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, 1999

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 LLC
                           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 29, 2000  Limited  Partnership  Units with an aggregate  value of
$96,659,726 were outstanding and held by non-affiliates.


                       DOCUMENTS INCORPORTED BY REFERENCE

                                      None


<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
contributions  and redemptions of Units for the year ended December 31, 1999 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  LLC acts as the general  partner (the
"General  Partner") of the Partnership.  The General Partner changed its form of
organization  from a corporation  to a limited  liability  company on October 1,
1999. The  Partnership's  commodity broker is 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. ("SSBHI"), which is the sole owner of SSB.
SSBHI 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, 1999, all commodity  trading  decisions are made for
the Partnership by John W. Henry & Company, Inc. ("JWH"), Campbell  and  Company


                                       3
<PAGE>

Inc.,   Willowbridge   Associates   Inc.  and  Beacon   Management   Corporation
(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.  Roy G.  Neiderhoffer,  Inc. was terminated as an
Advisor to the Partnership on August 31, 1999. Beacon Management Corporation was
added as an Advisor on February 1, 1999.
          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
ACustomer Agreement@) which provides that the Partnership will pay SSB 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.
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  Trading  Commission  (the "CFTC").  The  Partnership  pays for National
Futures  Association  ("NFA") fees, exchange and clearing fees, give-up and user


                                       4
<PAGE>

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,  1999,  1998 and 1997 is set forth
under "Item 6. Selected Financial Data." The Partnership  capital as of December
31, 1999, was $102,473,606.


                                       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 Geographic Areas. The Partnership does
not  engage in sales of goods or  services  or own any long  lived  assets,  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 have been no material  administrative,  civil or criminal actions
within the past five years against SSB or any of its  individual  principals and
no such actions are currently pending, except as follows.
         In  September  1992,  Harris  Trust and  Savings  Bank (as  trustee for
Ameritech  Pension Trust),  Ameritech  Corporation,  and an officer of Ameritech
sued  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 complaint  alleged that
purchases by Ameritech  Pension Trust from the Salomon entities of approximately



                                       6
<PAGE>

$20.9  million in  participations  in a portfolio  of motels  owned by Motels of
America,  Inc.  and Best Inns,  Inc.  violated the  Employee  Retirement  Income
Security Act ("ERISA"),  the Racketeer  Influenced and Corrupt  Organization Act
("RICO") and state law. SBI had acquired the participations  issued by Motels of
America and Best Inns to finance  purchases of motel  portfolios and sold 95% of
three  such  issues  and 100% of one  such  issue to  Ameritech  Pension  Trust.
Ameritech Pension Trust's  complaint sought (1)  approximately  $20.9 million on
the ERISA  claim,  and (2) in excess  of $70  million  on the RICO and state law
claims as well as other relief.  In various  decisions  between  August 1993 and
July 1999, the courts hearing the case have dismissed all of the  allegations in
the complaint against the Salomon entities.  In October 1999, Ameritech appealed
to the U.S.  Supreme Court and in January 2000, the Supreme Court agreed to hear
the case and oral argument will be heard April 17, 2000. The appeal seeks review
of the  decision  of the U.S.  Court of Appeals  for the  Seventh  Circuit  that
dismissed the sole remaining ERISA claim against the Salomon entities.
         Both the Department of Labor and the Internal  Revenue  Service ("IRS")
have  advised  SBI that they were or are  reviewing  the  transactions  in which
Ameritech  Pension Trust acquired such  participations.  With respect to the IRS
review,  SSBHI,  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. As of the date of this report,
the IRS has not issued such 30-day letters to SSBHI, SBI or SBRC.


                                       7
<PAGE>

     In December  1996, a complaint  seeking  unspecified  monetary  damages was
filed by Orange County,  California against numerous brokerage firms,  including
SSB,  in the U.S.  Bankruptcy  Court for the  Central  District  of  California.
(County  of  Orange et al. v. Bear  Stearns  & Co.  Inc.  et al.) The  complaint
alleged,  among other things,  that the  brokerage  firms  recommended  and sold
unsuitable  securities to Orange County.  SSB and the remaining  brokerage firms
settled with Orange County in mid 1999.
     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
determination that Smith Barney Inc. and another underwriter will be responsible
for any  damages  that the City may incur in the event the IRS denies tax exempt
status to the  City's  General  Obligation  Refunding  Bonds  Series  1991.  The
complaints  were  subsequently  amended.  SSB has asked the court to dismiss the
amended complaints.  In May 1999, the Court denied SSB's motion to dismiss,  but
stayed the litigation because the matter was not ripe.  In March 2000, the  city
filed a notice of discontinuance dismissing the complaint.
     In November  1998, a 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  alleged that,  pursuant
to a nationwide conspiracy, 17 broker-dealer defendants,  including SSB, charged



