
   
      Upon the exercise of a call option written by the Fund, the Fund may
suffer a loss equal to the excess of the security's market value at the time of
the option exercise over the Fund's acquisition cost of the security, less the
premium received for writing the option.

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

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

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


                                                                              15
<PAGE>

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

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

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

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

      ADDITIONAL INVESTMENTS

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


16
<PAGE>

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

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

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

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

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


                                                                              17
<PAGE>

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

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

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

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


18
<PAGE>

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

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

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

      Corporate securities in which the Fund may invest include corporate
fixed-income securities of both domestic and foreign issuers, such as bonds,
debentures,


                                                                              19
<PAGE>

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

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

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

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

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

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


20
<PAGE>

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

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

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

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

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

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


                                                                              21
<PAGE>

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

that the Fund deems representative of its value, the value of the Fund's net
assets could be adversely affected.

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

      CERTAIN INVESTMENT GUIDELINES

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

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

   
      RISK FACTORS AND SPECIAL CONSIDERATIONS
    

      Options. The Fund may enter into options transactions primarily as hedges
to reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio position being offset by a loss on the hedge position. The Fund bears
the risk that the prices of the securities being hedged will not move in the
same amount as the hedge. The Fund


22
<PAGE>

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

will engage in hedging transactions only when deemed advisable by SBMFM.
Successful use by the Fund of options will depend on SBMFM's ability to
correctly predict movements in the direction of the stock underlying the option
used as a hedge. Losses incurred in hedging transactions and the costs of these
transactions will affect the Fund's performance.

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

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

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

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


                                                                              23
<PAGE>

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

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

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

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

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

      The Fund's holdings in fixed-income securities (as rated by Moody's) for
the fiscal year ended July 31, 1997 were composed as follows:   % rated Baa;   %
rated Ba;   % rated B;   % rated Caa; and   % in non-rated securities. The 
percentages were calculated on a dollar weighted average basis by determining
monthly the percentage of the Fund's net assets invested in each rating category
and do not necessarily indicate what the composition of the Fund's holdings will
be in subsequent years.

      Securities of Unseasoned Issuers. Securities in which the Fund may invest


24
<PAGE>

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

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

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

PORTFOLIO TRANSACTIONS

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

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

      The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of the Class outstanding. Net asset value is calculated separately for
Class A, B, C and Y shares.

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


                                                                              25
<PAGE>

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

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

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

      DIVIDENDS AND DISTRIBUTIONS

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

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

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

      The per share dividends on Class B and Class C shares of the Fund may be


26
<PAGE>

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

lower than the per share dividends on Class A and Y shares principally as a
result of the distribution fee applicable with respect to Class B and Class 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 income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Code. To meet
those requirements, the Fund may need to restrict the degree to which it engages
in short-term trading and transactions in options. If the Fund qualifies as a
regulated investment company and meets certain distribution requirements, the
Fund will not be subject to Federal income tax on its net investment income and
net capital gains that it distributes to its shareholders.

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

   
      Distributions of capital gains or dividends received from foreign
corporations will not qualify for the Federal dividends-received deduction for
corporate shareholders (the "Corporate Deduction"). The Fund anticipates that
most of its dividends will not qualify for the Corporate Deduction. Each
shareholder will receive a statement annually from the Trust, which will set
forth separately the aggregate dollar amount of dividends and capital gains
distributed to the shareholder by the Fund with respect to the prior calendar
year and will identify the portions of the capital gains distribution that
qualify for the dividends -- received deduction or the 20% maximum capital gains
tax rate for individuals.
    

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

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


                                                                              27
<PAGE>

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

      GENERAL

      The Fund offers five Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. 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 the Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount). Class Z shares are offered
without a sales charge, CDSC, or service or distribution fee, exclusively to:
(a) tax-exempt employee benefit and retirement plans of Smith Barney and its
affiliates and (b) certain UITs sponsored by Smith Barney and its affiliates.
Investors meeting either of these criteria who are interested in acquiring Class
Z shares should contact a Smith Barney Financial Consultant for a Class Z
Prospectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.

      Purchases of Fund shares must be made through a brokerage account main
tained with Smith Barney, with an Introducing Broker or with an investment
dealer in the selling group, except for investors purchasing shares of the Fund
through a qualified retirement plan who may do so directly through First Data.
When purchasing shares of the Fund, investors must specify whether the purchase
is for Class A, Class B, Class C or Class Y shares. Smith Barney and other
broker-dealers may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or holds
shares. Accounts held directly at First Data are not subject to a main tenance
fee.

      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
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. 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 investment requirement for all Classes in the Fund
is $25. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class C shares and the minimum subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a quarterly basis, the minimum
initial investment requirement for Class A, Class B and Class C shares and the
minimum subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements for Class A shares for employees of Travelers
and its


28
<PAGE>

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

subsidiaries, including Smith Barney, unitholders who invest distributions from
a UIT sponsored by Smith Barney and Trustees of the Trust 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
Trust's transfer agent, First Data. Share certificates are issued only upon a
shareholder's written request to First Data.

      The minimum initial investment requirement in the Fund for an account
established under the Uniform Gift to Minors Act is $250 and the minimum
subsequent investment requirement is $50.

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

      SYSTEMATIC INVESTMENT PLAN

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


                                                                              29
<PAGE>

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

      INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES

      The sales charges applicable to purchases of Class A shares of the Fund
are as follows:

                                  Sales
                                 Charge as       Sales             Dealers
                                  % of         Charge as          Reallowance
                                 Offering        % of              as % of
Amount of Investment              Price     Amount Invested    Offering Price
================================================================================
Less than $25,000                 4.50%          4.71%              4.05%
$25,000 - $49,999                 4.00%          4.17%              3.60%
$50,000 - $99,99                  3.50%          3.63%              3.15%
$100,000 - $249,999               2.50%          2.56%              2.25%
$250,000 - $499,999               1.50%          1.52%              1.35%
$500,000 and over                    *              *                  *
================================================================================
*     Purchases of Class A shares of $500,000 or more will be made at net asset
      value without any initial sales charge, but will be subject to a CDSC of
      1.00% on redemptions made within 12 months of purchase. The CDSC on Class
      A shares is payable to Smith Barney, which compensates Smith Barney
      Financial Consultants and other dealers whose clients make purchases of
      $500,000 or more. The CDSC is waived in the same circumstances in which
      the CDSC applicable to Class B and Class C shares is waived. See "Deferred
      Sales Charge Alternatives" and "Waivers of CDSC."

      Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.

      The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Fund made at one time by "any person," which includes
an individual and his or her immediate family or a trustee or other fiduciary of
a single trust estate or single fiduciary account.

      INITIAL SALES CHARGE WAIVERS

   
      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the NASD, provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Smith Barney Financial Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment with Smith Barney), on the
condition the purchase of Class A shares is made with the proceeds of the
redemption of shares
    


30
<PAGE>

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

   
of a mutual fund which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial Consultant and (iii) was
subject to a sales charge; (d) purchases by shareholders who have redeemed Class
A shares in the Fund (or Class A shares of another fund of the Smith Barney
Mutual Funds that are offered with a sales charge) and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made within
60 calendar days of the redemption; (e) purchases by accounts managed by
registered investment advisory subsidiaries of Travelers; (f) investments of
distributions from a UIT sponsored by Smith Barney; (g) direct rollovers by plan
participants of distributions from a 401(k) plan offered to employees of
Travelers or its subsidiaries or a 401(k) plan enrolled in the Smith Barney
401(k) Program (Note: subsequent investments will be subject to the applicable
sales charge); (h) purchases by separate accounts used to fund certain
unregistered variable annuity contracts; (i) purchases by investors
participating in a Smith Barney fee-based arrangement; and (j) purchases of
Class A shares of the Fund by Section 403(b) or Section 401(a) or (k) accounts
associated with Copeland Retirement Programs. In order to obtain such discounts,
the purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase would qualify for the elimination of the
sales charge.
    

      RIGHT OF ACCUMULATION

      Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregating
the dollar amount of the new purchase and the total net asset value of all Class
A shares of the Fund and of funds sponsored by Smith Barney which are offered
with a sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.

      GROUP PURCHASES

      Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must


                                                                              31
<PAGE>

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

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 payroll deductions, IRAs or investments
pursuant to retirement plans under Sections 401 or 408 of the Code. Smith Barney
may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales-related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide 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 discretion of
Smith Barney.

      LETTER OF INTENT

      Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13-month period, provided that the investor refers to such
Letter of Intent when placing orders. For purposes of a Letter of Intent, the
"Amount of Investment" as referred to in the preceding sales charge table
includes purchases of all Class A shares of the Fund and other funds of the
Smith Barney Mutual Funds offered with a sales charge over 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 compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or First Data to obtain a Letter of Intent
application.


32
<PAGE>

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

      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Fund and agree to purchase a total of $5,000,000 of Class Y shares of the same
Fund within six months from the date of the Letter. If a total investment of
$5,000,000 is not made within the six-month period, all Class Y shares purchased
to date will be transferred to Class A shares, where they will be subject to all
fees (including a service fee of 0.25%) and expenses applicable to the Fund's
Class A shares, which may include a CDSC of 1.00%. The Fund expects that such
transfer will not be subject to Federal income taxes. Please contact a Smith
Barney Financial Consultant or First Data for further information.

      DEFERRED SALES CHARGE ALTERNATIVES

      "CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares that were purchased without an initial
sales charge but subject to a CDSC.

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

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


                                                                              33
<PAGE>

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

Year Since Purchase
Payment Was Made                                  CDSC
--------------------------------------------------------------------------------
  First                                           4.50%
  Second                                          4.00%
  Third                                           3.00%
  Fourth                                          2.00%
  Fifth                                           1.00%
  Sixth and thereafter                            0.00%
--------------------------------------------------------------------------------

      Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There also will be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder.

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

      To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired five
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.

      WAIVERS OF CDSC

      The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established


34
<PAGE>

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

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 591 1/42; (e) involuntary redemptions; and (f) redemptions of
shares to effect a combination of the Fund with any investment company by
merger, acquisition of assets or otherwise. In addition, a shareholder who has
redeemed shares from other 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 First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.

      SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS

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

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

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

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

      401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If at
the end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, a
Participating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund. For Participating Plans that were originally established through a Smith
Barney


                                                                              35
<PAGE>

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

retail brokerage account, the five-year period will be calculated from the date
the retail brokerage account was opened. Such Participating Plans will be
notified of the pending exchange in writing within 30 days after the fifth
anniversary of the enrollment date and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the 90th day after the
fifth anniversary date. If the Participating Plan does not qualify for the
five-year exchange to Class A shares, a review of the Participating Plan's
holdings will be performed each quarter until either the Participating Plan
qualifies or the end of the eighth year.

      401(k) Plans Opened Prior to June 21, 1996. In any year after the date a
Participating Plan enrolled in the Smith Barney 401(k) Program, if a
Participating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $500,000 as of the calendar year-end, the
Participating Plan will be offered the opportunity to exchange all of its Class
C shares for Class A shares of the Fund. Such Plans will be notified in writing
within 30 days after the last business day of the calendar year and, unless the
exchange offer has been rejected in writing, the exchange will occur on or about
the last business day of the following March.

      Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM)
Programs, whether opened before or after June 21, 1996, that has not previously
qualified for an exchange into Class A shares will be offered the opportunity to
exchange all of its Class C shares for Class A shares of the Fund, regardless of
asset size, at the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) or ExecChoice(TM) Programs. Such Plans will
be notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth anniversary
date. Once an exchange has occurred, a Participating Plan will not be eligible
to acquire additional Class C shares of the Fund but instead may acquire Class A
shares of the Fund. Any Class C shares not converted will continue to be subject
to the distribution fee.

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

      Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Funds are not available for purchase by Participating Plans opened on or after
June 21, 1996, but may continue to be purchased by any Participating Plan opened
prior to such date and originally investing in such Class. Class B shares
acquired are subject to a CDSC of 3.00% of redemption proceeds, if the
Participating Plan terminates within eight years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.


36
<PAGE>
--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

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

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

      The CDSC will be waived on redemptions of Class B shares in connection
with lump-sum or other distributions made by a Participating Plan as a result
of: (a) the retirement of an employee in the Participating Plan; (b) the
termination 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 591 1/42 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
Participating Plan to an employee.

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

      Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class A,
Class B and Class 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.


                                                                              37
<PAGE>

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

   
FUND NAME
    

Growth Funds

      Smith Barney Aggressive Growth Fund Inc.
      Smith Barney Appreciation Fund Inc.
      Smith Barney Disciplined Small Cap Fund, Inc.
      Smith Barney Fundamental Value Fund Inc.
      Smith Barney Growth Opportunity Fund
      Smith Barney Large Capitalization Growth Fund
      Smith Barney Managed Growth Fund
      Smith Barney Natural Resources Fund, Inc.
      Smith Barney Special Equities Fund

Growth and Income Funds

      Concert Social Awareness Fund
      Smith Barney Convertible Fund
      Smith Barney Funds, Inc. -- Equity Income Portfolio
      Smith Barney Growth and Income Fund
      Smith Barney Premium Total Return Fund
      Smith Barney Utilities Fund

Taxable Fixed --Income Funds

*     Smith Barney Adjustable Rate Government Income Fund
      Smith Barney Diversified Strategic Income Fund
+++   Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
      Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
      Smith Barney Government Securities Fund
      Smith Barney Investment Grade Bond Fund
      Smith Barney Managed Governments Fund Inc.

   
Tax-Exempt Funds

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


38
<PAGE>

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

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

   
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 Allocation Series Inc.

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

   
Money Market Funds

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

----------
*     Available for exchange with Class A and Class B shares of the Fund. In
      addition, shareholders who own Class C shares of the Fund through the
      Smith Barney 401(k) Program may exchange those shares for Class C shares
      of this fund.
**    Available for exchange with Class A, Class C and Class Y shares of the
      Fund.
***   Available for exchange with Class A shares of the Fund.
+     Available for exchange with Class B and Class C shares of the Fund.

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

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

      Class C Exchanges. Upon an exchange, the new Class C shares will be


                                                                              39
<PAGE>

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

deemed to have been purchased on the same date as the Class C shares of the Fund
that have been exchanged.

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

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

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

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

      The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.


40
<PAGE>

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

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

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

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

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


                                                                              41
<PAGE>

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

      AUTOMATIC CASH WITHDRAWAL PLAN

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

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

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

      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares, may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset value
next determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.

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


42
<PAGE>

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

      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.

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

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

      The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, however,
will not redeem shares based solely on market reductions in net asset value.
Before the Fund exercises such right, shareholders will receive written notice
and will be permitted 60 days to bring accounts up to the minimum to avoid
involuntary liquidation.

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

   YIELD

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


                                                                              43
<PAGE>

--------------------------------------------------------------------------------
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, Class B,
Class C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.

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

      BOARD OF TRUSTEES

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


44
<PAGE>

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

      INVESTMENT ADVISER

      SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves
as the Fund's investment adviser. SBMFM is a wholly owned subsidiary of
Holdings. SBMFM (through its predecessor entities) has been in the investment
counseling business since 1934 and is a registered investment adviser. SBMFM
renders investment advice to investment companies that had aggregate assets
under management as of September 30, 1997 in excess of $81 billion.

   Subject to the supervision and direction of the Trust's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund. Under an
investment advisory agreement, the Fund pays SBMFM a monthly fee at the annual
rate of 0.50% of the value of the Fund's average daily net assets. For the
fiscal year ended July 31, 1997, the Fund paid investment advisory fees to SBMFM
in an amount equal to 0.50% of the value of its average daily net assets.

      PORTFOLIO MANAGEMENT

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

      Management's discussion and analysis and additional performance
information regarding the Fund during the fiscal year ended July 31, 1997 is
included in the Annual Report dated July 31, 1997. A copy of the Annual Report
may be obtained upon request without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.

      ADMINISTRATOR

      SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. Pursuant to an administration agreement with the
Fund, SBMFM is paid a fee at the annual rate of 0.20% 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


                                                                              45
<PAGE>

--------------------------------------------------------------------------------
Distributor (continued)
--------------------------------------------------------------------------------

the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an annual service
fee with respect to Class A, Class B and Class 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 an annual 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
automatically convert to Class A shares eight years after the date of original
purchase will no longer be subject to distribution fees. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder accounts
and, in the case of Class B and Class C 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 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, utility,
communications and sales promotion expenses.

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

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

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

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


46
<PAGE>

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

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

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

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

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

      The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Trust plans to consolidate the mailing of the
Fund's semi-annual and annual reports by household. This consolidation means
that a household having multiple accounts with the identical address of record
will receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their accounts should contact their Smith Barney
Financial Consultants or the Fund's transfer agent.


                                                                              47
<PAGE>

                                SMITH BARNEY
           A Member of TravelersGroup [LOGO]

                                Smith Barney
                                        High
                                      Income
                                        Fund
                                            
                        388 Greenwich Street
                    New York, New York 10013
                                            
                                FD0220 11/97

PROSPECTUS

                                                                    SMITH BARNEY
                                                                            High
                                                                          Income
                                                                            Fund

                                                             Class Z Shares Only

                                                               November 28, 1997
                                                   Prospectus begins on page one

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

--------------------------------------------------------------------------------
Prospectus                                                     November 28, 1997
--------------------------------------------------------------------------------

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

     Smith Barney High Income Fund (the "Fund") is a diversified fund that seeks
to provide shareholders with high current income by investing in high-yielding
corporate bonds, debentures and notes. The Fund also purchases put and call
options and writes covered put and call options on securities it holds and on
stock indexes primarily as a hedge to reduce investment risk.

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

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

     This Prospectus sets forth concisely certain information about the Fund and
the Trust, including expenses, that prospective investors will find helpful in
making an investment decision. Investors are encouraged to read this Prospectus
carefully and retain it for future reference.

     The Class Z shares described in this Prospectus (previously designated as
Class C shares) are currently offered exclusively for sale to tax-exempt
employee benefit and retirement plans of Smith Barney Inc. ("Smith Barney") or
any of its affiliates ("Qualified Plans") and to certain unit investment trusts
sponsored by Smith Barney or any of its affiliates ("Smith Barney UITs").

   
     Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 28, 1997, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
    

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.


                                                                               1
<PAGE>

--------------------------------------------------------------------------------
Table of Contents
--------------------------------------------------------------------------------

The Fund's Expenses                                                            3
--------------------------------------------------------------------------------

Financial Highlights                                                           4
--------------------------------------------------------------------------------

Investment Objective and Policies                                              5
--------------------------------------------------------------------------------

Valuation of Shares                                                           17
--------------------------------------------------------------------------------

Dividends, Distributions and Taxes                                            17
--------------------------------------------------------------------------------

Purchase, Exchange and Redemption of Shares                                   19
--------------------------------------------------------------------------------

Performance                                                                   20
--------------------------------------------------------------------------------

Management of the Trust and the Fund                                          20
--------------------------------------------------------------------------------

Additional Information                                                        22
--------------------------------------------------------------------------------

================================================================================
     No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
================================================================================


2
<PAGE>

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

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

   
Annual Fund Operating Expenses
(as a percentage of average net assets)
    Management fees                                                  0.70%
    Other expenses                                                   0.05%
--------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES                                        0.75%
================================================================================
    

     The nature of the services for which the Fund pays management fees is
described under "Management of the Trust and the Fund." "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.

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

                                              1 year  3 years  5 years  10 years
--------------------------------------------------------------------------------
    An investor would pay the following 
    expenses on a $1,000 investment in Class
    Z shares of the Fund, assuming (1) 5.00% 
    annual return and (2) redemption
    at the end of each time period:             $8      $24      $42      $93
--------------------------------------------------------------------------------

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


                                                                               3
<PAGE>

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

   
The following information for each of the years in the three-year period ended
July 31, 1997 has been audited by KPMG Peat Marwick LLP, independent auditors
and appears in the Fund's Annual Report dated July 31, 1997. The following
information for the fiscal years ended July 31, 1993 and July 31, 1994 has been
audited by other independent auditors. The information set forth below should be
read in conjunction with the financial statements and related notes that also
appear in the Fund's 1997 Annual Report, which is incorporated by reference into
the Statement of Additional Information.

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

Smith Barney High Income Fund --
Class Z Shares
Year Ended July 31,              1997(1)   1996     1995    1994(2)  1993(3)
================================================================================
Net Asset Value,
  Beginning of Year               $10.99   $11.09   $11.16   $12.01   $11.03
--------------------------------------------------------------------------------
Income From Operations:
  Net investment income             1.12     1.11     1.11     1.10     0.79
  Net realized and unrealized
    gain (loss) on investments      0.80    (0.10)   (0.03)   (0.80)    1.07
--------------------------------------------------------------------------------
Total Income from Operations        1.92     1.01     1.08     0.30     1.86
--------------------------------------------------------------------------------
Less Distributions From:
  Net investment income            (1.11)   (1.11)   (1.08)   (1.15)   (0.88)
  Overdistribution of
    net investment income             --       --       --    (0.06)   (0.04)
  Capital                             --       --    (0.07)      --       --
--------------------------------------------------------------------------------
Total Distributions                (1.11)   (1.11)   (1.15)   (1.15)   (0.88)
--------------------------------------------------------------------------------
Net Asset Value, End of Year      $11.80   $10.99   $11.09   $11.16   $12.01
--------------------------------------------------------------------------------
Total Return                       18.29%    9.42%   10.55%    2.37%   17.47%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000's)     $104   $7,158   $9,917  $11,370  $26,112
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                          0.75%    0.77%    0.86%    0.77%     0.81%+
  Net investment income             9.88     9.98    10.28     9.61%    9.88%+
--------------------------------------------------------------------------------
Portfolio Turnover Rate               78%      72%      60%      98%      95%
================================================================================
    

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


4
<PAGE>

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

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

     CERTAIN INVESTMENT STRATEGIES

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

     Covered Option Writing. The Fund may write call options on securities. The
Fund realizes fees (referred to as "premiums") for granting the rights evidenced
by the options. A call option embodies the right of its purchaser to compel the
writer 


                                                                               5
<PAGE>

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

of the option to sell to the option holder an underlying security at a specified
price at any time during the option period. Thus, the purchaser of a call option
written by the Fund has the right to purchase from the Fund the underlying
security owned by the Fund at the agreed-upon price for a specified time period.

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

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

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

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


6
<PAGE>

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

investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.

     As fixed-income securities, convertible securities generally provide a
steady dividend which is higher than dividends paid by common stocks but at
lower interest rates or dividend yields than non-convertible fixed-income
securities. Like all fixed-income securities, there can be no assurance of
current income because issuers may default on their obligations. Similarly,
although the conversion feature of a convertible security enables the holder to
benefit from increases in the market price of the underlying common stock (to a
lesser extent than a direct holder of the common stock) there can be no
assurance of capital appreciation because of market fluctuations.

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

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

     ADDITIONAL INVESTMENTS

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


                                                                               7
<PAGE>

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

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

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

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

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


8
<PAGE>

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

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

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

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

     Foreign Securities. There are certain risks involved in investing in
securities 


                                                                               9
<PAGE>

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

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

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

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


10
<PAGE>

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

The Fund's investments in each of equipment leases or equipment trust
certificates will not exceed 5% of its assets.

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

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

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

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


                                                                              11
<PAGE>

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

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

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

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

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

   
     Securities of Developing Countries. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the 
    


12
<PAGE>

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

equity and fixed-income markets of developing countries involves exposure to
economic structures that are generally less diverse and mature, and to political
systems that can be expected to have less stability, than those of developed
countries. Historical experience indicates that the markets of developing
countries have been more volatile than the markets of the more mature economies
of developed countries; however, such markets often have provided higher rates
of return to investors.

     CERTAIN INVESTMENT GUIDELINES

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

     RISK FACTORS AND SPECIAL CONSIDERATIONS
    

     Options. The Fund may enter into options transactions primarily as hedges
to reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio position being offset by a loss on the hedge position. The Fund bears
the risk that the prices of the securities being hedged will not move in the
same amount as the hedge. The Fund will engage in hedging transactions only when
deemed advisable by SBMFM. Successful use by the Fund of options will depend on
SBMFM's ability to correctly predict movements in the direction of the stock
underlying the option used as a hedge. Losses incurred in hedging transactions
and the costs of these transactions will affect the Fund's performance.

     The ability of the Fund to engage in closing transactions with respect to
options 


                                                                              13
<PAGE>

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

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

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

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

     While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium- and low-rated and comparable
unrated securities generally are unsecured and 


14
<PAGE>

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

frequently are subordinated to the prior payment of senior indebtedness. The
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings.

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

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

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

     The Fund's holdings in fixed-income securities (as rated by Moody's) for
the fiscal year ended July 31, 1997 were composed as follows: _____% rated Baa;
______% rated Ba; ______% rated B; _____% rated Caa; and _____% in non-rated
securities. The percentages were calculated on a dollar weighted average basis
by determining monthly the percentage of the Fund's net assets invested in each
rating category and do not necessarily indicate what the composition of the
Fund's holdings will be in subsequent years.

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

   
     Rule 144A Securities. The Fund may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified institutional
buyers" pursuant to Rule 144A under the 1933 Act. Because Rule 144A Securities
are freely 
    


                                                                              15
<PAGE>

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

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

     PORTFOLIO TRANSACTIONS
    

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

   
     The net asset value per share of Class Z shares is determined as of the
close of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), on
each day that the NYSE is open by dividing the value of the Fund's net assets
attributable to Class Z by the number of shares of the Class outstanding. The
per share net asset value of the Class Z shares may be higher than those of
other Classes because of the lower expenses attributable to Class Z shares.
    

     Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Trust's Board of Trustees or delegates. A security
that is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trust's
Board of Trustees determines that amortized cost reflects fair value of those
investments. An option generally is valued at the last sale price or, in the
absence of the last sale price, the last offer price. Further information
regarding the Fund's valuation policies is contained in the Statement of
Additional Information.


16
<PAGE>

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

     DIVIDENDS AND DISTRIBUTIONS

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

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

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

     TAXES

     The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended. To meet those requirements, the Fund
may need to restrict the degree to which it engages in short-term trading and
transactions in options. If the Fund qualifies as a regulated investment company
and meets certain distribution requirements, the Fund will not be subject to
Federal income tax on its net investment income and net capital gains that it
distributes to its shareholders.

     Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal 


                                                                              17
<PAGE>

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

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

   
     Distributions of capital gains or dividends received from foreign
corporations will not qualify for the Federal dividends-received deduction for
corporate shareholders (the "Corporate Deduction"). The Fund anticipates that
most of its dividends will not qualify for the Corporate Deduction. Each
shareholder will receive a statement annually from the Trust, which will set
forth separately the aggregate dollar amount of dividends and capital gains
distributed to the shareholder by the Fund with respect to the prior calendar
year and will identify the portions of the capital gains distribution that
qualify for the dividends -- received deduction or the 20% maximum capital gains
tax rate for individuals..
    

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

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

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

     Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Smith Barney UIT. Purchases are effected at the net
asset value next determined after a purchase order is received by Smith Barney
(the "trade date"). Payment is due to Smith Barney on the third business day
(the "settlement date") after the trade date. Investors who make payment prior
to the settlement date may designate a temporary investment (such as a money
market fund of the Smith Barney Mutual Funds) for such payment until settlement
date. The Fund reserves the right to reject any purchase order and to suspend
the offering of shares for a period of time. There are no minimum investment
requirements for Class Z shares; however, the Fund reserves the right to vary
this policy at any time.

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

     Qualified Plans may redeem their shares on any day the Fund calculates its
net 


18
<PAGE>

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

asset value. See "Valuation of Shares." Redemption requests received in proper
form prior to the close of regular trading on the NYSE are priced at the net
asset value per share determined on that day. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value as
next determined. Shareholders acquiring Class Z shares through a Qualified Plan
or a Smith Barney UIT should consult the terms of their respective plans for
redemption provisions.

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

   
     YIELD
    

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

     TOTAL RETURN

     From time to time the Fund may include its total return, average annual
total return and current dividend return for Class Z shares in advertisements.
These figures are based on historical earnings and are not intended to indicate
future performance. Total return is computed for a specified period of time
assuming deduction of the maximum sales charge, if any, from the initial amount
invested and reinvestment of all income dividends and capital gain distributions
on the reinvestment dates at prices calculated as stated in this Prospectus,
then dividing the value of the investment at the end of the period so calculated
by the initial amount invested and subtracting 100%. The standard average annual
total return, as 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
by annualizing the most recent monthly distribution and dividing by the net
asset value on the last day of the period for which current dividend return is
presented. The current dividend return for Class Z shares may vary from time to
time depending on market conditions, the composition of its investment portfolio
and operating expenses. These factors and possible differences in the methods
used in calculating current dividend return should be considered when comparing
the Class Z share's current return to yields 


                                                                              19
<PAGE>

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

published for other investment companies and other investment vehicles. The Fund
may also include comparative performance information in advertising or marketing
the Class Z shares. Such performance information may include data from Lipper
Analytical Services, Inc. and other financial publications.

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

     BOARD OF TRUSTEES

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

     INVESTMENT ADVISER

     SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. 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. SBMFM (through its
predecessor entities) has been in the investment counseling business since 1934
and is a registered investment adviser. SBMFM renders investment advice to
investment companies that had aggregate assets under management as of September
30, 1997 in excess of $81 billion.

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

     PORTFOLIO MANAGEMENT

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


20
<PAGE>

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

     Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1997, is
included in the Annual Report dated July 31, 1997. A copy of the Annual Report
may be obtained upon request without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.

     ADMINISTRATOR

     SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. Pursuant to an administration agreement with the
Fund, SBMFM is paid a 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,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary
of Travelers.

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

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

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


                                                                              21
<PAGE>

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

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

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

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

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


22
<PAGE>

                                                                    SMITH BARNEY

                                               A Member of Travelers Group[LOGO]

                                                                    Smith Barney
                                                                            High
                                                                          Income
                                                                            Fund

                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                    FD0792 11/97


PROSPECTUS

                                                                    SMITH BARNEY
                                                                       Municipal
                                                                     High Income
                                                                            Fund

                                                               November 28, 1997

                                                   Prospectus begins on page one


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

================================================================================
Prospectus                                                     November 28, 1997
================================================================================

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

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

      This Prospectus sets forth concisely certain information about the Fund
and the Trust, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference. Shares of other funds offered by the Trust are
described in separate prospectuses that may be obtained by calling the Trust at
the telephone number set forth above or by contacting a Smith Barney Financial
Consultant.

      Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 28, 1997, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.


                                                                               1
<PAGE>

================================================================================
Table of Contents
================================================================================

Prospectus Summary                                                             3
--------------------------------------------------------------------------------
Financial Highlights                                                          10
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                  14
--------------------------------------------------------------------------------
Municipal Securities                                                          24
--------------------------------------------------------------------------------
Valuation of Shares                                                           25
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                            25
--------------------------------------------------------------------------------
Purchase of Shares                                                            28
--------------------------------------------------------------------------------
Exchange Privilege                                                            36
--------------------------------------------------------------------------------
Redemption of Shares                                                          39
--------------------------------------------------------------------------------
Minimum Account Size                                                          42
--------------------------------------------------------------------------------
Performance                                                                   42
--------------------------------------------------------------------------------
Management of the Trust and the Fund                                          43
--------------------------------------------------------------------------------
Distributor                                                                   45
--------------------------------------------------------------------------------
Additional Information                                                        46
--------------------------------------------------------------------------------

No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the
Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such an offer or solicitation in any such jurisdiction.


2
<PAGE>

================================================================================
Prospectus Summary
================================================================================

The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."

INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks maximum current income exempt from Federal income taxes by
investing primarily in intermediate- and long-term municipal bonds and notes
rated A, Baa or Ba by Moody's Investors Service, Inc. ("Moody's") or A, BBB or B
by Standard & Poor's Ratings Group ("S&P"). Intermediate-term bonds have
remaining maturities at the time of purchase of between five and fifteen years.
Long-term bonds have remaining maturities at the time of purchase of between
fifteen and thirty years. It is anticipated that the average remaining maturity
of bonds purchased by the Fund will be between three and twenty-five years. See
"Investment Objective and Management Policies."

ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class 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 4.00% and are subject to an annual service fee of 0.15% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary --
Reduced or No Initial Sales Charge."

      Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after the date of purchase and by 1.00% each year thereafter to zero. This CDSC
may be waived for certain redemptions. Class B shares are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.50% of the average
daily net assets of the Class. The Class B shares' distribution fee may cause
that Class to have higher expenses and pay lower dividends than Class A shares.


                                                                               3
<PAGE>

================================================================================
Prospectus Summary (continued)
================================================================================

      Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares --Deferred Sales Charge Alternatives."

      Class 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 0.15% and an annual
distribution fee of 0.55% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Fund shares, which when 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 duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for a reduced sales charge and the shares are subject
to lower ongoing expenses over the term of the investment. As an alternative,
Class B and Class 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>

================================================================================
Prospectus Summary (continued)
================================================================================

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

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge held in
funds sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.

      Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
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 Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences among the Classes of
shares.

PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained with 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. In addition, certain investors,
including certain institutional investors, may purchase shares directly from the
Fund through the Fund's transfer agent, First Data Investor Services Group, Inc.
("First Data"). See "Purchase of Shares."


                                                                               5
<PAGE>

================================================================================
Prospectus Summary (continued)
================================================================================

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 Retirement
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. The minimum investment requirements for purchases of Portfolio shares
through the Systematic Investment Plan are described below. There is no minimum
investment requirement in Class A for unitholders who invest distributions from
a unit investment trust ("UIT") sponsored by Smith Barney. It is not recommended
that the Fund be used as a vehicle for Keogh, IRA or other qualified retirement
plans. See "Purchase of Shares."

SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial investment
requirement for Class A, Class B and Class C shares and the minimum subsequent
investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."

REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."

MANAGEMENT OF THE TRUST AND THE FUND 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"), which is in turn 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
Trust and the Fund."

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

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

DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and distributions of net realized capital gains, if any, are paid
annually. See "Dividends, Distributions and Taxes."


6
<PAGE>

================================================================================
Prospectus Summary (continued)
================================================================================

REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."

RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the Fund
will achieve its investment objective. General changes in interest rates will
result in increases or decreases in the market value of the obligations held by
the Fund. The Fund may invest up to 35% of its assets in obligations rated Ba or
below by Moody's or BB or below by S&P or in nonrated securities deemed by SBMFM
to be of comparable quality, commonly known as "junk bonds." In addition, the
Fund may invest in obligations rated as low as Caa by Moody's or CCC by S&P.
Securities that are rated B generally lack characteristics of the desirable
investment and assurance of interest and principal payments over any long period
of time may be small. Securities that are rated Caa or CCC are of poor standing.
These issues may be in default or present elements of danger may exist with
respect to principal or interest. Although medium- or low-rated securities of
the type in which the Fund may invest offer a higher current yield than the
yield offered by higher rated securities, they involve greater volatility of
price and risk of loss of income and principal, including the probability of
default by or bankruptcy of the issuers of such securities. Medium- and
low-rated and comparable unrated securities (a) will likely have some quality
and protective characteristics that, in the judgment of the rating
organizations, are outweighed by large uncertainties of major risk exposures to
adverse conditions and (b) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. The Fund has the right to invest up to 20% of its net
assets in state and local obligations that are "private activity bonds," the
income for which may be taxable as a specific preference item for purposes of
the Federal alternative minimum tax. Certain of the investments held by the Fund
and certain of the investment strategies that the Fund may employ might expose
it to certain risks. See "Investment Objective and Management Policies --
Certain Portfolio Strategies."


                                                                               7
<PAGE>

================================================================================
Prospectus Summary (continued)
================================================================================

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

   
Smith Barney Municipal High Income Fund   Class A    Class B   Class C   Class Y
    
================================================================================
Shareholder Transaction Expenses
  Maximum sales charge imposed on purchases
   (as a percentage of offering price)      4.00%     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                           0.60%     0.60%     0.60%     0.60%
  12b-1 fees**                              0.15%     0.65%     0.70%     None
  Other expenses***                         0.08%     0.07%     0.10%     0.09%
--------------------------------------------------------------------------------
Total Fund Operating Expenses               0.83%     1.32%     1.40%     0.69%
================================================================================

*     Purchases of Class A shares of $500,000 or more will be made at net asset
      value with no sales charge, but will be subject to a CDSC of 1.00% on
      redemptions made within 12 months of purchase.

**    Upon conversion of Class B shares to Class A shares, such shares will no
      longer be subject to a distribution fee. Class C shares do not have a
      conversion feature and, therefore, are subject to an ongoing distribution
      fee. As a result, long-term shareholders of Class C shares may pay more
      than the economic equivalent of the maximum front-end sales charge
      permitted by the National Association of Securities Dealers, Inc. (the
      "NASD").

