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, 1997

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: 100,000  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 [ ]


<PAGE>



                                    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, 1997 are
reported  in the  Statement  of  Partners'  Capital  on page F-5 under  "Item 8.
Financial Statements and

                                      2

<PAGE>



Supplementary Data."
       The  General  Partner  has  agreed  to  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 and is a wholly owned subsidiary of Smith
Barney Inc. ("SB"). SB acts as commodity broker for the Partnership. On November
28, 1997, Smith Barney Holdings Inc. was merged with Salomon Inc to form Salomon
Smith Barney  Holdings  Inc.  ("SSBH"),  a wholly owned  subsidiary of Travelers
Group Inc. SB is a wholly owned subsidiary of SSBH.
      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 SB.
      As of December 31, 1997, all commodity  trading decisions are made for the
Partnership  by John W.  Henry &  Company,  Inc.  ("JWH"),  Millburn  Ridgefield
Corporation and Chesapeake Capital Corporation,

                                      3

<PAGE>



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 SB. The Advisors are not responsible for the  organization or
operation of the  Partnership.  Willowbridge  Associates  Inc. and ARA Portfolio
Management  Company,  L.L.C. were added as advisors to the Partnership on May 1,
1997.
      Pursuant  to the  terms  of the  Management  Agreements  (the  "Management
Agreement"),  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  SB (the
"Customer  Agreement") which provides that the Partnership will pay SB a monthly
brokerage  fee  equal to 1/2 of 1% of  month-end  Net  Assets  allocated  to the
Advisors (6% per year) in lieu of brokerage commissions on a per trade basis. SB
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  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

                                      4

<PAGE>



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 SB gives
the Partnership the legal right to net unrealized gains and losses.
      In addition,  SB 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 SB 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,  SB began  paying  interest  to the
Partnership  only after the amount of interest  accrued equaled the total amount
of  offering  and  organizational  expenses  paid by SB 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 year ended December 31, 1997 and for the period from January
17, 1996 (commencement of trading  operations) to December 31, 1996 is set forth
under "Item 6. Select  Financial  Data." The Partnership  capital as of December
31, 1997 was $111,579,692.

                                      5

<PAGE>



      (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, SB.
Item 3.  Legal Proceedings.
      There are no pending legal proceedings to which the Partnership is a party
or to  which  any of its  assets  is  subject.  No  material  legal  proceedings
affecting  the  Partnership  were  terminated  during the fiscal  year.  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.
                                    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

                                      6

<PAGE>



                Limited Partnership Interest.
          (b)   Holders. The number of holders of Units of Limited
                Partnership Interest as of December 31, 1997 was
                5,144.
          (c)   Distribution.  The Partnership did not declare a distribution in
                1997 or 1996.
Item 6. Select 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 year ended  December  31, 1997 and for the period from  January 17, 1996
(commencement  of trading  operations)  to December 31, 1996 and total assets at
December 31, 1997 and 1996 were as follows:
                                                     1997              1996
                                                -------------      --------

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

Interest Income                                    3,634,245         1,190,687
                                                -------------      -----------

                                                $  3,172,591       $10,060,305
                                                =============      ===========

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

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

Total assets                                    $113,547,434       $56,960,922
                                                =============      ===========


Item 7.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations.
        (a)     Liquidity.  The Partnership does not engage in sales

                                      7

<PAGE>



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 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

                                      8

<PAGE>



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.
        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,

                                      9

<PAGE>



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
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

                                      10

<PAGE>



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 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 interest income payable by
SB 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, 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 continues to offer Units at the Net Asset Value per Unit
as of the end of each month.  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.

                                      11

<PAGE>




        (c)     Results of Operations.
        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.  There were no operations in
1995. The net asset value of $939.07 at  commencement  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  $5,796,202  before
commissions  and  expenses  in 1997.  These  gains  were  attributable  to gains
incurred  in  the  trading  of  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  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.

                                      12

<PAGE>



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.


                                      13

<PAGE>



Item 8.         Financial Statements and Supplementary Data.




