2

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                  Annual Report Pursuant to Section 13 or 15(d)

                     of the Securities Exchange Act of 1934

                      For the year ended December 31, 1998

                         Commission File Number 0-22491

                  SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
             (Exact name of registrant as specified in its charter)

                         New York                        13-3769020 
               (State or other jurisdiction of         (I.R.S. Employer
               incorporation or organization)          Identification No.)

                    c/o Smith Barney Futures Management Inc.
                           390 Greenwich St. - 1st Fl.
                            New York, New York 10013
              (Address and Zip Code of principal executive offices)

                                 (212) 723-5424
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  Units of
                                                             Limited
                                                             Partnership
                                                             Interest
                                                             (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    Yes X No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]

As of February 28, 1999  Limited  Partnership  Units with an aggregate  value of
$1,201.32 were outstanding and held by non-affiliates.


                     DOCUMENTS INCORPORTED BY REFERENCE

Supplements  dated February 1, 1998 and April 30, 1998 to Prospectus dated April
30, 1997.


<PAGE>


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                                                       PART I

Item 1. Business.

         (a) General  development of business.  Smith Barney Diversified Futures
Fund L.P. II ("Partnership") is a limited partnership  organized on May 10, 1994
under the Partnership  laws of the State of New York. The Partnership  commenced
trading  operations on January 17, 1996. The Partnership  engages in speculative
trading  of  commodity   interests,   including  forward  contracts  on  foreign
currencies,   commodity  options  and  commodity  futures  contracts  and  other
financial instruments, foreign currencies and stock indices.
         A  Registration  Statement on Form S-1 relating to the public  offering
became effective on August 21, 1995. Beginning August 21, 1995, 100,000 Units of
Limited Partnership  Interest ("Units") were publicly offered at $1,000 per Unit
for a period of ninety days,  subject to increase for up to an additional  sixty
days at the sole  discretion  of the General  Partner.  Between  August 21, 1995
(commencement  of the offering  period) and January 16,  1996,  8,529 Units were
sold at $1,000 per Unit. Proceeds of the offering were held in an escrow account
and were transferred,  along with the General Partner's  contribution of $87,000
to the  Partnership's  trading  account on January 17, 1996 when the Partnership
commenced  trading.  Sales of additional Units and additional  General Partner's
contributions  and redemptions of Units for the year ended December 31, 1998 are
reported  in the  Statement  of  Partners'  Capital  on page F-6 under  "Item 8.
Financial  Statements and Supplementary Data." The General Partner has agreed to
                                   2
<PAGE>

make  capital  contributions,  if  necessary,  so that its  general  partnership
interest  will be equal to the  greater  of (i) an amount to entitle it to 1% of
each material item of Partnership income, loss, deduction or credit and (ii) the
greater  of (a) 1% of the  partners'  contributions  to the  Partnership  or (b)
$25,000.  The Partnership  will be liquidated upon the first of the following to
occur:  December 31, 2014;  the net asset value of a Unit decreases to less than
$400 as of the close of any  business  day; or under  certain  circumstances  as
defined in the Limited  Partnership  Agreement of the Partnership  (the "Limited
Partnership  Agreement").  Smith  Barney  Futures  Management  Inc.  acts as the
general  partner (the  "General  Partner") of the  Partnership.  On September 1,
1998, the Partnership's commodity broker, Smith Barney Inc., merged with Salomon
Brothers Inc and changed its name to Salomon Smith Barney Inc.  ("SSB").  SSB is
an  affiliate  of the General  Partner.  The General  Partner is wholly owned by
Salomon Smith Barney Holdings, Inc. ("SSBH"), which is the sole owner of SSB. On
October 8, 1998,  Travelers Group Inc. merged with Citicorp Inc. and changed its
name to Citigroup Inc. SSBH is a wholly owned subsidiary of Citigroup Inc.
     The  Partnership's  trading of futures  contracts  on  commodities  is done
primarily on United States and foreign commodity  exchanges.  It engages in such
trading through a commodity brokerage account maintained with SSB.
     As of December 31, 1998, all commodity  trading  decisions are made for the
                                   3
<PAGE>

Partnership  by John W.  Henry &  Company,  Inc.  ("JWH"),  Millburn  Ridgefield
Corporation,  Campbell and Company Inc.,  Willowbridge  Associates  Inc. and ARA
Portfolio Management Company, L.L.C. (collectively, the "Advisors"). None of the
Advisors is  affiliated  with the General  Partner or SSB.  The Advisors are not
responsible  for the  organization or operation of the  Partnership.  Chesapeake
Capital  Corporation  was terminated as an Advisor to the Partnership on January
31, 1998. Campbell & Co. Inc. was added as an Advisor on February 1, 1998.
          Pursuant to the terms of the Management  Agreements  (the  "Management
Agreements"),  the  Partnership is obligated to pay each Advisor:  (i) a monthly
management  fee equal to 1/6 of 1% (2% per year) of month-end Net Assets (except
that JWH will receive a monthly management fee equal to 1/3 of 1% (4% per year))
of the  Partnership  allocated  to each  Advisor as of the end of each month and
(ii) an incentive fee payable quarterly, equal to 20% of the New Trading Profits
(except JWH, which will receive an incentive fee of 15% of New Trading  Profits)
(as defined in the Management Agreements) of the Partnership.
         The  Partnership  has entered into a Customer  Agreement  with SSB (the
"Customer Agreement") which provides that the Partnership will pay SSB a monthly
brokerage fee equal to 2 of 1% of month-end Net Assets allocated to the Advisors
(6% per year) in lieu of brokerage  commissions  on a per trade basis.  SSB also
pays a portion of its brokerage fees to its financial  consultants who have sold
Units and who are  registered as associated  persons with the Commodity  Futures
                                   4
<PAGE>

Trading  Commission  (the "CFTC").  The  Partnership  pays for National  Futures
Association  ("NFA") fees, exchange and clearing fees, give-up and user fees and
floor  brokerage  fees.  Brokerage  fees  will  be  paid  for  the  life  of the
Partnership,  although the rate at which such fees are paid may be changed.  The
Customer  Agreement  between the  Partnership  and SSB gives the Partnership the
legal right to net unrealized gains and losses.
         In addition,  SSB pays the  Partnership  interest on 80% of the average
daily  equity  maintained  in cash in its account  during each month at a 30-day
U.S.  Treasury  bill  rate  determined  weekly  by  SSB  based  on  the  average
non-competitive  yield on 3-month U.S.  Treasury  bills maturing in 30 days from
the date on which such  weekly rate is  determined.  However,  SSB began  paying
interest to the  Partnership  only after the amount of interest  accrued equaled
the  total  amount  of  offering  and  organizational  expenses  paid  by SSB in
connection  with the  Partnership's  offering  plus  interest  at the prime rate
quoted by The Chase Manhattan Bank.
         (b) Financial  information about industry  segments.  The Partnership's
business  consists  of  only  one  segment,  speculative  trading  of  commodity
interests (including, but not limited to, futures contracts, options and forward
contracts  on  U.S.  Treasury  Bills,  other  financial   instruments,   foreign
currencies,  stock indices and physical  commodities).  The Partnership does not
engage in sales of goods or services.  The  Partnership's net income (loss) from
operations  for the years  ended  December  31, 1998 and 1997 and for the period
from January 17, 1996 (commencement of trading  operations) to December 31, 1996
                                  5
<PAGE>

is set forth under "Item 6. Selected Financial Data." The Partnership capital as
of December 31, 1998, was $151,797,782.
         (c)  Narrative  description  of business.  
              See  Paragraphs  (a) and (b) above. 
              (i) through (x) - Not applicable.  
              (xi) through (xii) - Not applicable. 
              (xiii) - The Partnership has no employees.
         (d) Financial  Information  About Foreign and Domestic  Operations  and
Export Sales. The Partnership does not engage in sales of goods or services, and
therefore this item is not applicable.
Item 2.  Properties.
         The  Partnership  does not own or lease  any  properties.  The  General
Partner operates out of facilities provided by its affiliate, SSB.
Item 3.  Legal Proceedings.
       There are no material legal  proceedings  pending against the Partnership
or the General  Partner.  
       This section describes the major legal  proceedings,  other than ordinary
routine litigation incidental to the business, to which SSBH, the parent company
of this General Partner or its  subsidiaries is a party or to which any of their
property is subject.
              In September  1992,  Harris Trust and Savings Bank (as trustee for
Ameritech  Pension  Trust  ("APT"),  Ameritech  Corporation,  and an  officer of
                                   6
<PAGE>