***   For Class Y shares, "Other expenses" have been estimated based on expenses
      incurred by Class A shares because as of July 31, 1997, no Class Y shares
      were outstanding.

      Class A shares of the Portfolio purchased through the Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of the initial sales charge. The fee will vary to a maximum
of 1.50%, depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.

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


8
<PAGE>

================================================================================
Prospectus Summary (continued)
================================================================================

net assets, consisting of a 0.55% distribution fee and a 0.15% service fee.
"Other expenses" in the above table include fees for shareholder services,
custodial fees, legal and accounting fees, printing costs and registration fees.

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

   
Smith Barney Municipal High Income Fund    1 Year   3 Years   5 Years  10 Years*
    
================================================================================
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:

       Class A                              $48      $65       $84      $138
       Class B                               58       72        82       146
       Class C                               24       44        77       168
       Class Y                                7       22        38        86

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

       Class A                              $48      $65       $84      $138
       Class B                               13       42        72       146
       Class C                               14       44        77       168
       Class Y                                7       22        38        86
================================================================================

*     Ten-year figures assume conversion of Class B shares to Class A shares at
      the end of the eighth year following the date of purchase.

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


                                                                               9
<PAGE>

================================================================================
Financial Highlights
================================================================================

The following information for each of the years in the three-year period ended
July 31, 1997 has been audited by KPMG Peat Marwick LLP, independent auditors,
whose report thereon appears in the Fund's Annual Report dated July 31, 1997.
The following information for the fiscal years ended July 31, 1988 through July
31, 1994 has been audited by other independent auditors. The information set out
below should be read in conjunction with the financial statements and related
notes that also appear in the Fund's Annual Report, which is incorporated by
reference into the Statement of Additional Information. No information is
presented for Class Y shares, because no Class Y shares were outstanding for the
periods shown.

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

<TABLE>
<CAPTION>
   
Smith Barney Municipal High Income Fund
    
Year Ended July 31,                             1997           1996           1995             1994          1993(1)
=======================================================================================================================
<S>                                            <C>            <C>            <C>              <C>            <C>    
Net Asset Value, Beginning of Year             $ 17.31        $ 17.25        $ 17.26          $ 18.24        $ 17.45
-----------------------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income                           0.97           1.00           1.04             1.06           0.78
  Net realized and unrealized gain (loss)
   on investments                                 0.77           0.06           0.01(2)         (0.85)          1.00
-----------------------------------------------------------------------------------------------------------------------
Total Income From Operations                      1.74           1.06           1.05             0.21           1.78
-----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                          (0.98)         (1.00)         (1.00)           (1.06)         (0.83)
  Net realized gains                              0.00*            --          (0.02)           (0.13)         (0.16)
  Capital                                           --             --          (0.04)              --             --
-----------------------------------------------------------------------------------------------------------------------
Total Distributions                              (0.98)         (1.00)         (1.06)           (1.19)         (0.99)
-----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year                   $ 18.07        $ 17.31        $ 17.25          $ 17.26        $ 18.24
-----------------------------------------------------------------------------------------------------------------------
Total Return                                     10.40%          6.28%          6.42%            1.14%         10.24%++
-----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)             $   254        $   232        $   238          $    18        $    14
-----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                        0.83%          0.84%          0.84%            0.84%          0.86%+
  Net investment income                           5.52           5.74           6.04             5.83           6.03+
-----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                             51%            44%            38%              39%            34%
=======================================================================================================================
</TABLE>

(1)   For the period from November 6, 1992 (inception date) to July 31, 1993.

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

++    Total return is not annualized as it may not be representative of the
      total return for the year.

+     Annualized.

*     Amount represents less than $0.01 per share.


10
<PAGE>

================================================================================
Financial Highlights (continued)
================================================================================

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

<TABLE>
<CAPTION>
   
Smith Barney Municipal High Income Fund
    
Year Ended July 31,                      1997           1996           1995             1994           1993           1992
==============================================================================================================================
<S>                                     <C>            <C>            <C>              <C>            <C>            <C>    
Net Asset Value,
  Beginning of Year                     $ 17.32        $ 17.26        $ 17.26          $ 18.24        $ 18.00        $ 16.97
------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income                    0.89           0.92           0.95             0.96           0.98           1.04
  Net realized and unrealized
   gain (loss) on investments              0.77           0.06           0.02(1)         (0.85)          0.45           1.17
------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations               1.66           0.98           0.97             0.11           1.43           2.21
------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                   (0.89)         (0.92)         (0.91)           (0.96)         (1.02)         (1.04)
  Net realized gains                       0.00*            --          (0.02)           (0.13)         (0.17)         (0.14)
  Capital                                    --             --          (0.04)              --             --             --
------------------------------------------------------------------------------------------------------------------------------
Total Distributions                       (0.89)         (0.92)         (0.97)           (1.09)         (1.19)         (1.18)
------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year            $ 18.09        $ 17.32        $ 17.26          $ 17.26        $ 18.24        $ 18.00
------------------------------------------------------------------------------------------------------------------------------
Total Return                               9.89%          5.74%          5.91%            0.60%          8.28%         13.50%
------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)      $   562        $   653        $   737          $ 1,069        $ 1,108        $   871
------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                 1.32%          1.33%          1.35%            1.33%          1.38%          1.45%#
  Net investment income                    5.04           5.23           5.61             5.34           5.52           5.96
------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                      51%            44%            38%              39%            34%            61%
==============================================================================================================================
</TABLE>

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

*     Amount represents less than $0.01 per share.

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


                                                                              11
<PAGE>

================================================================================
Financial Highlights (continued)
================================================================================

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

<TABLE>
<CAPTION>
   
Smith Barney Municipal High Income Fund
    
Year Ended July 31,                             1991           1990           1989           1988
====================================================================================================
<S>                                            <C>            <C>            <C>            <C>    
Net Asset Value, Beginning of Year             $ 16.98        $ 17.31        $ 16.44        $ 16.48
----------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income                           1.10           1.12           1.13           1.13
  Net realized and unrealized gain (loss)
   on investments                                 0.10          (0.30)          0.88           0.02
----------------------------------------------------------------------------------------------------
Total Income From Operations                      1.20           0.82           2.01           1.15
----------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                          (1.10)         (1.12)         (1.13)         (1.13)
  Net realized gains                             (0.11)         (0.03)         (0.01)         (0.06)
----------------------------------------------------------------------------------------------------
Total Distributions                              (1.21)         (1.15)         (1.14)         (1.19)
----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year                   $ 16.97        $ 16.98        $ 17.31        $ 16.44
----------------------------------------------------------------------------------------------------
Total Return                                      7.40%          4.95%         12.68%          7.32%
----------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)             $   639        $   574        $   558        $   451
----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                        1.45%          1.47%          1.44%          1.43%
  Net investment income                           6.48           6.57           6.70           6.99
----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                             44%            29%            21%            12%
====================================================================================================
</TABLE>


12
<PAGE>

================================================================================
Financial Highlights (continued)
================================================================================

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

   
Smith Barney Municipal High Income Fund
    
Year Ended July 31,                      1997           1996          1995(1)
================================================================================
Net Asset Value, Beginning of Year      $ 17.31        $ 17.25        $ 15.83
--------------------------------------------------------------------------------
Income From Operations:
  Net investment income                    0.88           0.89           0.60
  Net realized and unrealized
   gain on investments(2)                  0.77           0.08           1.50
--------------------------------------------------------------------------------
Total Income From Operations               1.65           0.97           2.10
--------------------------------------------------------------------------------
Less Distributions:
  Net investment income                   (0.89)         (0.91)         (0.62)
  Net realized gains                       0.00*            --          (0.02)
  Capital                                    --             --          (0.04)
--------------------------------------------------------------------------------
Total Distributions                       (0.89)         (0.91)         (0.68)
--------------------------------------------------------------------------------
Net Asset Value, End of Year            $ 18.07        $ 17.31        $ 17.25
--------------------------------------------------------------------------------
Total Return                               9.79%          5.69          13.45%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000s)          $   752        $   546        $   211
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                 1.40%          1.39%          1.18%+
  Net investment income                    4.94           5.18           5.56+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                      51%            44%            38%
================================================================================

(1)   For the period from November 17, 1994 (inception date) to July 31, 1995.

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

++    Total return is not annualized as it may not be representative of the
      total return for the year.

+     Annualized.

*     Amount represents less than $0.01 per share.


                                                                              13
<PAGE>

================================================================================
Investment Objective and Management Policies
================================================================================

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

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


14
<PAGE>

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

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

      Under normal circumstances, the Fund may invest up to 20% of its net
assets in "private activity bonds." Interest income on certain types of private
activity bonds issued after August 7, 1986 to finance nongovernmental activities
is a specific tax preference item for purposes of Federal individual and
corporate alternative minimum taxes. Individual and corporate shareholders may
be subject to a Federal alternative minimum tax to the extent that the Fund's
dividends are derived from interest on these bonds. These private activity bonds
are included in the term "Municipal Securities" for purposes of determining
compliance with the 80% test described above. Dividends derived from interest
income on all Municipal Securities are a component of the "adjusted current
earnings" item for purposes of the Federal corporate alternative minimum tax.

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

      ADDITIONAL INVESTMENTS

      Money Market Instruments. Under normal conditions, the Fund may invest up
to 20% of its assets in Temporary Investments, including taxable money market
instruments. In addition, when SBMFM believes that market conditions warrant,
the Fund may invest in Temporary Investments without limitation for defensive
purposes. Short-term instruments in which the Fund may invest include
obligations issued or guaranteed as to principal and interest by the United
States government ("U.S. government securities"), certain bank obligations
including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks,


                                                                              15
<PAGE>

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

domestic savings and loan associations and similar institutions); commercial
paper rated no lower than Prime-2 by Moody's or A-2 by S&P or the equivalent
from another NRSRO or, if unrated, of an issuer having an outstanding, unsecured
debt issue then rated within the three highest rating categories; and repurchase
agreements with respect to the securities in which the Fund may invest. The Fund
will invest in obligations of a foreign bank or foreign branch of a domestic
bank only if SBMFM determines that the obligations present minimum credit risks.
These obligations may be traded in the United States or outside the United
States, but will be denominated in U.S. dollars.

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

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

      CERTAIN INVESTMENT STRATEGIES

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

      Repurchase Agreements. The Fund may engage in repurchase agreement
transactions with certain member banks of the Federal Reserve System and with


16
<PAGE>

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

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

      When-Issued Securities. New issues of Municipal Securities are frequently
offered on a when-issued basis, which means that delivery and payment for such
securities normally take place within 45 days after the date of commitment to
purchase. The payment obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer enters into the
commitment. Municipal Securities, like other investments made by the Fund, may
decline or appreciate in value before their actual delivery to the Fund. Due to
the fluctuations in the value of securities purchased and sold on a when-issued
basis, the yields obtained on these securities may be higher or lower than the
yields available in the market on the date when the investments actually are
delivered to the buyers. The Fund will not accrue income with respect to a
when-issued security prior to its stated delivery date. The Fund will establish
a segregated account with the Trust's custodian, PNCBank, National Association
("PNCBank") consisting of cash, U.S. government securities, equity securities or
debt securities of any grade having a value equal to or greater than the Fund's
purchase commitments, provided such securities have been determined by SBMFM to
be liquid and unencumbered and are marked to market daily pursuant to guidelines
established by the Trustees. Placing securities rather than cash in the
segregated account may have a leveraging effect on the Fund's net assets. The
Fund generally will make commitments to purchase Municipal Securities on a
when-issued basis only with the intention of actually acquiring the securities,
but the Fund may sell these securities before the delivery date if it is deemed
advisable.


                                                                              17
<PAGE>

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

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

      Variable-Rate Demand Notes. Municipal Securities purchased by the Fund may
include variable-rate demand notes issued by industrial development authorities
and other governmental entities. Although variable-rate demand notes are
frequently not rated by credit rating agencies, unrated notes purchased by the
Fund will be determined by SBMFM to be of comparable quality at the time of
purchase to instruments rated "high quality" (that is, within the two highest
ratings) by any NRSRO. In addition, while no active secondary market may exist
with respect to a particular variable-rate demand note purchased by the Fund,
the Fund may, upon the notice specified in the note, demand payment of the
principal of and accrued interest on the note at any time and may resell the
note at any time to a third party. The absence of such an active secondary
market, however, could make it difficult for the Fund to dispose of the
variable-rate demand note involved in the event that the issuer of the note
defaulted on its payment obligations, and the Fund could, for this or other
reasons, suffer a loss to the extent of the default.

      Stand-by Commitments. The Fund may acquire "stand-by commitments" with
respect to Municipal Securities held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase, at the Fund's option, specified
Municipal Securities at a specified price. The Fund may pay for stand-by
commitments either separately in cash or by paying a higher price for the
securities acquired with the commitment, thus increasing the cost of the
securities and reducing the yield otherwise available for them. The Fund intends
to enter into stand-by commitments only with brokers,


18
<PAGE>

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

dealers and banks that, in the view of SBMFM, present minimal credit risks. In
evaluating the creditworthiness of the issuer of a stand-by commitment, SBMFM
will periodically review relevant financial information concerning the issuer's
assets, liabilities and contingent claims. The Fund will acquire stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.

      CERTAIN INVESTMENT GUIDELINES

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

      RISK FACTORS AND SPECIAL CONSIDERATIONS

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

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

      Opinions relating to the validity of Municipal Securities and to the
exemption of interest on them from Federal income taxes are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
SBMFM will review


                                                                              19
<PAGE>

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

the proceedings relating to the issuance of Municipal Securities or the basis
for opinions of counsel. The Fund may invest without limit in debt obligations
that are repayable out of revenues generated from economically related projects
or facilities or debt obligations whose issuers are located in the same state.
Sizable investments in these obligations could involve an increased risk to the
Fund should any of such related projects or facilities experience financial
difficulties.

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

      Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax exemption
on various types of Municipal Securities and may enact other similar laws in the
future. If any such laws are enacted that would reduce the availability of
Municipal Securities for investment by the Fund so as to affect the Fund's
shareholders adversely, the Trustees will reevaluate the Fund's investment
objective and policies and might submit possible changes in the Fund's structure
to Fund shareholders for their consideration. If legislation were enacted that
would treat a type of Municipal Securities as taxable for Federal income tax
purposes, the Fund would treat the security as a permissible taxable Temporary
Investment within the applicable limits set forth in this Prospectus.

      Medium-, Low- and Unrated Securities. The Fund may invest in medium-or
low-rated securities commonly known as "junk bonds," and unrated securities of
comparable quality. Generally, these securities offer a higher current yield
than the yield offered by higher-rated securities, but involve greater
volatility of price and risk of loss of income and principal, including the
probability of default by or bankruptcy of the issuers of such securities.
Medium- and low-rated and comparable unrated securities (a) will likely have
some quality and protective


20
<PAGE>

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

characteristics that, in the judgment of the rating organization, are outweighed
by large uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. These types
of factors could, in certain instances, reduce the value of securities held by
the Fund with a commensurate effect on the value of the Fund's shares.
Therefore, an investment in the Fund should not be considered as a complete
investment program and may not be appropriate for all investors.

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

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


                                                                              21
<PAGE>

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

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

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

   
      The Fund's holdings in fixed-income securities (as rated by Moody's) for
the fiscal year ended July 31, 1997 were composed as follows: 37.30% rated Aaa;
9.8% rated Aa; 13.2% rated A; 23.4% rated Baa; 7.0% rated Ba; 1.5% rated B; 0.0%
rated Ca or lower; and 7.8% in non-rated and short-term securities. The
percentages were calculated on dollar weighted average basis by determining the
percentage of the Fund's net assets invested in each rating category during the
most recent fiscal year and do not necessarily indicate what the composition of
the Fund's holdings will be in subsequent years.
    

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

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

      Futures and Options on Futures. When deemed advisable by SBMFM, the Fund
may enter into futures contracts or related options that are traded on a
domestic exchange or board of trade. Such investments, if any, by the Fund will
be made solely for the purpose of hedging against the effects of changes in the
value of its portfolio securities due to anticipated changes in interest rates
and market conditions and when the transactions are economically appropriate to
the reduction of risks inherent in the management of the Fund. The Fund may not
enter into futures and


22
<PAGE>

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

options contracts for which aggregate initial margin deposits and premiums paid
for unexpired options to establish such positions that are not bona fide hedging
positions (as defined by the Commodity Futures Trading Commission), exceed 5% of
the fair market value of the Fund's assets after taking into account unrealized
profits and unrealized losses on futures contracts into which it has entered.
With respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract always will be covered by cash and
cash equivalents plus accrued profits held in a segregated account.

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

      PORTFOLIO TRANSACTIONS

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

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

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


                                                                              23
<PAGE>

================================================================================
Municipal Securities
================================================================================

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

      CLASSIFICATIONS

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

================================================================================
Valuation of Shares
================================================================================

      The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE, on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.

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


24
<PAGE>

================================================================================
Dividends, Distributions and Taxes
================================================================================

      DIVIDENDS AND DISTRIBUTIONS

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

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

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

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

      The per share dividends on Class B shares and Class C shares may be lower
than the per share dividends on Class A and Y shares principally as a result of
the distribution fee applicable with respect to Class B and Class C shares. The
per share dividends on Class A shares of the Fund may be lower than the per
share dividends on Class Y principally as a result of the service fee applicable
to Class A shares. Distributions of capital gains, if any, will be in the same
amount for Classes A, B, C and Y.

      TAXES

      The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds


                                                                              25
<PAGE>

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

of the Trust. The Fund has qualified and intends to continue to qualify each
year as a "regulated investment company" under the Internal Revenue Code of
1986, as amended. Dividends paid from the Fund's net investment income (other
than dividends derived from interest earned on qualifying tax-exempt obligations
as described below) and distributions of the Fund's net realized short-term
capital gains are taxable to shareholders as ordinary income, regardless of how
long shareholders in the Fund have held their shares and whether the dividends
or distributions are received in cash or reinvested in additional shares of the
Fund. Distributions of the Fund's net realized long-term capital gains will be
taxable to shareholders as long-term capital gains, regardless of how long
shareholders have held their shares of the Fund and whether the distributions
are received in cash or are reinvested in additional Fund shares. In addition,
as a general rule, a shareholder's gain or loss on a sale or redemption of
shares of the Fund will be a long-term capital gain or loss if the shareholder
has held the shares for more than one year and will be a short-term capital gain
or loss if the shareholder has held the shares for one year or less. The per
share dividends and distributions on Class A shares will be higher than the per
share dividends and distributions on Class B shares as a result of lower
distribution and transfer agency fees applicable to Class A shares.

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

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

      Shareholders should consult their tax advisers with specific reference to
their own tax situations. Shareholders of the Fund should in particular consult
their tax advisers about the status of the Fund's dividends and distributions
for state and local tax purposes in order to assess the consequences of
investing in the Fund


26
<PAGE>

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

under state and local laws generally and to determine whether dividends paid by
the Fund are exempt from any otherwise applicable state or local income taxes.

================================================================================
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
redemptions. Class Y shares are sold without an initial sales charge or a CDSC,
and are available only to investors investing a minimum of $5,000,000 (except
for purchases of Class Y shares by Smith Barney Concert Allocation Series Inc.,
for which there is no minimum purchase amount). See "Prospectus Summary --
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.

      Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class B, Class C or Class Y shares. Smith
Barney and other broker-dealers may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at First Data are not subject
to a maintenance fee.

      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 in the Fund.
Investors in Class Y shares may open an account by making an initial investment
of $5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class C shares and the minimum subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a quarterly basis, the minimum
initial investment requirement for Class A, Class B and Class C shares and the
minimum subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements for Class A shares for employees of Travelers
and its subsidiaries, including Smith Barney, unit holders who invest
distributions from a UIT sponsored by Smith Barney and Trustees of the Trust 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 Fund's transfer agent, First Data. Share


                                                                              27
<PAGE>

================================================================================
Purchase of Shares (continued)
================================================================================

certificates are issued only upon a shareholder's written request to First Data.

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

      The minimum initial investment requirement in the Fund for an account
established under the Uniform Gift to Minors Act is $250 and the minimum
subsequent investment requirement is $50.

      SYSTEMATIC INVESTMENT PLAN

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


28
<PAGE>

================================================================================
Purchase of Shares (continued)
================================================================================

      INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES

      The sales charges applicable to purchases of Class A shares of the Fund
are as follows:

                                                                      Dealers
                            Sales Charge       Sales Charge         Reallowance
                               as % of            as % of             as % of
Amount of Investment       Offering Price     Amount Invested     Offering Price
--------------------------------------------------------------------------------
Less than $25,000               4.00%              4.17%               3.60%
$25,000-$49,999                 3.50%              3.63%               3.15%
$50,000-$99,999                 3.00%              3.09%               2.70%
$100,000-$249,999               2.50%              2.56%               2.25%
$250,000-$499,999               1.50%              1.52%               1.35%
$500,000 and over                 *                  *                   *
================================================================================

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

      Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.

      The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Fund made at one time by "any person," which includes
an individual and his or her immediate family, or a trustee or other fiduciary
of a single trust estate or single fiduciary account.

      INITIAL SALES CHARGE WAIVERS

   
      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries of any of the Smith Barney Mutual
Funds (including retired Board Members and employees), the immediate families of
such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the NASD, provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the seucrities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Smith Barney Financial Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment with Smith Barney),
    


                                                                              29
<PAGE>

================================================================================
Purchase of Shares (continued)
================================================================================

on the condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the Financial
Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Fund (or Class A shares of
another fund of the Smith Barney Mutual Funds that are offered with a sales
charge) and who wish to reinvest their redemption proceeds in the Fund, provided
the reinvestment is made within 60 calendar days of the redemption; (e)
purchases by accounts managed by registered investment advisory subsidiaries of
Travelers; (f) purchases by separate accounts used to fund certain unregistered
variable annuity contracts; (g) investments of distributions from a UIT
sponsored by Smith Barney; and (h) purchases by investors participating in a
Smith Barney fee-based arrangement. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.

      RIGHT OF ACCUMULATION

      Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregating
the dollar amount of the new purchase and the total asset value of all Class A
shares of the Fund and of funds sponsored by Smith Barney which are offered with
a sales charge listed under "Exchange Privilege" then held by such person and
applying the sales charge applicable to such aggregate. In order to obtain such
discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.

      GROUP PURCHASES

      Upon completion of certain automated systems, a reduced sales charge or
purchase 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 Alternatives -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer or partnership-sanctioned plan 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,


30
<PAGE>

================================================================================
Purchase of Shares (continued)
================================================================================

but is not required to, provide for payroll deductions. Smith Barney may also
offer a reduced sales charge or net asset value purchase for aggregating related
fiduciary accounts under such conditions that Smith Barney will realize
economies of sales efforts and sales-related expenses. An individual who is a
member of a qualified group may also purchase Class A shares at the reduced
sales charge applicable to the group as a whole. The sales charge is based upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the amount
of the current purchase. A "qualified group" is one which (a) has been in
existence for more than six months, (b) has a purpose other than acquiring Fund
shares at a discount and (c) satisfies uniform criteria which enable Smith
Barney to realize economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, must be available to arrange for
group meetings between representatives of the Fund and the members, and must
agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide 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 discretion of
Smith Barney.

      LETTER OF INTENT

      Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13-month period, provided that the investor refers to such
Letter of Intent when placing orders. For purposes of a Letter of Intent, the
"Amount Invested" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Fund and other funds of the Smith Barney
Mutual Funds offered with a sales charge over 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 compute the 13-month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or First Data to obtain a Letter of Intent
application.

      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y Shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Fund and agree to purchase a total of $5,000,000 of Class Y shares of the same
Fund within


                                                                              31
<PAGE>

================================================================================
Purchase of Shares (continued)
================================================================================

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 purchased to date will
be transferred to Class A shares, where they will be subject to all fees
(including a service fee of 0.15%)and expenses applicable to the Fund's Class A
shares, which may include a CDSC of 1.00%. The Fund expects that such transfer
will not be subject to Federal income taxes. Please contact a Smith Barney
Financial Consultant or First Datafor further information.

      DEFERRED SALES CHARGE ALTERNATIVES

      "CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares that were purchased without an initial
sales charge but subject to a CDSC.

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

      Class C 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.


32
<PAGE>

================================================================================
Purchase of Shares (continued)
================================================================================

         Year Since Purchase
         Payment was Made                                 CDSC
--------------------------------------------------------------------------------
         First                                            4.50%
         Second                                           4.00%
         Third                                            3.00%
         Fourth                                           2.00%
         Fifth                                            1.00%
         Sixth and thereafter                             0.00%
================================================================================

      Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements
--Class B Shares Conversion Feature."

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

      To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired five
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.

      WAIVERS OF CDSC

      The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholders'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


                                                                              33
<PAGE>

================================================================================
Purchase of Shares (continued)
================================================================================

shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the Fund
with any investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other 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 First Data in
the case of all other shareholders) of the shareholder'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
following funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class A,
Class B and Class C shares are subject to minimum investment requirements and
all shares are subject to the other requirements of the Fund into which
exchanges are made.

Fund Name

Growth Funds
       Smith Barney Aggressive Growth Fund Inc.
       Smith Barney Appreciation Fund Inc.
       Smith Barney Disciplined Small Cap Fund, Inc.
       Smith Barney Fundamental Value Fund Inc.
       Smith Barney Growth Opportunity Fund
       Smith Barney Large Capitalization Growth Fund
       Smith Barney Managed Growth Fund
       Smith Barney Natural Resources Fund Inc.
       Smith Barney Special Equities Fund

Growth and Income Funds
       Concert Social Awareness Fund
       Smith Barney Convertible Fund
       Smith Barney Funds, Inc. -- Equity Income Portfolio
       Smith Barney Growth and Income Fund
       Smith Barney Premium Total Return Fund
       Smith Barney Utilities Fund


34
<PAGE>

================================================================================
Exchange Privilege (continued)
================================================================================

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

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

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


                                                                              35
<PAGE>

================================================================================
Exchange Privilege (continued)
================================================================================

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

------------
*     Available for exchange with Class A and Class B shares of the Fund.

**    Available for exchange with Class A, Class C and Class Y shares of the
      Fund.

***   Available for exchange with Class A shares of the Fund.

+     Available for exchange with Class B and Class C shares of the Fund.

++    Available for exchange with Class A and Class Y shares of the Fund.

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

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

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

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


36
<PAGE>

================================================================================
Exchange Privilege (continued)
================================================================================

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

================================================================================
Redemption of Shares
================================================================================

      The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.

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

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


                                                                              37
<PAGE>

================================================================================
Exchange Privilege (continued)
================================================================================

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

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

      AUTOMATIC CASH WITHDRAWAL PLAN

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

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

      Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee that will be provided by First Data upon request.
Alternatively, an investor


38
<PAGE>

================================================================================
Exchange Privilege (continued)
================================================================================

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

      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset value
next determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.

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

      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 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
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this service
at any time following at least seven days' prior notice to shareholders.


                                                                              39
<PAGE>

================================================================================
Minimum Account Size
================================================================================

      The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, however,
will not redeem shares based solely on market reductions in net asset value.
Before the Fund exercises such right, shareholders will receive written notice
and will be permitted 60 days to bring accounts up to the minimum to avoid
involuntary liquidation.

================================================================================
Performance
================================================================================

      YIELD

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

      The equivalent taxable yield demonstrates the yield on a taxable
investment necessary to produce an after-tax yield equal to the Fund's
tax-exempt yield for each Class. It is calculated by increasing the yield shown
to the extent necessary to reflect the payment of taxes at specified tax rates.
Thus, the equivalent taxable yield always will exceed the Fund's yield. For more
information on equivalent taxable yields, refer to the table under "Dividends,
Distributions and Taxes."

      TOTAL RETURN

      From time to time the Fund may include the Fund's total return, average
annual total return and current dividend return in advertisements and/or other
types of sales literature. These figures are computed separately for Class A,
Class B, Class C and Class Y shares of the Fund. These figures are based on
historical earnings and are not intended to indicate future performance. Total
return is computed for a specified period of time assuming deduction of the
maximum sales charge, if any, from the initial amount invested and reinvestment
of all income dividends and capital gains distributions on the reinvestment
dates at prices calculated as stated in this Prospectus, then dividing the value
of the investment at the end of the period so calculated by the initial amount
invested and subtracting 100%. The standard average annual total return, as
prescribed by the SEC, is derived from this total return, which provides the
ending redeemable value. Such standard total return information may also be
accompanied with nonstandard total return information for


40
<PAGE>

================================================================================
Performance (continued)
================================================================================

differing periods computed in the same manner but without annualizing the total
return or taking sales charges into account. The Fund calculates current
dividend return for each Class by annualizing the most recent monthly
distribution and dividing by the net asset value or the maximum public offering
price (including sales charge) on the last day of the period for which current
dividend return is presented. The current dividend return for each Class may
vary from time to time depending on market conditions, the composition of its
investment portfolio and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return should be
considered when comparing a Class' current return to yields published for other
investment companies and other investment vehicles. The Fund may also include
comparative performance information in advertising or marketing its shares. Such
performance information may include data from Lipper Analytical Services, Inc.
or similar independent services that monitor the performance of mutual funds or
other industry publications.

================================================================================
Management of the Trust and the Fund
================================================================================

      BOARD OF TRUSTEES

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

      INVESTMENT ADVISER

      SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves
as the Fund's investment adviser. SBMFM is a wholly owned subsidiary of
Holdings. SBMFM (through predecessor entities) has been in the investment
counseling business since 1934 and is a registered investment adviser. SBMFM
renders investment advice to investment companies that had aggregate assets
under management as of September 30, 1997 in excess of $81 billion.

      Subject to the supervision and direction of the Fund's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfolio
managers and securities analysts who provide research services to the Fund. For
investment advisory services rendered, the Fund pays SBMFM a monthly fee at the
annual rate of 0.40% of the value of its average daily net assets.


                                                                              41
<PAGE>

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

      PORTFOLIO MANAGEMENT

      Lawrence T. McDermott, a Managing Director of Smith Barney, has served as
Vice President and Investment Officer of the Fund since it commenced operations
and manages the day to day operations of the Fund, including making all
investment decisions.

      Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1997 is
included in the Annual Report dated July 31, 1997. A copy of the Annual Report
may be obtained upon request and without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.

      ADMINISTRATOR

      SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered, the Fund pays
SBMFM a fee at the annual rate of 0.20% of the value of its 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
0.15% 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 0.55%, respectively, of the average daily net assets
attributable to those Classes. Class B shares which automatically convert to
Class A shares eight years after the date of original purchase will no longer be
subject to a distribution fee. The fees are used by 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 expenses; the cost
of printing and mailing prospectuses to potential investors; 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, utility, communications and sales
promotion expenses.


42
<PAGE>

================================================================================
Distributor (continued)
================================================================================

      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
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.

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

================================================================================
Additional Information
================================================================================

      The Trust was organized on March 12, 1985 under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts Business Trust." Each Class of the Fund represents identical
interests in the Fund's investment portfolio. As a result, the Classes have the
same rights, privileges and preferences, except with respect to: (a) the
designation of each Class; (b) the impact of the respective sales charges, if
any, for each Class; (c) the distribution and/or service fees, if any, borne by
each Class pursuant to the Plan; (d) the expenses allocable exclusively to each
Class; (e) voting rights on matters exclusively affecting a single Class; (f)
the exchange privileges of each Class; and (g) the conversion feature of the
Class B shares.

      The Trust's Board of Trustees does not anticipate that there will be any
conflicts among the interests of the holders of the different Classes of shares
of the Fund. The Trustees, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.

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

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


                                                                              43
<PAGE>

================================================================================
Additional Information (continued)
================================================================================

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

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

      The Fund sends its shareholders a semi-annual report and an audited annual
report, which includes a listing of the investment securities held by the Fund
at the end of the reporting period. In an effort to reduce the Fund's printing
and mailing costs, the Trust plans to consolidate the mailing of the Fund's
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their account should contact their Smith Barney
Financial Consultant or the Trust's transfer agent.


44
<PAGE>

                                                                    Smith Barney
                                                                    ------------
                                                A Member of TravelersGroup[LOGO]


                                                                       Municipal
                                                                     High Income
                                                                            Fund


                                                            388 Greenwich Street
                                                        New York, New York 10013



                                                                    FD0214 11/97

<PAGE>

P R O S P E C T U S 
 
                                                                    SMITH BARNEY
                                                                       Utilities
                                                                            Fund
                                                             
                                                          NOVEMBER 28, 1997     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 


[LOGO] Smith Barney Mutual Funds
       INVESTING FOR YOUR FUTURE.
       EVERY DAY.
<PAGE>
 
PROSPECTUS                                                  
                                                         NOVEMBER 28, 1997     
   
Smith Barney Utilities Fund     
       
388 Greenwich Street
New York, New York 10013
   
(800) 451-2010     
 
  The Smith Barney Utilities Fund (the "Fund") is a diversified fund that seeks
current income by investing in equity and debt securities of utility companies
selected by the Fund's investment adviser. Long-term capital appreciation is a
secondary objective of the Fund. The Fund is one of a number of funds, each
having distinct investment objectives and policies, making up the Smith Barney
Income Funds (the "Trust"). The Trust is an open-end management investment com-
pany commonly referred to as a mutual fund.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the tele-
phone number set forth above or by contacting a Smith Barney Financial Consul-
tant.
   
  Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated November 28, 1997, as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The Statement of Addi-
tional Information has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated by reference into this Prospectus in its
entirety.     
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                           10
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   15
-------------------------------------------------
VALUATION OF SHARES                            27
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             28
-------------------------------------------------
PURCHASE OF SHARES                             29
-------------------------------------------------
EXCHANGE PRIVILEGE                             39
-------------------------------------------------
REDEMPTION OF SHARES                           42
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           44
-------------------------------------------------
PERFORMANCE                                    45
-------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND           46
-------------------------------------------------
DISTRIBUTOR                                    47
-------------------------------------------------
ADDITIONAL INFORMATION                         47
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
   
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.     
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in this Prospec-
tus. See "Table of Contents."
 
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management invest-
ment company that seeks current income by investing in the equity and debt
securities of companies in the utility industries. Long-term capital apprecia-
tion is a secondary objective. The utility industries are comprised of compa-
nies principally engaged (that is, at least 50% of a company's assets, gross
income or net profits results from utility operations or the company is regu-
lated as a utility by a government agency or authority) in the manufacture,
production, generation, transmission and sale of electric and gas energy and
companies principally engaged in the communications field, including entities
such as telephone, telegraph, satellite, microwave and other companies regu-
lated by governmental agencies as utilities that provide communication facili-
ties for the public benefit, but not including those in public broadcasting.
Under normal circumstances, the Fund will invest at least 65% of its assets in
equity and debt securities of companies in the utility industries and will
concentrate in excess of 25% of its assets in the securities of these compa-
nies. 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. In addition, a fifth Class, Class Z shares, which is offered pur-
suant to a separate prospectus, is offered exclusively to (a) tax-exempt
employee benefit and retirement plans of Smith Barney Inc. ("Smith Barney")
and its affiliates and (b) unit investment trusts ("UITs") sponsored by Smith
Barney and its affiliates. See "Purchase of Shares" and "Redemption of
Shares."     
   
  Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% imposed at the time of purchase and are subject to
an annual service fee of 0.25% of the average daily net assets of the Class.
The initial sales charge may be reduced or waived for certain purchases. Pur-
chases of Class A shares of $500,000 or more will be made at net asset value
with no initial sales charge, but will be subject to a contingent deferred
sales charge ("CDSC") of 1.00% on redemptions made within 12 months of pur-
chase. See "Prospectus Summary--Reduced or No Initial Sales Charge."     
 
  Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year
after
 
                                                                              3
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.50% of the average daily net assets of the Class. The
Class B shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares.
 
  Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternative."
 
  Class 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 C
shares, 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 Fund 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 serv-
ice or distribution fees.
 
  In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
   
  Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the investment. As an
investment alternative, Class B and Class C shares are sold without any ini-
tial sales charge so the entire purchase price is immediately invested in the
Fund. Any investment return on these additional invested amounts may partially
or wholly offset the higher annual expenses of these Classes. Because the
Fund's future return cannot be predicted, however, there can be no assurance
that this would be the case.     
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
  Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares they do not have a conversion feature and therefore are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer-term investment outlooks.     
   
  Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the pur-
chase to the net asset value of all Class A shares offered with a sales charge
held in funds sponsored by Smith Barney listed under "Exchange Privilege."
Class A share purchases may also be eligible for a reduced initial sales
charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares will be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.     
 
  Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and Class 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 Trust and the Fund" for a
complete description of the sales charges and service and distribution fees
for each Class of shares and "Valuation of Shares," "Dividends, Distributions
and Taxes" and "Exchange Privilege" for other differences among the Classes of
shares.
   
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant-directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without a
sales charge as investment alternatives under both of these programs. See
"Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."     
   