                                       8
<PAGE>

excessive  mark-ups in connection with advanced  refunding  transactions.  Among
other relief,  plaintiffs sought compensatory and punitive damages,  restitution
and/or  rescission of the  transactions  and  disgorgement of alleged  excessive
profits.  In October 1999, the plaintiff filed a second amended  complaint.  SSB
has asked the court to dismiss the amended complaint.
         In connection with the Louisiana and Florida  matters,  the IRS and SEC
have been conducting an industry-wide investigation into the pricing of Treasury
securities in advanced refunding transactions.
         In December 1998, SSB was one of twenty-eight  market making firms that
reached a settlement  with the SEC in the matter titled In the Matter of Certain
Market Making  Activities on NASDAQ.  As part of the  settlement of that matter,
SSB, without  admitting or denying the factual  allegations,  agreed to an order
that  required  that it: (i) cease and desist  from  committing  or causing  any
violations of Sections  15(c)(1) and (2) of the Securities  Exchange Act of 1934
and Rules  15c1-2,  15c2-7 and 17a-3  thereunder,  (ii) pay  penalties  totaling
approximately  $760,000,  and (iii) submit certain policies and procedures to an
independent consultant for review.
         In March 1999, a complaint  seeking in excess of $250 million was filed
by a hedge fund and its investment  advisor  against SSB in the Supreme Court of
the  State of New  York,  County of New York  (MKP  Master  Fund,  LDC et al. v.
Salomon  Smith Barney Inc.).  The complaint  included  allegations  that,  while
acting as prime  broker for the hedge fund,  SSB  breached  its  contracts  with
plaintiffs,  misused their monies, and engaged in tortious  (wrongful)  conduct,

                                       9
<PAGE>

including  breaching  its fiduciary  duties.  SSB asked the court to dismiss the
complaint  in full.  In  October  1999,  the court  dismissed  the tort  claims,
including the breach of fiduciary  duty claims.  The court allowed the breach of
contract and misuse of money  claims to stand.  In December  1999,  SSB filed an
answer and asserted counterclaims against the investment advisor. In response to
plaintiff's motion to strike the counterclaims, in January 2000, SSB amended its
counterclaims  against  the  investment  advisor  to  seek  indemnification  and
contribution. Plaintiffs moved to strike SSB's amended counterclaims in February
2000. SSB will continue to contest this lawsuit vigorously.
         In the  course of its  business,  SSB,  as a major  futures  commission
merchant and  broker-dealer is a party to various claims and routine  regulatory
investigations  and proceedings  that the general partner believes do not have a
material  effect on the business of SSB. 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 Limited Partnership Interest.


10
<PAGE>

     (b)  Holders.  The  number  of  holders  of  Units of  Limited  Partnership
          Interest as of December 31, 1999 was 5,050.
     (c)  Distribution.  The  Partnership did not declare a distribution in 1999
          or 1998.
     (d)  Use of  Proceeds.  There were no  additional  sales  during the twelve
          months ended  December 31, 1999.  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  interests
          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,  1999 and 1998,  1997 and for the period from
January 17, 1996  (commencement of trading  operations) to December 31, 1996 and
total assets at December 31, 1999, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
<S>                                                <C>            <C>              <C>              <C>
                                                    1999             1998           1997            1996
                                               -------------   --------------  --------------    -------------
Realized and unrealized trading gains
 (losses) net of brokerage  commissions and
 clearing fees of $8,857,532, $8,891,659,
 $6,257,856 and $2,169,468,
 respectively                                 $ (21,027,791)   $  14,064,160   $    (461,654)   $   8,869,618
Interest income                                   4,658,630        4,818,279       3,634,245        1,190,687
                                              -------------    -------------   -------------    -------------
                                              $ (16,369,161)   $  18,882,439   $   3,172,591    $  10,060,305
                                              =============    =============   =============    =============
Net Income (loss)                             $ (21,048,896)   $  12,979,536   $    (313,824)   $   7,582,653
                                              =============    =============   =============    =============
Increase (decrease) in net
 asset value per unit                         $     (193.59)   $       95.43   $       (1.30)   $      185.99
                                              =============    =============   =============    =============
Total assets                                  $ 106,012,664    $ 154,692,651   $ 113,547,434    $  56,960,922
                                              =============    =============   =============    =============
</TABLE>

                                       12
<PAGE>


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, 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 follows 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.