                SMITH BARNEY  DIVERSIFIED FUTURES FUND L.P. II
                         INDEX TO FINANCIAL STATEMENTS



                              Page
                                                                  Number


                Report of Independent Accountants.                  F-2

                Financial Statements:
                Statement of Financial Condition at
                December 31, 1997 and 1996.                         F-3

                Statement of Income and Expenses for
                the year ended December 31,
                1997 and for the period from January
                17, 1996  (commencement  of
                trading operations) to December 31, 1996.           F-4

                Statement of Partners' Capital for
                the years ended December 31, 1997,
                1996 and 1995.                                      F-5

                Notes to Financial Statements.                    F-6 -  F-11




                                      F-1


                                   Continued


<PAGE>

           Report of Independent Accountants

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

We have  audited the  accompanying  statement  of  financial  condition of SMITH
BARNEY DIVERSIFIED  FUTURES FUND L.P. II (a New York Limited  Partnership) as of
December 31, 1997 and 1996,  and the related  statements  of income and expenses
for the year ended  December  31, 1997 and for the period from  January 17, 1996
(commencement  of trading  operations)  to December 31,  1996,  and of partners'
capital for the years ended December 31, 1997,  1996 and 1995.  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  in  accordance  with  generally   accepted  auditing
standards.  Those standards 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.  An audit also includes
assessing the accounting  principles used and significant  estimates made by the
management of the General Partner,  as well as evaluating the overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of Smith  Barney  Diversified
Futures  Fund L.P. II as of December  31, 1997 and 1996,  and the results of its
operations for the years ended  December 31, 1997,  1996 and 1995, in conformity
with generally accepted accounting principles.



                               Coopers & Lybrand L.L.P.

New York, New York
March 6, 1998

                                      F-2

<PAGE>


                  Smith Barney Diversified Futures Fund L.P. II
                        Statement of Financial Condition
                           December 31, 1997 and 1996


Assets:                                               1997              1996
Equity in commodity futures
  trading account:
   Cash and cash equivalents                      $104,013,967      $ 54,370,448
   (Note 3c)
   Net unrealized appreciation
    on open futures contracts                        8,931,038         1,981,313
   Commodity options owned, at
    market value (cost $144,827
    and $420,667 in 1997 and                           219,299           430,497
    1996, respectively)
                                                   113,164,304        56,782,258
                                                  ------------      ------------
Interest receivable                                    383,130           178,664
                                                  ------------      ------------
                                                  $113,547,434      $ 56,960,922
                                                  ------------      ------------

Liabilities and Partners'
Capital:
Liabilities:
  Accrued expenses:
   Commissions                                    $    578,625      $    288,503
   Management fees                                     263,105           133,127
   Incentive fees                                       18,146         1,036,077
   Other                                                67,467            47,744
  Redemptions payable (Note 5)                       1,040,399           145,230
  Commodity options written, at
  market value (premiums
  received $28,124 in 1996)                                 --            12,237
                                                  ------------      ------------
                                                     1,967,742         1,662,918

Partners' capital (Notes 1 and 7):
  General Partner, 1,003.8833
   and 498.0108 Unit
   equivalents outstanding in
   1997 and 1996, respectively                       1,128,124           560,295
  Limited Partners, 98,287.8866
   and 48,653.0617 Units of
   Limited Partnership
   Interest outstanding in 1997
   and 1996, respectively                          110,451,568        54,737,709
                                                  ------------      ------------
                                                   111,579,692        55,298,004
                                                  ------------      ------------

                                                  $113,547,434      $ 56,960,922
                                                  ------------      ------------



See notes to financial statements.

                                      F-3

<PAGE>


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


                                                    1997                 1996
Income:
  Net gains (losses) on
   trading of commodity
   interests:
   Realized gains
    (losses) on closed  positions                $(1,202,278)         $9,032,056
   Change in unrealized
    gains                                          6,998,480           2,007,030
    on open positions
                                                 -----------         -----------
                                                   5,796,202          11,039,086
  Less, Brokerage
   commissions and
   clearing fees
   ($164,059 and $67,406,
   respectively) (Note 3c)                         6,257,856           2,169,468
                                                 -----------         -----------
  Net realized and
   unrealized                                       (461,654)          8,869,618
   gains (losses)
  Interest income
   (Notes 3c and 6)                                3,634,245           1,190,687
                                                 -----------         -----------