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith Bar-
ney on a fully disclosed basis (an "Introducing Broker") or an investment
dealer in the selling group. In addition, certain investors, including quali-
fied retirement plans and certain other institutional investors, may purchase
shares directly from the Fund     
 
                                                                              5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
through the Fund's transfer agent, First Data Investor Services Group, Inc.
("First Data"). See "Purchase of Shares."     
          
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed Retire-
ment Plan. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the minimum subsequent
investment requirement for all Classes is $25. The minimum investment require-
ments for purchases of Fund shares through the Systematic Investment Plan are
described below. There is no minimum investment required in Class A for
unitholders who invest distributions from a UIT sponsored by Smith Barney. See
"Purchase of Shares."     
   
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial investment require-
ment for Class A, Class B and Class C shares and the minimum subsequent invest-
ment requirement for all Classes for shareholders purchasing shares through the
Systematic Investment Plan on a monthly basis is $25 and on a quarterly basis
is $50. See "Purchase of Shares."     
 
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
 
MANAGEMENT OF THE TRUST AND THE FUND 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 Bar-
ney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Trav-
elers Group Inc. ("Travelers"), a diversified financial services holding com-
pany 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 Trust and the
Fund."
 
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset value next determined.  See "Exchange Privilege."
   
VALUATION OF SHARES Net asset value of the Fund is generally quoted daily in
the financial section of most newspapers and is also available from Smith Bar-
ney Financial Consultants. See "Valuation of Shares."     
 
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and distributions of net realized capital gains, if any, are paid annu-
ally. See "Dividends, Distributions and Taxes."     
 
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution rein-
vestments will become eligible for conversion to Class A shares on a pro rata
basis. See "Dividends, Distributions and Taxes."
 
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. Because the Fund concentrates its
investments in one sector, its portfolio may be subject to greater risk and
market fluctuations than a portfolio of securities representing a broader range
of investment alternatives. The Fund will be affected by general changes in
interest rates which will result in increases or decreases in the market value
of the debt securities held by the Fund; the market value of the debt securi-
ties held by the Fund can be expected to vary inversely to changes in prevail-
ing interest rates. The Fund may invest up to 10% of its assets in lower-rated
fixed-income securities, which securities (a) will likely have some quality and
protective characteristics that, in the judgment of a rating organization, are
outweighed by large uncertainties or major risk exposures to adverse conditions
and (b) are predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the securi-
ties. Certain of the investments held by the Fund and certain of the investment
strategies and techniques that the Fund may employ might expose it to certain
risks. The investments presenting the Fund with risks are low-rated securities,
as described above, foreign securities and non-publicly traded and illiquid
securities. The investment strategies and techniques presenting the Fund with
risks are entering in repurchase agreements, lending portfolio securities,
engaging in short sales against the box and entering into transactions involv-
ing options and futures contracts. See "Investment Objective and Management
Policies."
 
                                                                               7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
THE FUND'S EXPENSES The following expense table lists the costs and expenses
an investor will incur either directly or indirectly as a shareholder of the
Fund, based on the maximum sales charge or maximum CDSC that may be incurred
at the time of purchase or redemption and the Fund's operating expenses for
its most recent fiscal year:
 
<TABLE>   
<CAPTION>
  SMITH BARNEY UTILITIES FUND                  CLASS A CLASS B CLASS C CLASS Y
------------------------------------------------------------------------------
  <S>                                          <C>     <C>     <C>     <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Maximum sales charge imposed on purchases
      (as a percentage of offering price)       5.00%   None    None    None
    Maximum CDSC (as a percentage of original
      cost or redemption proceeds, whichever
      is lower)                                 None*   5.00%   1.00%   None
------------------------------------------------------------------------------
  ANNUAL FUND OPERATING EXPENSES
    (as a percentage of average net assets)
    Management fees                             0.65%   0.65%   0.65%   0.65%
    12b-1 fees**                                0.25    0.75    0.70    None
    Other expenses                              0.16    0.12    0.12    0.02
------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES                 1.06%   1.52%   1.47%   0.67%
------------------------------------------------------------------------------
</TABLE>    
   
  * Purchases of Class A shares of $500,000 or more will be made at net asset
    value with no sales charge, but will be subject to a CDSC of 1.00% on
    redemptions made within 12 months of purchase.     
   
 ** Upon conversion of Class B shares to Class A shares, such shares will no
    longer be subject to a distribution fee. Class C shares do not have a
    conversion feature and, therefore, are subject to an ongoing distribution
    fee. As a result, long-term shareholders of Class C shares may pay more
    than the economic equivalent of the maximum front-end sales charge
    permitted by the National Association of Securities Dealers, Inc. (the
    "NASD").     
   
  Class A shares of the Fund purchased through the Smith Barney AssetOne Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depend-
ing on the amount of assets held through the Program. For more information,
please call your Smith Barney Financial Consultant.     
   
  The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in
the case of Class B, Class 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) and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption
of Shares." Smith Barney receives an annual 12b-1 service fee of 0.25% of the
value of average daily net assets of Class A shares. Smith Barney also
receives an annual 12b-1 fee of 0.75% of the value of average daily net assets
of Class B shares, consisting of a 0.50% distribution fee and a 0.25% service
fee. In Class C shares, Smith Barney receives an annual 12b-1 fee of 0.70% of
the value of average daily net assets of this Class, consisting of a 0.45%
distribution fee and a 0.25% service fee.     
 
8
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
"Other expenses" in the above table include fees for shareholder services, cus-
todial fees, legal and accounting fees, printing costs and registration fees.
 
 EXAMPLE
 
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
 
<TABLE>   
<CAPTION>
  SMITH BARNEY UTILITIES FUND                 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
------------------------------------------------------------------------------
  <S>                                         <C>    <C>     <C>     <C>
  An investor would pay the following
  expenses on a $1,000 investment, assuming
  (1) 5.00% annual return and (2) redemption
  at the end of each time period:
    Class A                                    $60     $82    $106     $173
    Class B                                     65      78      93      169
    Class C                                     25      46      80      176
    Class Y                                      7      21      37       83
  An investor would pay the following
  expenses on the same investment, assuming
  the same annual return and no redemption:
    Class A                                     60      82     106      173
    Class B                                     15      48      83      169
    Class C                                     15      46      80      176
    Class Y                                      7      21      37       83
------------------------------------------------------------------------------
</TABLE>    
* Ten-year figures assume conversion of Class B shares to Class A shares at the
  end of the eighth year following the date of purchase.
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                               9
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
  The following information for each of the years in the three-year period
ended July 31, 1997 has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Fund's Annual Report dated July
31, 1997. The following information for the fiscal years ended July 31, 1989
through July 31, 1994 has been audited by other independent auditors. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's 1997 Annual Report,
which is incorporated by reference into the Statement of Additional Informa-
tion.     
   
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
    
<TABLE>   
<CAPTION>
SMITH BARNEY UTILITIES FUND
YEAR ENDED JULY 31,                   1997    1996    1995    1994    1993(1)
-------------------------------------------------------------------------------
<S>                                  <C>     <C>     <C>     <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR   $14.51  $14.03  $13.28  $15.97   $14.36
-------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income                 0.80    0.83    0.85    0.56     0.66
 Net realized and unrealized gain
 (loss) on investments                 1.36    0.47    0.82   (1.92)    1.72
-------------------------------------------------------------------------------
Total Income (Loss) From Operations    2.16    1.30    1.67   (1.36)    2.38
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                (0.82)  (0.82)  (0.82)  (0.83)   (0.64)
 Net realized gains                   (0.32)     --   (0.08)  (0.50)   (0.13)
 Capital                                 --      --   (0.02)     --       --
-------------------------------------------------------------------------------
Total Distributions                   (1.14)  (0.82)  (0.92)  (1.33)   (0.77)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR         $15.53  $14.51  $14.03  $13.28   $15.97
-------------------------------------------------------------------------------
TOTAL RETURN                          15.48%   9.21%  13.24%  (8.99)%  17.01%++
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS)   $  248  $  266    $169     $41      $54
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                              1.06%   1.04%   1.07%   1.07%    1.07%+
 Net investment income                 5.29    5.55    6.36    5.54     5.67+
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                  45%     58%     36%     28%      37%
-------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID
ON EQUITY TRANSACTIONS (2)           $ 0.06  $ 0.06      --      --       --
-------------------------------------------------------------------------------
</TABLE>    
(1) For the period from November 6, 1992 (inception date) to July 31, 1993.
(2) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
       
10
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
   
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
    
<TABLE>   
<CAPTION>
SMITH BARNEY UTILITIES FUND
YEAR ENDED                   7/31/97  7/31/96  7/31/95  7/31/94   7/31/93  7/31/92(1)
--------------------------------------------------------------------------------------
<S>                          <C>      <C>      <C>      <C>       <C>      <C>
NET ASSET VALUE,
BEGINNING OF YEAR            $14.51   $14.02   $13.28   $15.97    $14.83     $13.95
--------------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
 Net investment income         0.73     0.77     0.78     0.75      0.79       0.35
 Net realized and
  unrealized gain (loss)
  on investments               1.35     0.47     0.82    (2.19)     1.30       0.89
--------------------------------------------------------------------------------------
Total Income (Loss) From
Operations                     2.08     1.24     1.60    (1.44)     2.09       1.24
--------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income        (0.75)   (0.75)   (0.76)   (0.75)    (0.80)     (0.35)
 Net realized gains           (0.32)      --    (0.08)   (0.50)    (0.15)        --
 Capital                         --       --    (0.02)      --        --      (0.01)
--------------------------------------------------------------------------------------
Total Distributions           (1.07)   (0.75)   (0.86)   (1.25)    (0.95)     (0.36)
--------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR                         $15.52   $14.51   $14.02   $13.28    $15.97     $14.83
--------------------------------------------------------------------------------------
TOTAL RETURN                  14.88%    8.78%   12.62%   (9.52)%   14.69%      8.98%++
--------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS)                   $  951   $1,310   $1,573   $1,823    $2,766     $1,721
--------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                      1.52%    1.55%    1.56%    1.54%     1.56%      1.57%+
 Net investment income         4.85     5.13     5.82     5.07      5.17       5.78+
--------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE          45%      58%      36%      28%       37%        10%
--------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER
SHARE PAID ON EQUITY
TRANSACTIONS (2)             $ 0.06   $ 0.06       --       --        --         --
--------------------------------------------------------------------------------------
</TABLE>    
(1) For the period from March 1, 1992 to July 31, 1992.
          
(2) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.     
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
       
                                                                             11
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
   
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
    
<TABLE>   
<CAPTION>
SMITH BARNEY UTILITIES FUND
YEAR ENDED                               2/28/92  2/28/91  2/28/90  2/28/89(1)
-------------------------------------------------------------------------------
<S>                                      <C>      <C>      <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR       $13.21   $12.93   $12.09     $12.00
-------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income                     0.82     0.88     0.87       0.64
 Net realized and unrealized gain (loss)
  on investments                           0.94     0.40     1.08       0.17
-------------------------------------------------------------------------------
Total Income (Loss) From Operations        1.76     1.28     1.95       0.81
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                    (0.84)   (0.90)   (0.90)     (0.57)
 Net realized gains                       (0.15)   (0.10)   (0.21)     (0.15)
 Capital                                  (0.03)      --       --         --
-------------------------------------------------------------------------------
Total Distributions                       (1.02)   (1.00)   (1.11)     (0.72)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR             $13.95   $13.21   $12.93     $12.09
-------------------------------------------------------------------------------
TOTAL RETURN                              13.63%   10.46%   16.34%      6.80%++
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS)       $1,275    $ 707    $ 604      $ 416
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                  1.58%    1.65%    1.70%      1.77%+
 Net investment income                     6.04     6.89     6.83       6.99+
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                      33%      31%      50%        46%
-------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS (2)                      --       --       --         --
-------------------------------------------------------------------------------
</TABLE>    
          
(1) For the period from March 28, 1988 (inception date) to February 28, 1989.
           
(2) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.     
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
       
12
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
   
FOR A CLASS C SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
    
<TABLE>   
<CAPTION>
SMITH BARNEY UTILITIES FUND
YEAR ENDED JULY 31,               1997(1)   1996     1995   1994(2)   1993(3)
-------------------------------------------------------------------------------
<S>                               <C>      <C>      <C>     <C>       <C>
NET ASSET VALUE, BEGINNING OF
YEAR                              $14.51   $ 14.02  $13.28  $15.97    $15.17
-------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income              0.73      0.77    0.78    0.73      0.35
 Net realized and unrealized gain
  (loss) on investments             1.36      0.47    0.82   (2.17)     0.86
-------------------------------------------------------------------------------
Total Income (Loss) From
Operations                          2.09      1.24    1.60   (1.44)     1.21
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income             (0.75)    (0.75)  (0.76)  (0.75)    (0.39)
 Net realized gains                (0.32)       --   (0.08)  (0.50)    (0.02)
 Capital                              --        --   (0.02)     --        --
-------------------------------------------------------------------------------
Total Distributions                (1.07)    (0.75)  (0.86)  (1.25)    (0.41)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR      $15.53   $ 14.51  $14.02  $13.28    $15.97
-------------------------------------------------------------------------------
TOTAL RETURN                       15.01%     8.80%  12.62%  (9.52)%    8.08%++
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)   $9,381   $11,441  $3,925  $1,894    $  252
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                           1.47%     1.50%   1.51%   1.48%     1.49%+
 Net investment income              4.89      5.19    5.77    5.13      5.25+
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE               45%       58%     36%     28%       37%
-------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS(4)    $ 0.06     $0.06      --      --        --
-------------------------------------------------------------------------------
</TABLE>    
   
(1) Per share amounts have been calculated using the monthly average shares
    method rather than the undistributed net investment income method, because
    it more accurately reflects the per share data for the period.     
   
(2) On November 7, 1994, the former Class D shares were renamed Class C
    shares.     
          
(3) For the period from February 4, 1993 (inception date) to July 31, 1993.
           
(4) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.     
 ++Total return is not annualized as it may not be representative of the total
   return for the year.
 + Annualized.
       
                                                                             13
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
   
FOR A CLASS Y SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
    
<TABLE>   
<CAPTION>
SMITH BARNEY UTILITIES FUND
YEAR ENDED JULY 31,                                         1997    1996(1)
-----------------------------------------------------------------------------
<S>                                                        <C>      <C>
NET ASSET VALUE, BEGINNING OF YEAR                         $ 14.52  $14.88
-----------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income                                        0.83    0.64
 Net realized and unrealized gain (loss) on investment        1.38   (0.29)
-----------------------------------------------------------------------------
Total Income From Operations                                  2.21    0.35
-----------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                                       (0.85)  (0.71)
 Net realized gains                                          (0.32)     --
-----------------------------------------------------------------------------
Total Distributions                                          (1.17)  (0.71)
-----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR                               $ 15.56  $14.52
-----------------------------------------------------------------------------
TOTAL RETURN                                                 15.88%   2.28%++
-----------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S)                             $24,676  $7,617
-----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                                     0.67%   0.78%+
 Net investment income                                        5.58   5.54+
-----------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                                         45%     58%
-----------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS    $0.06   $0.06
-----------------------------------------------------------------------------
</TABLE>    
   
(1) For the period October 9, 1995 (inception date) through July 31, 1996.     
 ++Total return is not annualized, as it may not be representative of the total
   return for the year.
 + Annualized.
 
14
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
 INVESTMENT OBJECTIVE
 
  The primary investment objective of the Fund is to provide current income.
Long-term capital appreciation is a secondary objective. The Fund's investment
objectives may be changed only with the approval of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund will achieve its
investment objectives.
 
 INVESTMENT POLICIES
 
  The Fund seeks to achieve its objectives by investing in equity and debt
securities of companies in the utility industries. For purposes of this Pro-
spectus, the utility industries are deemed to be comprised of companies princi-
pally engaged (that is, at least 50% of a company's assets, gross income or net
profits results from utility operations or the company is regulated as a util-
ity by a government agency or authority) in the manufacture, production, gener-
ation, transmission and sale of electric and gas energy and companies princi-
pally engaged in the communications field, including entities such as tele-
phone, telegraph, satellite, microwave and other companies regulated by govern-
mental agencies as utilities that provide communication facilities for the pub-
lic benefit, but not including those in public broadcasting. The Fund will
invest primarily in utility equity and debt securities that have a high
expected rate of return, as determined by the Fund's investment adviser, SBMFM.
Under normal market conditions, the Fund will invest at least 65% of its assets
in such securities. The Fund may invest up to 35% of its assets in equity and
debt securities of non-utility companies believed to afford a reasonable oppor-
tunity for achieving the Fund's investment objectives. When SBMFM believes that
market conditions warrant, the Fund may adopt a temporary defensive posture and
may invest, without limit, in: debt securities (whether or not they are utility
securities) such as rated or unrated bonds, debentures and commercial paper,
United States government securities and money market instruments. The Fund may
invest up to 10% of its assets in securities rated BB or B by Standard & Poor's
Ratings Group ("S&P") or Ba or B by Moody's Investors Service, Inc. ("Moody's")
whenever SBMFM believes that the incremental yield on such securities is advan-
tageous to the Fund in comparison to the additional risk involved. Securities
rated BBB/Baa are considered medium grade obligations, neither highly protected
nor poorly secured. Interest payments and principal security of BBB/Baa rated
securities appear adequate for the present but certain protective elements may
be lacking or may be unreliable over any great length of time. BBB/Baa rated
securities lack outstanding investment characteristics and may in fact have
speculative characteristics. The yields on lower-rated fixed-income securities
generally are higher than the yields available on higher-rated securities. See
"Risk Factors and Special Considerations" below. In addition, the Fund may
enter into repurchase agreements.
 
 
                                                                              15
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 INVESTMENT SECURITIES, STRATEGIES AND TECHNIQUES
 
  The Fund has the ability to engage in a number of specialized investment
strategies and techniques designed to enable the Fund to achieve its invest-
ment objectives. Included among these strategies are lending its portfolio
securities, selling securities "short against the box," writing covered call
and secured put options, as well as purchasing options on securities, purchas-
ing and selling interest rate futures contracts, options on futures contracts,
stock index put and call options and stock index futures contracts, each of
which is discussed below.
   
  U.S. Government Securities. United States government securities are obliga-
tions of, or guaranteed by, the United States government, its agencies or
instrumentalities ("U.S. government securities"). These include bills, certif-
icates of indebtedness, notes and bonds issued by the United States Treasury
or by agencies or instrumentalities of the United States government. Some U.S.
government securities, such as Treasury bills and bonds, are supported by the
full faith and credit of the United States; others, such as those of Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the United States
government to purchase the agency's obligations; still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the instrumentality. U.S. government securities generally do not involve the
credit risks associated with other types of interest-bearing securities,
although, as a result, the yields available from U.S. government securities
are generally lower than the yields available from interest-bearing corporate
securities.     
 
  Zero Coupon Securities. The Fund may also invest in zero coupon bonds. A
zero coupon bond pays no interest in cash to its holder during its life,
although interest is accrued during that period. Its value to an investor con-
sists of the difference between its face value at the time of maturity and the
price for which it was acquired, which is generally an amount significantly
less than its face value (sometimes referred to as a "deep discount" price).
Because such securities usually trade at a deep discount, they will be subject
to greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which make periodic distribu-
tions of interest. On the other hand, because there are no periodic interest
payments to be reinvested prior to maturity, zero coupon securities eliminate
reinvestment risk and lock in a rate of return to maturity.
 
  Repurchase Agreements. The Fund may engage in repurchase agreements with
certain member banks of the Federal Reserve System and with certain dealers on
the Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's hold-
 
16
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
ing period. This arrangement results in a fixed rate of return that is not
subject to market fluctuations during the Fund's holding period. The value of
the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including interest. Repurchase agreements
could involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities, the risk of a possible decline in the
value of the underlying securities during the period in which the Fund seeks
to assert its right to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or part of the income from
the agreement. SBMFM, acting under the supervision of the Trust's Board of
Trustees, reviews on an ongoing basis the value of the collateral and credit-
worthiness of those banks and dealers with which the Fund enters into repur-
chase agreements to evaluate potential risks.
   
  Lending Portfolio Securities. The Fund is authorized to lend up to 20% of
its portfolio securities to brokers, dealers and other financial organiza-
tions. The Fund's loans of securities will be collateralized by cash, letters
of credit or U.S. government securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities. By
lending its securities, the Fund seeks to generate income by continuing to
receive interest on the loaned securities, by investing the cash collateral in
short-term instruments or by obtaining yield in the form of interest paid by
the borrower when U.S. government securities are used as collateral.     
 
  Short Sales Against the Box. The Fund may sell its securities short up to 5%
of the Fund's net assets. In addition, the Fund may make short sales if at all
times when a position is open, the Fund owns the stock or owns preferred stock
or debt securities convertible or exchangeable without payment of further con-
sideration for, securities of the same issue as the securities sold short.
Short sales of this kind are referred to as "against the box." Short sales
against the box are used to defer recognition of capital gains or losses.
   
  Options Activities. The Fund may write (that is, sell) call options
("calls") if the calls are covered throughout the life of the option. A call
is covered if the Fund (a) owns the optioned securities, (b) maintains in a
segregated account with the Trust's custodian, PNC Bank, National Association
("PNC Bank"), cash, U.S. government securities, equity securities or debt
securities of any grade having a value equal to or greater than the Fund's
obligations under the call, provided such securities have been determined by
SBMFM to be liquid and unencumbered pursuant to guidelines established by the
Trustees ("eligible segregated assets") or (c) owns an offsetting call option.
The aggregate value of the obligations underlying calls on securities which
are written by the Fund and covered with cash or other eligible segregated
assets, together with the aggregate value of the obligations underlying put
options written by the Fund, will not exceed 50% of the Fund's net assets.
When the Fund writes a call, it receives a premium and gives the purchaser the
    
                                                                             17
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
right to buy the underlying security at any time during the call period (usu-
ally not more than nine months in the case of common stock or fifteen months in
the case of U.S. government securities) at a fixed exercise price regardless of
market price changes during the call period. If the call is exercised, the Fund
forgoes any gain from an increase in the market price of the underlying secu-
rity over the exercise price. The Fund may purchase calls on securities. The
Fund also may purchase and sell stock index calls which differ from calls on
individual securities in that they are settled in cash based on the values of
the securities in the underlying index, rather than by delivery of the under-
lying securities. In writing a call on a stock index, the Fund receives a pre-
mium and agrees that during the call period purchasers of a call, upon exercise
of the call, will receive an amount of cash if the closing level of the stock
index upon which the call is based is greater than the exercise price of the
call. When the Fund buys a call on a stock index, it pays a premium and during
the call period the Fund, upon exercise of the call, receives an amount of cash
if the closing level of the stock index upon which the call is based is greater
than the exercise price of the call.
 
  The Fund may write and purchase put options ("puts"). When the Fund writes a
put, it receives a premium and gives the purchaser of the put the right to sell
the underlying security to the Fund at the exercise price at any time during
the option period. When the Fund purchases a put, it pays a premium in return
for the right to sell the underlying security at the exercise price at any time
during the option period. For the purchase of a put to be profitable, the mar-
ket price of the underlying security must decline sufficiently below the exer-
cise price to cover the premium and transaction costs, unless the put is sold
in a closing sale transaction; otherwise, the purchase of the put effectively
increases the cost of the security and thus reduces its yield. The Fund also
may purchase and sell stock index puts, which differ from puts on individual
securities in that they are settled in cash based on the values of the securi-
ties in the underlying index, rather than by delivery of the underlying securi-
ties. Purchase of a stock index put is designed to protect against a decline in
the value of the Fund's portfolio generally, rather than an individual security
in the portfolio. Stock index puts are sold primarily to realize income from
the premiums received on the sale of such options. If any put is not exercised
or sold, it will become worthless on its expiration date. The Fund will not
purchase puts or calls on securities if more than 5% of its assets would be
invested in premiums on puts and calls, not including that portion of the pre-
mium which reflects the value of the securities owned by the Fund and under-
lying a put at the time of purchase.
 
  The Fund may write puts on securities only if they are "secured." A put is
"secured" if the Fund maintains cash or other eligible segregated assets with a
value equal to the exercise price in a segregated account or holds a put on the
same underlying security at an equal or greater exercise price. The aggregate
value of the
 
18
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
obligations underlying puts written by the Fund, together with the aggregate
value of the obligations underlying calls on securities which are written by
the Fund and covered with cash, cash equivalents or U.S. government securities,
will not exceed 50% of the Fund's net assets. The Fund also may write "strad-
dles," which are combinations of secured puts and covered calls on the same
underlying security.
 
  The Fund will realize a gain (or loss) on a closing purchase transaction with
respect to a call or put previously written by the Fund if the premium, plus
commission costs, paid to purchase the call or put is less (or greater) than
the premium, less commission costs, received on the sale of the call or put. A
gain also will be realized if a call or put which the Fund has written lapses
unexercised, because the Fund would retain the premium. See "Dividends, Distri-
butions and Taxes" below. The Fund will purchase and sell only options which
are listed on a national securities exchange and will write options only
through a national options clearing organization.
   
  There can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, trading in options on
U.S. government securities is relatively new, so that it is impossible to pre-
dict to what extent liquid markets will develop or continue. See the Statement
of Additional Information for a further discussion of risks involved in options
trading, and particular risks applicable to options trading on U.S. government
securities, including Government National Mortgage Association ("GNMA") certif-
icates and the characteristics and risks of stock index options transactions.
    
  Futures Contracts--General. The Fund may not purchase futures contracts or
related options if, immediately thereafter, more than 30% of the Fund's total
assets would be so invested. In purchasing and selling futures contracts and
related options, the Fund will comply with rules and interpretations of the
Commodity Futures Trading Commission ("CFTC"), under which the Fund is excluded
from regulation as a "commodity pool." CFTC regulations require, among other
things, that (a) futures and related options be used solely for bona fide hedg-
ing purposes (or that the underlying commodity value of the Fund's long posi-
tions not exceed the sum of certain identified liquid investments) and (b) the
Fund not enter into futures and related options for which the aggregate initial
margin and premiums exceed 5% of the fair market value of the Fund's assets. In
order to prevent leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash or other eligible segregated assets equal to the
market value of futures contracts purchased will be maintained in a segregated
account with PNC Bank. The Fund will engage only in futures contracts and
related options which are listed on a national commodities exchange.
 
  Interest Rate Futures Contracts. The Fund may purchase and sell interest rate
futures contracts as a hedge against changes in interest rates. An interest
rate
 
                                                                              19
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
futures contract is an agreement between two parties to buy and sell a security
for a set price on a future date. Interest rate futures contracts are traded on
designated "contracts markets" which, through their clearing corporations,
guarantee performance of the contracts. Currently, there are interest rate
futures contracts based on securities such as long-term Treasury bonds, Trea-
sury notes, GNMA certificates and three-month Treasury bills.
 
  Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into an interest rate futures
contract for the sale of securities has an effect similar to the actual sale of
securities, although sale of the interest rate futures contract might be accom-
plished more easily and quickly. For example, if the Fund holds long-term U.S.
government securities and SBMFM anticipates a rise in long-term interest rates,
the Fund could, in lieu of disposing of its portfolio securities, enter into
interest rate futures contracts for the sale of similar long-term securities.
If interest rates increased and the value of the Fund's securities declined,
the value of the Fund's interest rate futures contracts would increase, thereby
protecting the Fund by preventing the net asset value from declining as much as
it otherwise would have declined. Similarly, entering into interest rate
futures contracts for the purchase of securities has an effect similar to the
actual purchase of the underlying securities, but permits the continued holding
of securities other than the underlying securities. For example, if SBMFM
expects long-term interest rates to decline, the Fund might enter into interest
rate futures contracts for the purchase of long-term securities, so that it
could gain rapid market exposure that may offset anticipated increases in the
cost of securities that it intends to purchase, while continuing to hold high-
er-yielding short-term securities or waiting for the long-term market to stabi-
lize.
 
  The Fund may purchase and sell listed put and call options on interest rate
futures contracts. An option on an interest rate futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in an
interest rate futures contract (a long position if the option is a call and a
short position if the option is a put), at a specified exercise price at any
time during the option period. When an option on a futures contract is exer-
cised, delivery of the interest rate futures position is accompanied by cash
representing the difference between the current market price of the interest
rate futures contract and the exercise price of the option. The Fund may pur-
chase put options on interest rate futures contracts in lieu of, and for the
same purpose as, sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying interest rate
futures contract in the same manner as it purchases "protective puts" on secu-
rities. The purchase of call options on interest rate futures contracts is
intended to serve the same purpose as the actual purchase of the futures con-
tract, and the Fund will set aside cash and cash equivalents sufficient to pur-
chase the amount of portfolio
 
20
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
securities represented by the underlying futures contracts. See "Options Activ-
ities" and "Dividends, Distributions and Taxes."
 
  Stock Index Futures Contracts. The Fund may purchase and sell stock index
futures contracts. These transactions, if any, by the Fund will be made solely
for the purpose of hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in market conditions and will
be made when the transactions are economically appropriate to the reduction of
risks inherent in the management of the Fund. A stock index futures contract is
an agreement under which two parties agree to take or make delivery of the
amount of cash based on the difference between the value of a stock index at
the beginning and at the end of the contract period. When the Fund enters into
a stock index futures contract, it must make an initial deposit, known as "ini-
tial margin," as a partial guarantee of its performance under the contract. As
the value of the stock index fluctuates, either party to the contract is
required to make additional margin deposits, known as "variation margin," to
cover any additional obligation that it may have under the contract. The Fund
may not at any time commit more than 5% of its total assets to initial margin
deposits on futures contracts.
 
  Successful use of stock index futures contracts by the Fund is subject to
certain special risk considerations. A liquid stock index futures market may
not be available when the Fund seeks to offset adverse market movements. In
addition, there may be an imperfect correlation between movements in the secu-
rities included in the index and movements in the securities in the Fund. Suc-
cessful use of stock index futures contracts is further dependent on SBMFM's
ability to predict correctly movements in the direction of the stock markets
and no assurance can be given that its judgment in this respect will be cor-
rect. Risks in the purchase and sale of stock index futures are further
referred to in the Statement of Additional Information.
 
  Foreign Securities and American Depositary Receipts. The Fund may purchase
foreign securities or American Depositary Receipts ("ADRs"). ADRs are U.S.
dollar-denominated receipts issued generally by domestic banks and representing
the deposit with the bank of a security of a foreign issuer. ADRs are publicly
traded on exchanges or over-the-counter in the United States.
 
  Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting stan-
dards, generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. Additionally, dividends payable on foreign secu-
rities may be subject to foreign taxes
 
                                                                              21
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
withheld prior to distribution. Foreign securities often trade with less fre-
quency and volume than domestic securities and therefore may exhibit greater
price volatility. Changes in foreign exchange rates will affect the value of
those securities which are denominated or quoted in currencies other than the
U.S. dollar. Many of the foreign securities held by the Fund will not be regis-
tered with, nor will the issuers thereof be subject to the reporting require-
ments of, the SEC. Accordingly, there may be less publicly available informa-
tion about the securities and the foreign company or government issuing them
than is available about a domestic company or government entity. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of infla-
tion, capital reinvestment, resource self-sufficiency and balance of payment
positions.
 
  Non-Publicly Traded and Illiquid Securities. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when SBMFM believes it desirable
to do so. The Fund's investments in illiquid securities are subject to the risk
that should the Fund desire to sell any of these securities when a ready buyer
is not available at a price that the Fund deems representative of their value,
the value of the Fund's net assets could be adversely affected.
 
 INVESTMENT RESTRICTIONS
 
  The Trust has adopted certain fundamental investment restrictions with
respect to the Fund that may not be changed without approval of a majority of
the Fund's outstanding shares. The fundamental investment restrictions adopted
by the Trust prohibit the Fund from:
 
   1. Purchasing the securities of any issuer (other than U.S. government
 securities) if as a result more than 5% of the value of the Fund's total
 assets would be invested in the securities of the issuer, except that up to
 25% of the value of the Fund's total assets may be invested without regard
 to this 5% limitation.
 
   2. Purchasing more than 10% of the voting securities of any one issuer,
 provided that this limitation shall not apply to investments in U.S. govern-
 ment securities.
 
   3. Purchasing securities on margin, except that the Fund may obtain any
 short-term credits necessary for the clearance of purchases and sales of
 securities. For purposes of this restriction, the deposit or payment of ini-
 tial or variation margin in connection with futures contracts or related
 options will not be deemed to be a purchase of securities on margin by the
 Fund.
 
   4. Making short sales of securities or maintaining a short position,
 except to the extent of 5% of the Fund's net assets and except that the Fund
 may engage
 
22
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 in such activities without limit if, at all times when a short position is
 open, the Fund owns an equal amount of the securities or securities convert-
 ible into or exchangeable, without payment of any further consideration, for
 securities of the same issuer as, and at least equal in amount to, the secu-
 rities sold short.
 
   5. Borrowing money, including reverse repurchase agreements, except that
 the Fund may borrow from banks for temporary or emergency (not leveraging)
 purposes including the meeting of redemption requests that might otherwise
 require the untimely disposition of securities, in an amount not exceeding
 20% of the value of the Fund's total assets (including the amount borrowed)
 valued at market less liabilities (not including the amount borrowed) at the
 time the borrowing is made. Whenever borrowings exceed 5% of the value of
 the Fund's total assets, the Fund will not make any additional investments.
 
   6. Pledging, hypothecating, mortgaging or otherwise encumbering more than
 10% of the value of the Fund's total assets as security for any indebted-
 ness. For purposes of this restriction (a) the deposit of assets in escrow
 in connection with the writing of covered put or call options and the pur-
 chase of securities on a when-issued or delayed-delivery basis and (b) col-
 lateral arrangements with respect to (i) the purchase and sale of stock
 options, options on foreign currencies and options on stock indexes and (ii)
 initial or variation margin for futures contracts will not be deemed to be
 pledges of the Fund's assets.
 
   7. Investing in commodities, except that the Fund may purchase or write
 futures contracts and options on futures contracts as described in this Pro-
 spectus.
 
   8. Making loans to others, except through the purchase of qualified debt
 obligations, loans of portfolio securities and the entry into repurchase
 agreements.
 
   9. Concentrating in any industry, except that the Fund will concentrate in
 excess of 25% of its assets in the securities of companies within the util-
 ity industries.
 
  In addition, the Fund will not purchase restricted securities, illiquid secu-
rities (such as repurchase agreements with maturities in excess of seven days)
or other securities that are not readily marketable if more than 10% of the
total assets of the Fund would be invested in such securities.
 
  Certain other investment restrictions, including fundamental restrictions as
well as restrictions that may be changed without a shareholder vote, adopted by
the Trust are described in the Statement of Additional Information.
 
 RISK FACTORS AND SPECIAL CONSIDERATIONS
 
  Investment in the Fund involves special considerations, such as those
described below:
 
                                                                              23
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  General. Investment in the Fund may involve above-average risk of loss
because of, among other things, the Fund's use of strategies and techniques
that may be considered to be speculative. The strategy followed by the Fund
and certain of the strategies and techniques used by the Fund depend on fore-
casts made by SBMFM that may or may not prove to be correct.
 
  Low-Rated Securities. Low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment
of the rating organization, are outweighed by large uncertainties or major
risk exposures to adverse conditions and (b) are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the securities.
   
  While the market values of low-rated and comparable unrated securities tend
to react less to fluctuations in interest rate levels than the market values
of higher-rated securities, the market values of certain low-rated and compa-
rable unrated securities also tend to be more sensitive to individual corpo-
rate developments and changes in economic conditions than higher-rated securi-
ties. In addition, low-rated securities and comparable unrated securities gen-
erally present a higher degree of credit risk. Issuers of low-rated and compa-
rable unrated securities are often highly leveraged and may not have more tra-
ditional methods of financing available to them so that their ability to serv-
ice their debt obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. The risk of loss due to
default by such issuers is significantly greater because low-rated and compa-
rable unrated securities generally are unsecured and frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund may incur addi-
tional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The exist-
ence of limited markets for low-rated and comparable unrated securities may
diminish the Fund's ability to (a) obtain accurate market quotations for pur-
poses of valuing such securities and calculating its net asset value and (b)
sell the securities at fair value either to meet redemption requests or to
respond to changes in the economy or in the financial markets.     
 
  Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower yield-
ing security, thus resulting in a decreased return to the Fund.
 