Ameritech filed suit against Salomon  Brothers Inc. ("SBI") and Salomon Brothers
Realty Corporation ("SBRC") in the U.S. District Court for the Northern District
of Illinois  (Harris Trust Savings Bank, not  individually but solely as trustee
for the Ameritech Pension Trust,  Ameritech Corporation and John A. Edwardson v.
Salomon  Brothers Inc and Salomon  Brothers  Realty  Corp.).  The second amended
complaint  alleges that three purchases by APT from defendants of  participation
interests  in net cash flow or resale  proceeds  of three  portfolios  of motels
owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of
a similar participation  interest with respect to a portfolio of motels owned by
Best Inns, Inc. ("Best"),  violated the Employee  Retirement Income Security Act
("ERISA"),  and that the purchase of the  participation  interests for the third
MOA portfolio and for the Best portfolio  violated the Racketeer  Influenced and
Corrupt   Organization  Act  ("RICO")  and  state  law.  SBI  had  acquired  the
participation  interests  in  transactions  in which it  purchased  as principal
mortgage notes issued by MOA and Best to finance  purchases of motel portfolios;
95% of three such  interests  and 100% of one such interest were sold to APT for
purchase prices  aggregating  approximately  $20.9 million.  Plaintiffs'  second
amended complaint seeks (a) judgment on the ERISA claims for the purchase prices
of  the  four  participation   interests   (approximately  $20.9  million),  for
rescission and for  disgorgement  of profits,  as well as other relief,  and (b)
judgment on the claims  brought  under RICO and state law in the amount of $12.3
million,  with  damages  trebled to $37 million on the RICO claims and  punitive
                                   7
<PAGE>

damages  in excess of $37  million on certain of the state law claims as well as
other  relief.  The court  dismissed  the RICO,  breach of contract,  and unjust
enrichment  claims.  The court also found that  defendants did not qualify as an
ERISA  fiduciary and dismissed the claims based on that  allegation.  Defendants
moved for summary  judgment on the sole remaining  claim. The motion was denied,
and defendants  appealed to the U.S.  Court of Appeals for the Seventh  Circuit.
Defendants are awaiting a decision.
              Both the Department of Labor and the Internal Revenue Service have
advised  SBI that  they  were or are  reviewing  the  transactions  in which APT
acquired  such  participation  interests.  With respect to the Internal  Revenue
Service review,  SSBH, SBI and SBRC have consented to extensions of time for the
assessment  of excise  taxes that may be  claimed to be due with  respect to the
transactions  for the years 1987,  1988 and 1989.  In August 1996,  the IRS sent
SSBH,  SBI and SBRC what appeared to be draft  "30-day  letters" with respect to
the  transactions and SSBH, SBI and SBRC were given an opportunity to comment on
whether the IRS should issue 30-day letters,  which would actually  commence the
assessment  process.  In October 1996, SSBH, SBI and SBRC submitted a memorandum
setting forth  reasons why the IRS should not issue 30-day  letters with respect
to the transactions.
              In December 1996, a complaint seeking unspecified monetary damages
was  filed by  Orange  County,  California  against  numerous  brokerage  firms,
                                   8
<PAGE>

including Smith Barney, in the U.S. Bankruptcy Court for the Central District of
California  (County  of  Orange  et al. v.  Bear  Stearns  & Co.  Inc.  et al.).
Plaintiff alleges,  among other things, that defendants  recommended and sold to
plaintiff  unsuitable  securities  and that such  transactions  were outside the
scope of  plaintiff's  statutory and  constitutional  authority  (ultra  vires).
Defendants'  motion for summary  judgment  was granted with respect to the ultra
vires  claims in  February  1999.  The court  allowed  the  filing of an amended
complaint asserting claims based on alleged breaches of fiduciary duty.
       In June 1998,  complaints  were filed in the U.S.  District Court for the
Eastern District of Louisiana in two actions (Board of  Liquidations,  City Debt
of the City of New  Orleans v. Smith  Barney  Inc.  et ano.  and The City of New
Orleans v. Smith Barney Inc. et ano.),  in which the City of New Orleans seeks a
declaratory  judgment  that  Smith  Barney  Inc.  and  another  underwriter  are
responsible  for any damages  that the City may incur in the event the  Internal
Revenue  Service  denies tax  exempt  status to the  City's  General  Obligation
Refunding  Bonds  Series  1991.  The  Company  filed a  motion  to  dismiss  the
complaints in September 1998, and the complaints were subsequently  amended. The
Company has filed a motion to dismiss the amended complaints.
       In November  1998, a purported  class action  complaint  was filed in the
United States District Court for the Middle District of Florida (Dwight Brock as
Clerk for Collier County v. Merrill Lynch, et al.). The complaint  alleges that,
pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB,
charged excessive mark-ups in connection with advanced  refunding  transactions.
The Company intends to contest this complaint vigorously.

                                   9
<PAGE>

Environmental Matters

         In July  1996,  the City and  County of Denver  ("Denver")  enacted  an
ordinance   imposing   a   substantial   fee  on  any   radioactive   waste   or
radium-contaminated  material  disposed  of in the City of  Denver.  Under  this
ordinance,  Denver assessed a subsidiary of Salomon,  the S.W. Shattuck Chemical
Company, Inc.  ("Shattuck"),  $9.35 million for certain disposal already carried
out. Shattuck sued to enjoin  imposition of the fee on  constitutional  grounds.
The  United  States  also  sued,  seeking  to  enjoin  imposition  of the fee on
constitutional  grounds.  Denver  counterclaimed  and  moved  to add  SSBH  as a
defendant  for past costs.  These cases have been  consolidated  before the U.S.
District Court in Colorado,  which granted  Shattuck's  motion for a preliminary
injunction  enjoining Denver from enforcing the ordinance during the pendency of
the litigation. The parties have reached a settlement.
         The Company and various subsidiaries have also been named as defendants
in various  matters  incident to and typical of the businesses in which they are
engaged. These include numerous civil actions, arbitration proceedings and other
matters  in which the  Company's  broker-dealer  subsidiaries  have been  named,
arising in the  normal  course of  business  out of  activities  as a broker and
dealer in securities,  as an underwriter of securities,  as an investment banker
or otherwise. In the opinion of the Company's management,  none of these actions
is  expected to have a material  adverse  effect on the  consolidated  financial
condition of the Company and its subsidiaries.  
Item 4. Submission of Matters to a Vote of Security Holders.
         There were no matters  submitted  to the  security  holders  for a vote
during the last fiscal year covered by this report.
                                   10
<PAGE>

                                     PART II
      Item 5.  Market for Registrant's Common Equity and Related Security Holder
               Matters.
             (a)      Market  Information. The Partnership  has issued no stock.
                      There  is   no   public  market for  the  Units of Limited
                      Partnership Interest.
             (b)      Holders.  The   number of  holders of   Units  of  Limited
                      Partnership  Interest  as of December  31, 1998 was 5,887.
             (c)      Distribution. The Partnership did not declare a 
                      distribution in 1998 or 1997.
             (d)      Use of  Proceeds.  For the twelve  months  ended  December
                      31,  1998,  there were additional sales   of   38,309.9229
                      Units   totaling  $42,074,000  and  contributions  by  the
                      General  Partner representing 283.5082  Unit   equivalents
                      totaling $311,000. Proceeds from the sale  of   additional
                      Units are used  in   the  trading  of  commodity  interest
                      including futures contracts,options and forward contracts.

                                   11
<PAGE>


Item 6. Selected Financial Data. The Partnership commenced trading operations on
January 17, 1996.  Realized and  unrealized  trading  gains  (losses),  interest
income,  net income  (loss) and increase  (decrease) in net asset value per Unit
for the years ended  December  31, 1998 and 1997 and for the period from January
17, 1996  (commencement  of trading  operations)  to December 31, 1996 and total
assets at December 31, 1998, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                          <S>                <C>             <C>             <C>
                                            1998            1997            1996
                                   -------------   -------------   -------------

Realized and unrealized trading
 gains (losses) net of brokerage
 commissions and clearing fees
 of $8,891,659, $6,257,856 and
 $2,169,468, respectively          $  14,064,160   $    (461,654)  $   8,869,618

Interest income                        4,818,279       3,634,245       1,190,687
                                   -------------   -------------   -------------

                                   $  18,882,439   $   3,172,591   $  10,060,305
                                   =============   =============   =============

Net Income (loss)                  $  12,979,536   $    (313,824)  $   7,582,653
                                   =============   =============   =============

Increase (decrease) in net asset
 value per unit                    $       95.43   $       (1.30)  $      185.99
                                   =============   =============   =============

Total assets                       $ 154,692,651   $ 113,547,434   $  56,960,922
                                   =============   =============   =============

</TABLE>

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.

        (a)  Liquidity.  The  Partnership  does not  engage in sales of goods or
services.  Its only  assets  are its  equity in its  commodity  futures  trading
account,  consisting of cash and cash equivalents,  net unrealized  appreciation
(depreciation) on open futures contracts and interest receivable. Because of the
low margin deposits normally  required in commodity futures trading,  relatively
small price movements may result in substantial losses to the Partnership.  Such
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<PAGE>

substantial  losses could lead to a material decrease in liquidity.  To minimize
this risk, the Partnership will follow certain policies including:
           (1)  Partnership  funds are invested only in futures  contracts which
are traded in sufficient volume to permit, in the opinion of the Advisors,  ease
of taking and liquidating positions.
           (2) The  Partnership  will not permit the  churning of its  commodity
trading accounts.
           (3) No Advisor  initiates  additional  positions in any  commodity if
such  additional   positions  would  result  in  aggregate   positions  for  all
commodities  requiring as margin more than 66-2/3% of the  Partnership's  assets
allocated to the Advisor.
           (4) The Partnership  will not employ the trading  technique  commonly
known as  "pyramiding",  in which the  speculator  uses  unrealized  profits  on
existing positions as margin for the purchase or sale of additional positions in
the same or related commodities.
           (5) The  Partnership  will not utilize  borrowing  except  short-term
borrowing if the Partnership takes delivery of any cash commodities.
           (6) The Advisor may,  from time to time,  employ  trading  strategies
such as spread or straddles on behalf of the  Partnership.  The term "spread" or
"straddle"   describes  a  commodity  futures  trading  strategy  involving  the
simultaneous  buying and selling of futures  contracts on the same commodity but
involving different delivery dates or markets and in which the trader expects to
earn a profit from a widening or narrowing of the difference  between the prices
of the two contracts.
                                   13
<PAGE>