                                       13
<PAGE>


(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.
           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 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

                                       14
<PAGE>

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 Partnership will 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


                                       15
<PAGE>

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
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, 1999, 24,591.7470 Units
were  redeemed  totaling  $28,275,280.  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.
           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,

                                       16
<PAGE>

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.
           (c) Results of  Operations.  For the year ended December 31, 1999 the
net asset value per unit decreased  15.9% from  $1,219.19 to $1,025.60.  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.
           The Partnership  experienced net trading losses of $12,170,259 before
commissions  and expenses in 1999.  These losses were primarily  attributable to
losses  incurred in the trading of non-U.S.  interest  rates,  indices,  metals,
gains,  softs,  livestock  and  currencies  and were  partially  offset by gains
experienced in the trading of U.S. interest rates and energy.
           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 rates 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.

                                       17
<PAGE>

           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.
      (d)Operational Risk
         The  Partnership  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 Partnership is subject

                                       18
<PAGE>

to increased  risks with respect to its trading  activities  in emerging  market
securities,  where clearance,  settlement, and custodial risks are often greater
than in more established markets.
Technological Risk - the risk of loss attributable to technological  limitations
or hardware failure that constrain the Partnership's ability to gather, process,
and communicate information efficiently and securely, without interruption, with
customers,  among units  within the  Partnership,  and in the markets  where the
Partnership   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  Partnership's
unitholder, creditors, and regulators, is free of material errors.
Risk of Computer System Failure (Year 2000 Issue)
                  SSBHI's computer systems and business  processes  successfully
handled the date change from December 31, 1999 to January 1, 2000.  SSBHI is not

                                       19
<PAGE>

aware of any significant year 2000 problems  encountered  internally or with the
third parties with which it interfaces,  including customers and counterparties,
the global financial market  infrastructure,  and the utility  infrastructure on
which all corporations rely.
                  Based on  operations  since  January 1,  2000,  SSBHI does not
expect any  significant  impact to its ongoing  business as a result of the year
2000 issue. However, it is possible that the full impact of year 2000 issues has
not been fully recognized and no assurances can be given that year 2000 problems
will not emerge.
                  The pretax costs associated with required system modifications
and  conversions  totaled  approximately  $130 million.  These costs were funded
through  operating  cash flow and  expensed  in the  period  in which  they were
incurred.
                  The expenditures and the General Partner's resources dedicated
to the preparation for Year 2000 did not have a material impact on the operation
or results of the Partnership.
                  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.


                                       20
<PAGE>

    (e)  New Accounting Pronouncements
         The Partnership adopted Statement on Financial Accounting Standards No.
133 ("SFAS 133"),  Accounting For Derivative  Financial  Instruments and Hedging
Activities,  on January 1, 1999. SFAS 133 requires that an entity  recognize all
derivative instruments in the statement of financial condition and measure those
financial instruments at fair value. SFAS 133 has no impact on Partners' Capital
and operating results as all derivative  instruments are recorded at fair value,
with changes therein reported in the statement of income and expenses.
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


                                       21
<PAGE>

diversification results 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
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

                                       22
<PAGE>

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
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.

                                       23
<PAGE>

         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
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

                                       24
<PAGE>

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.

                                       25
<PAGE>


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, 1999. All
open position  trading risk exposures of the  Partnership  have been included in
calculating  the  figures  set  forth  below.  As  of  December  31,  1999,  the
Partnership's total capitalization was $102,473,606.

<TABLE>
<CAPTION>
<S>                                <C>          <C>          <C>             <C>
                                December 31, 1999
                                                                Year to Date
                                            % of Total     High           Low
Market Sector              Value at Risk  Capitalization  Value at Risk  Value at Risk
----------------------------------------------------------------------------------
Currencies
- OTC Contracts               $ 1,720,429       1.68%    $ 3,072,042   $ 2,199,833
- Exchange Traded Contracts     1,049,175       1.03%      2,724,264     1,125,696
Energy                          2,328,200       2.27%      3,097,700     2,287,000
Grains                            382,900       0.37%      1,066,275       403,800
Interest rates U.S.             1,902,900       1.86%      3,125,500     1,504,634
Interest rates Non-U.S          2,606,214       2.54%      6,364,023     4,304,901
Livestock                         133,625       0.13%        496,796       253,575
Metals                          1,510,250       1.47%      3,103,800     1,354,300
Softs                           1,494,803       1.46%      2,485,987     1,245,255
Stock Indices                   1,324,983       1.29%      5,983,258     2,566,317
                              -----------       ----
Total                         $14,453,479      14.10%
                              ===========      ======
</TABLE>



<PAGE>


     As of  December  31,  1998,  the  Partnership's  total  capitalization  was
$151,797,782.