  The market for certain low-rated and comparable unrated securities is rela-
tively new and has not fully weathered a major economic recession. Any such
economic downturn could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
 
24
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  Investment in Utility Securities. Because the Fund concentrates its invest-
ments in one sector, its portfolio may be subject to greater risk and market
fluctuations than a portfolio of securities representing a broader range of
investment alternatives. The Fund is particularly subject to risks that are
inherent to the utility industries that make up this sector, including diffi-
culty in obtaining an adequate return on invested capital, difficulty in
financing large construction programs during an inflationary period, restric-
tions on operations and increased cost and delays attributable to environmental
considerations and regulation, difficulty in raising capital in adequate
amounts on reasonable terms in periods of high inflation and unsettled capital
markets, increased costs and reduced availability of certain types of fuel,
occasional reduced availability and high costs of natural gas for resales, the
effects of energy conservation, the effects of a national energy policy and
lengthy delays and greatly increased costs and other problems associated with
the design, construction, licensing, regulation and operation of nuclear facil-
ities for electric generation, including, among other considerations, the prob-
lems associated with the use of radioactive materials and the disposal of
radioactive wastes. There are substantial differences between the regulatory
practices and policies of various jurisdictions, and any given regulatory
agency may make major shifts in policy from time to time. There is no assurance
that regulatory authorities will grant rate increases in the future or that
such increases will be adequate to permit the payment of dividends on common
stocks. Additionally, existing and possible future regulatory legislation may
make it even more difficult for these utilities to obtain adequate relief. Cer-
tain of the issuers of securities held by the Fund may own or operate nuclear
generating facilities. Governmental authorities may from time to time review
existing policies, and impose additional requirements governing the licensing,
construction and operation of nuclear power plants.
 
  Each of the risks referred to above could adversely affect the ability and
inclination of public utilities to declare or pay dividends and the ability of
holders of common stock to realize any value from the assets of the issuer upon
liquidation or bankruptcy. All of the utilities which are issuers of the secu-
rities held by the Fund have been experiencing one or more of these problems in
varying degrees. Moreover, price disparities within selected utility groups and
discrepancies in relation to averages and indices have occurred frequently for
reasons not directly related to the general movements or price trends of util-
ity common stocks. Causes of these discrepancies include changes in the overall
demand for and supply of various securities (including the potentially depress-
ing effect of new stock offerings), and changes in investment objectives, mar-
ket expectations or cash requirements of other purchasers and sellers of secu-
rities.
 
  Interest Rate Risk. The Fund will be affected by general changes in interest
rates which will result in increases or decreases in the market value of the
debt securities held by the Fund. The market value of the debt securities held
by the Fund can be expected to vary inversely to changes in prevailing interest
rates.
 
                                                                              25
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  Options on Securities. Because option premiums paid by the Fund are small in
relation to the market value of the investments underlying the options, buying
put options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuation than would be the case if the Fund did not
invest in options.
 
  No assurance can be given that the Fund will be able to effect closing trans-
actions at a time when it wishes to do so. If the Fund cannot enter into a
closing transaction, the Fund will continue to be subject to the risk that a
put option it has purchased will decline in value or become worthless as a
result of any increase in the value of the underlying security. The Fund also
could face higher transaction costs, including brokerage commissions.
 
  Lending of Portfolio Securities. The risk associated with lending portfolio
securities, as with other extensions of credit, consists of possible loss of
rights in the collateral should the borrower fail financially.
 
  Short Sales. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
 
  Futures Transactions. The use of futures contracts as a hedging device
involves several risks. No assurance can be given that a correlation will exist
between price movements in the stock index and price movements in the securi-
ties that are the subject of the hedge; the risk of imperfect correlation
increases as the composition of the securities held by the Fund diverges from
the securities included in the applicable stock index. Positions in futures
contracts may be closed out only on the exchange on which they were entered
into (or through a linked exchange) and no secondary market exists for those
contracts. In addition, although the Fund intends to enter into futures con-
tracts only if an active market exists for the contracts, no assurance can be
given that an active market will exist for the contracts at any particular
time. Certain exchanges do not permit trading in particular contracts at prices
that represent a fluctuation in price during a single day's trading beyond a
certain set limit. If prices fluctuate during a single day's trading beyond
those limits, the Fund could be prevented from promptly liquidating unfavorable
positions and thus be subjected to losses. Losses incurred in hedging transac-
tions and the costs of these transactions will affect the Fund's performance.
Successful use of stock index futures by the Fund for hedging purposes is sub-
ject to the ability of SBMFM to correctly predict movements in the direction of
the stock market.
    
 PORTFOLIO TRANSACTIONS     
   
  Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Smith Barney and certain of
its affiliated brokers. The Fund may use Smith Barney or a Smith Barney-
affiliated broker in connection with a purchase or sale of securities when
SBMFM believes     
 
26
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
that the charge for the transaction does not exceed usual and customary levels.
The Fund also may use Smith Barney as a commodities broker in connection with
entering into futures contracts and commodity options. Smith Barney has agreed
to charge the Fund commodity commissions at rates comparable to those charged
by Smith Barney to its most favored clients for comparable trades in comparable
accounts. In selecting a broker for a transaction, including Smith Barney or
its affiliates, the primary consideration is prompt and effective execution of
orders at the most favorable price. Subject to that primary consideration,
dealers may be selected for research, statistical or other services to enable
SBMFM to supplement its own research and analysis with the views and informa-
tion of other securities firms.     
 
VALUATION OF SHARES
 
 
  The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of the Class outstanding.
 
  Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfo-
lio securities which are traded primarily on foreign exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. A security that
is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trustees
determine that amortized cost reflects fair value of those investments. An
option generally is valued at the last sale price or, in the absence of the
last sale price, the last offer price. The value of a futures contract equals
the unrealized gain or loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract acquired on the
day on which the stock index futures contract is being valued. A settlement
price may not be used if the market makes a limited move with respect to a par-
ticular commodity or if the underlying securities market experiences signifi-
cant price fluctuations after the determination of the settlement price. In
such event, the futures contract will be valued at a fair market price
 
                                                                              27
<PAGE>
 
VALUATION OF SHARES (CONTINUED)
 
to be determined by or under the direction of the Board of Trustees. Further
information regarding the Trust's valuation policies with respect to the Fund
is contained in the Statement of Additional Information.
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
 
  The Fund will be treated separately from the Trust's other funds in determin-
ing the amounts of dividends from investment income and distributions of capi-
tal gains payable to shareholders.
 
  If a shareholder does not otherwise instruct, dividends and capital gain dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. Dividends from
net investment income, if any, of the Fund will be declared monthly and will be
paid on the last Friday of the month. Distributions of any net long-term capi-
tal gains earned by the Fund will be made annually after the close of the fis-
cal year in which they are earned. Distributions of short-term capital gains
may be paid more frequently with dividends from net investment income. In order
to avoid the application of a 4% nondeductible excise tax measured with respect
to certain undistributed amounts of ordinary income and capital gains, the Fund
may make such additional distributions as may be necessary to avoid the appli-
cation of this tax.
 
  If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions gen-
erally will be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. Pursuant to the requirements of the Investment Company Act of 1940, as
amended (the "1940 Act") and other applicable laws, a notice will accompany any
distribution paid from sources other than net investment income. In the event
the Fund distributes amounts in excess of its net investment income and net
realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.
 
  The per share dividends on Class B and Class C shares may be lower than the
per share dividends on Class A and Y shares principally as a result of the dis-
tribution fee applicable with respect to Class B and Class 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 applica-
ble 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.
 
28
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
 
 TAXES
 
  The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Code. To meet
those requirements, the Fund may need to restrict the degree to which it
engages in short-term trading, short sales of securities and transactions in
options. If the Fund qualifies as a regulated investment company and meets cer-
tain distribution requirements, the Fund will not be subject to Federal income
tax on its net investment income and net capital gains that it distributes to
its shareholders.
 
  Dividends paid by the Fund from investment income and distributions of short-
term capital gain will be taxable to shareholders as ordinary income for Fed-
eral income tax purposes, whether received in cash or reinvested in additional
shares. Distributions of long-term capital gain will be taxable to shareholders
as long-term capital gain, whether paid in cash or reinvested in additional
shares, and regardless of the length of time the investor has held his or her
shares of the Fund. Generally, dividends of investment income (to the extent
derived from most types of dividends from domestic corporations) from the Fund
will qualify for the Federal dividends-received deduction for corporate share-
holders. Each shareholder of the Fund will receive a statement annually from
the Trust, which will set forth separately the aggregate dollar amount of divi-
dends and capital gains distributed to the shareholder by the Fund with respect
to the prior calendar year and the amount of the distributions that qualifies
for the dividends-received deduction.
   
  Shareholders should consult their tax advisers about the status of the Fund's
dividends and distributions for Federal, state and local tax liabilities.     
 
PURCHASE OF SHARES
 
 
 GENERAL
   
  The Fund offers five Classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class Y shares are sold without an initial sales charge or CDSC and are
available only to investors investing a minimum of $5,000,000 (except for pur-
chases of Class Y shares by the Smith Barney Concert Allocation Series Inc.,
for which there is no minimum purchase amount). Class Z shares are offered
without a sales charge, CDSC, or service or distribution fee, exclusively to:
(a) tax-exempt employee benefit and retirement plans of Smith Barney and its
affiliates and (b) certain UITs sponsored by Smith Barney and its affiliates.
Investors meeting either of these crite     -
 
                                                                              29
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
ria who are interested in acquiring Class Z shares should contact a Smith Bar-
ney Financial Consultant for a Class Z Prospectus. See "Prospectus Summary--
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.
   
  Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the sell-
ing group, except for investors purchasing shares of the Fund through a quali-
fied retirement plan who may do so directly through First Data. When purchas-
ing shares of the Fund, investors must specify whether the purchase is for
Class A, Class B, Class C or Class Y shares. Smith Barney and other broker-
dealers may charge their customers an annual account maintenance fee in con-
nection with a brokerage account through which an investor purchases or holds
shares. Accounts held directly at First Data are not subject to a maintenance
fee.     
   
  Investors in Class A, Class B and Class C shares may open an account by mak-
ing an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan, in the Fund. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000. Sub-
sequent investments of at least $50 may be made for all Classes. For partici-
pants in retirement plans qualified under Section 403(b)(7) or Section 401(a)
of the Code, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes
in the Fund is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the minimum subsequent
investment for all Classes is $25. For shareholders purchasing shares of the
Fund through the Systematic Investment Plan on a quarterly basis, the minimum
initial investment requirement for Class A, Class B and Class C shares and the
minimum subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements for Class A shares for employees of Travelers
and its subsidiaries, including Smith Barney, Trustees of the Trust and their
spouses and children and unitholders who invest distributions from a UIT spon-
sored by Smith Barney. The Fund reserves the right to waive or change mini-
mums, 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 sharehold-
er's account by the Fund's transfer agent, First Data. Share certificates are
issued only upon a shareholder's written request to First Data.     
   
  The minimum initial investment requirement in the Fund for an account estab-
lished under the Uniform Gift to Minors Act is $250 and the minimum subsequent
investment requirement is $50.     
   
  Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Fund calculates its net asset value
are priced according to the net asset value determined on that day. Orders
received by     
 
30
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
dealers or Introducing Brokers prior to the close of regular trading on the
NYSE on any day the Fund calculates its net asset value are priced according
to the net asset value determined on that day, provided the order is received
by the Fund or Smith Barney prior to Smith Barney's close of business (the
"trade date"). For shares purchased through Smith Barney or Introducing Bro-
kers purchasing through Smith Barney, payment for Fund shares is due on the
third business day after the trade date. In all other cases, payment must be
made with the purchase order.     
 
 SYSTEMATIC INVESTMENT PLAN
   
  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on
a quarterly basis to charge the regular bank account or other financial insti-
tution indicated by the shareholder to provide systematic additions to the
shareholder's Fund account. A shareholder who has insufficient funds to com-
plete the transfer will be charged a fee of up to $25 by Smith Barney or First
Data. The Systematic Investment Plan also authorizes Smith Barney to apply
cash held in the shareholder's Smith Barney brokerage account or redeem the
shareholder's shares of a Smith Barney money market fund to make additions to
the account. Additional information is available from the Fund or a Smith Bar-
ney Financial Consultant.     
 
 INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
 
  The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
                                  SALES CHARGE
                         ------------------------------
                                                              DEALERS
                              % OF           % OF       REALLOWANCE AS % OF
  AMOUNT OF INVESTMENT   OFFERING PRICE AMOUNT INVESTED   OFFERING PRICE
---------------------------------------------------------------------------
  <S>                    <C>            <C>             <C>
  Less than $25,000           5.00%          5.26%             4.50%
  $ 25,000 - $ 49,999         4.00%          4.21%             3.60%
  $ 50,000 - $ 99,999         3.50%          3.63%             3.15%
  $100,000 - $249,999         3.00%          3.09%             2.70%
  $250,000 - $499,999         2.00%          2.04%             1.80%
  $500,000 and more            *               *                 *
---------------------------------------------------------------------------
</TABLE>
   
* Purchases of Class A shares of $500,000 or more will be made at net asset
  value without any initial sales charge, but will be subject to a CDSC of
  1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
  shares is payable to Smith Barney, which compensates Smith Barney Financial
  Consultants and other dealers whose clients make purchases of $500,000 or
  more. The CDSC is waived in the same circumstances in which the CDSC
  applicable to Class B and Class C shares is waived. See "Deferred Sales
  Charge Alternatives" and "Waivers of CDSC."     
 
  Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
 
 
                                                                             31
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
  The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual and his or her immediate family or a trustee or other fiduciary of a
single trust estate or single fiduciary account.     
 
 INITIAL SALES CHARGE WAIVERS
   
  Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families
of such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such per-
sons and (ii) employees of members of the NASD, provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption
or repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Smith Barney Financial Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment with Smith Barney), on
the condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the Financial Con-
sultant and (iii) was subject to a sales charge; (d) purchases by shareholders
who have redeemed Class A shares in the Fund (or Class A shares of another fund
of the Smith Barney Mutual Funds that are offered with a sales) and who wish to
reinvest their redemption proceeds in the Fund, provided the reinvestment is
made within 60 calendar days of the redemption; (e) purchases by accounts
managed by registered investment advisory subsidiaries of Travelers; (f)
investments of distributions from a UIT sponsored by Smith Barney, (g) direct
rollovers by plan participants of distributions from a 401(k) plan offered to
employees of Travelers or its subsidiaries or a 401(k) plan enrolled in the
Smith Barney 401(k) Program (Note: subsequent investments will be subject to
the applicable sales charge); (h) purchases by separate accounts used to fund
certain unregistered variable annuity contracts; (i) purchases by investors
participating in a Smith Barney fee-based arrangement; and (j) purchases of
Class A shares of the Fund by Section 403(b) or Section 401(a) or (k) accounts
associated with Copeland Retirement Programs. In order to obtain such dis-
counts, the purchaser must provide sufficient information at the time of pur-
chase to permit verification that the purchase would qualify for the elimina-
tion 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
 
32
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
dollar amount of the new purchase and the total asset value of all Class A
shares of the Fund and of funds sponsored by Smith Barney which are offered
with a sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or discon-
tinuance at any time with respect to all shares purchased thereafter.     
 
 GROUP PURCHASES
   
  Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares" and will be based upon
the aggregate sales of Class A shares of Smith Barney Mutual Funds offered with
a sales charge to, and share holdings of, all members of the group. To be eli-
gible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan meet-
ing certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales-related expenses. An
individual who is a member of a qualified group may also purchase Class A
shares at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of Class A shares offered
with a sales charge that have been previously purchased and are still owned by
the group, plus the amount of the current purchase. A "qualified group" is one
which (a) has been in existence for more than six months, (b) has a purpose
other than acquiring Fund shares at a discount and (c) satisfies uniform crite-
ria which enable Smith Barney to realize economies of scale in its costs of
distributing shares. A qualified group must have more than 10 members, must be
available to arrange for group meetings between representatives of the Fund and
the members, and must agree to include sales and other materials related to the
Fund in its publications and mailings to members at no cost to Smith Barney. In
order to obtain such reduced sales charge or to purchase at net asset value,
the purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to the discre-
tion of Smith Barney.     
 
                                                                              33
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
 LETTER OF INTENT
   
  Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13-month period, provided that the investor refers to such
Letter of Intent when placing orders. For purposes of a Letter of Intent, the
"Amount of Investment" as referred to in the preceding sales charge table
includes purchases of all Class A shares of the Fund and other funds of the
Smith Barney Mutual Funds offered with a sales charge over the 13-month period
based on the total amount of intended purchases plus the value of all Class A
shares previously purchased and still owned. An alternative is to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay the difference between
the sales charges applicable to the purchases made and the charges previously
paid, or an appropriate number of escrowed shares will be redeemed. Please con-
tact a Smith Barney Financial Consultant or First Data to obtain a Letter of
Intent application.     
   
  Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
make an initial minimum purchase of $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 of Intent. If a total investment
of $5,000,000 is not made within the six-month period, all Class Y shares pur-
chased to date will be transferred to Class A shares, where they will be sub-
ject to all fees (including a service fee of 0.25%) and expenses applicable to
the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund expects
that such transfer will not be subject to Federal income taxes. Please contact
a Smith Barney Financial Consultant or First Data for further information.     
 
 DEFERRED SALES CHARGE ALTERNATIVES
   
  "CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.     
 
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c) with respect
 
34
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
to Class B shares, shares redeemed more than five years after their purchase;
or (d) with respect to Class C shares and Class A shares that are CDSC Shares,
shares redeemed more than 12 months after their purchase.
   
  Class C shares and Class A shares that are CDSC shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the proceeding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
Class B shares held under the Smith Barney 401(k) Program, as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs.     
 
<TABLE>   
<CAPTION>
      YEAR SINCE PURCHASE
      PAYMENT WAS MADE      CDSC
---------------------------------
      <S>                   <C>
      First                 5.00%
      Second                4.00%
      Third                 3.00%
      Fourth                2.00%
      Fifth                 1.00%
      Sixth and thereafter  0.00%
---------------------------------
</TABLE>    
   
  Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There also will be converted at that time such pro-
portion of Class B Dividend Shares owned by the shareholder as the total number
of his or her Class B shares converting at the time bears to the total number
of outstanding Class B shares (other than Class B Dividend shares) owned by the
shareholder. See "Prospectus Summary--Alternative Purchase Arrangements--Class
B Shares Conversion Feature."     
 
  The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other applicable Smith Barney Mutual Funds, and Fund
shares being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will
reduce the gain or increase the loss, as the case may be, on the amount real-
ized on redemption. The amount of any CDSC will be paid to Smith Barney.
 
 
                                                                              35
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
  To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired five addi-
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.     
 
 WAIVERS OF CDSC
   
  The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of
the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a share-
holder who has redeemed shares from other funds of the Smith Barney Mutual
Funds may, under certain circumstances, 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 First Data in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
    
 SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS     
 
  Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below are offered to all plans partic-
ipating ("Participating Plans") in these Programs.
 
  The Fund offers to Participating Plans Class A and Class C shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class C shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class C shares
acquired by other investors; however, they are not subject to any initial sales
charge or CDSC. Once a Participating Plan has made an initial investment in the
Fund, all of its subse-
 
36
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
quent investments in the Fund must be in the same Class of shares, except as
otherwise described below.
 
  Class A Shares. Class A shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
 
  Class C Shares. Class C shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class C shares of one or more funds of the Smith Barney Mutual Funds.
   
  401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. If at the
end of the fifth year after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program or the Smith Barney ExecChoice (TM) Program, a Par-
ticipating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of the
Fund. For Participating Plans that were originally established through a Smith
Barney retail brokerage account, the five-year period will be calculated from
the date the retail brokerage account was opened. Such Participating Plans will
be notified of the pending exchange in writing within 30 days after the fifth
anniversary of the enrollment date and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the 90th day after the
fifth anniversary date. If the Participating Plan does not qualify for the five
year exchange to Class A shares, a review of the Participating Plan's holdings
will be performed each quarter until either the Participating Plan qualifies or
the end of the eighth year.     
 
  401(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if a Participating
Plan's total Class C holdings in all non-money market Smith Barney Mutual Funds
equal at least $500,000 as of the calendar year-end, the Participating Plan
will be offered the opportunity to exchange all of its Class C shares for Class
A shares of the Fund. Such Plans will be notified in writing within 30 days
after the last business day of the calendar year and, unless the exchange offer
has been rejected in writing, the exchange will occur on or about the last
business day of the following March.
   
  Any Participating Plan in the Smith Barney 401(k) or ExecChoice(TM) Programs,
whether opened before or after June 21, 1996, that has not previously qualified
for an exchange into Class A shares will be offered the opportunity to exchange
all of its Class C shares for Class A shares of a Fund, regardless of asset
size, at the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) or ExecChoice(TM) Programs. Such Plans will
be notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange     
 
                                                                              37
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
will occur on or about the eighth anniversary date. Once an exchange has
occurred, a Participating Plan will not be eligible to acquire additional Class
C shares of the Fund but instead may acquire Class A shares of the Fund. Any
Class C shares not converted will continue to be subject to the distribution
fee.
   
  Participating Plan wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice (TM) Program must purchase
such shares directly from First Data. For further information regarding these
Programs, investors should contact a Smith Barney Financial Consultant.     
 
  Existing 401(k) Plans Investing Class B Shares. Class B shares of the Fund
are not available for purchase by Participating Plans opened on or after June
21, 1996, but may continue to be purchased by any Participating Plan opened
prior to such date and originally investing in such Class. Class B shares
acquired are subject to a CDSC of 3.00% of redemption proceeds, if the Partici-
pating Plan terminates within eight years of the date the Participating Plan
first enrolled in the Smith Barney 401(k) Program.
 
  At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, the Participating Plan will be offered the
opportunity to exchange all of its Class B shares for Class A shares of the
Fund. Such Plans will be notified of the pending exchange in writing approxi-
mately 60 days before the eighth anniversary of the enrollment date and, unless
the exchange has been rejected in writing, the exchange will occur on or about
the eighth anniversary date. Once the exchange has occurred, a Participating
Plan will not be eligible to acquire additional Class B shares of the Fund but
instead may acquire Class A shares of the Fund. If the Participating Plan
elects not to exchange all of its Class B shares at that time, each Class B
share held by the Participating Plan will have the same conversion feature as
Class B shares held by other investors. See "Purchase of Shares--Deferred Sales
Charge Alternatives".
 
  No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
 
 
38
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
  The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee in the Participating Plan; (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemptions of shares in connection with a loan made by the Par-
ticipating Plan to an employee.
 
EXCHANGE PRIVILEGE
 
 
  Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class C shares are subject to minimum investment requirements and all shares
are subject to the other requirements of the fund into which exchanges are
made.
 
 FUND NAME
--------------------------------------------------------------------------------
  Growth Funds
  Smith Barney Aggressive Growth Fund Inc.
  Smith Barney Appreciation Fund Inc.
     
  Smith Barney Disciplined Small Cap Fund, Inc.     
  Smith Barney Fundamental Value Fund Inc.
  Smith Barney Growth Opportunity Fund
     
  Smith Barney Large Capitalization Growth Fund     
  Smith Barney Managed Growth Fund
  Smith Barney Natural Resources Fund, Inc.
  Smith Barney Special Equities Fund
 
  Growth and Income Funds
     
  Concert Social Awareness Fund     
  Smith Barney Convertible Fund
  Smith Barney Funds, Inc.--Equity Income Portfolio
  Smith Barney Growth and Income Fund
  Smith Barney Premium Total Return Fund
         
  Taxable Fixed-Income Funds
  *Smith Barney Adjustable Rate Government Income Fund
  Smith Barney Diversified Strategic Income Fund
         
  +Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Portfolio
  Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
  Smith Barney Government Securities Fund
 
                                                                              39
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
  Smith Barney High Income Fund
  Smith Barney Investment Grade Bond Fund
  Smith Barney Managed Governments Fund Inc.
 
  Tax-Exempt Funds
  Smith Barney Arizona Municipals Fund Inc.
  Smith Barney California Municipals Fund Inc.
  **Smith Barney Intermediate Maturity California Municipals Fund
  **Smith Barney Intermediate Maturity New York Municipals Fund
  Smith Barney Managed Municipals Fund Inc.
  Smith Barney Massachusetts Municipals Fund
     
  Smith Barney Municipal High Income Fund     
  Smith Barney Muni Funds--Florida Portfolio
  Smith Barney Muni Funds--Georgia Portfolio
  **Smith Barney Muni Funds--Limited Term Portfolio
  Smith Barney Muni Funds--National Portfolio
  Smith Barney Muni Funds--New York Portfolio
  Smith Barney Muni Funds--Pennsylvania Portfolio
  Smith Barney New Jersey Municipals Fund Inc.
  Smith Barney Oregon Municipals Fund
         
  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 Allocation Series Inc.     
     
  Smith Barney Concert Allocation Series Inc.--Balanced Portfolio     
     
  Smith Barney Concert Allocation Series Inc.--Conservative Portfolio     
     
  Smith Barney Concert Allocation Series Inc.--Growth Portfolio     
     
  Smith Barney Concert Allocation Series Inc.--High Growth Portfolio     
     
  Smith Barney Concert Allocation Series Inc.--Income Portfolio     
 
  Money Market Funds
  ++Smith Barney Exchange Reserve Fund
  +++Smith Barney Money Funds, Inc.--Cash Portfolio
  +++Smith Barney Money Funds, Inc.--Government Portfolio
  ***Smith Barney Money Funds, Inc.--Retirement Portfolio
  +Smith Barney Municipal Money Market Fund, Inc.
  +Smith Barney Muni Funds--California Money Market Portfolio
  +Smith Barney Muni Funds--New York Money Market Portfolio
 
40
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
-------------------------------------------------------------------------------
   
  * Available for exchange with Class A and Class B shares of the Fund. In
    addition, shareholders who own Class C shares of the Fund through the
    Smith Barney 401(k) Program may exchange those shares for Class C shares
    of this fund.     
 ** Available for exchange with Class A, Class C and Class Y shares of the
    Fund.
*** Available for exchange with Class A shares of the Fund.
  + Available for exchange with Class A and Class Y shares of the Fund.
 ++ Available for exchange with Class B and Class C shares of the Fund.
   
+++ Available for exchange with Class A and Class Y shares of the Fund. In
    addition, Participating Plans opened prior to June 21, 1996 and investing
    in Class C shares may exchange those Fund shares for Class C shares of
    this fund.     
   
  Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Fund that have been exchanged.     
 
  Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
 
  Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without impo-
sition of any charge.
 
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. 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, the Fund
may, at its discretion, decide to limit additional purchases and/or exchanges
by a shareholder. Upon such a determination, the Fund will provide notice in
writing or by telephone to the shareholder at least 15 days prior to sus-
pending the exchange privilege and during the 15-day period the shareholder
will be required to (a) redeem his or her shares in the Fund or (b) remain
invested in the Fund or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.
   
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will
be made upon receipt of all supporting documents in proper form. If the
account registration of the shares of the fund being acquired is identical to
the registration of the     
 
                                                                             41
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
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 First Data receives further
instructions from Smith Barney, or if the shareholder's account is not with
Smith Barney, from the shareholder directly. The redemption proceeds will be
remitted on or before the third business day following receipt of proper ten-
der, except on any days on which the NYSE is closed or as permitted under the
1940 Act in extraordinary circumstances. Generally, if the redemption proceeds
are remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.     
 
  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
 
  Smith Barney Utilities Fund
  Class A, B, C or Y (please specify)
  c/o First Data Investor Services Group, Inc.
     
  P.O. Box 5128     
     
  Westborough, Massachusetts 01581-5128     
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
 
42
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $2000 must be guaranteed by an eligible guaran-
tor 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 $2000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an invest-
or's address of record. First Data may require additional supporting documents
for redemptions made by corporations, executors, administrators, trustees or
guardians. A redemption request will not be deemed properly received until
First Data receives all required documents in proper form.
    
 AUTOMATIC CASH WITHDRAWAL PLAN     
   
  The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the share-
holder is eligible to receive qualified distributions and has an account value
of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. For further information regarding the automatic cash withdrawal
plan, shareholders should contact a Smith Barney Financial Consultant.     
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
   
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
is entitled to participate in this program, he or she should contact First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization Form, along with a signature guaran-
tee, that will be provided by First Data upon request. Alternatively, an
investor may authorize telephone redemptions on the new account application
with the applicant's signature guarantee when making his or her initial invest-
ment in the Fund.     
   
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value next
    
                                                                              43
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
   
  A shareholder will have the option of having the redemption proceeds mailed
to his or her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must com-
plete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.     
   
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day on which the NYSE is open. Exchange
requests received after the close of regular trading on the NYSE are processed
at the net asset value next determined.     
   
  Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions com-
municated by telephone that are reasonably believed to be genuine. The Fund and
its agents will employ procedures designed to verify the identity of the caller
and legitimacy of instructions (for example, a shareholder's name and account
number will be required and phone calls may be recorded). The Fund reserves the
right to suspend, modify or discontinue the telephone redemption and exchange
program or to impose a charge for this service at any time following at least
seven days' prior notice to shareholders.     
       
MINIMUM ACCOUNT SIZE
   
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.     
 
44
<PAGE>
 
PERFORMANCE
 
 
 
 YIELD
 
  From time to time, the Fund advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is com-
puted by dividing the net investment income per share earned by the Class dur-
ing the period by the maximum offering price per share on the last day of the
period. This income is "annualized" by assuming that the amount of income is
generated each month over a one-year period and is compounded semi-annually.
The annualized income is then shown as a percentage of the net asset value.
 
 TOTAL RETURN
 
  From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gains distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the invest-
ment at the end of the period so calculated by the initial amount invested and
subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeem-
able value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating cur-
rent dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.
 
 BOARD OF TRUSTEES
 
  Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the companies that furnish services to the Trust and the
 
                                                                              45
<PAGE>
 
MANAGEMENT OF THE TRUST AND THE FUND
 
Fund, including agreements with the Fund's distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains background information regarding
each Trustee and executive officer of the Trust.
    
 INVESTMENT ADVISER     
   
  SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. SBMFM is a wholly owned subsidiary of Hold-
ings). SBMFM (through predecessor entities) has been in the investment coun-
seling business since 1934 and is a registered investment adviser. SBMFM ren-
ders investment advice to investment companies that had aggregate assets under
management as of September 30, 1997 in excess of $81 billion.     
 
  Subject to the supervision and direction of the Fund's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers
and securities analysts who provide research services to the Fund. For invest-
ment advisory services rendered to the Fund, the Fund pays SBMFM a fee at the
annual rate of 0.45% of the value of the Fund's average daily net assets.
 
 PORTFOLIO MANAGEMENT
 
  Jack S. Levande, a Managing Director of Smith Barney, has served as Vice
President and Investment Officer of the Fund since it commenced operations and
manages the day-to-day operations of the Fund, including making all investment
decisions.
   
  Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1997 is included in
the Annual Report dated July 31, 1997. A copy of the Annual Report may be
obtained upon request without charge from a Smith Barney Financial Consultant
or by writing or calling the Fund at the address or phone number listed on
page one of this Prospectus.     
    
 ADMINISTRATOR     
 
  SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered to the Fund,
the Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the
Fund's average daily net assets.
 
46
<PAGE>
 
DISTRIBUTOR
   
  Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an annual
service fee with respect to Class A, Class B and Class 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 an annual 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 these Classes. Class B shares
that automatically convert to Class A shares eight years after the date of
original purchase will no longer be subject to distribution fees. The fees are
used by Smith Barney to pay its Financial Consultants for servicing shareholder
accounts and, in the case of Class B and Class C shares, to cover expenses pri-
marily intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to poten-
tial investors; payments to and expenses of Smith Barney Financial Consultants
and other persons who provide support services in connection with the distribu-
tion of shares; interest and/or carrying charges; and indirect and overhead
costs of Smith Barney associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses.     
 
  The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
   
  Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Trust's Board of Trust-
ees will evaluate the appropriateness of the Plan and its payment terms on a
continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.     
 
ADDITIONAL INFORMATION
 
 
  The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest of separate series hav-
ing a $.001 per share par value. Shares of beneficial interest of the Fund are
currently classified into five Classes: A, B, C, Y and Z.
 
                                                                              47
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
 
 
  Each Class of Fund shares represents identical interests in the Fund's
investment portfolio. As such, they have the same rights, privileges and pref-
erences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees, if any, borne by each Class; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The Trust's Board of Trustees does not antici-
pate that there will be any conflicts among the interests of the holders of the
different Classes. The Trustees, on an ongoing basis, will consider whether any
such conflict exists and, if so, take appropriate action.
 
  When matters are submitted for shareholder vote, shareholders of each Class
of each fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Shares of the
Trust will be voted generally on a Trust-wide basis on all matters, except mat-
ters affecting the interests of one Fund or one Class of shares.
 
  The Trust does not hold annual shareholder meetings. There normally will be
no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have
been elected by shareholders. The Trustees will call a meeting for any purpose
for voting on the written request of shareholders holding at least 10% of the
Fund's outstanding shares and the Fund will assist shareholders in calling such
a meeting as required by the 1940 Act.
 
  PNC Bank, located at 17th and Chestnut Streets, Philadelphia, PA 19103,
serves as custodian of the Trust's investments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Trust's transfer agent.
   
  The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Trust plans to consolidate the mailing of the
Fund's semi-annual and annual reports by household. This consolidation means
that a household having multiple accounts with the identical address of record
will receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their accounts should contact their Smith Barney
Financial Consultants or the Fund's transfer agent.     
 
48
<PAGE>
 
 
                                              SMITH BARNEY
                                              ----------------------------------
                                              A Member of TravelersGroup  [LOGO]
 
 
 
 
 
                                                                   SMITH BARNEY
                                                                 UTILITIES FUND
 
                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                 
                                                              FD 0229 11/97     
<PAGE>

P R O S P E C T U S
 
 
 
                                                                    SMITH BARNEY
                                                                       Utilities
                                                                            Fund
                                                             Class Z Shares Only
                                                             
                                                          NOVEMBER 28, 1997     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
 
 


<PAGE>
 
   
PROSPECTUS                                              NOVEMBER 28, 1997     
   
Smith Barney Utilities Fund--Class Z Shares     
388 Greenwich Street
New York, New York 10013
   
(800) 451-2010     
 
  Smith Barney Utilities Fund (the "Fund") is a diversified fund that seeks
current income by investing in equity and debt securities of utility companies
selected by the Fund's investment adviser. Long-term capital appreciation is a
secondary objective of the Fund.
 
  The Fund is one of a number of funds, each having distinct investment objec-
tives and policies, making up the Smith Barney Income Funds (the "Trust"). The
Trust is an open-end, management investment company commonly referred to as a
mutual fund.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Trust, including expenses, that prospective investors will find helpful in
making an investment decision. Investors are encouraged to read this Prospectus
carefully and retain it for future reference.
   
  The Class Z shares described in this Prospectus (previously designated as
Class C shares) are currently offered exclusively for sale to tax-exempt
employee benefit and retirement plans ("Qualified Plans") of Smith Barney Inc.
("Smith Barney") or any of its affiliates and to certain unit investment trusts
sponsored by Smith Barney or any of its affiliates ("Smith Barney UITs").     
   
  Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated November 28, 1997 as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The Statement of Addi-
tional Information has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated by reference into this Prospectus in its
entirety.     
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
THE FUND'S EXPENSES                             3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            4
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    5
-------------------------------------------------
VALUATION OF SHARES                            17
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             18
-------------------------------------------------
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES    19
-------------------------------------------------
PERFORMANCE                                    20
-------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND           21
-------------------------------------------------
ADDITIONAL INFORMATION                         22
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
   
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund to
buy or the Distributor to sell any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such an offer or
solicitation in such jurisdiction.     
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
THE FUND'S EXPENSES
 
 
The following expense table lists the costs and expenses an investor will incur
either directly or indirectly as a shareholder of Class Z shares of the Fund,
based on the Fund's operating expenses for its most recent fiscal year:
 
<TABLE>   
<CAPTION>
  SMITH BARNEY UTILITIES FUND--       AS A % OF
  CLASS Z SHARES                  AVERAGE NET ASSETS
----------------------------------------------------
  <S>                             <C>
  ANNUAL FUND OPERATING EXPENSES
    Management fees                      0.65%
    Other expenses                       0.08%
----------------------------------------------------
  TOTAL FUND OPERATING EXPENSES          0.73%
----------------------------------------------------
</TABLE>    
 
  The nature of the services for which the Fund pays management fees is
described under "Management of the Trust and the Fund." "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
 
 EXAMPLE
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase and Redemption of Shares" and "Manage-
ment of the Trust and the Fund."
 
<TABLE>   
<CAPTION>
  SMITH BARNEY UTILITIES FUND--CLASS Z SHARES   1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
  <S>                                           <C>    <C>     <C>     <C>
  You would pay the following expenses on a
  $1,000 investment in Class Z shares of the
  Fund, assuming (1) 5% annual return and (2)
  redemption at the end of each time period:     $ 7     $23     $41     $91
-------------------------------------------------------------------------------
</TABLE>    
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                               3
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
 The following information for each of the years in the three-year period ended
July 31, 1997 has been audited by KPMG Peat Marwick LLP, independent auditors,
and appears in the Fund's Annual Report dated July 31, 1997. The following
information for the fiscal years ended July 31, 1993 and July 31, 1994 has been
audited by other independent auditors. The information set out below should be
read in conjunction with the financial statements and related notes that also
appear in the Fund's 1997 Annual Report, which is incorporated by reference
into the Statement of Additional Information.     
   