           The Partnership is party to financial  instruments  with  off-balance
sheet risk, including derivative financial  instruments and derivative commodity
instruments,  in the normal course of its business.  These financial instruments
include forwards,  futures and options,  whose value is based upon an underlying
asset,  index, or reference rate, and generally  represent future commitments to
exchange  currencies  or cash  flows,  or to  purchase  or sell other  financial
instruments  at  specified  terms  at  specified  future  dates.  Each of  these
instruments  is subject  to  various  risks  similar  to those  relating  to the
underlying financial  instruments  including market and credit risk. The General
Partner monitors and controls the  Partnership's  risk exposure on a daily basis
through   financial,   credit  and  risk  management   monitoring  systems  and,
accordingly  believes  that  it has  effective  procedures  for  evaluating  and
limiting the credit and market risks to which the  Partnership is subject.  (See
also  Item  8.  Financial   Statements  and  Supplementary  Data.,  for  further
information  on  financial  instrument  risk  included in the notes to financial
statements.)
           Other than the risks  inherent  in  commodity  futures  trading,  the
Partnership  knows of no trends demands,  commitments,  events or  uncertainties
which  will  result  in  or  which  are  reasonably  likely  to  result  in  the
Partnership's  liquidity  increasing  or  decreasing  in any  material  way. The
Limited  Partnership  Agreement  provides  that the General  Partner may, at its
discretion,  cause the Partnership to cease trading operations and liquidate all
                                   14
<PAGE>

open positions upon the first to occur of the following:  (i) December 31, 2014;
(ii) the vote dissolve the Partnership by limited  partners owning more than 50%
of the Units;  (iii) assignment by the General Partner of all of its interest in
the  Partnership  or  withdrawal,  removal,  bankruptcy  or any other event that
causes the General  Partner to cease to be a general  partner under the New York
Revised Limited Partnership Act unless the Partnership is continued as described
in the  Limited  Partnership  Agreement;  (iv) Net Asset Value per Unit falls to
less than $400 as of the end of any trading  day; or (v) the  occurrence  of any
event which shall make it unlawful for the  existence of the  Partnership  to be
continued.
           (b)  Capital  resources.  (i) The  Partnership  has made no  material
commitments for capital expenditures.
              (ii)  The   Partnership's   capital   consists   of  the   capital
contributions  of the  partners as  increased or decreased by gains or losses on
commodity trading,  and by expenses,  interest income,  redemptions of Units and
distributions of profits,  if any. Gains or losses on commodity  futures trading
cannot be predicted.  Market moves in commodities are dependent upon fundamental
and technical  factors which the Partnership may or may not be able to identify.
Partnership   expenses  will  consist  of,  among  other  things,   commissions,
management  fees and incentive  fees.  The level of these  expenses is dependent
upon the level of trading  gains or losses and the  ability of the  Advisors  to
identify and take  advantage of price  movements in the  commodity  markets,  in
addition  to the level of net  assets  maintained.  In  addition,  the amount of
                                   15
<PAGE>

interest  income  payable by SSB is dependent upon interest rates over which the
Partnership has no control.
           No forecast can be made as to the level of  redemptions  in any given
period.  Beginning June 30, 1996 a Limited Partner may cause all of his Units to
be redeemed by the Partnership at the Net Asset Value thereof as of the last day
of each month on ten days' written notice to the General Partner. No fee will be
charged for redemptions. For the year ended December 31, 1998, 13,377.6641 Units
were  redeemed  totaling  15,146,446.  For the year  ended  December  31,  1997,
11,519.2474  Units were  redeemed  totaling  $12,684,088.  For the period  ended
December 31, 1996, 1,911.1385 Units were redeemed totaling $1,968,649.
           The  Partnership  ceased to offer Units  effective March 1, 1998. For
the year ended  December 31, 1998,  there were  additional  sales of 38,309.9229
Units totaling $42,074,000 and contributions by the General Partner representing
283.5082 Units equivalents  totaling  $311,000.  For the year ended December 31,
1997, there were additional sales of 61,154.0723 Units totaling  $68,708,600 and
contributions  by the General  Partner  representing  505.8725 Unit  equivalents
totaling $571,000. For the period ended December 31, 1996, there were additional
sales of 42,034.2002 Units totaling $41,190,000 and contributions by the General
Partner representing 411.0108 Unit equivalents totaling $402,000.
           (c) Results of  Operations.  For the year ended December 31, 1998 the
net asset value per Unit  increased  8.5% from  $1,123.76 to $1,219.19.  For the
year ended  December 31, 1997,  the net asset value per Unit decreased 0.1% from
$1,125.06 to $1,123.76.  For the period from January 17, 1996  (commencement  of
trading operations) to December 31, 1996, the net asset value per Unit increased
19.8% from $939.07 to $1,125.06.  The net asset value of $939.07 at commencement
                                   16
<PAGE>

of trading  operations  is reflective  of charging  offering and  organizational
expenses against the initial capital of the Partnership for financial  reporting
purposes.
           The Partnership  experienced net trading gains of $22,955,819  before
commissions  and expenses in 1998.  These gains were primarily  attributable  to
trading in  currencies,  U.S. and non-U.S.  interest rate products and livestock
and were partially offset by losses in grains, metals, softs and indices.
           The Partnership  experienced  net trading gains of $5,796,202  before
commissions and expenses in 1997. These gains were primarily attributable to the
trading of U.S.  and  non-U.S.  interest  rates,  metals,  indices  and  foreign
currencies.  However,  these  trading  gains  were  partially  offset  by losses
experienced in the trading of energy, grains, livestock and softs.
           The Partnership  experienced net trading gains of $11,039,086  before
commissions  and expenses in 1996.  These gains were primarily  attributable  to
gains  incurred  in the trading of interest  rates,  metals,  energy and foreign
currencies.  However,  these  trading  gains  were  partially  offset  by losses
experienced in the trading of stock indices and agricultural commodity futures.
           Commodity   futures   markets  are  highly   volatile.   Broad  price
fluctuations  and rapid  inflation  increase  the risks  involved  in  commodity
trading,  but also increase the possibility of profit.  The profitability of the
Partnership  depends on the  existence  of major price trends and the ability of
the  Advisors  to  identify  those  price  trends  correctly.  Price  trends are
influenced  by, among other things,  changing  supply and demand  relationships,
weather, governmental, agricultural, commercial and trade programs and policies,
national and international political and economic events and changes in interest
rates.  To the extent  that market  trends  exist and the  Advisors  are able to
identify them, the Partnership expects to increase capital through operations.
                                   17
<PAGE>

         (d)      Operational Risk
                  The  Company is  directly  exposed  to market  risk and credit
risk, which arise in the normal course of its business activities. Slightly less
direct, but of critical importance, are risks pertaining to operational and back
office  support.  This is  particularly  the  case  in a  rapidly  changing  and
increasingly  global  environment  with  increasing  transaction  volumes and an
expansion  in the number and  complexity  of products in the  marketplace.  Such
risks  include:   Operational/Settlement  Risk  -  the  risk  of  financial  and
opportunity loss and legal liability attributable to operational problems,  such
as inaccurate  pricing of  transactions,  untimely  trade  execution,  clearance
and/or  settlement,  or the inability to process large volumes of  transactions.
The Company is subject to increased risks with respect to its trading activities
in emerging market securities, where clearance,  settlement, and custodial risks
                                   18
<PAGE>

are often greater than in more  established  markets.  
Technological Risk - the risk of loss attributable to technological  limitations
or hardware failure that constrain the Company's ability to gather, process, and
communicate  information  efficiently and securely,  without interruption,  with
customers,  among units within the Company, and in the markets where the Company
participates.
Legal/Documentation  Risk - the risk of loss attributable to deficiencies in the
documentation  of  transactions  (such  as  trade  confirmations)  and  customer
relationships  (such as master  netting  agreements)  or errors  that  result in
noncompliance  with  applicable  legal and  regulatory  requirements.  
Financial  Control  Risk - the  risk  of loss  attributable  to  limitations  in
financial  systems and controls.  Strong  financial  systems and controls ensure
that assets are safeguarded,  that  transactions are executed in accordance with
management's   authorization,   and  that  financial   information  utilized  by
management  and  communicated  to  external  parties,  including  the  Company's
stockholder, creditors, and regulators, is free of material errors.
Risk of Computer System Failure (Year 2000 Issue)
                  The Year 2000 issue is the  result of  existing  computers  in
many  businesses  using  only two digits to  identify a year in the date  field.
These  computers and programs,  often referred to as  "information  technology,"
were  designed  and  developed  without  considering  the impact of the upcoming
change in the century. If not corrected,  many computer  applications could fail
or create  erroneous  results at the Year 2000.  Such systems and  processes are
dependent on correctly identifying dates in the next century.
                                   19
<PAGE>

                  The  General   Partner   administers   the   business  of  the
Partnership through various systems and processes maintained by SSBH and SSB. In
addition, the operation of the Partnership is dependent on the capability of the
Partnership's  Advisors,  the brokers and  exchanges  through which the Advisors
trade, and other third parties to prepare adequately for the Year 2000 impact on
their  systems  and  processes.   The  Partnership  itself  has  no  systems  or
information technology applications relevant to its operations.
                  The General Partner,  SSB, SSBH and their parent  organization
Citigroup Inc. have  undertaken a  comprehensive,  firm-wide  evaluation of both
internal and external  systems  (systems  related to third parties) to determine
the  specific  modifications  needed to prepare for the year 2000.  The combined
Year 2000 program in SSB is expected to cost approximately $140 million over the
four years  from 1996  through  1999,  and  involve  over 450 people at the peak
staffing level. SSB expects to complete all compliance and certification work by
June 1999. At this time,  over 95% of SSBH systems have completed the correction
process  and are Year 2000  compliant.  Over 73% of the systems  have  completed
certification testing. The Year 2000 project at SSBH remains on schedule.
                  The systems and components  supporting  the General  Partner's
business that require  remediation have been identified and  modifications  have
been made to bring them into Year 2000 compliance.  Testing of these systems was
                                   20
<PAGE>