                                                   3,172,591          10,060,305
Expenses:
  Management fees (Note                            2,545,702             866,887
  3b)
  Incentive fees (Note 3b)                           314,930           1,199,948
  Other expenses                                     625,783             119,553
  Organization expense (Note 6)                           --             291,264
                                                 -----------         -----------
                                                   3,486,415           2,477,652
                                                 -----------         -----------
Net income (loss)                                  $(313,824)         $7,582,653
                                                 -----------         -----------
Net income (loss) per
  Unit of Limited
  Partnership Interest
  and General Partner
  Unit equivalent (Notes 1 and 7)                $     (1.30)        $    185.99
                                                 -----------         -----------



See notes to financial statements.

                                      F-4

<PAGE>


                            Smith Barney Diversified
                              Futures Fund L.P. II
                         Statement of Partners' Capital
                               for the years ended
                        December 31, 1997, 1996 and 1995


                                   Limited          General
                                   Partners         Partner           Total
Partners' capital at
   December 31, 1994            $       1,000    $       1,000    $       2,000
                                -------------    -------------    -------------
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
                                -------------    -------------    -------------

See notes to financial statements.


                                      F-5


<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 and is a wholly  owned  subsidiary of
    Smith Barney Inc.  ("SB").  SB acts as commodity  broker for the Partnership
    (see Note 3c). On November 28, 1997,  Smith  Barney Holdings Inc. was merged
    with Salomon Inc to form  Salomon  Smith Barney  Holdings Inc.  ("SSBH"),  a
    wholly  owned  subsidiary  of  Travelers  Group  Inc.  SB is a wholly  owned
    subsidiary of SSBH.

    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.

                                      F-6

<PAGE>

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 market value for
       those  commodity  interests  for  which  market  quotations  are  readily
       available  or at  fair  value  on the  last  business  day  of the  year.
       Investments in commodity  interests  denominated in foreign  currency are
       translated into U.S. dollars at the exchange rates prevailing on the last
       business day of the year.  Realized gain (loss) 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.

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,   Chesapeake  Capital   Corporation,
       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 SB and are not responsible for the
       organization or operation of the  Partnership.  The Partnership  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 earned by each Advisor for the  Partnership  (except JWH,
       which  will  receive an  incentive  fee of 15% of New  Trading  Profits).
       Willowbridge Associates Inc. and ARA Portfolio Management Company, L.L.C.
       were added as Advisors to the Partnership on May 1, 1997.


                                      F-7

<PAGE>

    c. Customer Agreement:

       The Partnership has entered into a Customer Agreement which provides that
       the  Partnership  will pay SB 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. SB 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 SB. The Partnership's  cash is
       deposited  by SB in  segregated  bank  accounts as required by  Commodity
       Futures Trading  Commission  regulations.  At December 31, 1997 and 1996,
       the  amount of cash held for  margin  requirements  was  $20,242,392  and
       $6,904,509,  respectively.  SB 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 SB 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 SB 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 expense.

    All of the  commodity  interests,  owned  by the  Partnership,  are held for
    trading  purposes.  The fair value of these commodity  interests,  including
    options thereon at December 31, 1997 and 1996 was $9,150,337 and $2,399,573,
    respectively,  and the average fair value during the year then ended,  based
    on monthly calculation was $5,938,920 and $2,965,883, respectively.

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.

                                      F-8


<PAGE>



6.  Organization and Offering Costs:

    Expenses  related  to the  continuous  offering  of  Units  in 1997  totaled
    $501,620 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 SB 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 SB 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 for the year ended December 31, 1997
    and  for  the  period  from  January  17,  1996   (commencement  of  trading
    operations) to December 31, 1996 were as follows:



<PAGE>


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


8.  Financial Instrument Risk:

    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 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.


                                      F-9


<PAGE>

    Market  risk is the  potential  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 SB.

    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, 1997,
    the  Partnership's  commitment  to purchase and sell these  instruments  was
    $529,827,193 and $562,544,334, respectively, as detailed below. All of these
    instruments mature within one year of December 31, 1997. However, due to the
    nature of the Partnership's  business,  these instruments may not be held to
    maturity.  At  December  31,  1997,  the  fair  value  of the  Partnership's
    derivatives, including options thereon, was $9,150,337, as detailed below.