FOR A CLASS Z SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
    
<TABLE>   
<CAPTION>
SMITH BARNEY UTILITIES FUND
YEAR ENDED JULY 31,            1997(1)   1996     1995    1994(2)   1993(3)
------------------------------------------------------------------------------
<S>                            <C>      <C>      <C>      <C>       <C>
NET ASSET VALUE, BEGINNING OF
  YEAR                         $ 14.52  $ 14.02  $ 13.28  $ 15.97   $ 14.36
------------------------------------------------------------------------------
INCOME (LOSS) FROM
  OPERATIONS:
 Net investment income            0.83     0.88     0.89     0.89      0.69
 Net realized and unrealized
   gain (loss) on investments     1.37     0.47     0.82    (2.21)     1.72
------------------------------------------------------------------------------
Total Income (Loss) From
  Operations                      2.20     1.35     1.71    (1.32)     2.41
------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income           (0.85)   (0.85)   (0.87)   (0.87)    (0.66)
 Net realized gains              (0.32)      --    (0.08)   (0.50)    (0.14)
 Capital                           --        --    (0.02)      --        --
------------------------------------------------------------------------------
Total Distributions              (1.17)   (0.85)   (0.97)   (1.37)    (0.80)
------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR   $ 15.55  $ 14.52  $ 14.02  $ 13.28   $ 15.97
------------------------------------------------------------------------------
TOTAL RETURN                     15.81%    9.62%   13.55%   (8.78)%   17.21%++
------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
  (000S)                       $13,654  $14,515  $14,631  $11,372   $22,251
------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                         0.73%    0.78%    0.81%    0.69%     0.68%+
 Net investment income            5.63     5.90     6.58     5.92      6.06+
------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE            45%       58%      36%      28%       37%
------------------------------------------------------------------------------
AVERAGE COMMISSION PER SHARE
  PAID ON EQUITY TRANSACTIONS
  (4)                            $0.06    $0.06       --       --        --
------------------------------------------------------------------------------
</TABLE>    
   
(1) Per share amounts have been calculated using the monthly average shares
    method rather than the undistributed net investment income method, because
    it more accurately reflects the per share data for the period.     
   
(2) On November 7, 1994, the former Class C shares were renamed Class Z shares.
           
(3) For the period from November 6, 1992 (inception date) to July 31, 1993.
           
(4) As of September 1995, the SEC instituted new guidelines requiring the
    disclosure of average commissions per share.     
  ++Total return is not annualized as it may not be representative of the total
    return for the year.
  + Annualized.
       
4
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
 
 INVESTMENT OBJECTIVE
  The primary investment objective of the Fund is to provide current income.
Long-term capital appreciation is a secondary objective. The Fund's investment
objectives may be changed only with the approval of the holders of a majority
of the Fund's outstanding shares. There can be no assurance that the Fund's
investment objectives will be achieved.
 
 INVESTMENT POLICIES
  The Fund seeks to achieve its objectives by investing in equity and debt
securities of companies in the utility industries. For purposes of this Pro-
spectus, the utility industries are deemed to be comprised of companies princi-
pally engaged (that is, at least 50% of a company's assets, gross income or net
profits results from utility operations or the company is regulated as a util-
ity by a government agency or authority) in the manufacture, production, gener-
ation, transmission and sale of electric and gas energy and companies princi-
pally engaged in the communications field, including entities such as tele-
phone, telegraph, satellite, microwave and other companies regulated by govern-
mental agencies as utilities that provide communication facilities for the pub-
lic benefit, but not including those in public broadcasting. The Fund will
invest primarily in utility equity and debt securities that have a high
expected rate of return, as determined by the Fund's investment adviser, Smith
Barney Mutual Funds Management Inc. ("SBMFM"). Under normal market conditions,
the Fund will invest at least 65% of its assets in such securities. The Fund
may invest up to 35% of its assets in equity and debt securities of non-utility
companies believed to afford a reasonable opportunity for achieving the Fund's
investment objectives. When SBMFM believes that market conditions warrant, the
Fund may adopt a temporary defensive posture and may invest without limit in:
debt securities (whether or not they are utility securities) such as rated or
unrated bonds, debentures and commercial paper, United States government secu-
rities and money market instruments. The Fund may invest up to 10% of its
assets in securities rated BB or B by Standard & Poor's Ratings Group ("S&P")
or Ba or B by Moody's Investors Service, Inc. ("Moody's") whenever SBMFM
believes that the incremental yield on such securities is advantageous to the
Fund in comparison to the additional risk involved. Securities rated BBB/Baa
are considered medium grade obligations, neither highly protected nor poorly
secured. Interest payments and principal security of BBB/Baa rated securities
appear adequate for the present but certain protective elements may be lacking
or may be unreliable over any great length of time. Such securities lack out-
standing investment characteristics and may in fact have speculative character-
istics. The yields on lower-rated fixed-income securities generally are higher
than the yields available on higher-rated securities. See "Risk Factors and
Special Considerations" below. In addition, the Fund may enter into repurchase
agreements.
 
 
                                                                               5
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 INVESTMENT SECURITIES, STRATEGIES AND TECHNIQUES
  The Fund has the ability to engage in a number of specialized investment
strategies and techniques designed to enable the Fund to achieve its invest-
ment objectives. Included among these strategies are lending its portfolio
securities, selling securities "short against the box," writing covered call
and secured put options as well as purchasing options on securities, purchas-
ing and selling interest rate futures contracts, options on futures contracts,
stock index put and call options and stock index futures contracts, each of
which is discussed below.
   
  U.S. Government Securities. United States government securities are obliga-
tions of, or guaranteed by, the United States government, its agencies or
instrumentalities ("U.S. government securities"). These include bills, certif-
icates of indebtedness, notes and bonds issued by the United States Treasury
or by agencies or instrumentalities of the United States government. Some U.S.
government securities, such as Treasury bills and bonds, are supported by the
full faith and credit of the United States; others, such as those of Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the United States
government to purchase the agency's obligations; still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the instrumentality. U.S. government securities generally do not involve the
credit risks associated with other types of interest-bearing securities,
although, as a result, the yields available from U.S. government securities
are generally lower than the yields available from interest-bearing corporate
securities.     
 
  Zero Coupon Securities. The Fund may also invest in zero coupon bonds. A
zero coupon bond pays no interest in cash to its holder during its life,
although interest is accrued during that period. Its value to an investor con-
sists of the difference between its face value at the time of maturity and the
price for which it was acquired, which is generally an amount significantly
less than its face value (sometimes referred to as a "deep discount" price).
Because such securities usually trade at a deep discount, they will be subject
to greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which make periodic distribu-
tions of interest. On the other hand, because there are no periodic interest
payments to be reinvested prior to maturity, zero coupon securities eliminate
reinvestment risk and lock in a rate of return to maturity.
 
  Repurchase Agreements. The Fund may engage in repurchase agreements with
certain member banks of the Federal Reserve System and with certain dealers on
the Federal Reserve Bank of New York's list of reporting dealers. Under the
terms of a typical repurchase agreement, the Fund would acquire an underlying
debt obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an
 
6
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
agreed-upon price and time, thereby determining the yield during the Fund's
holding period. This arrangement results in a fixed rate of return that is not
subject to market fluctuations during the Fund's holding period. The value of
the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including interest. Repurchase agreements
could involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities, the risk of a possible decline in the
value of the underlying securities during the period in which the Fund seeks to
assert its right to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or part of the income from
the agreement. SBMFM, acting under the supervision of the Trust's Board of
Trustees, reviews on an ongoing basis the value of the collateral and credit-
worthiness of those banks and dealers with which the Fund enters into repur-
chase agreements to evaluate potential risks.
   
  Lending Portfolio Securities. The Fund is authorized to lend up to 20% of its
portfolio securities to brokers, dealers and other financial organizations. The
Fund's loans of securities will be collateralized by cash, letters of credit or
U.S. government securities that are maintained at all times in an amount at
least equal to the current market value of the loaned securities. By lending
its securities, the Fund seeks to generate income by continuing to receive
interest on the loaned securities, by investing the cash collateral in short-
term instruments or by obtaining yield in the form of interest paid by the bor-
rower when U.S. government securities are used as collateral.     
 
  Short Sales Against the Box. The Fund may sell its securities short up to 5%
of the Fund's net assets. In addition, the Fund may make short sales if at all
times when a position is open, the Fund owns the stock or owns preferred stock
or debt securities convertible or exchangeable without payment of further con-
sideration for, securities of the same issue as the securities sold short.
Short sales of this kind are referred to as "against the box." Short sales
against the box are used to defer recognition of capital gains or losses.
   
  Options Activities. The Fund may write (that is, sell) call options ("calls")
if the calls are covered throughout the life of the option. A call is covered
if the Fund (a) owns the optioned securities, (b) maintains in a segregated
account with the Trust's custodian, PNC Bank, National Association ("PNC Bank")
cash, U.S. government securities, equity securities or debt securities of any
grade having a value equal to or greater than the Fund's obligations under the
call, provided such securities have been determined by SBMFM to be liquid and
unencumbered pursuant to guidelines established by the Trustees ("eligible seg-
regated assets"), or (c) owns an offsetting call option. The aggregate value of
the obligations underlying calls on securities which are written by the Fund
and covered with cash, or other eligible segregated assets, together with the
aggregate value of the obligations underlying put options written by the Fund,
will not exceed 50% of the Fund's net     
 
                                                                               7
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
assets. When the Fund writes a call, it receives a premium and gives the pur-
chaser the right to buy the underlying security at any time during the call
period (usually not more than nine months in the case of common stock or fif-
teen months in the case of U.S. government securities) at a fixed exercise
price regardless of market price changes during the call period. If the call is
exercised, the Fund forgoes any gain from an increase in the market price of
the underlying security over the exercise price. The Fund may purchase calls on
securities. The Fund also may purchase and sell stock index calls which differ
from calls on individual securities in that they are settled in cash based on
the values of the securities in the underlying index, rather than by delivery
of the underlying securities. In writing a call on a stock index, the Fund
receives a premium and agrees that during the call period purchasers of a call,
upon exercise of the call, will receive an amount of cash if the closing level
of the stock index upon which the call is based is greater than the exercise
price of the call. When the Fund buys a call on a stock index, it pays a pre-
mium and during the call period the Fund, upon exercise of the call, receives
an amount of cash if the closing level of the stock index upon which the call
is based is greater than the exercise price of the call.
 
  The Fund may write and purchase put options ("puts"). When the Fund writes a
put, it receives a premium and gives the purchaser of the put the right to sell
the underlying security to the Fund at the exercise price at any time during
the option period. When the Fund purchases a put, it pays a premium in return
for the right to sell the underlying security at the exercise price at any time
during the option period. For the purchase of a put to be profitable, the mar-
ket price of the underlying security must decline sufficiently below the exer-
cise price to cover the premium and transaction costs, unless the put is sold
in a closing sale transaction; otherwise, the purchase of the put effectively
increases the cost of the security and thus reduces its yield. The Fund also
may purchase and sell stock index puts, which differ from puts on individual
securities in that they are settled in cash based on the values of the securi-
ties in the underlying index, rather than by delivery of the underlying securi-
ties. Purchase of a stock index put is designed to protect against a decline in
the value of the Fund's portfolio generally, rather than an individual security
in the portfolio. Stock index puts are sold primarily to realize income from
the premiums received on the sale of such options. If any put is not exercised
or sold, it will become worthless on its expiration date. The Fund will not
purchase puts or calls on securities if more than 5% of its assets would be
invested in premiums on puts and calls, not including that portion of the pre-
mium which reflects the value of the securities owned by the Fund and under-
lying a put at the time of purchase.
 
  The Fund may write puts on securities only if they are "secured." A put is
"secured" if the Fund maintains cash or other eligible segregated assets with a
value equal to the exercise price in a segregated account or holds a put on the
same underlying security at an equal or greater exercise price. The aggregate
value of the
 
8
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
obligations underlying puts written by the Fund, together with the aggregate
value of the obligations underlying calls on securities which are written by
the Fund and covered with cash, cash equivalents or U.S. government securi-
ties, will not exceed 50% of the Fund's net assets. The Fund also may write
"straddles," which are combinations of secured puts and covered calls on the
same underlying security.
 
  The Fund will realize a gain (or loss) on a closing purchase transaction
with respect to a call or put previously written by the Fund if the premium,
plus commission costs, paid to purchase the call or put is less (or greater)
than the premium, less commission costs, received on the sale of the call or
put. A gain also will be realized if a call or put which the Fund has written
lapses unexercised, because the Fund would retain the premium. See "Dividends,
Distributions and Taxes" below. The Fund will purchase and sell only options
which are listed on a national securities exchange and will write options only
through a national options clearing organization.
   
  There can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, trading in options on
U.S. government securities is relatively new, so that it is impossible to pre-
dict to what extent liquid markets will develop or continue. See the Statement
of Additional Information for a further discussion of risks involved in
options trading, and particular risks applicable to options trading on U.S.
government securities, including Government National Mortgage Association
("GNMA") certificates and the characteristics and risks of stock index options
transactions.     
 
  Futures Contracts--General. The Fund may not purchase futures contracts or
related options if, immediately thereafter, more than 30% of the Fund's total
assets would be so invested. In purchasing and selling futures contracts and
related options, the Fund will comply with rules and interpretations of the
Commodity Futures Trading Commission ("CFTC"), under which the Fund is
excluded from regulation as a "commodity pool." CFTC regulations require,
among other things, that (a) futures and related options be used solely for
bona fide hedging purposes (or that the underlying commodity value of the
Fund's long positions not exceed the sum of certain identified liquid invest-
ments) and (b) the Fund not enter into futures and related options for which
the aggregate initial margin and premiums exceed 5% of the fair market value
of the Fund's assets. In order to prevent leverage in connection with the pur-
chase of futures contracts by the Fund, an amount of cash or other eligible
segregated assets equal to the market value of futures contracts purchased
will be maintained in a segregated account with PNC Bank. The Fund will engage
only in futures contracts and related options which are listed on a national
commodities exchange.
 
  Interest Rate Futures Contracts. The Fund may purchase and sell interest
rate futures contracts as a hedge against changes in interest rates. An inter-
est rate
 
                                                                              9
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
futures contract is an agreement between two parties to buy and sell a security
for a set price on a future date. Interest rate futures contracts are traded on
designated "contracts markets" which, through their clearing corporations,
guarantee performance of the contracts. Currently, there are interest rate
futures contracts based on securities such as long-term Treasury bonds, Trea-
sury notes, GNMA certificates and three-month Treasury bills.
 
  Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into an interest rate futures
contract for the sale of securities has an effect similar to the actual sale of
securities, although sale of the interest rate futures contract might be accom-
plished more easily and quickly. For example, if the Fund holds long-term U.S.
government securities and SBMFM anticipates a rise in long-term interest rates,
the Fund could, in lieu of disposing of its portfolio securities, enter into
interest rate futures contracts for the sale of similar long-term securities.
If interest rates increased and the value of the Fund's securities declined,
the value of the Fund's interest rate futures contracts would increase, thereby
protecting the Fund by preventing the net asset value from declining as much as
it otherwise would have declined. Similarly, entering into interest rate
futures contracts for the purchase of securities has an effect similar to the
actual purchase of the underlying securities, but permits the continued holding
of securities other than the underlying securities. For example, if SBMFM
expects long-term interest rates to decline, the Fund might enter into interest
rate futures contracts for the purchase of long-term securities, so that it
could gain rapid market exposure that may offset anticipated increases in the
cost of securities that it intends to purchase, while continuing to hold high-
er-yielding short-term securities or waiting for the long-term market to stabi-
lize.
 
  The Fund may purchase and sell listed put and call options on interest rate
futures contracts. An option on an interest rate futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in an
interest rate futures contract (a long position if the option is a call and a
short position if the option is a put), at a specified exercise price at any
time during the option period. When an option on a futures contract is exer-
cised, delivery of the interest rate futures position is accompanied by cash
representing the difference between the current market price of the interest
rate futures contract and the exercise price of the option. The Fund may pur-
chase put options on interest rate futures contracts in lieu of, and for the
same purpose as, sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying interest rate
futures contract in the same manner as it purchases "protective puts" on secu-
rities. The purchase of call options on interest rate futures contracts is
intended to serve the same purpose as the actual purchase of the futures con-
tract, and the Fund will set aside cash and cash equivalents sufficient to pur-
chase the amount of portfolio
 
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
securities represented by the underlying futures contracts. See "Options Activ-
ities" and "Dividends, Distributions and Taxes."
 
  Stock Index Futures Contracts. The Fund may purchase and sell stock index
futures contracts. These transactions, if any, by the Fund will be made solely
for the purpose of hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in market conditions and will
be made when the transactions are economically appropriate to the reduction of
risks inherent in the management of the Fund. A stock index futures contract is
an agreement under which two parties agree to take or make delivery of the
amount of cash based on the difference between the value of a stock index at
the beginning and at the end of the contract period. When the Fund enters into
a stock index futures contract, it must make an initial deposit, known as "ini-
tial margin," as a partial guarantee of its performance under the contract. As
the value of the stock index fluctuates, either party to the contract is
required to make additional margin deposits, known as "variation margin," to
cover any additional obligation that it may have under the contract. The Fund
may not at any time commit more than 5% of its total assets to initial margin
deposits on futures contracts.
 
  Successful use of stock index futures contracts by the Fund is subject to
certain special risk considerations. A liquid stock index futures market may
not be available when the Fund seeks to offset adverse market movements. In
addition, there may be an imperfect correlation between movements in the secu-
rities included in the index and movements in the securities in the Fund. Suc-
cessful use of stock index futures contracts is further dependent on SBMFM's
ability to predict correctly movements in the direction of the stock markets
and no assurance can be given that its judgment in this respect will be cor-
rect. Risks in the purchase and sale of stock index futures are further
referred to in the Statement of Additional Information.
 
  Foreign Securities and American Depositary Receipts. The Fund may purchase
foreign securities or American Depositary Receipts ("ADRs"). ADRs are U.S. dol-
lar-denominated receipts issued generally by domestic banks and representing
the deposit with the bank of a security of a foreign issuer. ADRs are publicly
traded on exchanges or over-the-counter in the United States.
 
  Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting stan-
dards, generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. Additionally, dividends payable on foreign secu-
rities may be subject to foreign taxes withheld prior to distribution. Foreign
securities often trade with less frequency and
 
                                                                              11
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
volume than domestic securities and therefore may exhibit greater price vola-
tility. Changes in foreign exchange rates will affect the value of those secu-
rities which are denominated or quoted in currencies other than the U.S. dol-
lar. Many of the foreign securities held by the Fund will not be registered
with, nor will the issuers thereof be subject to the reporting requirements of,
the SEC. Accordingly, there may be less publicly available information about
the securities and the foreign company or government issuing them than is
available about a domestic company or government entity. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment positions.
 
  Non-Publicly Traded and Illiquid Securities. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when SBMFM believes it desirable
to do so. The Fund's investments in illiquid securities are subject to the risk
that should the Fund desire to sell any of these securities when a ready buyer
is not available at a price that the Fund deems representative of their value,
the value of the Fund's net assets could be adversely affected.
 
 INVESTMENT RESTRICTIONS
  The Trust has adopted certain fundamental investment restrictions with
respect to the Fund that may not be changed without approval of a majority of
the Fund's outstanding shares. The fundamental investment restrictions adopted
by the Trust prohibit the Fund from:
 
  1. Purchasing the securities of any issuer (other than U.S. government
 securities) if as a result more than 5% of the value of the Fund's total
 assets would be invested in the securities of the issuer, except that up to
 25% of the value of the Fund's total assets may be invested without regard
 to this 5% limitation.
 
  2. Purchasing more than 10% of the voting securities of any one issuer,
 provided that this limitation shall not apply to investments in U.S. govern-
 ment securities.
 
  3. Purchasing securities on margin, except that the Fund may obtain any
 short-term credits necessary for the clearance of purchases and sales of
 securities. For purposes of this restriction, the deposit or payment of ini-
 tial or variation margin in connection with futures contracts or related
 options will not be deemed to be a purchase of securities on margin by the
 Fund.
 
  4. Making short sales of securities or maintaining a short position, except
 to the extent of 5% of the Fund's net assets and except that the Fund may
 engage in such activities without limit if, at all times when a short posi-
 tion is open, the
 
12
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 Fund owns an equal amount of the securities or securities convertible into
 or exchangeable, without payment of any further consideration, for securi-
 ties of the same issuer as, and at least equal in amount to, the securities
 sold short.
 
  5.  Borrowing money, including reverse repurchase agreements, except that
 the Fund may borrow from banks for temporary or emergency (not leveraging)
 purposes including the meeting of redemption requests that might otherwise
 require the untimely disposition of securities, in an amount not exceeding
 20% of the value of the Fund's total assets (including the amount borrowed)
 valued at market less liabilities (not including the amount borrowed) at the
 time the borrowing is made. Whenever borrowings exceed 5% of the value of
 the Fund's total assets, the Fund will not make any additional investments.
 
  6. Pledging, hypothecating, mortgaging or otherwise encumbering more than
 10% of the value of the Fund's total assets as security for any indebted-
 ness. For purposes of this restriction (a) the deposit of assets in escrow
 in connection with the writing of covered put or call options and the pur-
 chase of securities on a when-issued or delayed-delivery basis and (b) col-
 lateral arrangements with respect to (i) the purchase and sale of stock
 options, options on foreign currencies and options on stock indexes and (ii)
 initial or variation margin for futures contracts will not be deemed to be
 pledges of the Fund's assets.
 
  7. Investing in commodities, except that the Fund may purchase or write
 futures contracts and options on futures contracts as described in this Pro-
 spectus.
 
  8. Making loans to others, except through the purchase of qualified debt
 obligations, loans of portfolio securities and the entry into repurchase
 agreements.
 
  9. Concentrating in any industry, except that the Fund will concentrate in
 excess of 25% of its assets in the securities of companies within the util-
 ity industries.
 
  In addition, the Fund will not purchase restricted securities, illiquid
securities (such as repurchase agreements with maturities in excess of seven
days) or other securities that are not readily marketable if more than 10% of
the total assets of the Fund would be invested in such securities.
 
  Certain other investment restrictions, including fundamental restrictions as
well as restrictions that may be changed without a shareholder vote, adopted
by the Trust are described in the Statement of Additional Information.
       
 RISK FACTORS AND SPECIAL CONSIDERATIONS
  Investment in the Fund involves special considerations, such as those
described below:
 
  General. Investment in the Fund may involve above-average risk of loss
because of, among other things, the Fund's use of strategies and techniques
that may be considered to be speculative. The strategy followed by the Fund
and certain
 
                                                                             13
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
of the strategies and techniques used by the Fund depend on forecasts made by
SBMFM that may or may not prove to be correct.
 
  Low-Rated Securities. Low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment
of the rating organization, are outweighed by large uncertainties or major
risk exposures to adverse conditions and (b) are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the securities.
   
  While the market values of low-rated and comparable unrated securities tend
to react less to fluctuations in interest rate levels than the market values
of higher-rated securities, the market values of certain low-rated and compa-
rable unrated securities also tend to be more sensitive to individual corpo-
rate developments and changes in economic conditions than higher-rated securi-
ties. In addition, low-rated securities and comparable unrated securities gen-
erally present a higher degree of credit risk. Issuers of low-rated and compa-
rable unrated securities are often highly leveraged and may not have more tra-
ditional methods of financing available to them so that their ability to serv-
ice their debt obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. The risk of loss due to
default by such issuers is significantly greater because low-rated and compa-
rable unrated securities generally are unsecured and frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund may incur addi-
tional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The exist-
ence of limited markets for low-rated and comparable unrated securities may
diminish the Fund's ability to (a) obtain accurate market quotations for pur-
poses of valuing such securities and calculating its net asset value and (b)
sell the securities at fair value either to meet redemption requests or to
respond to changes in the economy or in the financial markets.     
 
  Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower yield-
ing security, thus resulting in a decreased return to the Fund.
 
  The market for certain low-rated and comparable unrated securities is rela-
tively new and has not fully weathered a major economic recession. Any such
economic downturn could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
 
  Investment in Utility Securities. Because the Fund concentrates its invest-
ments in one sector, its portfolio may be subject to greater risk and market
fluctuations
 
14
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
than a portfolio of securities representing a broader range of investment
alternatives. The Fund is particularly subject to risks that are inherent to
the utility industries that make up this sector, including difficulty in
obtaining an adequate return on invested capital, difficulty in financing
large construction programs during an inflationary period, restrictions on
operations and increased cost and delays attributable to environmental consid-
erations and regulation, difficulty in raising capital in adequate amounts on
reasonable terms in periods of high inflation and unsettled capital markets,
increased costs and reduced availability of certain types of fuel, occasional
reduced availability and high costs of natural gas for resales, the effects of
energy conservation, the effects of a national energy policy and lengthy
delays and greatly increased costs and other problems associated with the
design, construction, licensing, regulation and operation of nuclear facili-
ties for electric generation, including, among other considerations, the prob-
lems associated with the use of radioactive materials and the disposal of
radioactive wastes. There are substantial differences between the regulatory
practices and policies of various jurisdictions, and any given regulatory
agency may make major shifts in policy from time to time. There is no assur-
ance that regulatory authorities will grant rate increases in the future or
that such increases will be adequate to permit the payment of dividends on
common stocks. Additionally, existing and possible future regulatory legisla-
tion may make it even more difficult for these utilities to obtain adequate
relief. Certain of the issuers of securities held by the Fund may own or oper-
ate nuclear generating facilities. Governmental authorities may from time to
time review existing policies, and impose additional requirements governing
the licensing, construction and operation of nuclear power plants.
 
  Each of the risks referred to above could adversely affect the ability and
inclination of public utilities to declare or pay dividends and the ability of
holders of common stock to realize any value from the assets of the issuer
upon liquidation or bankruptcy. All of the utilities which are issuers of the
securities held by the Fund have been experiencing one or more of these prob-
lems in varying degrees. Moreover, price disparities within selected utility
groups and discrepancies in relation to averages and indices have occurred
frequently for reasons not directly related to the general movements or price
trends of utility common stocks. Causes of these discrepancies include changes
in the overall demand for and supply of various securities (including the
potentially depressing effect of new stock offerings), and changes in invest-
ment objectives, market expectations or cash requirements of other purchasers
and sellers of securities.
 
  Interest Rate Risk. The Fund will be affected by general changes in interest
rates which will result in increases or decreases in the market value of the
debt securities held by the Fund. The market value of the debt securities held
by the Fund can be expected to vary inversely to changes in prevailing inter-
est rates.
 
                                                                             15
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  Options on Securities. Because option premiums paid by the Fund are small in
relation to the market value of the investments underlying the options, buying
put options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuation than would be the case if the Fund did not
invest in options.
 
  No assurance can be given that the Fund will be able to effect closing trans-
actions at a time when it wishes to do so. If the Fund cannot enter into a
closing transaction, the Fund will continue to be subject to the risk that a
put option it has purchased will decline in value or become worthless as a
result of any increase in the value of the underlying security. The Fund also
could face higher transaction costs, including brokerage commissions.
 
  Lending of Portfolio Securities. The risk associated with lending portfolio
securities, as with other extensions of credit, consists of possible loss of
rights in the collateral should the borrower fail financially.
 
  Short Sales. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
 
  Futures Transactions. The use of futures contracts as a hedging device
involves several risks. No assurance can be given that a correlation will exist
between price movements in the stock index and price movements in the securi-
ties that are the subject of the hedge; the risk of imperfect correlation
increases as the composition of the securities held by the Fund diverges from
the securities included in the applicable stock index. Positions in futures
contracts may be closed out only on the exchange on which they were entered
into (or through a linked exchange) and no secondary market exists for those
contracts. In addition, although the Fund intends to enter into futures con-
tracts only if an active market exists for the contracts, no assurance can be
given that an active market will exist for the contracts at any particular
time. Certain exchanges do not permit trading in particular contracts at prices
that represent a fluctuation in price during a single day's trading beyond a
certain set limit. If prices fluctuate during a single day's trading beyond
those limits, the Fund could be prevented from promptly liquidating unfavorable
positions and thus be subjected to losses. Losses incurred in hedging transac-
tions and the costs of these transactions will affect the Fund's performance.
Successful use of stock index futures by the Fund for hedging purposes is sub-
ject to the ability of SBMFM to correctly predict movements in the direction of
the stock market.
    
 PORTFOLIO TRANSACTIONS     
   
  Securities and commodities transactions on behalf of the Fund will be exe-
cuted by a number of brokers and dealers, including Smith Barney. The Fund may
use Smith Barney in connection with a purchase or sale of securities when SBMFM
believes that the charge for the transaction does not exceed usual and custom-
ary     
 
16
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
levels. The Fund also may use Smith Barney as a commodities broker in connec-
tion with entering into futures contracts and commodity options. Smith Barney
has agreed to charge the Fund commodity commissions at rates comparable to
those charged by Smith Barney to its most favored clients for comparable trades
in comparable accounts.     
   
  In selecting a broker for a transaction, including Smith Barney or its affil-
iates, the primary consideration is prompt and effective execution of orders at
the most favorable price. Subject to that primary consideration, dealers may be
selected for research, statistical or other services to enable SBMFM to supple-
ment its own research and analysis with the views and information of other
securities firms.     
 
VALUATION OF SHARES
 
 
  The net asset value per share of Class Z shares is determined as of the close
of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), on each
day that the NYSE is open, by dividing the value of the Fund's net assets
attributable to Class Z by the total number of shares of the Class outstanding.
The per share net asset value of the Class Z shares may be higher than those of
other Classes because of the lower expenses attributable to Class Z shares.
 
  Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Portfo-
lio securities which are traded primarily on foreign exchanges are generally
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. A security that
is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trustees
determine that amortized cost reflects fair value of those investments. An
option generally is valued at the last sale price or, in the absence of the
last sale price, the last offer price. The value of a futures contract equals
the unrealized gain or loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract acquired on the
day on which the stock index futures contract is being valued. A settlement
price may not be used if the market makes a limited move with respect to a par-
ticular commodity or if the underlying securities market experiences signifi-
cant price fluctuations after the determination of the
 
                                                                              17
<PAGE>
 
VALUATION OF SHARES (CONTINUED)
 
settlement price. In such event, the futures contract will be valued at a fair
market price to be determined by or under the direction of the Board of Trust-
ees. Further information regarding the Trust's valuation policies with respect
to the Fund is contained in the Statement of Additional Information.
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS
  The Fund will be treated separately from the Trust's other funds in determin-
ing the amounts of dividends from investment income and distributions of capi-
tal gains payable to shareholders. Dividends and capital gain distributions
will be reinvested automatically for each shareholder's account at net asset
value in additional Class Z shares of the Fund, unless the shareholder is eli-
gible for qualified distributions and instructs the Fund to pay all dividends
and capital gain distributions in cash. Dividends from net investment income,
if any, of the Fund will be declared monthly and will be paid on the last Fri-
day of the month. Distributions of any net long-term capital gains earned by
the Fund will be made annually after the close of the fiscal year in which they
are earned. Distributions of short-term capital gains may be paid more fre-
quently with dividends from net investment income. In addition, in order to
avoid the application of a 4% nondeductible excise tax measured with respect to
certain undistributed amounts of ordinary income and capital gains, the Fund
may make an additional distribution shortly before December 31 in each year of
any undistributed ordinary income on capital gains and expects to pay any other
dividends and distributions necessary to avoid the application of this tax.
 
  If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions gen-
erally will be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. Pursuant to the requirements of the Investment Company Act of 1940, as
amended (the "1940 Act") and other applicable laws, a notice will accompany any
distribution paid from sources other than net investment income. In the event
the Fund distributes amounts in excess of its net investment income and net
realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.
 
 TAXES
  The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a
 
18
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
 
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended. To meet those requirements, the Fund may need to restrict the
degree to which it engages in short-term trading, short sales of securities and
transactions in options. If the Fund qualifies as a regulated investment com-
pany and meets certain distribution requirements, the Fund will not be subject
to Federal income tax on its net investment income and net capital gains that
it distributes to its shareholders.
 
  Dividends paid by the Fund from investment income and distributions of short-
term capital gain will be taxable to shareholders as ordinary income for Fed-
eral income tax purposes, whether received in cash or reinvested in additional
shares. Distributions of long-term capital gain will be taxable to shareholders
as long-term capital gain, whether paid in cash or reinvested in additional
shares, and regardless of the length of time the investor has held his or her
shares of the Fund. Generally, dividends of investment income (to the extent
derived from most types of dividends from domestic corporations) from the Fund
will qualify for the Federal dividends-received deduction for corporate share-
holders. Each shareholder of the Fund will receive a statement annually from
the Trust, which will set forth separately the aggregate dollar amount of divi-
dends and capital gains distributed to the shareholder by the Fund with respect
to the prior calendar year and the amount of the distributions that qualifies
for the dividends-received deduction.
   
  Shareholders should consult their plan document or tax advisers about the
consequences associated with participating in a Qualified Plan or Smith Barney
UIT.     
 
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
 
 
  Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Smith Barney UIT. Purchases are effected at net
asset value next determined after a purchase order is received by Smith Barney
(the "trade date"). Payment is due to Smith Barney on the third business day
(the "settlement date") after the trade date. Investors who make payment prior
to the settlement date may designate a temporary investment (such as a money
market fund of the Smith Barney Mutual Funds) for such payment until settlement
date. The Fund reserves the right to reject any purchase order and to suspend
the offering of shares for a period of time. There are no minimum investment
requirements for Class Z shares; however, the Fund reserves the right to vary
this policy at any time.
   
  Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, currently 4:00 p.m., New York time, on any day
that the Fund calculates its net asset value are priced according to the net
asset value determined on that day. See "Valuation of Shares." Certificates for
Fund shares are issued upon request to the Trust's transfer agent.     
 
                                                                              19
<PAGE>
 
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES (CONTINUED)
 
 
  Qualified Plans may redeem their shares on any day on which the Fund calcu-
lates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form prior to the close of regular trading on the NYSE are
priced at the net asset value per share determined on that day. Redemption
requests received after the close of regular trading on the NYSE are priced at
the net asset value as next determined. Shareholders acquiring Class Z shares
through a Qualified Plan or a Smith Barney UIT should consult the terms of
their respective plans for redemption provisions.
 
  Holders of Class Z shares should consult their Qualified Plans for informa-
tion about available exchange options.
 
PERFORMANCE
 
 
 YIELD
  From time to time, the Fund advertises the 30-day "yield" of its Class Z
shares. The yield refers to the income generated by an investment in the Fund
over the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by the Fund with respect to
a Class during the period by the maximum public offering price per share on the
last day of the period. This income is "annualized" by assuming the amount of
income is generated each month over a one-year period and is compounded semi-
annually. The annualized income is then shown as a percentage of the net asset
value.
 
 TOTAL RETURN
  From time to time the Fund may include its total return, average annual total
return and current dividend return for Class Z shares in advertisements and/or
other types of sales literature. These figures are based on historical earnings
and are not intended to indicate future performance. Total return is computed
for a specified period of time assuming deduction of the maximum sales charge,
if any, from the initial amount invested and reinvestment of all income divi-
dends and capital gains distributions on the reinvestment dates at prices cal-
culated as stated in this Prospectus, then dividing the value of the investment
at the end of the period so calculated by the initial amount invested and sub-
tracting 100%. The standard average annual total return, as prescribed by the
SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with non-
standard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return by annualizing the most
recent monthly distribution and dividing by the net asset value or the maximum
public offering price (including sales charge) on the last day of the period
for which current dividend return is presented. The Fund's current dividend
 
20
<PAGE>
 
PERFORMANCE (CONTINUED)
 
return may vary from time to time depending on market conditions, the composi-
tion of its investment portfolio and operating expenses. These factors and
possible differences in the methods used in calculating current dividend
return should be considered when comparing the Fund's current return to yields
published for other investment companies and other investment vehicles. The
Fund may also include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include data
from Lipper Analytical Services, Inc. and other financial publications.
 
MANAGEMENT OF THE TRUST AND THE FUND
 
 
 BOARD OF TRUSTEES
   
  Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains background information regarding
each Trustee and executive officer of the Trust.     
    