completed in the fourth  quarter of 1998.  Final testing and  certification  are
expected to be completed by the end of the first quarter of 1999.
                  This expenditure and the General Partner's resources dedicated
to the  preparation  for Year 2000 do not and will not have a material impact on
the operation or results of the Partnership.
                  The General Partner has requested and received statements from
the Advisors that each has undertaken its own evaluation and  remediation  plans
to identify any of its  computer  systems  that are Year 2000  vulnerable.  Each
Advisor has confirmed it is taking immediate  actions to remedy those systems as
necessary. The General Partner will continue to inquire into and to confirm each
Advisor's readiness for Year 2000.
                  The most likely and most  significant  risk to the Partnership
associated  with the lack of Year  2000  readiness  is the  failure  of  outside
organizations,  including the commodities exchanges, clearing organizations,  or
regulators  with which the  Partnership  interacts  to  resolve  their Year 2000
issues in a timely  manner.  This risk could  involve the inability to determine
the value of the  Partnership  at some  point in time and would  make  effecting
purchases  or  redemptions  of Units in the  Partnership  infeasible  until such
valuation was determinable.
                  SSB has  successfully  participated in  industry-wide  testing
including:  The Streetwide  Beta Testing  organized by the  Securities  Industry
Association  (SIA),  a  government  securities  clearing  test with the  Federal
Reserve Bank of New York,  The  Depository  Trust  Company,  and The Bank of new
York,  and Futures  Industry  Association  participants  test.  The firm is also
                                   21
<PAGE>

participating in the streetwide testing which commenced in March 1999.
                  It is possible that problems may occur that would require some
time to repair.  Moreover,  it is possible that problems will occur outside SSBH
for which  SSBH could  experience  a  secondary  effect.  Consequently,  SSBH is
preparing   comprehensive,   written   contingency  plans  so  that  alternative
procedures  and a  framework  for  critical  decisions  are  defined  before any
potential crisis occurs.
                  The  goal  of  Year  2000  contingency  planning  is a set  of
alternate  procedures to be used in the event of a critical  system failure or a
failure by a supplier or  counterparty.  Planning work was completed in December
1998, and testing of alternative  procedures will be conducted in the first half
of 1999.  
European  Economic and Monetary Union
           European  Economic and Monetary Union ("EMU") is an historic event in
Europe involving the unification of currency in eleven major countries.  The new
unified currency, called the Euro, is expected to compete on a global scale with
the U.S. Dollar and the Japanese Yen.  Introduction of the Euro began on January
1, 1999,  when the European  Central Bank assumed control of the monetary policy
for participating  nations.  Exchange rates between the participating  countries
were fixed and the Euro is available for electronic payments. Also on January 1,
1999,  various  issuers  re-denominated  their  securities and  harmonized  bond
payment  conventions.  A three-year  transition period began on January 1, 1999,
after which Euro notes and coins will be issued by the European Central Bank and
national currencies will be phased out. 22
<PAGE>

                  The Company completed a successful  conversion to the Euro and
has  commenced  trading  and  settlement  in the  new  currency  with  no  major
exceptions.
                  As the preceding  risks are largely  interrelated,  so are the
Company's   actions  to  mitigate  and  manage   them.   The   Company's   Chief
Administrative  Officer is  responsible  for,  among other things,  oversight of
global  operations and technology.  An essential element in mitigating the risks
noted above is the  optimization  of  information  technology and the ability to
manage  and   implement   change.   To  be  an   effective   competitor   in  an
information-driven  business of a global  nature  requires  the  development  of
global  systems and  databases  that ensure  increased and more timely access to
reliable data.
         (e)      New Accounting Pronouncements
In June  1998,  the  Financial  Accounting  Standards  Board  issued  SFAS  133,
Accounting for Derivative  Instruments and Hedging Activities ("SFAS 133"). SFAS
133  requires  that an entity  recognize  all  derivatives  in the  statement of
financial  condition and measure those  instruments  at fair value.  SFAS 133 is
effective for fiscal year beginning  after June 15, 1999 SFAS 133 is expected to
have no material  impact on the financial  statements of the  Partnership as all
commodity interests are recorded at fair value, with changes therein reported in
the statement of income and expenses.
                                   23
<PAGE>

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
         The Partnership is a speculative  commodity pool. The market  sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company,  the risk of market sensitive  instruments is
integral, not incidental, to the Partnership's main line of business.
         Market movements result in frequent changes in the fair market value of
the  Partnership's  open positions and,  consequently,  in its earnings and cash
flow. The Partnership's  market risk is influenced by a wide variety of factors,
including the level and volatility of interest  rates,  exchange  rates,  equity
price  levels,  the market value of financial  instruments  and  contracts,  the
diversification effects among the Partnership's open positions and the liquidity
of the markets in which it trades.
         The  Partnership  rapidly  acquires and liquidates  both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance,  and
the Partnership's  past performance is not necessarily  indicative of its future
results.
         Value at Risk is a measure of the maximum amount which the  Partnership
could  reasonably  be expected to lose in a given market  sector.  However,  the
                                   24
<PAGE>

inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets  traded by the  Partnership  of market  movements  far  exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's  experience to date (i.e., "risk of
ruin").  In  light  of the  foregoing  as well as the  risks  and  uncertainties
intrinsic  to all  future  projections,  the  inclusion  of  the  quantification
included in this section should not be considered to constitute any assurance or
representation  that the  Partnership's  losses  in any  market  sector  will be
limited to Value at Risk or by the  Partnership's  attempts to manage its market
risk.
Quantifying the Partnership's Trading Value at Risk
         The following  quantitative  disclosures  regarding  the  Partnership's
market risk exposures contain "forward-looking statements" within the meaning of
the safe harbor from civil liability provided for such statements by the Private
Securities  Litigation  Reform  Act of 1995  (set  forth in  Section  27A of the
Securities Act of 1933 and Section 21E of the Securities  Exchange Act of 1934).
All  quantitative  disclosures in this section are deemed to be  forward-looking
statements  for purposes of the safe harbor except for  statements of historical
fact (such as the terms of  particular  contracts  and the number of market risk
sensitive instruments held during or at the end of the reporting period).
         The Partnership's risk exposure in the various market sectors traded by
the  Advisors  is  quantified  below in  terms  of  Value  at  Risk.  Due to the
                                   25
<PAGE>

Partnership's  mark-to-market  accounting,  any  loss in the  fair  value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized).  Exchange  maintenance  margin  requirements have been
used by the Partnership as the measure of its Value at Risk.  Maintenance margin
requirements  are set by  exchanges  to  equal  or  exceed  the  maximum  losses
reasonably  expected to be  incurred in the fair value of any given  contract in
95%-99% of any one-day intervals.  The maintenance margin levels are established
by dealers and exchanges using historical price studies as well as an assessment
of current market volatility (including the implied volatility of the options on
a given futures  contract) and economic  fundamentals to provide a probabilistic
estimate  of  the  maximum  expected   near-term   one-day  price   fluctuation.
Maintenance  margin  has been  used  rather  than the more  generally  available
initial margin, because initial margin includes a credit risk component which is
not relevant to Value at Risk.
         In the case of market  sensitive  instruments  which  are not  exchange
traded  (almost  exclusively  currencies  in the case of the  Partnership),  the
margin requirements for the equivalent futures positions have been used as Value
at  Risk.  In those  rare  cases in  which a  futures-equivalent  margin  is not
available, dealers' margins have been used.
         The fair value of the Partnership's  futures and forward positions does
not have any  optionality  component.  However,  certain of the  Advisors  trade
commodity options. The Value at Risk associated with options is reflected in the
                                   26
<PAGE>

following  table  as the  margin  requirement  attributable  to  the  instrument
underlying each option. Where this instrument is a futures contract, the futures
margin,   and   where   this   instrument   is   a   physical   commodity,   the
futures-equivalent  maintenance  margin  has  been  used.  This  calculation  is
conservative in that it assumes that the fair value of an option will decline by
the same  amount as the fair value of the  underlying  instrument,  whereas,  in
fact,  the fair values of the options  traded by the  Partnership  in almost all
cases fluctuate to a lesser extent than those of the underlying instruments.
         In  quantifying  the   Partnership's   Value  at  Risk,  100%  positive
correlation  in the  different  positions  held in each market risk category has
been  assumed.  Consequently,  the margin  requirements  applicable  to the open
contracts have simply been added to determine each trading category's  aggregate
Value at Risk.  The  diversification  effects  resulting  from the fact that the
Partnership's positions are rarely, if ever, 100% positively correlated have not
been  reflected.  The  Partnership's  Trading Value at Risk in Different  Market
Sectors
         The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category as of December 31, 1998. All
open position  trading risk exposures of the  Partnership  have been included in
calculating  the  figures  set  forth  below.  As  of  December  31,  1998,  the
Partnership's total capitalization was $151,797,782.
                                   27

<PAGE>
<TABLE>
<CAPTION>
<S>                                 <C>           <C>    


                             December 31, 1998

                                               % of Total
Market Sector                 Value at Risk   Capitalization

Currencies
- OTC Contracts               $ 3,585,707       2.36%
- Exchange Traded Contracts       407,950       0.27%
Energy                          1,783,000       1.17%
Grains                            434,400       0.29%
Interest rate U.S.              1,261,900       0.83%
Interest rates Non-U.S          4,400,489       2.90%
Livestock                         169,300       0.11%
Metal                           1,666,300       1.10%
Softs                           1,260,507       0.83%
Stock Indices                   1,999,807       1.32%
                              -----------      ------

Total                         $16,969,360      11.18%
                              ===========      =====
</TABLE>

Material Limitations on Value at Risk as an Assessment of Market Risk
         The face value of the market sector instruments held by the Partnership
is typically many times the applicable margin requirement  (margin  requirements
generally  range  between  2% and 15% of  contract  face  value)  as well as the
capitalization  of the  Partnership.  The  magnitude of the  Partnership's  open
positions  creates a "risk of ruin" not typically found in most other investment
vehicles.  Because of the size of its positions,  certain  market  conditions --
unusual,  but  historically  recurring  from  time to time --  could  cause  the
Partnership  to incur severe  losses over a short period of time.  The foregoing
Value at Risk table -- as well as the past  performance  of the  Partnership  --
give no indication of this "risk of ruin."
                                   28