                                      F-10

<PAGE>

                                             December 31, 1997
                                   ----------------------------------------
                                           Notional or Contractual
                                            Amount of Commitments
                                 To Purchase        To Sell          Fair Value
Currencies:
  -Exchange
   Traded                       $ 16,384,721      $107,228,370      $    480,324
   Contracts
  -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                    140,875,215        11,765,610           717,418
  U.S
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
                                ------------      ------------      ------------

At December 31, 1996, the notional or contractual  amounts of the  Partnership's
commitment  to  purchase  and  sell  these   instruments  was  $287,865,518  and
$181,348,343, respectively, and the fair value of the Partnership's derivatives,
including options thereon, was $2,399,573 as detailed below.


                                      F-11

<PAGE>
                                                 December 31, 1996
                                      ----------------------------------------
                                              Notional or Contractual
                                                Amount of Commitments
                                      To Purchase     To Sell        Fair Value
Currencies:
  -Exchange
   Traded                            $ 12,752,114   $ 15,672,967   $    596,711
   Contracts
  -OTC Contracts 48,300,653            72,590,507        393,543
Energy                                 12,060,803             --        328,180
Grains                                    175,750      4,560,014        148,525
Interest Rate                          54,062,085      4,098,651        (55,803)
  U.S
Interest Rate
  Non-U.S                             137,083,934     42,405,484        (44,169)
Livestock                                 385,930             --            840
Metals                                  7,349,851     23,421,538        416,746
Softs                                   7,984,383      8,534,913         28,892
Indices                                 7,710,015     10,064,269        586,108
                                     ------------   ------------   ------------
Total                                $287,865,518   $181,348,343   $  2,399,573
                                     ------------   ------------   ------------

9.  Subsequent Events:

     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.


                                      F-11

<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. Investment
decisions  will be made by John W. Henry &  Company,  Inc.,  Chesapeake  Capital
Corporation,  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,  which
receives  compensation for its services,  as set forth under "Item 1. Business."
SB, 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 $6,257,856
were paid for the year ended  December 31, 1997.  Management  fees and incentive
fees of $2,545,702 and $314,930, respectively, were paid to the Advisors for the
year ended December 31, 1997.

                                      14

<PAGE>




Item 12.    Security Ownership of Certain Beneficial Owners and
            Management.
            (a).  Security ownership of certain beneficial owners.
As of March 1, 1998, 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  1,003.8833  Units (1.0%) of Limited  Partnership  Interest as of
December 31, 1997.
            (c).  Changes in control.   None.
Item 13.   Certain Relationship and Related Transactions.
           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, 1997 and
                  1996.  Statement  of Income  and  Expenses  for the year ended
                  December  31,  1997 and for the period  from  January 17, 1996
                  (commencement of trading operations) to

                                      15

<PAGE>



                  December 31, 1996.
                  Statement  of Partners'  Capital for the years ended  December
                  31, 1997, 1996 and 1995.
          (2)     Financial Statement Schedules: Financial Data
                  Schedule for the year ended December 31, 1997.
          (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).
          10.4-  Management Agreement among the Partnership, the

                                      16

<PAGE>



                 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 herein).
          10.8-  Management Agreement among the Partnership, the General Partner
                 and ARA Portfolio Management Company, L.L.C.(filed herein).
          10.9-  Management Agreement among the Partnership, the
                 General Partner and Campbell & Co., Inc. (filed
                 herein).
          10.10- Letters extending Management Agreements with John W. Henry &
                 Company , Inc., Chesapeake  Capital  Corporation  and  Millburn
                 Ridgefield Corporation. (filed herein).
          10.11- Letter from General Partner terminating Management
                 Agreement with Chesapeake Capital Corporation (filed
                 herein).





      (b)    Reports on 8-K:   None Filed.

                                      17

<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


                                      18


<PAGE>




                                  SIGNATURES

       Pursuant  to  the  requirements  of  the  Securities  Act  of  1933,  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 1998.

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  Act  of  1933,  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 Schaefer                 /s/    Daniel A. Dantuono
Michael 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

                                      19

<PAGE>