 INVESTMENT ADVISER     
   
  SBMFM is a registered investment adviser whose principal executive offices
are located at 388 Greenwich Street, New York, New York 10013, and serves as
the Fund's investment adviser. 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 seg-
ments: Investment Services, Consumer Finance Services, Life Insurance Services
and Property & Casualty Insurance Service. SBMFM (through its predecessor
entities) has been in the investment counseling business since 1934 and is a
registered investment adviser. SBMFM renders investment advice to investment
companies that had aggregate assets under management as of September 30, 1997
in excess of $81 billion.     
 
  Subject to the supervision and direction of the Fund's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's investment
objectives and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research services to the Fund. For
investment advisory services rendered the Fund pays SBMFM a fee at the annual
rate of 0.45% of the value of the Fund's daily net assets.
 
                                                                             21
<PAGE>
 
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
 
 
 PORTFOLIO MANAGEMENT
  Jack S. Levande, a Managing Director of Smith Barney, has served as Vice
President and Investment Officer of the Fund since it commenced operations and
manages the day to day operations of the Fund, including making all investment
decisions.
   
  Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended July 31, 1997 is included in
the Annual Report dated July 31, 1997. A copy of the Annual Report may be
obtained upon request and without charge from a Smith Barney Financial Consul-
tant or by writing or calling the Fund at the address or phone number listed on
page one of this Prospectus.     
    
 ADMINISTRATOR     
   
  SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered, the Fund pays
SBMFM a 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,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary
of Holdings.
 
ADDITIONAL INFORMATION
 
 
  The Trust was organized on March 12, 1985 in the Commonwealth of Massachu-
setts and is a business entity commonly known as a "Massachusetts business
trust."
 
  The Trust offers shares of beneficial interest of separate series having a
$.001 per share par value. Shares of beneficial interest of the Fund are cur-
rently classified into five Classes: A, B, C, Y and Z. Each Class of shares
represents identical pro rata interests in the Fund's investment portfolio. As
a result, the Classes have the same rights, privileges and preferences, except
with respect to: (a) the designation of each Class; (b) the effect of the
respective sales charges, if any, for each Class; (c) the distribution and/or
service fees, if any, borne by each Class pursuant to a plan adopted under Rule
12b-1 under the 1940 Act; (d) the expenses allocable exclusively to each Class;
(e) voting rights on matters exclusively affecting a single Class; (f) the
exchange privilege of each Class; and (g) the conversion feature of a Class.
The Trust's Board of Trustees does not anticipate that there will be any con-
flicts among the interests of the holders of the different Classes of shares of
the
 
22
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
 
Fund. The Trustees, on an ongoing basis, will consider whether any such con-
flict exists and, if so, take appropriate action.
   
  The Trust does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have
been elected by shareholders. The Trustees will call a meeting for any purpose
upon the written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Trust will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for shareholder
vote, shareholders of each Class of the Fund will have one vote for each full
share owned and a proportionate, fractional vote for any fractional share held
of that Class. Shares of the Trust will be voted generally on a Trust-wide
basis on all matters, except matters affecting only the interests of one Fund
or one or more of the Classes of shares.     
 
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include a listing of the investment securities held by the Fund
at the end of the reporting period. In an effort to reduce the Fund's printing
and mailing costs, the Trust plans to consolidate the mailing of the Fund's
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Trust also plans to con-
solidate the mailing of the Fund's Prospectus so that a shareholder having
multiple accounts (that is, individual, IRA and/or Self-Employed Retirement
Plan accounts) will receive a single Prospectus annually. Shareholders who do
not want this consolidation to apply to their accounts should contact a Smith
Barney Financial Consultant or First Data Investor Services Group, Inc.
 
  PNC Bank, located at 17th and Chestnut Streets, Philadelphia, PA 19103,
serves as custodian of the Fund's investments.
 
  First Data Investor Services Group, Inc., located at Exchange Place, Boston,
Massachusetts 02109, serves as the Trust's transfer agent.
 
                                                                              23
<PAGE>
 
 
 
 
 
                      [This page intentionally left blank]
 
 
<PAGE>
 
 
                                              SMITH BARNEY
                                              ----------------------------------
                                              A Member of TravelersGroup  [LOGO]
 
 
 
 
 
 
 
 
 
 
                                                     SMITH BARNEY UTILITIES FUND
 
 
                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                 
                                                              FD 0791 11/97     


SMITH BARNEY INCOME FUNDS
PART B
Smith Barney
INCOME FUNDS

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

   
Statement of Additional Information	November 28, 1997
    

   
	This Statement of Additional Information expands upon and 
supplements the information contained in the current Prospectuses 
of Smith Barney Income Funds (the "Trust"), relating to seven 
investment funds offered by the Trust: Smith Barney Convertible 
Fund (the "Convertible Fund"), Smith Barney Diversified Strategic 
Income Fund (the "Diversified Strategic Income Fund"), Smith 
Barney Exchange Reserve Fund (the "Exchange Reserve Fund"), Smith 
Barney High Income Fund (the "High Income Fund"), Smith Barney 
Premium Total Return Fund (the "Premium Total Return Fund"), Smith 
Barney Municipal High Income Fund (the "Municipal High Income 
Fund"), and Smith Barney Utilities Fund (the "Utilities Fund"), 
each a "Fund" and together the "Funds," each dated November 28, 
1997, as amended or supplemented from time to time (the 
"Prospectuses"), and should be read in conjunction with the 
Prospectuses. The Prospectuses may be obtained from any Smith 
Barney Financial Consultant or by writing or calling the Trust at 
the address or telephone number set forth above. This Statement of 
Additional Information, although not in itself a prospectus, is 
incorporated by reference into the Prospectuses in its entirety.
    

CONTENTS

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

   
Management of the Trust and the Funds			2
Investment Objectives and Management Policies. 		7
Purchase of Shares					29
Redemption of Shares					30
Distributor..						31
Valuation of Shares					33
Exchange Privilege					34
Performance Data (See in the Prospectuses "Performance"
 or "Yield Information")					34
Taxes (See in the Prospectuses "Dividends, Distributions
 and Taxes")						40
Additional Information					44
Voting Rights						44	
Financial Statements					50
Appendix						A-1
    

MANAGEMENT OF THE TRUST AND THE FUNDS

The executive officers of the Trust are employees of certain of 
the organizations that provide services to the Trust. These 
organizations are the following:

   
<TABLE>
<CAPTION>
Name						Service
<S>						<C>
Smith Barney Inc. ("Smith Barney")		Distributor
PFS Distributors ("PFS")				Distributor to Exchange 
						Reserve Fund

Smith Barney Mutual Funds Management
 Inc. ("SBMFM")					Investment Adviser to the 
						Convertible Fund,
						Diversified Strategic Income 
						Fund, Exchange
						Reserve Fund; HighIncome Fund, 
						Municipal High
						Income Fund and Utilities 
						Fund; Administrator

Smith Barney Strategy Advisers Inc.
 ("Strategy Advisers")				Investment Adviser to 
						Premium Total Return Fund 

Smith Barney Global Capital Management
 Inc. ("Global Capital Management")		Sub-Investment Adviser 
						to Diversified Strategic
						Income Fund

Boston Partners Asset Management,
 L.P. ("Boston Partners")				Sub-Investment Adviser 
						to Premium Total Return
						Fund

PNC Bank, National Association
 ("PNC Bank")					Custodian to Convertible 
						Fund, Exchange Reserve
						Fund, High Income Fund, 
						Premium Total Return
						Fund, Municipal High Income 
						Fund and Utilities Fund

Chase Manhattan Bank ("Chase")			Custodian to Diversified 
						Strategic Income Fund

First Data Investors Services Group,
 Inc. ("First Data")				Transfer Agent
</TABLE>
    

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

Trustees and Executive Officers of the Trust

The Trustees and executive officers of the Trust, together with 
information as to their principal business occupations during the 
past five years, are shown below. The executive officers of the 
Trust are employees of organizations that provide services to the 
Funds. Each Trustee who is an "interested person" of the Trust, as 
defined in the Investment Company Act of 1940, as amended (the 
"1940 Act"), is indicated by an asterisk. 

   
Lee Abraham, Trustee (Age 70). Retired; formerly Chairman and 
Chief Executive Officer of Associated Merchandising Corporation, a 
major retail merchandising and sourcing organization. His address 
is 106 Barnes Road, Stamford, Connecticut 06902.

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

Richard E. Hanson, Jr., Trustee (Age 56). Head of School, The New 
Atlanta Jewish Community High School, Atlanta Georgia; prior to 
July 1, 1994, Headmaster, Lawrence Country Day School-Woodmere 
Academy, Woodmere, New York; prior to July 1, 1990, Headmaster of 
Woodmere Academy. His address is 58 Ivy Chase, Atlanta, GA  30342.

*Heath B. McLendon, Chairman of the Board and Investment Officer 
(Age 61). Managing Director of Smith Barney and Chairman of the 
Board of Strategy Advisers; prior to July 1993, Senior Executive 
Vice President of Shearson Lehman Brothers Inc. ("Shearson Lehman 
Brothers"); Vice Chairman of Shearson Asset Management, a Director 
of PanAgora Asset Management, Inc. and PanAgora Asset Management 
Limited. His address is 388 Greenwich Street, New York, New York 
10013.

John C. Bianchi, Vice President and Investment Officer (Age 42). 
Managing Director of Smith Barney; prior to July 1993, Managing 
Director of Shearson Lehman Advisors. His address is 388 Greenwich 
Street, New York, New York 10013.

James E. Conroy, Vice President and Investment Officer (Age 46). 
Managing Director of Smith Barney; prior to July 1993, Managing 
Director of Shearson Lehman Advisors. His address is 388 Greenwich 
Street, New York, New York 10013.

Victor Filatov, Vice President and Investment Officer (Age 45). 
Managing Director of Smith Barney, President and Director of Smith 
Barney Global Capital Management Inc.; prior to 1993, Vice 
President of J.P. Morgan Securities Inc.  Mr. Filatov is Vice 
President and Investment Officer of four other Smith Barney Mutual 
Funds. His address is 10 Piccadilly, London, WIV 9LA, UK.

Jack S. Levande, Vice President and Investment Officer (Age 51). 
Managing Director of Smith Barney; prior to July 1993, Managing 
Director of Shearson Lehman Advisors. His address is 388 Greenwich 
Street, New York, New York 10013.

Lawrence T. McDermott, Vice President and Investment Officer (Age 
49). Managing Director of Smith Barney; prior to July 1993, 
Managing Director of Shearson Lehman Advisors. His address is 388 
Greenwich Street, New York, New York 10013.

Mark E. Donovan, Investment Officer (Age 38). Equity Portfolio 
Manager of Boston Partners and Chairman of the Equity Strategy 
Committee; prior to 1995, Senior Vice President and Equity 
Portfolio Manager of The Boston Company Advisors. His address is 
One Financial Center, Boston, MA  02111.

Robert E. Swab, Investment Officer (Age 42). Vice President of 
Smith Barney. His address is 388 Greenwich Street, New York, New 
York 10013.

Phyllis M. Zahorodny, Vice President and Investment Officer (Age 
39). Managing Director of Smith Barney; prior to July 1993, 
Managing Director of Shearson Lehman Advisors. Her address is 388 
Greenwich Street, New York, New York 10013.

Lewis E. Daidone, Senior Vice President and Treasurer (Age 40). 
Managing Director and Chief Financial Officer of Smith Barney 
Mutual Funds; Director and Senior Vice President of SBMFM. His 
address is 388 Greenwich Street, New York, New York 10013.

Christina T. Sydor, Secretary (Age 46). Managing Director of Smith 
Barney; General Counsel and Secretary of SBMFM. Her address is 388 
Greenwich Street, New York, New York 10013.
    

   
	Each Trustee also serves as a director, trustee and/or 
general partner of certain other mutual funds for which Smith 
Barney serves as distributor. Global Capital Management, SBMFM and 
Strategy Advisers are "affiliated persons" of the Trust as defined 
in the 1940 Act by virtue of their positions as investment 
advisers to the Funds. As of October 31, 1997, the Trustees and 
officers of the Funds, as a group, owned less than 1% of the 
outstanding shares of beneficial interest of each Fund.

	No officer, director or employee of Smith Barney or any 
Smith Barney parent or subsidiary receives any compensation from 
the Trust for serving as an officer or Trustee of the Trust. The 
Trust pays each Trustee who is not an officer, director or 
employee of Smith Barney or any of its affiliates a fee of $17,000 
per year plus $3,250 per meeting attended, and reimburses them for 
travel and out-of-pocket expenses. For the fiscal year ended July 
31, 1997, such travel and out-of-pocket expenses totaled $2,599.

	For the fiscal year ended July 31, 1997 and the calendar 
year ended December 31, 1996, the Trustees of the Trust were paid 
the following compensation:

<TABLE> 
<CAPTION> 
 
								Aggregate 
						Total		Compensation 
				Aggregate	Pension or	from the Funds 
				Compensation	Retirement	and the Fund 
				from the Funds	Benefits		Complex for 
				for the Fiscal	Accrued		the Year ended 
				Year ended	from the		December 
Trustee(*)			July 31, 1997	the Funds	31, 1996 	
	 
<S>				<C>		<C>		<C> 
Lee Abraham (9)			$36,050		$0		44,550
Antoinette C. Bentley (9)+	63,310		0		4,350
Allan J. Bloostein (15)		44,550		0		3,150
Richard E. Hanson, Jr. (9)		44,550		0		4,550
Heath B. McLendon (41)		0		0		0
Madelon DeVoe Talley (10)++ #	22,275		0		5,342
</TABLE>

*	Number of directorships/trusteeships held with other Smith 
Barney Mutual Funds.
+	Director deceased as of March 1997.  Ms. Bentley's estate was 
paid $38,960 in deferred compensation.
++	Director deceased as of July 1997.  
#	Ms. Talley deferred $22,275 of compensation from the Trust for 
the fiscal year ended July 31, 1997.
    

Investment Advisers, Sub-Investment Advisers and Administrator

   
SBMFM and Strategy Advisors each serve as investment adviser 
("Investment Adviser") to one or more Funds pursuant to a separate 
written agreement with the relevant Fund (an "Advisory 
Agreement"). SBMFM serves as Investment Adviser to its relevant 
Funds pursuant to a transfer of the investment advisory agreement, 
effective November 7, 1994, from its affiliate, Mutual Management 
Corp. SBMFM is a wholly owned subsidiaries of Smith Barney 
Holdings Inc. ("Holdings"). Strategy Advisers is a wholly owned 
subsidiary of SBMFM. Holdings is a wholly owned subsidiary of 
Travelers Group Inc. The Advisory Agreements were most recently 
approved by the Board of Trustees, including a majority of the 
Trustees who are not "interested persons" of the Trust or the 
Advisers ("Independent Trustees"), on August 6, 1997.  SBMFM also 
serves as administrator (the "Administrator") to each Fund 
pursuant to a separate written agreement dated May 4, 1994 (the 
"Administration Agreement") which was most recently approved by 
the Board of Trustees, including a majority of the Independent 
Trustees, on August 6, 1997. Boston Partners and Global Capital 
Management each serve as a sub-investment adviser ("Sub-Investment 
Adviser") to Premium Total Return Fund, pursuant to a written 
agreement dated August 15, 1995 and to Diversified Strategic 
Income Fund, pursuant to a written agreement dated March 21, 1994, 
respectively.  Both agreements were most recently approved by the 
Fund's Board of Trustees, including a majority of the Independent 
Trustees, on August 6, 1997.
    
	Certain of the services provided to the Trust by the 
Investment Advisers and the Sub-Investment Advisers are described 
in the Prospectuses under "Management of the Trust and the Fund." 
Each Investment Adviser, Sub-Investment Adviser, and the 
Administrator pay the salaries of all officers and employees who 
are employed by both it and the Trust, and maintain office 
facilities for the Trust. In addition to those services, SBMFM 
furnishes the Trust with statistical and research data, clerical 
help and accounting, data processing, bookkeeping, internal 
auditing and legal services and certain other services required by 
the Trust, prepares reports to the Funds' shareholders and 
prepares tax returns, reports to and filings with the Securities 
and Exchange Commission (the "SEC") and state Blue Sky 
authorities. The Investment Advisers and Sub-Investment Advisers 
bear all expenses in connection with the performance of their 
services.

	As compensation for investment advisory services, each Fund 
pays its Investment Adviser a fee computed daily and paid monthly 
at the following annual rates:

   
<TABLE> 
<CAPTION> 
					Investment Advisory
					Fee As a Percentage
Fund					of Average Net Assets
<S>					<C>
Convertible Fund				0.50%
Diversified Strategic Income Fund		0.45%
Exchange Reserve Fund			0.30%
High Income Fund			0.50%
Premium Total Return Fund		0.55%
Municipal High Income Fund		0.40%
Utilities Fund				0.45%
</TABLE>
    

	For the periods below, the Funds paid investment advisory 
fees to their respective Investment Advisers as follows:


   
<TABLE> 
<CAPTION>
									For the
									Period 
									From
									August
			For the						1, 1996
			Fiscal						through
			Year ended					Dec-
			July 31:						cember 
			1995		1996		1997		31, 1996 
<S>			<C>		<C>		<C>		<C> 
Convertible Fund		$     415,666	$    417,942	$    489,663	

Diversified Strategic
  Income Fund		11,112,553	11,818,108	12,546,980	

Exchange Reserve Fund	547,990		448,925		442,557	

High Income Fund	3,706,659	4,506,352	5,646,405	

Premium Total Return
 Fund			10,627,086	13,381,076	--		$6,454,801

Municipal High Income
 Fund			4,033,479	3,771,279	3,395,338	

Utilities Fund		7,885,332	8,094,511	6,431,624	
</TABLE>
    

	As compensation for administrative services, each Fund pays 
the Administrator a fee computed daily and paid monthly at the 
annual rate of 0.20% of the Fund's average daily net assets.  For 
the periods shown below, the Funds paid administrative fees to 
SBMFM:

   
<TABLE>
<CAPTION>
									For the
									Period
									from
			For the						August
			Fiscal						1, 1996
			Year ended					through
			July 31:						December
			1995		1996		1997		31, 1996 
<S>			<C>		<C>		<C>		<C> 

Convertible Fund		166,266		167,177		195,865	

Diversified Strategic
 Income Fund		4,938,912	5,252,493	5,576436	

Exchange Reserve Fund	365,327		299,283		295,038	

High Income Fund	1,482,663	1,802,541	2,258,562	

Premium Total Return
 Fund			3,930,566	2,299,990	--		$2,347,201

Municipal High Income
 Fund			2,016,740	1,885,640	1,697,669	

Utilities Fund		3,542,538	3,597,560	2,858,500	
</TABLE>
    

	For the fiscal years ended July 31, 1995, 1996 and 1997, 
Diversified Strategic Income Fund paid Global Capital Management 
sub-investment advisory fees of $1,234,728, $2,626,246 and 
$2,788,218, respectively.

	Each Investment Adviser and SBMFM, as administrator, have 
agreed that if in any fiscal year the aggregate expenses of the 
Fund that it serves (including fees payable pursuant to its 
Advisory Agreement and Administration Agreement, but excluding 
interest, taxes, brokerage, distribution and service fees and, if 
permitted by the relevant state securities commission, 
extraordinary expenses) exceed the expense limitation of any state 
having jurisdiction over the Fund, the Investment Adviser and 
SBMFM will, to the extent required by state law, reduce their fees 
by the amount of such excess expenses, such amount to be allocated 
between them in the proportion that their respective fees bear to 
the aggregate of the fees paid by the Fund. Such fee reduction, if 
any, will be estimated and reconciled on a monthly basis. The most 
restrictive state expense limitation applicable to any Fund is 
2.5% of the first $30 million of the Fund's average daily net 
assets, 2% of the next $70 million of the average daily net assets 
and 1.5% of the remaining average daily net assets of the Fund. No 
such fee reduction was required for the fiscal years ended July 
31, 1995, 1996 and 1997.

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

Counsel and Auditors

	Willkie Farr & Gallagher serves as legal counsel to the 
Trust. The Trustees who are not "interested persons" of the Fund 
have selected Stroock & Stroock & Lavan, LLP as their legal 
counsel. 

   
	KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 
10154 has been selected as the Trust's independent auditor to 
examine and report on the Trust's financial statements and 
highlights for the fiscal year ending July 31, 1998.
    

	In the interest of economy and convenience, certificates 
representing shares in the Trust are not physically issued except 
upon specific request made by a shareholder to First Data. First 
Data maintains a record of each shareholder's ownership of Trust 
shares. Shares do not have cumulative voting rights, which means 
that holders of more than 50% of the shares voting for the 
election of Trustees can elect all of the Trustees. Shares are 
transferable but have no preemptive or subscription rights. 
Shareholders generally vote by Fund, except with respect to the 
election of Trustees and the selection of independent public 
accountants.

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

INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES

	The Prospectuses discuss the investment objectives of the 
Funds and the policies to be employed to achieve those objectives. 
This section contains supplemental information concerning the 
types of securities and other instruments in which the Funds may 
invest, the investment policies and portfolio strategies that the 
Funds may utilize and certain risks attendant to such investments, 
policies and strategies.

	U.S. Government Securities (All Funds). United States 
government securities include debt obligations of varying 
maturities issued or guaranteed by the United States government or 
its agencies or instrumentalities ("U.S. government securities"). 
U.S. government securities include not only direct obligations of 
the United States Treasury, but also securities issued or 
guaranteed by the Federal Housing Administration, Farmers Home 
Administration, Export-Import Bank of the United States, Small 
Business Administration, Government National Mortgage Association 
("GNMA"), General Services Administration, Central Bank for 
Cooperatives, Federal Intermediate Credit Banks, Federal Land 
Banks, Federal National Mortgage Association ("FNMA"), Maritime 
Administration, Tennessee Valley Authority, District of Columbia 
Armory Board, Student Loan Marketing Association, International 
Bank for Reconstruction and Development, and Resolution Trust 
Corporation. Certain U.S. government securities, such as those 
issued or guaranteed by GNMA, FNMA and Federal Home Loan Mortgage 
Corporation ("FHLMC"), are mortgage-related securities. Because 
the United States government is not obligated by law to provide 
support to an instrumentality that it sponsors, a Fund will invest 
in obligations issued by such an instrumentality only if its 
Investment Adviser determines that the credit risk with respect to 
the instrumentality does not make its securities unsuitable for 
investment by the Fund.

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

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

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

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

	The Exchange Reserve Fund may purchase a CD issued by a 
bank, savings and loan association or other banking institution 
with less than $1 billion in assets (a "Small Issuer CD") so long 
as the issuer is a member of the FDIC or Office of Thrift 
Supervision and is insured by the Savings Association Insurance 
Fund ("SAIF"), and so long as the principal amount of the Small 
Issuer CD is fully insured and is no more than $100,000. The 
Exchange Reserve Fund will at any one time hold only one Small 
Issuer CD from any one issuer. Savings and loan associations whose 
CDs may be purchased by the Funds are members of the Federal Home 
Loan Bank and are insured by the SAIF. As a result, such savings 
and loan associations are subject to regulation and examination.

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

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

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

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

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

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

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

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

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

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

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

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

	Options on Securities (Convertible, Diversified Strategic 
Income, High Income, Premium Total Return and Utilities Funds). 
These Funds may engage in transactions in options on securities, 
which, depending on the Fund, may include the writing of covered 
put options and covered call options, the purchase of put and call 
options and the entry into closing transactions. 

	The principal reason for writing covered call options on 
securities is to attempt to realize, through the receipt of 
premiums, a greater return than would be realized on the 
securities alone. Diversified Strategic Income Fund, however, may 
engage in option transactions only to hedge against adverse price 
movements in the securities that it holds or may wish to purchase 
and the currencies in which certain portfolio securities may be 
denominated. In return for a premium, the writer of a covered call 
option forfeits the right to any appreciation in the value of the 
underlying security above the strike price for the life of the 
option (or until a closing purchase transaction can be effected). 
Nevertheless, the call writer retains the risk of a decline in the 
price of the underlying security. Similarly, the principal reason 
for writing covered put options is to realize income in the form 
of premiums. The writer of a covered put option accepts the risk 
of a decline in the price of the underlying security. The size of 
the premiums that a Fund may receive may be adversely affected as 
new or existing institutions, including other investment 
companies, engage in or increase their option-writing activities.

	Options written by a Fund normally will have expiration 
dates between one and nine months from the date written. The 
exercise price of the options may be below, equal to or above the 
market values of the underlying securities at the times the 
options are written. In the case of call options, these exercise 
prices are referred to as "in-the-money," "at-the-money" and "out-
of-the-money," respectively. A Fund with option-writing authority 
may write (a) in-the-money call options when its Investment 
Adviser expects that the price of the underlying security will 
remain flat or decline moderately during the option period, (b) 
at-the-money call options when its Investment Adviser expects that 
the price of the underlying security will remain flat or advance 
moderately during the option period and (c) out-of-the-money call 
options when its Investment Adviser expects that the price of the 
underlying security may increase but not above a price equal to 
the sum of the exercise price plus the premiums received from 
writing the call option. In any of the preceding situations, if 
the market price of the underlying security declines and the 
security is sold at this lower price, the amount of any realized 
loss will be offset wholly or in part by the premium received. 
Out-of-the-money, at-the-money and in-the-money put options (the 
reverse of call options as to the relation of exercise price to 
market price) may be utilized in the same market environments that 
such call options are used in equivalent transactions.

	So long as the obligation of a Fund as the writer of an 
option continues, the Fund may be assigned an exercise notice by 
the broker-dealer through which the option was sold, requiring the 
Fund to deliver (in the case of a call) or take delivery of (in 
the case of a put) the underlying security against payment of the 
exercise price. This obligation terminates when the option expires 
or the Fund effects a closing purchase transaction. A Fund can no 
longer effect a closing purchase transaction with respect to an 
option once it has been assigned an exercise notice. To secure its 
obligation to deliver the underlying security when it writes a 
call option, or to pay for the underlying security when it writes 
a put option, a Fund will be required to deposit in escrow the 
underlying security or other assets in accordance with the rules 
of the Options Clearing Corporation (the "Clearing Corporation") 
or similar foreign clearing corporation and of the securities 
exchange on which the option is written.

	The Diversified Strategic Income Fund may purchase and sell 
put, call and other types of option securities that are traded on 
domestic or foreign exchanges or the over-the-counter market 
including, but not limited to, "spread" options, "knock-out" 
options, "knock-in" options and "average rate" or "look-back" 
options.

	"Spread" options are dependent upon the difference between 
the price of two securities or futures contracts. "Knock-out" 
options are canceled if the price of the underlying asset reaches 
a trigger level prior to expiration. "Knock-in" options only have 
value if the price of the underlying asset reaches a trigger 
level. "Average rate" or "Look-back" options are options where the 
option's strike price at expiration is set based on either the 
average, maximum or minimum price of the asset over the period of 
the option.

	The Diversified Strategic Income Fund may utilize up to 15% 
of its assets to purchase options and may do so at or about the 
same time that it purchases the underlying security or at a later 
time. In purchasing options on securities, the Fund will trade 
only with counterparties of high status in terms of credit quality 
and commitment to the market. 

	An option position may be closed out only where there exists 
a secondary market for an option of the same series on a 
recognized securities exchange or in the over-the-counter market. 
In light of this fact and current trading conditions, the Fund 
expects to purchase only call or put options issued by the 
Clearing Corporation. The Funds with option-writing authority 
expect to write options only on U.S. securities exchanges, except 
that the Diversified Strategic Income Fund also may write options 
on foreign exchanges and in the over-the-counter market.

	A Fund may realize a profit or loss upon entering into a 
closing transaction. In cases in which a Fund has written an 
option, it will realize a profit if the cost of the closing 
purchase transaction is less than the premium received upon 
writing the original option and will incur a loss if the cost of 
the closing purchase transaction exceeds the premium received upon 
writing the original option. Similarly, when a Fund has purchased 
an option and engages in a closing sale transaction, whether the 
Fund realizes a profit or loss will depend upon whether the amount 
received in the closing sale transaction is more or less than the 
premium that the Fund initially paid for the original option plus 
the related transaction costs.

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

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

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

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

	Stock Index Options (Premium Total Return and Utilities 
Funds). These Funds may purchase and write put and call options on 
U.S. stock indexes listed on U.S. exchanges for the purpose of 
hedging their portfolios. A stock index fluctuates with changes in 
the market values of the stocks included in the index. Some stock 
index options are based on a broad market index such as the New 
York Stock Exchange Composite Index or a narrower market index 
such as the Standard & Poor's 100. Indexes also are based on an 
industry or market segment such as the AMEX Oil and Gas Index or 
the Computer and Business Equipment Index.

	Options on stock indexes are similar to options on stock 
except that (a) the expiration cycles of stock index options are 
monthly, while those of stock options are currently quarterly and 
(b) the delivery requirements are different. Instead of giving the 
right to take or make delivery of stock at a specified price, an 
option on a stock index gives the holder the right to receive a 
cash "exercise settlement amount" equal to (a) the amount, if any, 
by which the fixed exercise price of the option exceeds (in the 
case of a put) or is less than (in the case of a call) the closing 
value of the underlying index on the date of exercise, multiplied 
by (b) a fixed "index multiplier." Receipt of this cash amount 
will depend upon the closing level of the stock index upon which 
the option is based being greater than (in the case of a call) or 
less than (in the case of a put) the exercise price of the option. 
The amount of cash received will be equal to such difference 
between the closing price of the index and the exercise price of 
the option expressed in dollars times a specified multiple. The 
writer of the option is obligated, in return for the premium 
received, to make delivery of this amount. The writer may offset 
its position in stock index options prior to expiration by 
entering into a closing transaction on an exchange or it may let 
the option expire unexercised.

	The effectiveness of purchasing or writing stock index 
options as a hedging technique will depend upon the extent to 
which price movements in the portion of a securities portfolio 
being hedged correlate with price movements of the stock index 
selected. Because the value of an index option depends upon 
movements in the level of the index rather than the price of a 
particular stock, whether the Premium Total Return and Utilities 
Funds will realize a gain or loss from the purchase or writing of 
options on an index depends upon movements in the level of stock 
prices in the stock market generally or, in the case of certain 
indexes, in an industry or market segment, rather than movements 
in the price of a particular stock. Accordingly, successful use by 
a Fund of options on stock indexes will be subject to its 
Investment Adviser's ability to predict correctly movements in the 
direction of the stock market generally or of a particular 
industry. This requires different skills and techniques than 
predicting changes in the prices of individual stocks.

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

	Mortgage-Related Securities (Diversified Strategic Income 
and Exchange Reserve Funds). The average maturity of pass-through 
pools of mortgage-related securities varies with the maturities of 
the underlying mortgage instruments. In addition, a pool's stated 
maturity may be shortened by unscheduled payments on the 
underlying mortgages. Factors affecting mortgage prepayments 
include the level of interest rates, general economic and social 
conditions, the location of the mortgaged property and age of the 
mortgage. Because prepayment rates of individual pools vary 
widely, it is not possible to accurately predict the average life 
of a particular pool. Common practice is to assume that 
prepayments will result in an average life ranging from 2 to 10 
years for pools of fixed-rate 30-year mortgages. Pools of 
mortgages with other maturities or different characteristics will 
have varying average life assumptions.

	Mortgage-related securities may be classified as private, 
governmental or government-related, depending on the issuer or 
guarantor. Private mortgage-related securities represent pass-
through pools consisting principally of conventional residential 
mortgage loans created by non-governmental issuers, such as 
commercial banks, savings and loan associations and private 
mortgage insurance companies. Governmental mortgage-related 
securities are backed by the full faith and credit of the United 
States. GNMA, the principal guarantor of such securities, is a 
wholly owned United States government corporation within the 
Department of Housing and Urban Development. Government-related 
mortgage-related securities are not backed by the full faith and 
credit of the United States government. Issuers of such securities 
include FNMA and FHLMC. FNMA is a government-sponsored corporation 
owned entirely by private stockholders, which is subject to 
general regulation by the Secretary of Housing and Urban 
Development. Pass-through securities issued by FNMA are guaranteed 
as to timely payment of principal and interest by FNMA. FHLMC is a 
corporate instrumentality of the United States, the stock of which 
is owned by the Federal Home Loan Banks. Participation 
certificates representing interests in mortgages from FHLMC's 
national portfolio are guaranteed as to the timely payment of 
interest and ultimate collection of principal by FHLMC.

	Private, U.S. governmental or government-related entities 
create mortgage loan pools offering pass-through investments in 
addition to those described above. The mortgages underlying these 
securities may be alternative mortgage instruments, that is, 
mortgage instruments whose principal or interest payments may vary 
or whose terms to maturity may be shorter than previously 
customary. As new types of mortgage-related securities are 
developed and offered to investors, Diversified Strategic Income 
Fund, consistent with its investment objective and policies, will 
consider making investments in such new types of securities.

	Currency Transactions (Diversified Strategic Income and High 
Income Funds). The Funds' dealings in forward currency exchange 
transactions will be limited to hedging involving either specific 
transactions or portfolio positions. Transaction hedging is the 
purchase or sale of forward currency contracts with respect to 
specific receivables or payables of the Fund generally arising in 
connection with the purchase or sale of its securities. Position 
hedging, generally, is the sale of forward currency contracts with 
respect to portfolio security positions denominated or quoted in 
the currency. A Fund may not position hedge with respect to a 
particular currency to an extent greater than the aggregate market 
value of the security at any time, or securities held in its 
portfolio denominated or quoted in, or currently convertible into 
(such as through exercise of an option or consummation of a 
forward currency contract) that particular currency. If a Fund 
enters into a transaction hedging or position hedging transaction, 
it will cover the transaction through one or more of the following 
methods: (a) ownership of the underlying currency or an option to 
purchase such currency; (b) ownership of an option to enter into 
an offsetting forward currency contract; (c) entering into a 
forward contract to purchase currency being sold, or to sell 
currency being purchased, provided that such covering contract is 
itself covered by any one of these methods unless the covering 
contract closes out the first contract; or (d) depositing into a 
segregated account with the custodian or a sub-custodian of the 
Fund cash or readily marketable securities in an amount equal to 
the value of the Fund's total assets committed to the consummation 
of the forward currency contract and not otherwise covered. In the 
case of transaction hedging, any securities placed in the account 
must be liquid debt securities. In any case, if the value of the 
securities placed in the segregated account declines, additional 
cash or securities will be placed in the account so that the value 
of the account will equal the above amount. Hedging transactions 
may be made from any foreign currency into dollars or into other 
appropriate currencies.

	At or before the maturity of a forward contract, a Fund may 
either sell a portfolio security and make delivery of the currency 
or retain the security and offset its contractual obligation to 
deliver the currency by purchasing a second contract pursuant to 
which the relevant Fund will obtain, on the same maturity date, 
the same amount of the currency which it is obligated to deliver. 
If a Fund retains the portfolio security and engages in an 
offsetting transaction, the Fund, at the time of execution of the 
offsetting transaction, will incur a gain or loss to the extent 
movement has occurred in forward contract prices. Should forward 
prices decline during the period between a Fund's entering into a 
forward contract for the sale of a currency and the date that it 
enters into an offsetting contract for the purchase of the 
currency, the Fund will realize a gain to the extent that the 
price of the currency it has agreed to sell exceeds the price of 
the currency it has agreed to purchase. Should forward prices 
increase, the Fund will suffer a loss to the extent the price of 
the currency it has agreed to purchase exceeds the price of the 
currency it has agreed to sell.

	The cost to a Fund of engaging in currency transactions 
varies with factors such as the currency involved, the length of 
the contract period and the market conditions then prevailing. 
Because transactions in currency exchange are usually conducted on 
a principal basis, no fees or commissions are involved. The use of 
forward currency contracts does not eliminate fluctuations in the 
underlying prices of the securities, but it does establish a rate 
of exchange that can be achieved in the future. In addition, 
although forward currency contracts limit the risk of loss due to 
a decline in the value of the hedged currency, at the same time 
they limit any potential gain that might result should the value 
of the currency increase.

	If a devaluation is generally anticipated, the Diversified 
Strategic Income and High Income Funds may not be able to contract 
to sell the currency at a price above the devaluation level they 
anticipate.

	Foreign Currency Options (Diversified Strategic Income and 
High Income Funds) The High Income Fund may only purchase put and 
call options on foreign currencies, whereas the Diversified 
Strategic Income Fund may purchase or write put and call options 
on foreign currencies for the purpose of hedging against changes 
in future currency exchange rates. Foreign currency options 
generally have three, six and nine month expiration cycles. Put 
options convey the right to sell the underlying currency at a 
price which is anticipated to be higher than the spot price of the 
currency at the time the option expires. Call options convey the 
right to buy the underlying currency at a price which is expected 
to be lower than the spot price of the currency at the time that 
the option expires.