<PAGE>


Non-Trading Risk
         The  Partnership  has  non-trading  market  risk  on its  foreign  cash
balances not needed for margin.  However,  these balances (as well as any market
risk they represent) are immaterial.
         Materiality  as used in this  section,  "Qualitative  and  Quantitative
Disclosures About Market Risk," is based on an assessment of reasonably possible
market movements and the potential losses caused by such movements,  taking into
account the leverage,  optionality and multiplier  features of the Partnership's
market sensitive instruments.  Qualitative Disclosures Regarding Primary Trading
Risk Exposures
         The  following  qualitative  disclosures  regarding  the  Partnership's
market risk exposures - except for (i) those  disclosures that are statements of
historical fact and (ii) the  descriptions  of how the  Partnership  manages its
primary market risk exposures - constitute forward-looking statements within the
meaning of Section 27A of the  Securities  Act and Section 21E of the Securities
Exchange Act. The  Partnership's  primary  market risk  exposures as well as the
strategies  used and to be used by the  General  Partner  and the  Advisors  for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of the Partnership's risk
controls to differ materially from the objectives of such strategies. Government
interventions,  defaults and expropriations,  illiquid markets, the emergence of
dominant fundamental factors,  political upheavals,  changes in historical price

                                   29
<PAGE>

relationships,  an influx of new market  participants,  increased regulation and
many  other  factors  could  result in  material  losses as well as in  material
changes to the risk exposures and the management  strategies of the Partnership.
There can be no assurance that the Partnership's  current market exposure and/or
risk  management  strategies  will  not  change  materially  or  that  any  such
strategies will be effective in either the short- or long- term.  Investors must
be  prepared  to  lose  all or  substantially  all of  their  investment  in the
Partnership
         The  following   were  the  primary   trading  risk  exposures  of  the
Partnership as of December 31, 1998, by market sector.
         Interest Rates.  Interest rate risk is the principal market exposure of
the  Partnership.  Interest  rate  movements  directly  affect  the price of the
futures  positions held by the Partnership and indirectly the value of its stock
index and currency positions.  Interest rate movements in one country as well as
relative  interest  rate  movements  between  countries  materially  impact  the
Partnership's profitability. The Partnership's primary interest rate exposure is
to interest rate  fluctuations in the United States and the other G-7 countries.
However,  the Partnership also takes futures positions on the government debt of
smaller nations -- e.g.,  Australia.  The General Partner  anticipates  that G-7
interest rates will remain the primary market  exposure of the  Partnership  for
the foreseeable future. The changes in interest rates which have the most effect
on the  Partnership are changes in long-term,  as opposed to short-term,  rates.

                                   30
<PAGE>

Consequently,  even a material  change in  short-term  rates  would have  little
effect on the Partnership were the medium- to long-term rates to remain steady.
         Currencies.  The  Partnership's  currency  exposure is to exchange rate
fluctuations,  primarily  fluctuations  which  disrupt  the  historical  pricing
relationships   between   different   currencies  and  currency   pairs.   These
fluctuations  are  influenced  by interest rate changes as well as political and
general  economic  conditions.  The General Partner does not anticipate that the
risk profile of the Partnership's  currency sector will change  significantly in
the future,  although it is difficult at this point to predict the effect of the
introduction  of the Euro on the  Advisors'  currency  trading  strategies.  The
currency trading Value at Risk figure includes foreign margin amounts  converted
into U.S.  dollars with an  incremental  adjustment to reflect the exchange rate
risk inherent to the  dollar-based  Partnership in expressing Value at Risk in a
functional currency other than dollars.
         Stock Indices.  The Partnership's  primary equity exposure is to equity
price  risk  in the  G-7  countries.  The  stock  index  futures  traded  by the
Partnership  are by law  limited  to futures on  broadly  based  indices.  As of
December 31, 1998,  the  Partnership's  primary  exposures  were in the S&P 500,
Financial  Times  (England),  Nikkei  (Japan)  and Hang Seng (Hong  Kong)  stock
indices.  The General Partner  anticipates  little,  if any,  trading in non-G-7
stock indices. The Partnership is primarily exposed to the risk of adverse price
trends or static  markets in the major  U.S.,  European  and  Japanese  indices.
(Static markets would not cause major market changes but would make it difficult
                                   31
<PAGE>

     for the Partnership to avoid being "whipsawed" into numerous small losses.)
Metals.  The  Partnership's  primary metal market exposure is to fluctuations in
the price of gold and silver. Although certain of the Advisors will from time to
time trade base  metals  such as  aluminum  and  copper,  the  principal  market
exposures of the Partnership have consistently been in the precious metals, gold
and silver. The Advisors' gold trading has been increasingly  limited due to the
long-lasting and mainly non-volatile  decline in the price of gold over the last
10-15 years. However, silver prices have remained volatile over this period, and
the  Advisors  have from time to time taken  substantial  positions as they have
perceived market  opportunities to develop. The General Partner anticipates that
gold  and  silver  will  remain  the  primary  metals  market  exposure  for the
Partnership.  
      Commodities.   The  Partnership's   primary  commodities  exposure  is  to
agricultural  price  movements  which are often  directly  affected by severe or
unexpected weather conditions. Coffee, cocoa, cotton and sugar accounted for the
substantial  bulk of the  Partnership's  commodity  exposure as of December  31,
1998.
      Energy. The Partnership's primary energy market exposure is to gas and oil
price movements, often resulting from political developments in the Middle East.
Oil prices are  currently  depressed,  but they can be volatile and  substantial
profits and losses have been and are expected to continue to be  experienced  in
this market.
                                   32
<PAGE>

Qualitative Disclosures Regarding Non-Trading Risk Exposure
      The following were the only  non-trading risk exposures of the Partnership
as of December 31, 1998.
      Foreign  Currency  Balances.  The  Partnership's  primary foreign currency
balances are in Japanese yen,  German marks,  British  pounds and French francs.
The  Advisor  regularly  converts  foreign  currency  balances  to dollars in an
attempt to control the Partnership's non-trading risk.
Qualitative Disclosures Regarding Means of Managing Risk Exposure.
      The  General  Partner  monitors  the  Partnership's  performance  and  the
concentration of its open positions,  and consults with the Advisors  concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require certain of the Advisors to close out
individual  positions  as  well  as  enter  programs  traded  on  behalf  of the
Partnership. However, any such intervention would be a highly unusual event. The
General  Partner  primarily  relies on the Advisors'  own risk control  policies
while maintaining a general  supervisory  overview of the  Partnership's  market
risk exposures.
      Each Advisor applies its own risk  management policies to its trading. The
Advisors often follow diversification  guidelines,   margin limits and stop loss
points to  exit a  position. The  Advisors'  research  of risk management  often
suggests  on  going  modifications to  their  trading  programs. As part of  the
General Partner's risk management, the General Partner periodically  meets  with
the Advisors to discuss  their  risk  management  and to look for  any  material
changes to the  Advisors'portfolio  balance and trading  techniques.The Advisors
are required to  notify the  General  Partner of  any material  changes to their
programs.
                                   33

<PAGE>


Item 8.    Financial Statements and Supplementary Data.
             SMITH BARNEY  DIVERSIFIED FUTURES FUND L.P. II
                     INDEX TO FINANCIAL STATEMENTS


                                                                        Page
                                                                       Number
             Oath or Affirmation                                         F-2

             Report of Independent Accountants.                          F-3

             Financial Statements:
             Statement of Financial Condition at
             December 31, 1998 and 1997.                                 F-4

             Statement  of Income and  Expenses  for the years  ended
             December  31,  1998  and 1997  and for the  period  from
             January 17, 1996 (commencement of trading operations)
             to December 31, 1996.                                       F-5

             Statement of Partners' Capital for
             the years ended December 31, 1998, 1997
             and 1996.                                                   F-6
             Notes to Financial Statements.                           F-7 - F-11




                                  F-1
                             Continued
<PAGE>

                           To The Limited Partners of
                 Smith Barney Diversified Futures Fund L.P. II

To the best of the  knowledge  and belief of the  undersigned,  the  information
contained herein is accurate and complete.







By:  Daniel A. Dantuono, Chief Financial Officer
     Smith Barney Futures Management Inc.
     General Partner, Smith Barney Diversified
      Futures Fund L.P. II

Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, N.Y. 10013
212-723-5424



                               F-2


<PAGE>


                          Report of Independent Accountants

To the Partners of
   Smith Barney Diversified Futures Fund L.P. II:

In our  opinion,  the  accompanying  statement of  financial  condition  and the
related  statements  of income and  expenses and of  partners'  capital  present
fairly,  in all  material  respects,  the  financial  position  of Smith  Barney
Diversified  Futures Fund L.P. II at December 31, 1998 and 1997, and the results
of its  operations  for each of the three years in the period ended December 31,
1998,  in  conformity  with  generally  accepted  accounting  principles.  These
financial  statements  are the  responsibility  of the management of the General
Partner;  our  responsibility  is to  express  an  opinion  on  these  financial
statements  based on our  audits.  We  conducted  our audits of these  financial
statements  in accordance  with  generally  accepted  auditing  standards  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by the management of the General  Partner,
and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.