	The Fund may use foreign currency options under the same 
circumstances that it could use forward currency exchange 
transactions. A decline in the dollar value of a foreign currency 
in which a Fund's securities are denominated, for example, will 
reduce the dollar value of the securities even if their value in 
the foreign currency remains constant. In order to protect against 
such diminutions in the value of securities that it holds, the 
Fund may purchase put options on the foreign currency. If the 
value of the currency declines, the Fund will have the right to 
sell the currency for a fixed amount in dollars and will thereby 
offset, in whole or in part, the adverse effect on its securities 
that otherwise would have resulted. Conversely, if a rise in the 
dollar value of a currency in which securities to be acquired are 
denominated is projected, thereby potentially increasing the cost 
of the securities, the Fund may purchase call options on the 
particular currency. The purchase of these options could offset, 
at least partially, the effects of the adverse movements in 
exchange rates. The benefit to the Fund derived from purchases of 
foreign currency options, like the benefit derived from other 
types of options, will be reduced by the amount of the premium and 
related transaction costs. In addition, if currency exchange rates 
do not move in the direction or to the extent anticipated, the 
Fund could sustain losses on transactions in foreign currency 
options that would require it to forego a portion or all of the 
benefits of advantageous changes in the rates.

	Foreign Government Securities (Diversified Strategic Income 
Fund and High Income Fund). Among the foreign government 
securities in which the Fund may invest are those issued by 
countries with developing economies, i.e., countries in the 
initial stages of their industrialization cycles. Investing in 
securities of countries with developing economies involves 
exposure to economic structures that are generally less diverse 
and less mature, and to political systems that can be expected to 
have less stability, than those of developed countries. The 
markets of countries with developing economies historically have 
been more volatile than markets of the more mature economies of 
developed countries, but often have provided higher rates of 
return to investors.

   
	Municipal Securities (Municipal High Income Fund). Municipal 
securities include debt obligations issued to fund various public 
purposes, such as constructing public facilities, refunding 
outstanding obligations, paying general operating expenses and 
extending loans to public institutions and facilities ("Municipal 
Securities"). Private activity bonds that are issued by or on 
behalf of public authorities to finance privately operated 
facilities are considered to be Municipal Securities if the 
interest paid thereon may be excluded from gross income (but not 
necessarily from alternative minimum taxable income) for Federal 
income tax purposes in the opinion of bond counsel to the issuer.
    

	Municipal bonds may be issued to finance life care 
facilities. Life care facilities are an alternative form of long-
term housing for the elderly which offer residents the 
independence of condominium life style and, if needed, the 
comprehensive care of nursing home services. Bonds to finance 
these facilities have been issued by various state industrial 
development authorities. Because the bonds are secured only by the 
revenues of each facility and not by state or local government tax 
payments, they are subject to a wide variety of risks, including a 
drop in occupancy levels, the difficulty of maintaining adequate 
financial reserves to secure estimated actuarial liabilities, the 
possibility of regulatory cost restrictions applied to health care 
delivery and competition from alternative health care or 
conventional housing facilities.

   
	Municipal leases are Municipal Securities that may take the 
form of a lease or an installment purchase contract issued by 
state and local governmental authorities to obtain funds to 
acquire a wide variety of equipment and facilities such as fire 
and sanitation vehicles, computer equipment and other capital 
assets. These obligations make it possible for state and local 
government authorities to acquire property and equipment without 
meeting constitutional and statutory requirements for the issuance 
of debt. Thus, municipal leases have special risks not normally 
associated with municipal bonds. These obligations frequently 
contain "non-appropriation" clauses providing that the 
governmental issuer of the obligation has no obligation to make 
future payments under the lease or contract unless money is 
appropriated for such purposes by the legislative body on a yearly 
or other periodic basis. In addition to the "non-appropriation" 
risk, municipal leases represent a type of financing that has not 
yet developed the depth of marketability associated with municipal 
bonds; moreover, although the obligations will be secured by the 
leased equipment, the disposition of the equipment in the event of 
foreclosure might prove to be difficult. In order to limit such 
risks, Municipal High Income Fund proposes to purchase either (a) 
municipal leases rated in the four highest categories by Moody's 
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings 
Group ("S&P") or (b) unrated municipal leases purchased 
principally from domestic banks or other responsible third parties 
which enter into an agreement with the Fund, which provide that 
the seller will either remarket or repurchase the municipal lease 
within a short period after demand by the Fund.
    

   
	Temporary Investments (Municipal High Income Fund). When 
Municipal High Income Fund is maintaining a defensive position it 
may invest in short-term investments ("Temporary Investments") 
consisting of: (a) the following tax-exempt securities: (i) tax-
exempt notes of municipal issuers having, at the time of purchase, 
a rating of MIG 1 through MIG 4 by Moody's or rated SP-1 or SP-2 
by S&P or, if not rated, of issuers having an issue of outstanding 
Municipal Securities rated within the four highest grades by 
Moody's or S&P; (ii) tax-exempt commercial paper having a rating 
not lower than A-2 by S&P or Prime-2 by Moody's at the time of 
purchase; and (iii) variable-rate demand notes rated within the 
two highest ratings by any major rating service, or determined to 
be of comparable quality to instruments with such rating, at the 
time of purchase; and (b) the following taxable securities: (i) 
U.S. government securities, including repurchase agreements with 
respect to such securities; (ii) other debt securities rated 
within the four highest grades by Moody's or S&P; (iii) commercial 
paper rated in the highest grade by either of these rating 
services; and (iv) CDs of domestic banks with assets of $1 billion 
or more. Among the tax-exempt notes in which the Fund may invest 
are Tax Anticipation Notes, Bond Anticipation Notes and Revenue 
Anticipation Notes, which are issued in anticipation of receipt of 
tax funds, proceeds of bond placements or other revenues, 
respectively. At no time will more than 20% of the Fund's total 
assets be invested in Temporary Investments unless the Fund has 
adopted a defensive investment policy in anticipation of a market 
decline. The Fund, however, intends to purchase tax-exempt 
Temporary Investments pending the investment of the proceeds of 
the sale of shares of the Fund and of its portfolio securities, or 
in order to have highly liquid securities available to meet 
anticipated redemptions.
    

	Investing in Utilities (Utilities Fund). Each of the risks 
referred to in Utilities Fund's Prospectus could adversely affect 
the ability and inclination of public utilities to declare or pay 
dividends and the ability of holders of common stock to realize 
any value from the assets of the issuer upon liquidation or 
bankruptcy. Moreover, price disparities within selected utility 
groups and discrepancies in relation to averages and indices have 
occurred frequently for reasons not directly related to the 
general movements or price trends of utility common stocks. These 
discrepancies may caused by changes in the overall demand for, and 
supply of, various securities (including the potentially 
depressing effect of new stock offerings), and changes in 
investment objectives, market expectations or cash requirements of 
other purchasers and sellers of securities.
   
	Futures Activities (Diversified Strategic Income, High 
Income, Municipal High Income and Utilities Funds). These Funds 
may enter into futures contracts and/or options on futures 
contracts that are traded on a U.S. exchange or board of trade. 
These investments may be made by a Fund for the purpose of hedging 
against the effects of changes in the value of its portfolio 
securities due to anticipated changes in interest rates, currency 
values and/or market conditions but not for purposes of 
speculation. In the case of Municipal High Income Fund, 
investments in futures contracts will be made only in unusual 
circumstances, such as when the Fund's Investment Adviser 
anticipates an extreme change in interest rates or market 
conditions. See "Taxes" below.
    

   
	Futures Contracts (Convertible, Diversified Strategic 
Income, Municipal High Income and Utilities Funds). The Funds may 
acquire or sell a futures contract to mitigate the effect of 
fluctuations in interest rates, currency values or market 
conditions (depending on the type of contract) on portfolio 
securities without actually buying or selling the securities. For 
example, if Municipal High Income Fund owns long-term bonds and 
tax-exempt rates are expected to increase, the Fund might enter 
into a short position in municipal bond index futures contracts. 
Such a sale would have much the same effect as the Fund's selling 
some of the long-term bonds in its portfolio. If tax-exempt rates 
increase as anticipated, the value of certain long-term Municipal 
Securities in the Fund would decline, but the value of the Fund's 
futures contracts would increase at approximately the same rate, 
thereby keeping the net asset value of the Fund from declining as 
much as it otherwise would have. Of course, because the value of 
portfolio securities will far exceed the value of the futures 
contracts sold by a Fund, an increase in the value of the futures 
contracts could only mitigate, not totally offset, the decline in 
the value of the Fund.
    

	The Diversified Strategic Income Fund may enter into futures 
contracts or related options on futures contracts that are traded 
on a domestic or foreign exchange or in the over-the-counter 
market. These investments may be made for the purpose of hedging 
against changes in the value of its portfolio securities but not 
for purposes of speculation. The ability of the Fund to trade in 
futures contracts may be limited by the requirements of the 
Internal Revenue Code of 1986 as amended (the "Code"), applicable 
to a regulated investment company. 

	No consideration is paid or received by a Fund upon entering 
into a futures contract. Initially, a Fund will be required to 
deposit with its custodian an amount of cash or cash equivalents 
equal to approximately 1% to 10% of the contract amount (this 
amount is subject to change by the board of trade on which the 
contract is traded and members of such board of trade may charge a 
higher amount). This amount, known as initial margin, is in the 
nature of a performance bond or good faith deposit on the contract 
and is returned to a Fund upon termination of the futures 
contract, assuming that all contractual obligations have been 
satisfied. Subsequent payments to and from the broker, known as 
variation margin, will be made daily as the price of the 
securities, currency or index underlying the futures contract 
fluctuates, making the long and short positions in the futures 
contract more or less valuable, a process known as "marking-to-
market." At any time prior to expiration of a futures contract, a 
Fund may elect to close the position by taking an opposite 
position, which will terminate the Fund's existing position in the 
contract.

	Several risks are associated with the use of futures 
contracts as a hedging device. Successful use of futures contracts 
by a Fund is subject to the ability of its Investment Adviser to 
predict correctly movements in interest rates, stock or bond 
indices or foreign currency values. These predictions involve 
skills and techniques that may be different from those involved in 
the management of the portfolio being hedged. In addition, there 
can be no assurance that there will be a correlation between 
movements in the price of the underlying securities, currency or 
index and movements in the price of the securities which are the 
subject of the hedge. A decision of whether, when and how to hedge 
involves the exercise of skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of 
market behavior or unexpected trends in interest rates or currency 
values.

	Although the Funds with authority to engage in futures 
activity intend to enter into futures contracts only if there is 
an active market for such contracts, there is no assurance that an 
active market will exist for the contracts at any particular time. 
Most futures exchanges and boards of trade limit the amount of 
fluctuation permitted in futures contract prices during a single 
trading day. Once the daily limit has been reached in a particular 
contract, no trades may be made that day at a price beyond that 
limit. It is possible that futures contract prices could move to 
the daily limit for several consecutive trading days with little 
or no trading, thereby preventing prompt liquidation of futures 
positions and subjecting some futures traders to substantial 
losses. In such event, and in the event of adverse price 
movements, a Fund would be required to make daily cash payments of 
variation margin and an increase in the value of the portion of 
the portfolio being hedged, if any, may partially or completely 
offset losses on the futures contract. As described above, 
however, there is no guarantee that the price of the securities 
being hedged will, in fact, correlate with the price movements in 
a futures contract and thus provide an offset to losses on the 
futures contract.

	If a Fund has hedged against the possibility of a change in 
interest rates or currency or market values adversely affecting 
the value of securities held in its portfolio and rates or 
currency or market values move in a direction opposite to that 
which the Fund has anticipated, the Fund will lose part or all of 
the benefit of the increased value of securities which it has 
hedged because it will have offsetting losses in its futures 
positions. In addition, in such situations, if the Fund had 
insufficient cash, it may have to sell securities to meet daily 
variation margin requirements at a time when it may be 
disadvantageous to do so. These sales of securities may, but will 
not necessarily, be at increased prices which reflect the change 
in interest rates or currency values, as the case may be.

	Options on Futures Contracts. An option on an interest rate 
futures contract, as contrasted with the direct investment in such 
a contract, gives the purchaser the right, in return for the 
premium paid, to assume a position in the underlying interest rate 
futures contract at a specified exercise price at any time prior 
to the expiration date of the option. An option on a foreign 
currency futures contract, as contrasted with the direct 
investment in such a contract, gives the purchaser the right, but 
not the obligation, to assume a long or short position in the 
relevant underlying future currency at a predetermined exercise 
price at a time in the future. Upon exercise of an option, the 
delivery of the futures position by the writer of the option to 
the holder of the option will be accompanied by delivery of the 
accumulated balance in the writer's futures margin account, which 
represents the amount by which the market price of the futures 
contract exceeds, in the case of a call, or is less than, in the 
case of a put, the exercise price of the option on the futures 
contract. The potential for loss related to the purchase of an 
option on futures contracts is limited to the premium paid for the 
option (plus transaction costs). Because the value of the option 
is fixed at the point of sale, there are no daily cash payments to 
reflect changes in the value of the underlying contract; however, 
the value of the option does change daily and that change would be 
reflected in the net asset value of a Fund investing in the 
option.

	Several risks are associated with options on futures 
contracts. The ability to establish and close out positions on 
such options will be subject to the existence of a liquid market. 
In addition, the purchase of put or call options on interest rate 
and foreign currency futures will be based upon predictions by a 
Fund's Investment Adviser as to anticipated trends in interest 
rates and currency values, as the case may be, which could prove 
to be incorrect. Even if the expectations of an Investment Adviser 
are correct, there may be an imperfect correlation between the 
change in the value of the options and of the portfolio securities 
or the currencies being hedged.

	Foreign Investments (Convertible, Diversified Strategic 
Income, High Income and Utilities Funds). Investors should 
recognize that investing in foreign companies involves certain 
considerations which are not typically associated with investing 
in U.S. issuers. Since the Fund will be investing in securities 
denominated in currencies other than the U.S. dollar, and since 
the Fund may temporarily hold funds in bank deposits or other 
money-market investments denominated in foreign currencies, the 
Fund may be affected favorably or unfavorably by exchange control 
regulations or changes in the exchange rate between such 
currencies and the dollar. A change in the value of a foreign 
currency relative to the U.S. dollar will result in a 
corresponding change in the dollar value of the Fund's assets 
denominated in that foreign currency. Changes in foreign currency 
exchange rates may also affect the value of dividends and interest 
earned, gains and losses realized on the sale of securities and 
net investment income and gain, if any, to be distributed to 
shareholders by the Fund.

	The rate of exchange between the U.S. dollar and other 
currencies is determined by the forces of supply and demand in the 
foreign exchange markets. Changes in the exchange rate may result 
over time from the interaction of many factors directly or 
indirectly affecting economic conditions and political 
developments in other countries. Of particular importance are 
rates of inflation, interest rate levels, the balance of payments 
and the extent of government surpluses or deficits in the Unites 
States and the particular foreign country.  All these factors are 
in turn sensitive to the monetary, fiscal and trade policies 
pursued by the governments of the United States and other foreign 
countries important to international trade and finance. Government 
intervention may also play a significant role. National 
governments rarely voluntarily allow their currencies to float 
freely in response to economic forces. Sovereign governments use a 
variety of techniques, such as intervention by a country's central 
bank or imposition of regulatory controls or taxes, to affect the 
exchange rates of their currencies.

	Many of the securities held by the Fund will not be 
registered with, nor the issuers thereof be subject to reporting 
requirements of, the SEC. Accordingly, there may be less publicly 
available information about the securities and about the foreign 
company or government issuing them than is available about a 
domestic company or government entity. Foreign issuers are 
generally not subject to uniform financial reporting standards, 
practices and requirements comparable to those applicable to U.S. 
issuers. In addition, with respect to some foreign countries, 
there is the possibility of expropriation or confiscatory 
taxation, limitations on the removal of funds or other assets of 
the Fund, political or social instability, or domestic 
developments which could affect U.S. investments in those 
countries. Moreover, individual foreign economies may differ 
favorably or unfavorably from the U.S. economy in such respects as 
growth of gross national product, rate of inflation, capital 
reinvestment, resource self-sufficiency and balance of payment 
positions. The Fund may invest in securities of foreign 
governments (or agencies or instrumentalities thereof), and many, 
if not all, of the foregoing considerations apply to such 
investments as well.

	Securities of some foreign companies are less liquid, and 
their prices are more volatile, than securities of comparable 
domestic companies. Certain foreign countries are known to 
experience long delays between the trade and settlement dates of 
securities purchased or sold. Due to the increased exposure of the 
Fund to market and foreign exchange fluctuations brought about by 
such delays, and to the corresponding negative impact on Fund 
liquidity, the Fund will avoid investing in countries which are 
known to experience settlement delays which may expose the Fund to 
unreasonable risk of loss.

	The interest payable on the Fund's foreign securities may be 
subject to foreign withholding taxes, and while investors may be 
able to claim some credit or deductions for such taxes with 
respect to their allocated shares of such foreign tax payments, 
the general effect of these taxes will be to reduce the Fund's 
income. Additionally, the operating expenses of the Fund can be 
expected to be higher than those of an investment company 
investing exclusively in U.S. securities, since the expenses of 
the Fund, such as custodial costs, valuation costs and 
communication costs, as well as the rate of the investment 
advisory fees, though similar to such expenses of some other 
international funds, are higher than those costs incurred by other 
investment companies.

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

	Short Sales (Utilities Fund). Utilities Fund may, from time 
to time, sell securities short but the value of securities sold 
short will not exceed 5% of the value of the Fund's assets. In 
addition, the Fund may not (a) sell short the securities of a 
single issuer to the extent of more than 2% of the value of the 
Fund's net assets or (b) sell short the securities of any class of 
an issuer to the extent of more than 2% of the outstanding 
securities of the class at the time of the transaction. A short 
sale is a transaction in which the Fund sells securities that it 
does not own (but has borrowed) in anticipation of a decline in 
the market price of the securities.

	When the Fund makes a short sale, the proceeds it receives 
from the sale are retained by a broker until the Fund replaces the 
borrowed securities. To deliver the securities to the buyer, the 
Fund must arrange through a broker to borrow the securities and, 
in so doing, the Fund becomes obligated to replace the securities 
borrowed at their market price at the time of replacement, 
whatever that price may be. The Fund may have to pay a premium to 
borrow the securities and must pay any dividends or interest 
payable on the securities until they are replaced.

	The Fund's obligation to replace the securities borrowed in 
connection with a short sale will be secured by collateral 
deposited with the broker that consists of cash, U.S. government 
securities, equity securities or debt securities of any grade, 
providing such securities have been determined by the Investment 
Adviser to be liquid and unencumbered and are marked to market 
daily pursuant to guidelines established by the Trustees. In 
addition, the Fund will place in a segregated account with its 
custodian an amount of cash or U.S. government securities equal to 
the difference, if any, between the market value of the securities 
at the time they were sold short and the value of any assets 
deposited as collateral with the broker in connection with the 
short sale (not including the proceeds of the short sale). Until 
it replaces the borrowed securities, the Fund will maintain the 
segregated account daily such that the amount deposited in the 
account plus the amount deposited with the broker, not including 
the proceeds from the short sale, will  equal the current market 
value of the securities sold short and will not be less than the 
market value of the securities at the time they were sold short. 

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

Investment Restrictions

The Trust has adopted investment restrictions 1 through 14 below 
(other than restriction 10 as applied to Utilities Fund) as 
fundamental policies with respect to the Funds, which, under the 
terms of the 1940 Act, may not be changed without the vote of a 
majority of the outstanding voting securities of a Fund. A 
"majority" is defined in the 1940 Act as the lesser of (a) 67% or 
more of the shares present at a shareholder meeting, if the 
holders of more than 50% of the outstanding shares of the Trust 
are present or represented by proxy, or (b) more than 50% of the 
outstanding shares. Investment restrictions 15 through 20, and 
restriction 10, as applied to Utilities Fund, may be changed by 
vote of a majority of the Board of Trustees at any time.

	The investment policies adopted by the Trust prohibit a Fund 
from:

1.	Purchasing the securities of any issuer (other than U.S. 
government securities) if as a result more than 5% of the 
value of the Fund's total assets would be invested in the 
securities of the issuer, except that up to 25% of the 
value of the Fund's total assets may be invested without 
regard to this 5% limitation.

2.	Purchasing (a) more than 10% of the voting securities of 
any one issuer, (b) more than 10% of the securities of 
any class of any one issuer or (c) more than 10% of the 
outstanding debt securities of any one issuer, except 
that limitation (c) does not apply to the Exchange 
Reserve and Diversified Strategic Income Funds and 
limitations (b) and (c) do not apply to the Utilities 
Fund; provided that this limitation shall not apply to 
investment in U.S. government securities.

3.	Purchasing securities on margin, except that the Fund may 
obtain any short-term credits necessary for the clearance 
of purchases and sales of securities. For purposes of 
this restriction, the deposit or payment of initial or 
variation margin in connection with futures contracts or 
related options will not be deemed to be a purchase of 
securities on margin by any Fund permitted to engage in 
transactions in futures contracts or related options.

4.	Making short sales of securities or maintaining a short 
position except that (a) the Premium Total Return, 
Utilities and Convertible Funds may engage in such 
activities if, at all times when a short position is 
open, the relevant Fund owns an equal amount of the 
securities convertible into or exchangeable, without 
payment of any further consideration, for securities of 
the same issuer as, and at least equal in amount to, the 
securities sold short, and if, with respect to the 
Premium Total Return and Convertible Funds, not more than 
10% of the relevant Fund's net assets (taken at current 
value) is held as collateral for such sales at any one 
time and (b) Utilities Fund may make short sales or 
maintain a short position to the extent of 5% of its net 
assets.

5.	Borrowing money, except that: (a) the Fund may borrow 
from banks for temporary or emergency (not leveraging) 
purposes, including the meeting of redemption requests 
that might otherwise require the untimely disposition of 
securities, in an amount not exceeding 10% (20% for 
Utilities Fund) of the value of the Fund's total assets 
(including the amount borrowed) valued at market less 
liabilities (not including the amount borrowed) at the 
time the borrowing is made; (b) Diversified Strategic 
Income Fund may enter into reverse repurchase agreements 
and forward roll transactions; and (c) one or more Funds 
may enter into futures contracts. Except for Diversified 
Strategic Income Fund, whenever borrowings described 
under (a) above exceed 5% of the value of a Fund's total 
assets, the Fund will not make any additional 
investments. Immediately after any borrowing (including 
reverse repurchase agreements and forward roll 
transactions), Diversified Strategic Income Fund will 
maintain an asset coverage of at least 300% with respect 
to all its borrowings.

6.	Pledging, hypothecating, mortgaging or otherwise 
encumbering more than 10% of the value of the Fund's 
total assets. For purposes of this restriction, (a) the 
deposit of assets in escrow in connection with the 
writing of covered put or call options and the purchase 
of securities on a when-issued or delayed-delivery basis 
and (b) collateral arrangements with respect to (i) the 
purchase and sale of stock options, options on foreign 
currencies and options on stock indexes and (ii) initial 
or variation margin for futures contracts will not be 
deemed to be pledges of a Fund's assets.

7.	Underwriting the securities of other issuers, except 
insofar as a Fund may be deemed an underwriter under the 
Securities Act of 1933, as amended, (the "1933 Act") by 
virtue of disposing of portfolio securities.

8.	Purchasing or selling real estate or interests in real 
estate, except that the Fund may purchase and sell 
securities that are secured by real estate and may 
purchase securities issued by companies that invest or 
deal in real estate.
   
9.	Investing in commodities, except that (a) the High 
Income, Diversified Strategic Income, Utilities and 
Municipal High Income Funds may invest in futures 
contracts and options on futures contracts as described 
in their Prospectuses and (b) upon 60 days' notice given 
to its shareholders, the Premium Total Return and 
Convertible Funds may engage in hedging transactions 
involving futures contracts and related options, 
including stock index futures contracts and financial 
futures contracts.
    

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

11.	Making loans to others, except through purchasing 
qualified debt obligations, entering into repurchase 
agreements and, with respect to Funds other than the 
Exchange Reserve Fund, lending portfolio securities 
consistent with the Fund's investment objective. 

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

13.	Purchasing any securities which would cause more than 
25% of the value of the Fund's total assets at the time 
of purchase to be invested in the securities of issuers 
conducting their principal business activities in the 
same industry, except that Exchange Reserve Fund and 
Utilities Fund will invest in excess of 25% of their 
respective assets in the securities of companies within 
the banking industry and utility industry, respectively; 
provided that there shall be no limit on the purchase of 
(a) U.S. government securities or (b) for Funds other 
than the Exchange Reserve and Utilities Funds, Municipal 
Securities issued by governments or political 
subdivisions of governments.

14.	Writing or selling puts, calls, straddles, spreads or 
combinations thereof, except, with respect to Funds other 
than Exchange Reserve Fund, as permitted under the Fund's 
investment objective and policies.

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

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

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

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

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

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

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

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

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

	For purposes of the investment restrictions described above, 
the issuer of a Municipal Security is deemed to be the entity 
(public or private) ultimately responsible for the payment of the 
principal of and interest on the security. For purposes of 
investment restriction 13, private activity bonds (other than 
those issued for charitable, educational and certain other 
purposes), the payment of principal and interest on which is the 
ultimate responsibility of companies within the same industry, are 
grouped together as an industry. The Trust may make commitments 
more restrictive than the restrictions listed above with respect 
to a Fund so as to permit the sale of shares of the Fund in 
certain states. Should the Trust determine that any such 
commitment is no longer in the best interests of the Fund and its 
shareholders, the Trust will revoke the commitment by terminating 
the sale of shares of the Fund in the state involved. The 
percentage limitations contained in the restrictions listed above 
apply at the time of purchases of securities.

Portfolio Turnover

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

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

	Certain other practices which may be employed by a Fund also 
could result in high portfolio turnover. For example, portfolio 
securities may be sold in anticipation of a rise in interest rates 
(market decline) or purchased in anticipation of a decline in 
interest rates (market rise) and later sold. In addition, a 
security may be sold and another of comparable quality purchased 
at approximately the same time to take advantage of what a Fund's 
Investment Adviser believes to be a temporary disparity in the 
normal yield relationship between the two securities. These yield 
disparities may occur for reasons not directly related to the 
investment quality of particular issues or the general movement of 
interest rates, such as changes in the overall demand for, or 
supply of, various types of securities. 

   
	For the fiscal years ended July 31, 1995, 1996 and 1997, the 
portfolio turnover rates were as follows:

<TABLE> 
<CAPTION> 
							For the Period 
				For the Fiscal		from August 1, 
				Year Ended		1996 through 
				July 31			December 31, 
				1995	1996	1997	1996 
<S>				<C>	<C>	<C>	<C> 
Convertible Fund			48%	59%	57%		
Diversified Strategic Income Fund	83	90	85		
High Income Fund		60	72	78		
Premium Total Return Fund	63	58	--	30%
Municipal High Income Fund	38	44	51		
Utilities Fund			36	58	45		
</TABLE>
    

	For regulatory purposes, the turnover rate of Exchange 
Reserve Fund is zero.

Portfolio Transactions

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

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

Total Brokerage Commissions Paid
   
<TABLE>
<CAPTION>
		Premium							Diversified
		Total				High				Strategic
		Return		Convertible	Income		Utilities		Income
Fiscal Year	Fund		Fund		Fund		Fund		Fund	
<S>		<C>		<C>		<C>		<C>		<C>
1995		$3,517,469	$39,798		$97,439		$2,134,306	$        0
1996		3,935,585	16,920		32,621		2,446,072	50,196
1996*		1,179,425	--		--		--		--
1997		--		0		0		138,150		0
</TABLE>

Brokerage Commissions Paid to Smith Barney

<TABLE>
<CAPTION>
		Premium							Diversified
		Total				High				Strategic
		Return		Convertible	Income		Utilities		Income
Fiscal Year	Fund		Fund		Fund		Fund		Fund	
<S>		<C>		<C>		<C>		<C>		<C>
1995		$694,467	$600		$0		$162,924	$0
1996		628,778		0		0		91,818		0
1996* 		209,905		--		--		--		--
1997		--		0		0		138,150		0
</TABLE>

% of Total Brokerage Commissions Paid to Smith Barney

<TABLE>
<CAPTION>
		Premium							Diversified
		Total				High				Strategic
		Return		Convertible	Income		Utilities		Income
Fiscal Year	Fund		Fund		Fund		Fund		Fund	
<S>		<C>		<C>		<C>		<C>		<C>
1995		19.75%		1.51%		0%		7.63%		0%
1996		15.98		0		0		3.75		0
1996*		17.80		--		--		--		--
1997		--		0		0		6.60		0
</TABLE>

% of Total Dollar Amount of Transactions Involving Commissions 
Paid to Smith Barney


<TABLE>
<CAPTION>
		Premium							Diversified
		Total				High				Strategic
		Return		Convertible	Income		Utilities		Income
Fiscal Year	Fund		Fund		Fund		Fund		Fund	
<S>		<C>		<C>		<C>		<C>		<C>
1995		20.02%		1.69%		0%		8.21%		0%
1996		16.26		0		0		2.72		0
1996*		13.62		--		--		--		--
1997		--		0		0		5.85		0
</TABLE>
    

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

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

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

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


PURCHASE OF SHARES

Volume Discounts

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

Combined Right of Accumulation

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

Determination of Public Offering Prices

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


REDEMPTION OF SHARES

Detailed information on how to redeem shares of a Fund is included 
in its Prospectus. The right of redemption of shares of a Fund may 
be suspended or the date of payment postponed (a) for any periods 
during which the New York Stock Exchange, Inc. (the "NYSE") is 
closed (other than for customary weekend and holiday closings), 
(b) when trading in the markets the Fund normally utilizes is 
restricted, or an emergency exists, as determined by the SEC, so 
that disposal of the Fund's investments or determination of its 
net asset value is not reasonably practicable or (c) for such 
other periods as the SEC by order may permit for the protection of 
the Fund's shareholders.

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

	Automatic Cash Withdrawal Plan. An automatic cash withdrawal 
plan (the "Withdrawal Plan") is available to shareholders who own 
shares of a Fund with a value of at least $10,000 ($5,000 for 
retirement plan accounts) and who wish to receive specific amounts 
of cash monthly or quarterly. Withdrawals of at least $50 may be 
made under the Withdrawal Plan by redeeming as many shares of the 
Fund as may be necessary to cover the stipulated withdrawal 
payment. Any applicable CDSC will not be waived on amounts 
withdrawn by shareholders that exceed 1.00% per month of the value 
of a shareholder's shares at the time the Withdrawal Plan 
commences. (With respect to Withdrawal Plans in effect prior to 
November 7, 1994, any applicable CDSC will be waived on amounts 
withdrawn that do not exceed 2.00% per month of the value of a 
shareholder's shares at the time the Withdrawal Plan commences). 
To the extent that withdrawals exceed dividends, distributions and 
appreciation of a shareholder's investment in the Fund, there will 
be a reduction in the value of the shareholder's investment and 
continued withdrawal payments may reduce the shareholder's 
investment and ultimately exhaust it. Withdrawal payments should 
not be considered as income from investment in a Fund. 
Furthermore, as it generally would not be advantageous to a 
shareholder to make additional investments in a Fund at the same 
time he or she is participating in the Withdrawal Plan with 
respect to that Fund, purchases by such shareholders of additional 
shares in the Fund in amounts less than $5,000 will not ordinarily 
be permitted.

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


DISTRIBUTOR

	Smith Barney serves as the Trust's distributor on a best 
efforts basis pursuant to a distribution agreement (the 
"Distribution Agreement").

	PFS serves as one of the Trust's distributors with respect 
to the Exchange Reserve Fund pursuant to a Distribution Agreement 
dated November 20, 1995.

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

   
	For the fiscal year ended July 31, 1997, Smith Barney and/or 
PFS incurred distribution expenses totaling approximately $[               
], consisting of approximately $[                ] for 
advertising, $[             ] for printing and mailing 
prospectuses, $[                ] for support services and 
overhead expenses, $[           ] to Smith Barney or PFS Financial 
Consultants and $[                     ] for accruals for interest 
on the excess of Smith Barney and/or PFS expenses incurred in the 
distribution of the Fund's shares over the sum of the distribution 
fees and CDSC received by Smith Barney and/or PFS.
    

Distribution Arrangements

   
	Shares of the Trust are distributed on a best efforts basis 
by Smith Barney as sales agent of the Trust pursuant to the 
Distribution Agreement. To compensate Smith Barney for the 
services it provides and for the expense it bears under the 
Distribution Agreement, the Trust has adopted a services and 
distribution plan (the "Plan") pursuant to Rule 12b-1 under the 
1940 Act. Under the Plan, each Fund, except Exchange Reserve Fund, 
pays Smith Barney a service fee, accrued daily and paid monthly, 
calculated at the annual rate of 0.25% (0.15% in the case of 
Municipal High Income Fund) of the value of the Fund's average 
daily net assets attributable to its Class A, Class B and Class C 
shares. In addition, each Fund except the Exchange Reserve Fund, 
pays Smith Barney, with respect to its Class B and Class C shares, 
a distribution fee.  The Exchange Reserve Fund pays PFS a 
distribution fee with respect to its Class B shares.  The 
distribution fee is primarily intended to compensate Smith Barney 
and/or PFS for its initial expense of paying Financial Consultants 
a commission upon sales of those shares. The Class B and Class C 
shares' distribution fees, accrued daily and paid monthly, are 
calculated at the annual rate of 0.50% for Class B shares and 
0.45% for Class C shares (0.50% for Class C shares in the case of 
Exchange Reserve Fund and 0.55% for Class C shares in the case of 
Municipal High Fund) of the value of a Fund's average daily net 
assets attributable to the shares of the respective Class. 

	For the fiscal years ended July 31, 1995, 1996 and 1997, 
Smith Barney received $52,644,615, $57,460,253 and $[                    
], respectively, in the aggregate from the Trust under the Plan.
    

	The following expenses were incurred during the periods 
indicated:

Sales Charges (paid to Smith Barney).

Class A

   
<TABLE> 
<CAPTION> 
									For the Period 
			For the Fiscal					from August 1, 
			Year Ended					1996 through 
			July 31						December 31, 
			1995		1996		1997		1996 
<S>			<C>		<C>		<C>		<C> 
Convertible Fund		$   8,900	$ 49,000		$  19,000

Diversified Strategic
 Income Fund		471,500		792,000		983,000	

High Income Fund	457,100		593,000		726,000	

Premium Total Return
 Fund			594,400		968,000		--		$435,000

Municipal High Income
 Fund			68,794		47,000		46,000	

Utilities Fund		150,600		228,000		55,000
</TABLE>	

CDSC (paid to Smith Barney)

Class B

<TABLE> 
<CAPTION> 
									For the Period 
			For the Fiscal					from August 1, 
			Year Ended					1996 through 
			July 31						December 31, 
			1995		1996		1997		1996 
<S>			<C>		<C>		<C>		<C> 
Convertible Fund		$  126,500 	$    95,000 	$     59,000

Diversified Strategic
 Income Fund		6,000,000	4,015,000	2,858,000	

Exchange Reserve Fund	1,429,000	765,000		618,000	

High Income Fund	1,000,000	915,000		831,000	

Premium Total Return
 Fund			1,765,800	2,905,000	--		$1,009,000

Municipal High Income
 Fund			1,649,382	929,000		525,000	

Utilities Fund		4,738,800 	3,393,000	2,514,000	
</TABLE>

Service Fees and Distribution Fees

<TABLE> 
<CAPTION> 
									For the Period 
			For the Fiscal					from August 1, 
			Year Ended					1996 through 
			July 31						December 31, 
			1995		1996		1997		1996 
<S>			<C>		<C>		<C>		<C> 

Convertible Fund		$468,685 	$433,951 	$413,173	

Diversified Strategic
 Income Fund		17,817,988	18,641,336	19,195,740	

Exchange Reserve Fund	913,444		748,208		737,595	

High Income Fund	4,029,911	4,893,170	5,818,152	

Premium Total Return
 Fund			12,565,954	15,646,147	--		$7,545,851

Municipal High Income
 Fund			5,456,482	4,945,112	4,316,732	

Utilities Fund		12,305,595	12,152,329	9,205,137
</TABLE>
    	

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


VALUATION OF SHARES

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

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

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

EXCHANGE PRIVILEGE

Except as noted below, shareholders of any of the Smith Barney 
Mutual Funds may exchange all or part of their shares for shares 
of the same Class of other Smith Barney Mutual Funds, to the 
extent such shares are offered for sale in the shareholder's state 
of residence, on the basis of relative net asset value per share 
at the time of exchange as follows:

A.	Class A shares of any fund purchased with a sales charge 
may be exchanged for Class A shares of any of the other 
funds.  Class A shares of any fund may be exchanged 
without a sales charge for shares of the funds that are 
offered without a sales charge. Class A shares of any 
fund purchased without a sales charge may be exchanged 
for shares sold with a sales charge.

B.	Class A shares of any fund acquired by a previous 
exchange of shares purchased with a sales charge may be 
exchanged for Class A shares of any of the other funds.

C.	Class B shares of any fund may be exchanged without a 
sales charge. Class B shares of a Fund exchanged for 
Class B shares of another fund will be subject to the 
higher applicable CDSC of the two funds and, for purposes 
of calculating CDSC rates and conversion periods, will be 
deemed to have been held since the date the shares being 
exchanged were deemed to be purchased.

	Dealers other than Smith Barney must notify First Data of 
the investor's prior ownership of Class A shares of Smith Barney 
High Income Fund and the account number in order to accomplish an 
exchange of shares of Smith Barney High Income Fund under 
paragraph B above.

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

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


PERFORMANCE DATA

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

Yield

Exchange Reserve Fund. The current yield for the Fund is computed 
by (a) determining the net change in the value of a hypothetical 
pre-existing account in the Fund having a balance of one share at 
the beginning of a seven-calendar-day period for which yield is to 
be quoted, (b) dividing the net change by the value of the account 
at the beginning of the period to obtain the base period return 
and (c) annualizing the results (i.e., multiplying the base period 
return by 365/7). The net change in the value of the account 
reflects the value of additional shares purchased with dividends 
declared on the original share and any such additional shares, but 
does not include realized gains and losses or unrealized 
appreciation and depreciation. In addition, the Fund may calculate 
a compound effective annualized yield by adding 1 to the base 
period return (calculated as described above), raising the sum to 
a power equal to 365/7 and subtracting 1.

   
	For the seven-day period ended July 31, 1997, the annualized 
yield was 4.51%, and the compound effective yield was 4.61%. As of 
July 31, 1997, the Fund's average portfolio maturity was 47 days. 
    

	Other Funds. The 30-day yield figure of a Fund other than 
Exchange Reserve Fund is calculated according to a formula 
prescribed by the SEC. The formula can be expressed as follows:

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

Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of waiver and 
reimbursement).
c = the average daily number of shares outstanding 
during the period that were entitled to receive 
dividends.
d = the maximum offering price per share on the last 
day of the period.

	For the purpose of determining the interest earned (variable 
"a" in the formula) on debt obligations that were purchased by a 
Fund at a discount or premium, the formula generally calls for 
amortization of the discount or premium; the amortization schedule 
will be adjusted monthly to reflect changes in the market values 
of the debt obligations.

	Investors should recognize that, in periods of declining 
interest rates, a Fund's yield will tend to be somewhat higher 
than prevailing market rates, and in periods of rising interest 
rates the Fund's yield will tend to be somewhat lower. In 
addition, when interest rates are falling, the inflow of net new 
money to the Fund from the continuous sale of its shares will 
likely be invested in portfolio instruments producing lower yields 
than the balance of such Fund's investments, thereby reducing the 
current yield of the Fund. In periods of rising interest rates, 
the opposite can be expected to occur.

Average Annual Total Return

The "average annual total return" figures for each Fund, other 
than Exchange Reserve Fund, are 
computed according to a formula prescribed by the SEC. The formula 
can be expressed as follows:

	P(1+T)n = ERV

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

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


   
<TABLE>
<CAPTION>
			One-	Five-	Commencement
			Year	Year	of
Fund			Period	Period	Operations
<S>			<C>	<C>	<C>
Convertible Fund		21.94%	N/A	12.50%

Diversified Strategic
 Income Fund		11.36	N/A	8.52

High Income Fund	13.31	N/A	11.90

Premium Total Return
 Fund+			20.67	N/A	14.69

Municipal High Income
 Fund			10.39	N/A	7.23

Utilities Fund		15.48	N/A	9.25
</TABLE>

+ 	For the Premium Total Return Fund, figures are for the 
period ended December 31, 1996.  For all other Funds, figures 
are for the period ended July 31, 1997.
    

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

   
<TABLE>
<CAPTION>
			One-	Five-	Ten-	Commencement
			Year	Year	Year	of
Fund			Period	Period	Period	Operations
<S>			<C>	<C>	<C>	<C>
Convertible Fund (1)	26.29%	11.28%	9.08%	9.44%

Diversified Strategic
 Income Fund (2)(6)	10.89	7.26	N/A	9.16

High Income Fund(3)(6)	17.72	11.03	9.32	9.41

Premium Total Return
 Fund+(4)		20.67	13.52	N/A	14.69

Municipal High Income
 Fund(4)(6)		9.88	6.03	7.56	8.35

Utilities Fund(5)		14.80	7.87	N/A	10.21
</TABLE>

+	For the Premium Total Return Fund, figures are for the period 
ended December 31, 1996.  For all other Funds, figures are for 
the period ended July 31, 1997.
(1) Fund commenced operations on September 9, 1986.
(2) Fund commenced operations on December 28, 1989. 
(3) Fund commenced operations on September 2, 1986. 
(4) Fund commenced operations on September 16, 1985. 
(5) Fund commenced operations on March 28, 1988. 
(6) Prior to November 6, 1992, the maximum CDSC imposed on 
redemptions was 5.00%.
    

	The average annual total returns (with fees waived) of the 
Fund's Class C shares were as follows for the periods indicated:

   
<TABLE>
<CAPTION>
			One-	Five-	Commencement
			Year	Year	of
Fund			Period	Period	Operations
<S>			<C>	<C>	<C>
Convertible Fund(3)	26.37%	N/A	16.40%

Diversified Strategic
 Income Fund (5)		10.92	N/A	7.41

High Income Fund (4)	17.76	N/A	12.83

Premium Total Return
 Fund+(1)		20.13	N/A	14.73

Municipal High Income
 Fund(2)			9.78	N/A	10.70

Utilities Fund(6)		15.01	N/A	7.40
</TABLE>

+	For the Premium Total Return Fund, figures are for the period 
ended December 31, 1996.  For all other Funds, figures are for 
the period ended July 31, 1997.
(1)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on June 1, 1993.
(2)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on November 17, 1994 
(3)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on November 7, 1994
(4)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on August 24, 1994.
(5)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on March 19, 1993.
(6)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on February 4, 1993.
    

	A Class' total return figures calculated in accordance with 
the above formula assume that the maximum sales charge or maximum 
applicable CDSC, as the case may be, has been deducted for the 
hypothetical $1,000 initial investment at the time of purchase.

Aggregate Total Return

The aggregate total return figures for each Fund, other than 
Exchange Reserve Fund, represent the cumulative change in the 
value of an investment in the Class for the specified period and 
are computed by the following formula:
	ERV - P
	P

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

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

No Load*


   
<TABLE>
<CAPTION>
			One-	Five-	Ten-	Commencement
			Year	Year	Year	of
Fund			Period	Period	Period	Operations
<S>			<C>	<C>	<C>	<C>
Convertible Fund(1)	26.29%	70.64%	138.43%
	167.86%

Diversified Strategic
 Income Fund(2)(6)	10.89	41.99	N/A	94.63

High Income Fund(3)(6)	17.72	68.74	143.71	166.99

Premium Total Return
 Fund+(4)		20.09	88.52	N/A	314.70

Municipal High Income
 Fund(4)(6)		9.88	34.03	107.33	159.26

Utilities Fund(5)		14.88	46.03	N/A	148.20
</TABLE>
    

Load**

   
<TABLE>
<CAPTION>
			One-	Five-	Ten-	Commencement
			Year	Year	Year	of
Fund			Period	Period	Period	Operations
<S>			<C>	<C>	<C>	<C>
Convertible Fund(1)	21.29%	69.64%	138.43%167.86%

Diversified Strategic
 Income Fund(2)(6)	6.39	40.99	N/A	94.63

High Income Fund(3)(6)	13.22	67.74	143.71	166.99

Premium Total Return
 Fund +(4)		15.09	87.52	N/A	314.16

Municipal High Income
 Fund(4)(6)		5.38	33.03	107.33	159.26

Utilities Fund(5)		9.88	45.03	N/A	148.20
</TABLE>

+	For the Premium Total Return Fund, figures are for the period 
ended December 31, 1996.  For all other Funds, figures are for 
the period ended July 31, 1997.
*	Figures do not include the effect of the maximum sales charge 
or maximum applicable CDSC. If they had been included, it would 
have the effect of lowering the returns shown.
**	Figures include the effect of the maximum sales charge or 
maximum applicable CDSC. 
(1) 	Fund commenced operations on September 9, 1986.
(2) 	Fund commenced operations on December 28, 1989.
(3)	Fund commenced operations on September 2, 1986.
(4)	Fund commenced operations on September 16, 1985.
(5)	Fund commenced operations on March 28, 1988.
(6)	Prior to November 6, 1992 the maximum CDSC imposed on 
redemptions was 5%.
    
	The aggregate total returns (with fees waived) of the Class A and 
Class C shares of the Funds indicated were as follows for the periods 
indicated:

No Load*

   
<TABLE>
<CAPTION>
			One-	Five-	Commencement
			Year	Year	of
Fund/Class		Period	Period	Operations
<S>			<C>	<C>	<C>
Convertible Fund			
Class A (1)		26.94%	N/A	72.83%
Class C (2)		26.37	N/A	51.42
			
Diversified Strategic Income Fund			
Class A (1)		11.36	N/A	47.29
Class C (3)		10.92	N/A	36.68
			
High Income Fund			
Class A (1)		18.31	N/A	70.25
Class C (4)		17.76	N/A	42.54
			
Premium Total Return Fund+			
Class A (1)		20.67	N/A	76.73
Class C (5)		20.13	N/A	61.83
			
Municipal High Income Fund			
Class A (1)		10.39	N/A	39.19
Class C (6)		15.01	N/A	31.62
			
Utilities Fund			
Class A (1)		15.48	N/A	52.04
Class C (7)		15.01	N/A	37.77
</TABLE>
    

Load**

   
<TABLE>
<CAPTION>
			One-	Five-	Commencement
			Year	Year	of
Fund			Period	Period	Operations
<S>			<C>	<C>	<C>
Convertible Fund			
Class A (1)		20.62	N/A	64.15
Class C (2)		25.37	N/A	51.42
			
Diversified Strategic Income Fund			
Class A (1)		6.33	N/A	40.63
Class C (3)		9.92	N/A	36.68
			
High Income Fund			
Class A (1)		12.96	N/A	62.58
Class C (4)		16.76	N/A	42.54
			
Premium Total Return Fund+			
Class A (1)		14.64	N/A	67.87
Class C (5)		19.13	N/A	61.83
			
Municipal High Income Fund			
Class A (1)		5.98	N/A	33.60
Class C (6)		8.78	N/A	31.62
			
Utilities Fund			
Class A (1)		9.73	N/A	44.40
Class C (7)		14.01	N/A	37.77
</TABLE>

+	For the Premium Total Return Fund, figures are for the period 
ended December 31, 1996.  For all other Funds, figures are for 
the period ended July 31, 1997.
*	Figures do not include the effect of the maximum sales charge 
or maximum applicable CDSC. 
**	Figures include the effect of the maximum sales charge or 
maximum applicable CDSC.
(1)	The Fund commenced selling Class A shares on November 6, 
1992.
(2)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on November 7, 1994.
(3)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on March 19, 1993.
(4)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on August 24, 1994.
(5)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on June 1, 1993.
(6)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on November 17, 1994.
(7)	The Fund commenced selling Class C shares (previously 
designated as Class D shares) on February 4, 1993.
    

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

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

TAXES

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

Tax Status of the Funds

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

	Each Fund has qualified and the Trust intends that each Fund 
continue to qualify separately each year as a "regulated 
investment company" under the Code. A qualified Fund will not be 
liable for Federal income taxes to the extent its taxable net 
investment income and net realized capital gains are distributed 
to its shareholders, provided that each Fund distributes at least 
90% of its net investment income. One of the several requirements 
for qualification is that a Fund receive at least 90% of its gross 
income each year from dividends, interest, payments with respect 
to securities loans and gains from the sale or other disposition 
of equity or debt securities or foreign currencies, or other 
income (including but not limited to gains from options, futures, 
or forward contracts) derived with respect to the Fund's 
investment in such stock, securities, or currencies. The Trust 
does not expect any Fund to have difficulty meeting this test.

	To qualify as a regulated investment company, a Fund also 
must earn less than 30% of its gross income from the disposition 
of securities held for less than three months. The 30% test will 
limit the extent to which a Fund may sell securities held for less 
than three months; effect short sales of securities held for less 
than three months; write options which expire in less than three 
months; and effect closing transactions with respect to call or 
put options that have been written or purchased within the 
preceding three months. (If a Fund purchases a put option for the 
purpose of hedging an underlying portfolio security, the 
acquisition of the option is treated as a short sale of the 
underlying security unless the option and the security are 
acquired on the same date.) Finally, as discussed below, this 
requirement also may limit investments by certain Funds in options 
on stock indexes, options on non-convertible debt securities, 
futures contracts and options on futures contracts, and foreign 
currencies (or options, futures or forward contracts on foreign 
currencies) but only to the extent that such foreign currencies 
are not directly related to the Trust's principal business of 
investing in securities.

Taxation of Investment by the Funds

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

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

	If a put or call option that a Fund has purchased on an 
equity or convertible debt security expires unexercised, the Fund 
will realize capital loss equal to the cost of the option. If the 
Fund enters into a closing sale transaction with respect to the 
option, it will realize a capital gain or loss (depending on 
whether the proceeds from the closing transaction are greater or 
less than the cost of the option). The gain or loss will be short-
term or long-term, depending on the Fund's holding period in the 
option. If the Fund exercises such a put option, it will realize a 
short-term capital gain or loss (long-term if the Fund holds the 
underlying security for more than one year before it purchases the 
put) from the sale of the underlying security measured by the 
sales proceeds decreased by the premium paid. If the Fund 
exercises such a call option, the premium paid for the option will 
be added to the tax basis of the security purchased.

	One or more Funds may invest in section 1256 contracts, and 
the Code imposes a special "mark-to-market" system for taxing 
these contracts. These contracts generally include options on non-
convertible debt securities (including United States government 
securities), options on stock indexes, futures contracts, options 
on futures contracts and certain foreign currency contracts. 
Options on foreign currency, futures contracts on foreign currency 
and options on foreign currency futures will qualify as "section 
1256" contracts if the options or futures are traded on or subject 
to the rules of a qualified board or exchange. Generally, most of 
the foreign currency options and foreign currency futures and 
related options in which certain Funds may invest will qualify as 
section 1256 contracts. In general, gain or loss on section 1256 
contracts will be taken into account for tax purposes when 
actually realized (by a closing transaction, by exercise, by 
taking delivery or by other termination). In addition, any section 
1256 contracts held at the end of a taxable year will be treated 
as sold at their year-end fair market value (that is, marked to 
the market), and the resulting gain or loss will be recognized for 
tax purposes. Provided that section 1256 contracts are held as 
capital assets and are not part of a straddle, both the realized 
and the unrealized year-end gain or loss from these investment 
positions (including premiums on options that expire unexercised) 
will be treated as 60% long-term and 40% short-term capital gain 
or loss, regardless of the period of time particular positions 
actually are held by a Fund. 

	A portion of the mark-to-market gain on instruments held for 
less than three months at the close of a Fund's taxable year may 
represent a gain on securities held for less than three months for 
purposes of the 30% test discussed above. Accordingly, a Fund may 
have to restrict its fourth-quarter transactions in section 1256 
contracts.

	Straddles. While the mark-to-market system is limited to 
section 1256 contracts, the Code contains other rules applicable 
to transactions which create positions which offset positions in 
section 1256 or other investment contracts. Those rules, 
applicable to "straddle" transactions, are intended to eliminate 
any special tax advantages for such transactions. "Straddles" are 
defined to include "offsetting positions" in actively-traded 
personal property. Under current law, it is not clear under what 
circumstances one investment made by a Fund, such as an option or 
futures contract, would be treated as "offsetting" another 
investment also held by the Fund, such as the underlying security 
(or vice versa) and, therefore, whether the Fund would be treated 
as having entered into a straddle. In general, investment 
positions may be "offsetting" if there is a substantial diminution 
in the risk of loss from holding one position by reason of holding 
one or more other positions (although certain "qualified" covered 
call stock options written by a Fund may be treated as not 
creating a straddle). Also, the forward currency contracts entered 
into by a Fund may result in the creation of "straddles" for 
Federal income tax purposes.

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

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

   
	Constructive Sales.  If a Fund effects a short sale of 
securities at a time when it has an unrealized gain on the 
securities, it may be required to recognize that gain as if it had 
actually sold the securities (as a "constructive sale") at the 
time it effects the short sale.  However, such constructive sale 
treatment may not apply if the Fund closes out the short sale with 
securities other than the appreciated securities held at the time 
of the short sale and if certain other conditions are satisfied.  
Uncertainty regarding the tax consequences of effecting short 
sales may limit the extent to which a Fund may effect short sales.

	Section 988. Foreign currency gain or loss from transactions 
in (a) bank forward contracts not traded in the interbank market 
and (b) futures contracts traded on a foreign exchange may be 
treated as ordinary income or loss under the Code section 988. A 
Fund may elect to have section 988 apply to section 1256 
contracts. Pursuant to that election, foreign currency gain or 
loss from these transactions would be treated entirely as ordinary 
income or loss when realized. A Fund will make the election 
necessary to gain such treatment if the election is otherwise in 
the best interests of the Fund. 
    

Taxation of the Trust's Shareholders

Dividends paid by a Fund from investment income and distributions 
of short-term capital gains will be taxable to shareholders as 
ordinary income for Federal income tax purposes, whether received 
in cash or reinvested in additional shares. Distributions of long-
term capital gains will be taxable to shareholders as long-term 
capital gain, whether paid in cash or reinvested in additional 
shares, and regardless of the length of time that the shareholder 
has held his or her shares of the Fund.  A portion of long-term 
capital gains (including such gains attributable to the 60% long-
term gains portion of gains on Section 1256 contracts) may be 
designated as eligible for the 20% maximum capital gains tax rate 
on gains realized by individuals from capital assets held for more 
than 18 months.

	Dividends of investment income (but not capital gains) from 
any Fund generally will qualify for the Federal dividends-received 
deduction for domestic corporate shareholders to the extent that 
such dividends do not exceed the aggregate amount of dividends 
received by the Fund from domestic corporations. If securities 
held by a Fund are considered to be "debt-financed" (generally, 
acquired with borrowed funds), are held by the Fund for less than 
46 days (91 days in the case of certain preferred stock), or are 
subject to certain forms of hedges or short sales, the portion of 
the dividends paid by the Fund which corresponds to the dividends 
paid with respect to such securities will not be eligible for the 
corporate dividends-received deduction.

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

	Capital Gains Distribution. As a general rule, a shareholder 
who redeems or exchanges his or her shares will recognize long-
term capital gain or loss if the shares have been held for more 
than one year, and will recognize short-term capital gain or loss 
if the shares have been held for one year or less. However, if a 
shareholder receives a distribution taxable as long-term capital 
gain with respect to shares of a Fund and redeems or exchanges the 
shares before he or she has held them for more than six months, 
any loss on such redemption or exchange that is less than or equal 
to the amount of the distribution will be treated as a long-term 
capital loss.

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

   
	Municipal High Income Fund. Because the Municipal High 
Income Fund will distribute exempt-interest dividends, interest on 
indebtedness incurred by shareholders, directly or indirectly, to 
purchase or carry shares of the Fund will not be deductible for 
Federal income tax purposes. If a shareholder redeems or exchanges 
shares of the Fund with respect to which he receives an exempt-
interest dividend before holding the shares for more than six 
months, no loss will be allowed on the redemption or exchange to 
the extent of the dividend received. Also, that portion of any 
dividend from the Fund which represents income from private 
activity bonds other than those issued for charitable, educational 
and certain other purposes held by the Fund may not retain its 
tax-exempt status in the hands of a shareholder who is a 
"substantial user" of a facility financed by such bonds or a 
person "related" to a substantial user. Investors should consult 
their own tax advisors to see whether they may be substantial 
users or related persons with respect to a facility financed by 
bonds in which the Fund may invest. Moreover, investors receiving 
social security or certain other retirement benefits should be 
aware that tax-exempt interest received from the Fund may under 
certain circumstances cause up to one-half of such retirement 
benefits to be subject to tax. If the Fund receives taxable 
investment income, it will designate as taxable the same 
percentage of each dividend as the actual taxable income bears to 
the total investment income earned during the period for which the 
dividend is paid. The percentage of each dividend designated as 
taxable, if any, may, therefore, vary. Dividends derived from 
interest from Municipal Securities which are exempt from Federal 
tax also may be exempt from personal income taxes in the state 
where the issuer is located, but in most cases will not be exempt 
under the tax laws of other states or local authorities. Annual 
statements will set forth the amount of interest from Municipal 
Securities earned by the Fund in each state or possession in which 
issuers of portfolio securities are located.
    

ADDITIONAL INFORMATION

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

	PNC Bank is located at 17th and Chestnut Streets, 
Philadelphia, Pennsylvania 19103, and serves as the custodian for 
each of the Funds, except Diversified Strategic Income Fund. 
Chase, located at Chase MetroTech Center, Brooklyn, NY 11245, 
serves as the custodian for Diversified Strategic Income Fund. 
Under their respective custodian agreements with the respective 
Funds, each custodian is authorized to establish separate accounts 
for foreign securities owned by the appropriate Fund to be held 
with foreign branches of other U.S. banks as well as with certain 
foreign banks and securities depositories. For its custody 
services to the Trust, each custodian receives monthly fees based 
upon the month-end aggregate net asset value of the appropriate 
Fund, plus certain charges for securities transactions including 
out-of-pocket expenses, and costs of any foreign and domestic sub-
custodians. The assets of the Trust are held under bank 
custodianship in compliance with the 1940 Act.

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

   
VOTING RIGHTS

	The Trustees themselves have the power to alter the number 
and the terms of office of the Trustees, and they may at any time 
lengthen their own terms or make their terms of unlimited duration 
(subject to certain removal procedures) and appoint their own 
successors, provided that in accordance with the 1940 Act at any 
time at least a majority, but in most instances at least two-
thirds, of the Trustees have been elected by the shareholders of 
the Fund.  Shares do not have cumulative voting rights and 
therefore the holders of more than 50% of the outstanding shares 
of the Fund may elect all of the Trustees irrespective of the 
votes of other shareholders.  Class A, Class B, Class C and Class 
Y shares of a Fund, if any, represent interests in the assets of 
that Fund and have identical voting, dividend, liquidation and 
other rights on the same terms and conditions, except that each 
Class of shares has exclusive voting rights with respect to 
provisions of the Fund's Rule 12b-1 distribution plan which 
pertain to a particular class.  For example, a change in 
investment policy for a Fund would be voted upon only by 
shareholders of the Fund involved.  Additionally, approval of each 
Fund's Investment Advisory Agreement is a matter to be determined 
separately by that Fund.  Approval of a proposal by the 
shareholders of one Fund is effective as to that Fund whether or 
not enough votes are received from the shareholders of the other 
Funds to approve the proposal as to those Funds. As of October 31, 
1997, the following shareholders beneficially owned 5% or more of 
a class of  shares of a Fund:

Convertible Fund Class C

Norman O. Davis and Karen J. Davis, Trustees
Davis Trust 1995 u/a/d 10/18/95
5280 Via Ester
Yorba Linda, CA 92686-4530
owned 6,131.730 (7.9325%) shares

Edith B. Cappel
1549 Rockledge Lane #1
Walnut Creek, CA 94595-2485
owned 5,067.523 (6.5557%) shares

Marsha L. Miller, Trustee
FBO Christopher Travis Hedenann Trust
u/a/d 1/5/88
P.O. Box 540303
Houston, TX 77254-0303
owned 3,973.850 (5.1409%) shares

Convertible Fund Class Y

Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,897,887.672 (70.2272%) shares

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 512,122.585 (18.9499%) shares

Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 143,872.407 (5.3236%) shares

Diversified Strategic Income Fund Class Y

Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 6,706,119.974 (59.6145%) shares

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 2,384,904.133 (21.2007%) shares

Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,356,386.933 (12.0576%) shares

Diversified Strategic Income Fund Class Z

Citibank NA, Custodian
Smith Barney Shearson 401(k) Savings Plan
Smith Barney Account
Attn: Nancy Kronenberg
111 Wall Street FISD/20th Floor
New York, NY 10043
owned 2,534,451.818 (99.9949%) shares

High Income Fund Class Y

Smith Barney Concert Series, Inc.
Growth Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 4,926,349.245 (35.3241%) shares

Smith Barney Concert Series, Inc.
High Growth Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 3,982,698.793 (28.5577%) shares

CoreStates Bank NA
NDTA
Taxable Account
Attn: Charles Mercado/Joe Alteri
P.O. Box 7829
Philadelphi, PA 19101-7829
owned 1,834,560.768 (13.1546%) shares

CoreStates Bank NA
ANDTA
IRA Account
Attn: Charles Mercado/Joe Alteri
P.O. Box 7829
Philadelphi, PA 19101-7829
owned 1,029,694.691 (7.3833%) shares

Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 943,794.447 (6.7674%) shares

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 808,272.816 (5.7956%) shares

High Income Fund Class Z

Ennis D. Robertson
Carefree Country Club
9705 Lake Bess Road #253
Winter Haven, FL 33884-3225
owned 4,219.858 (47.0815%) shares

Ennis D. Robertson
Smith Barney Inc. IRA Custodian
Carefree Country Club
9705 Lake Bess Road #253
Winter Haven, FL 33884-3225
owned 3,664.199 (40.8819%) shares

Michael A. Blum
Smith Barney Inc. Rollover Custodian
235 East 22nd Street, Apt. 101
New York, NY 10010-4637
owned 879.249 (9.8099%) shares

Premium Total Return Fund Class Y

Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 1,621,857.688 (76.3720%) shares

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 219,513.609 (10.3367%) shares

Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 127,272.269 (5.9931%) shares

Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 123,891.848 (5.8339%) shares

Municipal High Income Fund Class C

Margaret C. Glass
311 Louise Drive
Lafayette, LA 70506-3239
owned 5,452.029 (12.3651%) shares

Albert P. Brown
4248 Saratoga Avenue, K-384
Downers Grove, IL 60515-1973
owned  4,489.778 (10.1828%) shares

Joseph Giralano and Gloria Giralano, JTWRS
1435 Clinton Place
River Forest, IL 60305-1205
owned 4,188.661 (9.4998%) shares

John J. Madden and Deborah A. Madden, JTWRS
1920 Sandhill Road
Indianapolis, IN 46217-4659
owned 2,949.181 (6.6887%) shares

Deloa Oakes
3700 Taft
Boise, ID 83703-4876
owned 2,917.132 (6.6160%) shares

Daniel D. Dunsing and L. Mae Dunsing, TIC
Sub-Acount 1
P.O. Box 12
Sitka, AK 99835-0012

 Utilities Fund Class Y

Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 87,595.967 (74.5319%) shares

Smith Barney Concert Series, Inc.
Select Conservative Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 21,266.015 (18.0944%) shares

Smith Barney Concert Series, Inc.
Select Income Portfolio
PNC Bank, NA
Attn: Beverly Timson
200 Stevens Drive Suite 440
Lester, PA 19113-1522
owned 8,582.457 (7.3024%) shares

Utilities Fund Class Z

Citibank NA, Custodian
Smith Barney Shearson 401(k) Savings Plan
Smith Barney Account
Attn: Nancy Kronenberg
111 Wall Street FISD/20th Floor
New York, NY 10043
owned 739,802.184 (95.9836%) shares
    

FINANCIAL STATEMENTS

   
The Funds' Annual Reports for the fiscal year ended July 31, 1997 
(except for the Premium Total Return Fund, whose Annual Report is 
for the fiscal year ended December 31, 1996), accompany this 
Statement of Additional Information and are incorporated herein by 
reference in their entirety.
    

APPENDIX

Description of Ratings

Description of S&P Corporate Bond Ratings

	AAA

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

	AA

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

	A

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

	BBB

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

	BB, B and CCC

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


Description of Moody's Corporate Bond Ratings

	Aaa

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


	Aa

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

	A

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

	Baa

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

	Ba

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

	B

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

	Caa

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

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


Description of S&P Municipal Bond Ratings

	AAA

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

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

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

	AA

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

	A

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

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

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

	BBB

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

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

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

	BB, B, CCC and CC

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

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

	D

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

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


Description of S&P Municipal Note Ratings

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


Description of Moody's Municipal Bond Ratings

	Aaa

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


	Aa

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

	A

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

	Baa

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

	Ba

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

	B

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

	Caa

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

	Ca

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

	C

	Bonds which are rated C are the lowest rated class of bonds, and issues 
so rated can be regarded as having extremely poor prospects of ever attaining 
any real investment standing.
	Moody's applies the numerical modifiers 1, 2 and 3 in each generic 
rating classification from Aa through B. The modifier 1 indicates that the 
security ranks in the higher end of its generic ratings category; the modifier 
2 indicates a mid-range ranking; and the modifier 3 indicates that the issue 
ranks in the lower end of its generic ratings category.


Description of Moody's Municipal Note Ratings

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


Description of Commercial Paper Ratings

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

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

	Short-term obligations, including commercial paper, rated A-1+ by IBCA 
Limited or its affiliate IBCA Inc. are obligations supported by the highest 
capacity for timely repayment. Obligations rated A-1 have a very strong 
capacity for timely repayment. Obligations rated A-2 have a strong capacity 
for timely repayment, although such capacity may be susceptible to adverse 
changes in business, economic and financial conditions.

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

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

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

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








								Smith Barney
								INCOME FUNDS




					
							Statement of
							Additional Information
							   
							November 28, 1997
							    

Convertible Fund

Diversified Strategic Income Fund

Exchange Reserve Fund

High Income Fund

Premium Total Return Fund

Municipal High Income Fund

Utilities Fund











Smith Barney
Income Funds
388 Greenwich Street
New York, New York 10013					SMITH BARNEY
								A Member of TravelersGroup


FD 01217     11/97



SMITH BARNEY INCOME FUNDS
PART C
Item 24.  Financial Statements and Exhibits

(a)	Financial Statements:
	
   
Included in Part A:

Financial Highlights

Included in Part B:

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

Included in Part C:

Consent of Auditors is filed herein.
    

(b)	Exhibits:

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


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

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

(3)	Not Applicable.

(4)	Registrant's form of stock certificates for Class A, Class 
B, Class C and Class Y shares of beneficial interest in each 
of its sub-trusts are incorporated by reference to 
Post-Effective Amendment No. 34 to the Registration 
Statement.

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

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

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

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

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

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

(7)	Not Applicable.

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

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

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

(b)	Transfer Agency and Registrar Agreement between the 
Registrant and First Data Investor Services Group, Inc., 
(formerly The Shareholder Services Group, Inc.) is 
incorporated by reference to Post-Effective Amendment No. 40 
to the Registration Statement.
   
(10)	Opinion of Counsel was filed with Registrant's 24f-2 Notice 
on September 17, 1997 as Accession number 000091155-97-
000419.
    
(11)	   Consent of KPMG Peat Marwick LLP is filed herein.    

(12)	Not Applicable.

(13)	Not Applicable.

(14)	Not Applicable.

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

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

(17)	    Financial Data Schedule is filed herein    .

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

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

None.

Item 26.  Number of Holders of Securities
   
(1)					(2)
					Number of Record Holders
Title of Class				by Class as of October 31, 
1997

Beneficial Interest par value
$.001 per share


    
   
<TABLE>
<CAPTION>
Fund		Class A		Class B		Class C		Class Y		Class Z
<S>		<C>		<C>		<C>		<C>		<C>
Convertible
 Fund		3,380		3,235		88		8		N/A

Diversified
 Strategic Income
 Fund		15,412		105,550		4,073		9		7

Exchange
 Reserve  Fund	N/A		6,118		705		N/A		N/A

High Income
 Fund		22,966		31,174		1,943		13		6

Tax-Exempt
 Income Fund	7,422		13,724		37		0		N/A

Utilities Fund	22,114		64,100		625		6		10
</TABLE>
    

Item 27.  Indemnification

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

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

Investment Adviser - - Smith Barney Mutual Funds Management Inc. 
("SBMFM")

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

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

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

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

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

Item 28(b)  Business and Other Connections of Sub-Investment 
Adviser

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

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

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

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

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

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

Item 29.  Principal Underwriters
   
Consulting Group Capital Markets Funds; Global Horizons Investment 
Series (Cayman Islands); Greenwich Street California Municipal 
Fund Inc.; Greenwich Street Municipal Fund Inc.; Greenwich Street 
Series Fund; High Income Opportunity Fund Inc.; The Italy Fund 
Inc.; Managed High Income Portfolio Inc.; Managed Municipals 
Portfolio II Inc.; Managed Municipals Portfolio Inc.; Municipal 
High Income Fund Inc.; Puerto Rico Daily Liquidity Fund Inc.; 
Smith Barney Adjustable Rate Government Income Fund; Smith Barney 
Aggressive Growth Fund Inc.; Smith Barney Appreciation Fund Inc.; 
Smith Barney Arizona Municipals Fund Inc.; Smith Barney California 
Municipals Fund Inc.; Smith Barney Concert Series Inc.; Smith 
Barney Disciplined Small Cap Fund, Inc.; Smith Barney Equity 
Funds; Smith Barney Fundamental Value Fund Inc.; Smith Barney 
Funds, Inc.; Smith Barney Income Funds; Smith Barney Income Trust; 
Smith Barney Institutional Cash Management Fund, Inc.; Smith 
Barney Intermediate Municipal Fund, Inc.; Smith Barney Investment 
Funds Inc.; Smith Barney Investment Trust; Smith Barney Large 
Capitalization Growth Fund; Smith Barney Managed Governments Fund 
Inc.; Smith Barney Managed Municipals Fund Inc.; Smith Barney 
Massachusetts Municipals Fund; Smith Barney Money Funds, Inc.; 
Smith Barney Muni Funds; Smith Barney Municipal Fund, Inc.; Smith 
Barney Municipal Money Market Fund, Inc.; Smith Barney Natural 
Resources Fund Inc.; Smith Barney New Jersey Municipals Fund Inc.; 
Smith Barney Oregon Municipals Fund Inc.; Smith Barney Principal 
Return Fund; Smith Barney Telecommunications Trust; Smith Barney 
Variable Account Funds; Smith Barney World Funds, Inc.; Smith 
Barney Worldwide Special Fund N.V. (Netherlands Antilles); 
Travelers Series Fund Inc.; The USA High Yield Fund N.V.; 
Worldwide Securities Limited  (Bermuda); Zenix Income Fund Inc. 
and various series of unit investment trusts.
    
Smith Barney is a wholly owned subsidiary of Holdings. On June 1, 
1994, Smith Barney changed its name from Smith Barney Shearson 
Inc. to its current name. The information required by this Item 29 
with respect to each director, officer and partner of Smith Barney 
is incorporated by reference to Schedule A of FORM BD filed by 
Smith Barney pursuant to the Securities Exchange Act of 1934 (SEC 
File No. 812-8510).

Item 30.  Location of Accounts and Records

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

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

(3)	Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York  10013

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

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

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

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

Item 31.  Management Services

Not Applicable.

Item 32.  Undertakings

(a)	The Registrant hereby undertakes to call a meeting of its 
shareholders for the purpose of voting upon the question of 
removal of a trustee or trustees of Registrant when requested 
in to do so by the holders of at least 10% of Registrant's 
outstanding shares. Registrant undertakes further, in 
connection with the meeting, to comply with the provisions of 
Section 16(c) of the 1940 Act relating to communications with 
the shareholders of certain common-law trusts.



SIGNATURES

	Pursuant to the requirements of the Securities Act of 1933, 
as amended, and the Investment Company Act of 1940, as amended, 
the Registrant, SMITH BARNEY INCOME FUNDS, has duly caused this 
Amendment to the Registration Statement to be signed on its behalf 
by the undersigned, thereunto duly authorized, all in the City of 
New York, State of New York on the    25th day of November,     
1997.

	SMITH BARNEY INCOME FUNDS
	By: /s/ Heath B. McLendon
	Heath B. McLendon, Chairman of 
the Board

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

Signature		Title				Date

/s/ Heath B. McLendon	Chairman of the Board		   11/25/97    
Heath B. McLendon	(Chief Executive Officer)

/s/ Lewis E. Daidone	Senior Vice President and		   11/25/97    
Lewis E. Daidone	Treasurer (Chief Financial
			and Accounting Officer)

/s/ Lee Abraham*	Trustee				   11/25/97    
Lee Abraham

/s/ Allan J. Bloostein*	Trustee				   11/25/97    
Allan J. Bloostein

/s/ Richard E. Hanson*	Trustee				   11/25/97    
Richard E. Hanson

* Signed by Heath B. McLendon, their duly authorized 
attorney-in-fact, pursuant to power of attorney dated September 4, 
1996.

/s/ Heath B. McLendon
Heath B. McLendon