                                                  PricewaterhouseCoopers LLP

New York, New York
February 26, 1999

                                   F-3
<PAGE>


                  Smith Barney Diversified Futures Fund L.P. II
                        Statement of Financial Condition
                           December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                1998            1997
<S>                                                 <C>          <C> 
Assets: 
Equity in commodity futures trading
   account:
 Cash (Note 3c)                           $146,338,218   $104,013,967
 Net unrealized appreciation on open         
   futures contracts                         7,931,171      8,931,038
 Commodity options owned, at fair
   value cost($144,827 in 1997)                   --          219,299
                                          ------------   ------------

                                           154,269,389    113,164,304
Interest receivable                            423,262        383,130
                                          ------------   ------------
                                          $154,692,651   $113,547,434
                                          ------------   ------------


Liabilities and Partners' Capital:
Liabilities:
  Accrued expenses:
   Commissions                            $    788,297   $    578,625
   Management fees                             344,022        263,105
   Incentive fees                              236,839         18,146
   Other                                        59,980         67,467
  Redemptions payable (Note 5)               1,465,731      1,040,399
                                          ------------   ------------
                                             2,894,869      1,967,742
                                          ------------   ------------
Partners' capital (Notes 1 and 7):
  General Partner, 1,287.3915 and
   1,003.8833 Unit equivalents
   outstanding 
   in 1998 and 1997, respectively            1,569,575      1,128,124
  Limited Partners, 123,220.1454 and
   98,287.8866 Units of Limited
   Partnership Interest outstanding in
   1998 and 1997, respectively             150,228,207    110,451,568
                                          ------------   ------------
                                           151,797,782    111,579,692
                                          ------------   ------------
                                          $154,692,651   $113,547,434
                                          ============   ============
</TABLE>
See notes to financial statements.

                                             F-4
<PAGE>


                  Smith Barney Diversified Futures Fund L.P. II
                        Statement of Income and Expenses
            for the year ended 1998 and 1997 and for the period from
            January 17, 1996 (commencement of trading operations) to
                                December 31, 1996

<TABLE>
<CAPTION>

                                   1998               1997            1996
<S>                               <C>                 <C>             <C> 
Income:
  Net gains (losses) on
   trading of commodity
   interests:
   Realized gains (losses)
    on closed positions       $ 24,030,158    $ (1,202,278)   $  9,032,056
   Change in unrealized
    gains on open positions     (1,074,339)      6,998,480       2,007,030
                              ------------    ------------    ------------
                                22,955,819       5,796,202      11,039,086
  Less, Brokerage
   commissions including
   clearing fees
   of $201,707, $164,059
   and $67,406,
   respectively (Note 3c)       (8,891,659)     (6,257,856)     (2,169,468)
                              ------------    ------------    ------------
  Net realized and  
   unrealized gains(losses)     14,064,160        (461,654)      8,869,618
   
  Interest income
   (Notes 3c and 6)              4,818,279       3,634,245       1,190,687
                              ------------    ------------    ------------
                                18,882,439       3,172,591      10,060,305
                              ------------    ------------    ------------
Expenses:
  Management fees (Note 3b)      3,553,437       2,545,702         866,887
  Incentive fees (Note 3b)       1,998,362         314,930       1,199,948
  Other expenses                   351,104         625,783         119,553
  Organization expense
  (Note 6)                            --              --           291,264
                              ------------    ------------    ------------
                                 5,902,903       3,486,415       2,477,652
                              ------------    ------------    ------------
Net income (loss)             $ 12,979,536    $   (313,824)   $  7,582,653
                              ============    ============    ============
Net income (loss) per Unit
  of Limited Partnership
  Interest and General
  Partner Unit equivalent
  (Notes 1 and 7)             $      95.43    $      (1.30)         185.99
                              ============    ============    ============
</TABLE>


See notes to financial statements.

                                     F-5
<PAGE>


                            Smith Barney Diversified
                              Futures Fund L.P. II
                         Statement of Partners' Capital
                               for the years ended
                        December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                 Limited          Genearal 
                                Partners           Partner             Total
<S>                                <C>            <C>                <C>  
                                                                     
Partners' capital at
   December 31, 1995        $       1,000    $       1,000    $       2,000
Proceeds from offering of
   8,529 Units of Limited
   Partnership Interest
   and General Partner's
   contribution
   representing 86 Unit
   equivalents (Note 1)         8,529,000           86,000        8,615,000
Offering and organization
   costs (Note 6)                (519,700)          (5,300)        (525,000)
                            -------------    -------------    -------------
Opening Partnership
  capital for operations        8,010,300           81,700        8,092,000
Net income                      7,506,058           76,595        7,582,653
Sale of 42,034.2002 Units
  of Limited Partnership
  Interest and General
  Partner's contribution
  representing 411.0108
  Unit equivalents             41,190,000          402,000       41,592,000
Redemption of 1,911.1385
  Units of Limited
  Partnership Interest         (1,968,649)            --         (1,968,649)
                            -------------    -------------    -------------
Partners' capital at
  December 31, 1996            54,737,709          560,295       55,298,004
Net loss                         (310,653)          (3,171)        (313,824)
Sale of 61,154.0723 Units
  of Limited Partnership
  Interest and General
  Partner's contribution
  representing 505.8725
  Unit equivalents             68,708,600          571,000       69,279,600
Redemption of 11,519.2474
  Units of Limited
  Partnership Interest        (12,684,088)            --        (12,684,088)
                            -------------    -------------    -------------
Partners' capital at
   December 31, 1997          110,451,568        1,128,124      111,579,692
Net income                     12,849,085          130,451       12,979,536
Sale of 38,309.9229 Units
  of Limited Partnership
  Interest and General
  Partner's contribution
  representing 283.5082
  Unit equivalents             42,074,000          311,000       42,385,000
Redemption of 13,377.6641
  Units of Limited
  Partnership Interest        (15,146,446)            --        (15,146,446)
                            -------------    -------------    -------------
 Partners' capital at
   December 31, 1998        $ 150,228,207    $   1,569,575    $ 151,797,782
                            =============    =============    =============
</TABLE>


See notes to financial statements.


                                    F-6

<PAGE>


                            Smith Barney Diversified
                              Futures Fund L.P. II
                          Notes to Financial Statements

1.  Partnership Organization:
    Smith  Barney  Diversified  Futures  Fund L.P. II (the  "Partnership")  is a
    limited   partnership  which  was  organized  on  May  10,  1994  under  the
    partnership  laws of the  State of New  York to  engage  in the  speculative
    trading of a diversified  portfolio of commodity interests including futures
    contracts,  options and forward contracts.  The commodity interests that are
    traded by the  Partnership  are volatile and involve a high degree of market
    risk.  Between  August 21, 1995  (commencement  of the offering  period) and
    January 16, 1996, 8,529 Units of Limited Partnership Interest ("Units") were
    sold at $1,000 per Unit.  The proceeds of the initial  offering were held in
    an escrow  account  until  January 17, 1996,  at which time they were turned
    over to the  Partnership  for trading.  The  Partnership  continues to offer
    Units during the continuous  offering period.  The Partnership is authorized
    to sell 100,000 Units during the public offering period of the  Partnership.
    Smith  Barney  Futures  Management  Inc.  acts as the general  partner  (the
    "General   Partner")  of  the   Partnership.   On  September  1,  1998,  the
    Partnership's  commodity  broker,  Smith  Barney  Inc.,  merged with Salomon
    Brothers Inc and changed its name to Salomon Smith Barney Inc. ("SSB").  SSB
    is an affiliate of the General Partner.  The General Partner is wholly owned
    by Salomon Smith Barney Holdings, Inc. ("SSBH"),  which is the sole owner of
    SSB. On October 8, 1998,  Travelers Group Inc. merged with Citicorp Inc. and
    changed its name to  Citigroup  Inc.  SSBH is a wholly owned  subsidiary  of
    Citigroup  Inc. The General  Partner and each limited  partner  share in the
    profits  and  losses  of the  Partnership  in  proportion  to the  amount of
    partnership  interest owned by each except that no limited  partner shall be
    liable for  obligations of the  Partnership in excess of his initial capital
    contribution and profits, if any, net of distributions. The Partnership will
    be liquidated  upon the first to occur of the following:  December 31, 2014;
    the net asset value of a Unit  decreases  to less than $400 as of a close of
    any business  day; or under certain  other  circumstances  as defined in the
    Limited Partnership Agreement.
2.  Accounting Policies:
    a. All commodity interests (including  derivative financial  instruments and
       derivative  commodity  instruments)  are used for trading  purposes.  The
       commodity  interests  are recorded on trade date and open  contracts  are
       recorded in the  statement  of  financial  condition at fair value on the
       last business day of the year,  which  represents  market value for those
       commodity  interests for which market  quotations are readily  available.
       Investments in commodity interests  denominated in foreign currencies are
       translated into U.S. dollars at the exchange rates prevailing on the last
       business  day of  the  year.  Realized  gains  (losses)  and  changes  in
       unrealized values on commodity  interests are recognized in the period in
       which the contract is closed or the changes occur and are included in net
       gains (losses) on trading of commodity interests.
    b. Income  taxes have not been  provided  as each  partner  is  individually
       liable for the taxes,  if any, on his share of the  Partnership's  income
       and expenses.
    c. The  preparation  of financial  statements in conformity  with  generally
       accepted accounting  principles requires management to make estimates and
       assumptions that affect the reported amounts of assets and liabilities at
       the date of the financial statements and the reported amounts of revenues
       and expenses  during the reporting  period.  Actual  results could differ
       from these estimates.
                                   F-7
<PAGE>

3.  Agreements:
    a. Limited Partnership Agreement:
       The  General  Partner   administers  the  business  and  affairs  of  the
       Partnership  including  selecting  one or more  advisors to make  trading
       decisions for the Partnership.
    b. Management Agreements:
       The General  Partner,  on behalf of the  Partnership,  has  entered  into
       Management  Agreements  with  John W.  Henry  &  Company,  Inc.  ("JWH"),
       Millburn  Ridgefield  Corporation,  Campbell  & Co.,  Inc.,  Willowbridge
       Associates   Inc.  and  ARA   Portfolio   Management   Company,   L.L.C.,
       (collectively,  the "Advisors"),  registered  commodity trading advisors.
       The Advisors are not  affiliated  with one another and none is affiliated
       with  the  General  Partner  or SSB  and  are  not  responsible  for  the
       organization  or operation of the  Partnership.  The Parnership  will pay
       each Advisor a monthly management fee equal to 1/6 of 1% (2% per year) of
       month-end  Net Assets  allocated to the Advisor  (except JWH,  which will
       receive  a  monthly  management  fee  equal to 1/3 of 1% (4% per year) of
       month-end Net Assets).  In addition,  the Partnership is obligated to pay
       each Advisor an incentive fee payable  quarterly  equal to 20% of the New
       Trading Profits,  as defined,  earned by each Advisor for the Partnership
       (except JWH,  which will  receive an incentive  fee of 15% of New Trading
       Profits).
    c. Customer Agreement:
       The Partnership has entered into a Customer Agreement which provides that
       the Partnership  will pay SSB a monthly  brokerage fee equal to 1/2 of 1%
       (6% per year) of month-end Net Assets,  as defined,  in lieu of brokerage
       commissions  on a per trade  basis.  SSB will pay a portion of  brokerage
       fees  to  its  financial   consultants   who  have  sold  Units  in  this
       Partnership. Brokerage fees will be paid for the life of the Partnership,
       although  the rate at which  such  fees  are  paid  may be  changed.  The
       Partnership  will pay for  National  Futures  Association  ("NFA")  fees,
       exchange,  clearing,  user,  give-up and floor brokerage fees. All of the
       Partnership's  assets are deposited in the Partnership's  account at SSB.
       The Partnership's cash is deposited by SSB in segregated bank accounts to
       the extent required by Commodity Futures Trading Commission  regulations.
       At  December  31,  1998 and 1997,  the  amount  of cash  held for  margin
       requirements  was  $18,983,738  and  $20,242,392,  respectively.  SSB has
       agreed to pay the Partnership interest on 80% of the average daily equity
       maintained  in cash in its  account  during  each month at a 30-day  U.S.
       Treasury  bill  rate  determined  weekly  by SSB  based  on  the  average
       noncompetitive  yield on 3-month U.S.  Treasury bills maturing in 30 days
       from the date on which  such  weekly  rate is  determined.  The  Customer
       Agreement between the Partnership and SSB gives the Partnership the legal
       right to net unrealized gains and losses.  The Customer  Agreement may be
       terminated upon notice by either party.
4.  Trading Activities:
    The Partnership was formed for the purpose of trading contracts in a variety
    of commodity  interests,  including  derivative  financial  instruments  and
    derivative  commodity  interests.  The results of the Partnership's  trading
    activity  are shown in the  statement  of income  and  expenses.  All of the
    commodity  interests,  owned  by  the  Partnership,  are  held  for  trading
    purposes.  The fair value of these commodity  interests,  including  options
    thereon,  if  applicable,  at December 31, 1998 and 1997 was  $7,931,171 and
    $9,150,337,  respectively,  and the average  fair value during the year then
    ended,  based on a  monthly  calculation,  was  $8,531,763  and  $5,938,920,
    respectively.
                                  F-8
<PAGE>

5.  Distributions and Redemptions:
    Distributions of profits, if any, will be made at the sole discretion of the
    General Partner; however,  beginning with the quarter ended June 30, 1996, a
    limited partner may require the Partnership to redeem his Units at their Net
    Asset  Value  as of the last day of any  month  on 10  days'  notice  to the
    General  Partner  provided  that no  redemption  may  result in the  limited
    partner holding fewer than 3 Units after redemption is effected. There is no
    fee charged to limited partners in connection with redemptions.
6.  Organization and Offering Costs:
    Expenses  related  to the  continuous  offering  of  Units  in 1998 and 1997
    totaled  $248,844  and  $501,620,  respectively,  and are  included in other
    expenses.  Offering  and  organization  expenses of  approximately  $525,000
    relating to the issuance and marketing of Units during the initial  offering
    period  were  initially  paid by SSB and were  charged  against  the initial
    capital of the Partnership. In addition, expenses of $291,264 related to the
    continuous  offering of Units were incurred through December 31, 1996. As of
    December 31, 1996, the  Partnership had reimbursed SSB for all such expenses
    incurred  during the initial  offering and  continuous  offering  period (in
    addition to interest  at the prime rate quoted by the Chase  Manhattan  Bank
    totaling  approximately  $20,929) from interest  earned on funds held in its
    account.

7.  Net Asset Value Per Unit:
    Changes  in the net asset  value per Unit of  Partnership  interest  for the
    years ended  December  31, 1998 and 1997 and for the period from January 17,
    1996  (commencement  of trading  operations)  to  December  31, 1996 were as
    follows:





                                     1998         1997          1996
Net realized and unrealized
 gains (losses)                  $  103.15  $     (0.92) $    177.40
Interest income                      41.25        43.48        36.09
Expenses                            (48.97)      (43.86)      (67.51)
Other                                --           --           40.01
                                 ---------    ---------    ---------
Increase (decrease) for period       95.43        (1.30)      185.99
Net asset value per Unit,
 beginning of period              1,123.76     1,125.06       939.07
                                 ---------    ---------    ---------
Net asset value per Unit,
 end of period                   $1,219.19   $ 1,123.76   $ 1,125.06
                                 ==========   =========     =========

                                                      
8.  Financial Instrument Risks:
    The Partnership is party to financial  instruments  with  off-balance  sheet
    risk, including  derivative  financial  instruments and derivative commodity
    instruments,   in  the  normal  course  of  its  business.  These  financial
    instruments may include forwards,  futures and options, whose value is based
    upon an underlying asset,  index, or reference rate, and generally represent
    future  commitments to exchange  currencies or cash flows, or to purchase or
    sell other  financial  instruments  at specific  terms at  specified  future
    dates,  or,  in the  case of  derivative  commodity  instruments,  to have a
    reasonable  possibility  to be  settled  in cash or with  another  financial
    instrument.   These   instruments   may  be   traded  on  an   exchange   or
    over-the-counter  ("OTC").  Exchange traded instruments are standardized and
    include futures and certain option  contracts.  OTC contracts are negotiated
    between contracting  parties and include forwards and certain options.  Each
    of these instruments is subject to various risks similar to those related to
    the underlying  financial  instruments  including market and credit risk. In
    general,  the risks  associated  with OTC  contracts  are greater than those
    associated with exchange traded  instruments  because of the greater risk of
    default by the counterparty to an OTC contract. Market risk is the potential

                               F-9
<PAGE>

    for  changes  in  the  value  of the  financial  instruments  traded  by the
    Partnership due to market changes,  including  interest and foreign exchange
    rate movements and fluctuations in commodity or security prices. Market risk
    is directly impacted by the volatility and liquidity in the markets in which
    the related  underlying  assets are traded.  Credit risk is the  possibility
    that a loss may  occur  due to the  failure  of a  counterparty  to  perform
    according  to the terms of a contract.  Credit risk with respect to exchange
    traded  instruments  is reduced to the extent  that an  exchange or clearing
    organization acts as a counterparty to the  transactions.  The Partnership's
    risk of loss in the event of  counterparty  default is typically  limited to
    the amounts  recognized  in the  statement  of financial  condition  and not
    represented  by the  contract or notional  amounts of the  instruments.  The
    Partnership has  concentration  risk because the sole counterparty or broker
    with  respect  to the  Partnership's  assets  is SSB.  The  General  Partner
    monitors  and  controls  the  Partnership's  risk  exposure on a daily basis
    through  financial,  credit  and risk  management  monitoring  systems,  and
    accordingly  believes that it has effective  procedures  for  evaluating and
    limiting  the credit and market risks to which the  Partnership  is subject.
    These monitoring systems allow the General Partner to statistically  analyze
    actual  trading  results  with  risk  adjusted  performance  indicators  and
    correlation  statistics.  In addition,  on-line  monitoring  systems provide
    account  analysis of futures,  forwards  and  options  positions  by sector,
    margin  requirements,  gain and loss transactions and collateral  positions.
    The   notional  or   contractual   amounts  of  these   instruments,   while
    appropriately not recorded in the financial  statements,  reflect the extent
    of the Partnership's involvement in these instruments. At December 31, 1998,
    the  Partnership's  commitment  to purchase and sell these  instruments  was
    $627,878,574 and $849,849,754, respectively, as detailed below. All of these
    instruments mature within one year of December 31, 1998. However, due to the
    nature of the Partnership's  business,  these instruments may not be held to
    maturity.  At  December  31,  1998,  the  fair  value  of the  Partnership's
    derivatives,  including options thereon, if applicable,  was $7,931,171,  as
    detailed below.
                                  December 31, 1998
                               Notional or Contractual
                                Amount of Commitments
                                To Purchase       To Sell       Fair Value
Currencies:
  -Exchange Traded Contracts   $ 23,119,700   $  1,535,710   $   (260,990)
  -OTC Contracts                206,074,644    166,497,199     (1,219,718)
Energy                                 --       16,794,100        316,796
Grains                              301,800     15,364,740        446,680
Interest Rate U.S.               70,685,806    226,439,506       (588,909)
Interest Rate Non-U.S           281,828,669    352,070,813      7,311,953
Livestock                              --        4,570,380        214,540
Metals                           15,054,941     42,312,165        790,656
Softs                            14,099,125     15,753,068        853,554
Indices                          16,713,889      8,512,073         66,609
                               ------------   ------------   ------------
Total                          $627,878,574   $849,849,754   $  7,931,171
                               ============   ============    ============

                                 F-10
<PAGE>

At December 31, 1997, the notional or contractual  amounts of the  Partnership's
commitment  to  purchase  and  sell  these   instruments  was  $529,827,193  and
$562,544,334, respectively, and the fair value of the Partnership's derivatives,
including options thereon, if applicable, was $9,150,337, as detailed below.

                                  December 31, 1997
                               Notional or Contractual
                                Amount of Commitments

                                To Purchase       To Sell      Fair Value
Currencies:
  -Exchange Traded Contracts   $ 16,384,721   $107,228,370   $    480,324
  -OTC Contracts                 51,178,514    103,210,400        451,488
Energy                                 --       35,726,058      1,910,464
Grains                            7,962,725     10,551,808         79,029
Interest Rate U.S.              140,875,215     11,765,610        717,418
Interest Rate Non-U.S           262,803,653    198,052,010      1,149,142
Livestock                              --        7,732,038        262,598
Metals                           21,841,650     52,955,116      2,665,247
Softs                            26,105,281     19,193,510        888,328
Indices                           2,675,434     16,129,414        546,299
                               ------------   ------------   ------------
Total                          $529,827,193   $562,544,334   $  9,150,337
                               ============   ============   ============
                                                          

9.   Subsequent Events:

     Millburn Ridgefield  Corporation  and ARA  Portfolio  Management Company, 
     L.L.C. were terminated as Advisors to the Partnership on January 31, 1999.
     Beacon  Management  Corporation and Roy G.  Niederhoffer  Co., Inc. were 
     added as Advisors on February 1, 1999.

10.  New Accounting Pronouncements:

     In June 1998,  the Financial  Accounting  Standards  Board issued SFAS 133,
     Accounting for Derivative  Instruments and Hedging Activities ("SFAS 133").
     SFAS 133 requires that an entity recognize all derivatives in the statement
     of financial  condition and measure those  instruments at fair value.  SFAS
     133 is effective for fiscal years  beginning  after June 15, 1999. SFAS 133
     is expected to have no material  impact on the financial  statements of the
     Partnership  as all commodity  interests  are recorded at fair value,  with
     changes therein reported in the statement of income and expenses.

                                  F-11
<PAGE>




                                  
<PAGE>


Item 9. Changes in and   Disagreements  with   Accountants  on   Accounting  and
Financial Disclosure.
              During  the last  two  fiscal  years  and any  subsequent  interim
period, no independent accountant who was engaged as the principal accountant to
audit the Partnership's financial statements has resigned or was dismissed.
                               PART III
Item 10.  Directors and Executive Officers of the Registrant.
              The  Partnership  has no officers or directors and its affairs are
managed by  its  General  Partner, Smith  Barney Futures  Management  Inc. As of
December 31,  1998,  investment  decisions  were  being  made  by John  W. Henry
& Company,  Inc.,  Campbell and Company Inc.,  Millburn Ridgefield  Corporation,
Willowbridge  Associates Inc. and

ARA Portfolio Management Company, L.L.C. (collectively, the "Advisors").

Item 11. Executive Compensation.
         The  Partnership   has no  directors  or  officers.  Its   affairs  are
managed by Smith Barney Futures  Management Inc., its General  Partner.  SSB, an
affiliate of the General  Partner,  is the commodity  broker for the Partnership
and receives brokerage  commissions for such services,  as described under "Item
1.  Business."  Brokerage  commissions and clearing fees of $8,891,659 were paid
for the year ended  December 31, 1998.  Management  fees and  incentive  fees of
$3,553,437 and $1,998,362,  respectively, were paid to the Advisors for the year
ended December 31, 1998.

                                   35
<PAGE>


Item 12. Security Ownership of Certain Beneficial Owners and Management.
         (a).  Security  ownership of certain  beneficial owners. As of March 1,
1999, the  Partnership  knows of no person who  beneficially  owns more  than 5%
of the Units outstanding.
         (b). Security  ownership of management. Under the terms of the  Limited
Partnership  Agreement,  the  Partnership's  affairs are managed by the  General
Partner. The  General  Partner  owns  Units  of  general  partnership   interest
equivalent  to  1,287.3915  Units (1.0%) of Limited  Partnership  Interest as of
December 31, 1998.
         (c).  Changes in control.   None.

Item 13. Certain Relationship and Related Transactions.
         Salomon  Smith  Barney  Inc. and Smith Barney Futures  Management  Inc.
would be  considered promoters  for purposes of item 404 (d) of Regulation  S-K.
The nature and the  amounts  of  compensation  each promoter  will  receive from
the  Partnership  are set forth under "Item 1. Business" and "Item 11. Executive
Compensation."

                                      PART IV
Item 14.       Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
         (a) (1)Financial Statements:
                Statement of  Financial Condition at December 31, 1998 and 1997.
                Statement of Income and Expenses for the years ended December31,
                1998  and  1997  and  for  the  period  from  January  17,  1996
                (commencement of  trading   operations) to  December  31,  1996.
                Statement of Partners' Capital for the years ended  December 31,
                1998, 1997 and 1996.
            
             (2)Financial Statement  Schedules: Financial Data  Schedule for the
                year ended December 31, 1998.
                                       36  
<PAGE>
            
             (3) Exhibits:
             
              3.1 - Limited Partnership  Agreement  (filed as Exhibit 3.1 to the
                    Registration  Statement on Form  S-1 (File No. 33-79244  and
                    incorporated herein by reference).
             
              3.2 - Certificate of Limited Partnership of   the  Partnership  as
                    filed in the office of the County  Clerk of New York  County
                    (filed  as  Exhibit  3.2  to  the  Registration    Statement
                    on  Form  S-1  (Filed  No.   33-79244)   and    incorporated
                    herein by reference).
              
              10.1- Customer  Agreement between the Partnership and Smith Barney
                    (filed  as  Exhibit  10.1  to the  Registration    Statement
                    on  Form  S-1  (File  No. 33-79244) and  incorporated herein
                    by reference).
              
              10.2- Subscription  Agreement  (filed  as  Exhibit  10.2  to   the
                    Registration Statement on Form S-1 (File  No. 33-29144)  and
                    incorporated herein by reference).

              10.3- Escrow Instructions relating to escrow of subscription funds
                   (filed  as  Exhibit  10.3  to  the  Registration Statement on
                    Form  S-1  (File  No.   33-79244)   and incorporated  herein
                    by reference).
                                        37
              
<PAGE>
 
             10.4- Management  Agreement  among  the  Partnership, the  General
                    Partner and Chesapeake Capital Corporation (filed as Exhibit
                    10.5 to  the  Registration  Statement on Form S-1  (File No.
                    33-79244) and incorporated herein by reference).
             
              10.5- Management  Agreement  among  the  Partnership,  the General
                    Partner and John W. Henry & Co. Inc.(filed as  Exhibit  10.6
                    to the Registration Statement on Form S-1 (File No.33-79244)
                    and incorporated herein by reference).
              
              10.6- Management   Agreement  among  the Partnership,  the General
                    Partner  and  Millburn  Ridgefield   Corporation  (filed  as
                    Exhibit 10.7 to  the  Registration  Statement  on  Form  S-1
                    (File  No.  33-79244) and incorporated herein by reference).

              10.7- Management  Agreement  among the  Partnership,  the  General
                    Partner and  Willowbridge  Associates Inc. (filed as Exhibit
                    10.7 to the Form 10-K for the year ended December 31, 1997).

              10.8- Management  Agreement  among the  Partnership,  the  General
                    Partner and ARA Portfolio Management Company,  L.L.C. (filed
                    as Exhibit 10.8 to the Form 10-K for the year ended December
                    31,  1997). 
              10.9- Letter from General Partner terminating Management Agreement
                    with  Chesapeake  Capital Corporation (filed as Exhibit 10.9
                    to the Form 10-K for the year ended December 31, 1997).
                                        38
<PAGE>
 
             10.10- Management  Agreement among  the  Partnership,  the  General
                    Partner and Campbell & Co., Inc.  (filed as Exhibit 10.10 to
                    the Form 10-K for the year ended December 31, 1997).

             10.11- Letters extending  Management  Agreements with John W. Henry
                    & Company Inc.,  Chesapeake Capital Corporation and Millburn
                    Ridgefield  Corporation  for 1996 and 1997 (filed as Exhibit
                    10.11 to the  Form  10-K for the  year  ended  December  31,
                    1997).

             10.12- Letters   from  General  Partner   terminating    Management
                    Agreement  with  Millburn   Ridgefield   Corporation  (filed
                    herein).
 
             10.13- Letter  from   General   Partner    terminating   Management
                    Agreement with ARA Portfolio Management (filed herein).

             10.14- Management  Agreement  among  the  Partnership,  the General
                    Partner and Beacon Management Corporation (filed herein).

             10.15- Management  Agreement among  the   Partnership,  the General
                    Partner and Roy G. Neiderhoffer Co., Inc. (filed herein).

             10.16- Letters  extending  Management Agreements with John W. Henry
                    &  Company   Inc.,   Campbell  &  and   Company,   Inc.  and
                    Willowbridge  Associates  Inc.(filed herein). (b) Reports on
                    8-K: None Filed.
                                   39
<PAGE>


         Supplemental Information To Be Furnished With Reports Filed Pursuant To
Section 15(d) Of The Act by  Registrants  Which Have Not  Registered  Securities
Pursuant To Section 12 Of the Act.




Annual Report to Limited Partners
                                  40 
<PAGE>


                               SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York and State of New York on the 24th day of March 1999.


SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II


By:       Smith Barney Futures Management Inc.
          (General Partner)



By        /s/        David J. Vogel
          David J. Vogel, President & Director


Pursuant  to the  requirements  of the  Securities  Exchange  Act of 1934,  this
Registration  Statement  has been signed below by the  following  persons in the
capacities and on the date indicated.

/s/     David J. Vogel                                /s/   Jack H. Lehman III
David J. Vogel,                                       Jack H. Lehman III
Director, Principal Executive                         Chairman and Director
Officer and President



/s/    Michael R. Schaefer                            /s/    Daniel A. Dantuono
Michael R. Schaefer                                   Daniel A. Dantuono
Director                                              Treasurer, Chief Financial
                                                      Officer and Director



/s/ Daniel R. McAuliffe, Jr.                          /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr.                              Steve J. Keltz
Director                                              Secretary and Director




/s/   Shelley Ullman
Shelley Ullman
Director
                                   41
<PAGE>