                         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%
Indices                         1,999,807       1.32%
                              -----------   ---------

Total                         $16,969,360      11.18%
                              ===========   =========

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  maintenance margin  requirement  (margin
requirements  generally range between 2% and 15% of contract face value) as well
as many  times 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."
                                       27
<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

                                       28
<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, 1999, 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.
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.

                                       29
<PAGE>

         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.  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, 1999,  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
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

                                       30
<PAGE>

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.

     Softs. 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,
1999.
     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 can be volatile and substantial  profits and losses have been and are
expected to continue to be experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
     The following were the only  non-trading  risk exposures of the Partnership
as of December 31, 1999.
     Foreign  Currency  Balances.  The  Partnership's  primary foreign  currency
balances are in Japanese yen,  German marks,  British  pounds and French francs.

                                       31
<PAGE>

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 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.
     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 ongoing 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



                                       32
<PAGE>

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, 1999 and 1998.                                F-4

   Statement of Income and Expenses for
   the years ended December 31, 1999,
   1998 and 1997.                                             F-5

   Statement of Partners' Capital for
   the years ended December 31, 1999, 1998
   and 1997.                                                  F-6

   Notes to Financial Statements.                          F-7 - F-10






                                       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 LLC
     General Partner, Smith Barney Diversified
     Futures Fund L.P. II

     Smith Barney Futures Management LLC
     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, 1999 and 1998, and the results
of its  operations  for each of the three years in the period ended December 31,
1999, in conformity with accounting  principles generally accepted in the United
States.  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 auditing standards generally accepted in
the United  States,  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 25, 2000

                                       F-3
<PAGE>


                  Smith Barney Diversified Futures Fund L.P. II
                        Statement of Financial Condition
                           December 31, 1999 and 1998


Assets:                                              1999           1998
Equity in commodity futures trading account:
   Cash (Note 3c)                                $101,629,135   $146,338,218
   Net unrealized appreciation on open
    futures contracts                               4,026,105      7,931,171
                                                 ------------   ------------
                                                  105,655,240    154,269,389
Interest receivable                                   357,424        423,262
                                                 ------------   ------------
                                                 $106,012,664   $154,692,651
                                                 ------------   ------------

Liabilities and Partners' Capital:
Liabilities:
  Accrued expenses:
   Commissions                                   $    540,229   $    788,297
   Management fees                                    238,436        344,022
   Incentive fees                                        --          236,839
   Professional fees                                   80,860         48,443
   Other                                               13,116         11,537
  Redemptions payable (Note 5)                      2,666,417      1,465,731
                                                 ------------   ------------
                                                    3,539,058      2,894,869
                                                 ------------   ------------
Partners' capital (Notes 1 and 6):
  General Partner, 1,287.3915 Unit equivalents
   outstanding in 1999 and 1998                     1,320,349      1,569,575
  Limited Partners, 98,628.3984 and
   123,220.1454 Units of Limited
   Partnership Interest outstanding in
   1999 and 1998, respectively                    101,153,257    150,228,207
                                                 ------------   ------------
                                                  102,473,606    151,797,782
                                                  ------------   -----------
                                                 $106,012,664   $154,692,651
                                                 ------------   ------------

See notes to financial statements.

                                       F-4
<PAGE>


                  Smith Barney Diversified Futures Fund L.P. II
                        Statement of Income and Expenses
                               for the years ended
                        December 31, 1999, 1998 and 1997


<TABLE>
<CAPTION>
                                                                1999            1998             1997
<S>                                                               <C>           <C>               <C>
Income:
  Net gains (losses) on trading of commodity interests:
   Realized gains (losses) on closed positions             $ (8,265,193)   $ 24,030,158    $ (1,202,278)
   Change in unrealized gains (losses) on open positions     (3,905,066)     (1,074,339)      6,998,480
                                                           ------------    ------------    ------------
                                                            (12,170,259)     22,955,819       5,796,202
  Less, Brokerage commissions including clearing fees
   of $321,934, $201,707 and $164,059, respectively
   (Note 3c)                                                 (8,857,532)     (8,891,659)     (6,257,856)
                                                           ------------    ------------    ------------
  Net realized and unrealized gains (losses)                (21,027,791)     14,064,160        (461,654)
  Interest income (Note 3c)                                   4,658,630       4,818,279       3,634,245
                                                           ------------    ------------    ------------
                                                            (16,369,161)     18,882,439       3,172,591
                                                           ------------    ------------    ------------
Expenses:
  Management fees (Note 3b)                                   3,463,948       3,553,437       2,545,702
  Incentive fees (Note 3b)                                    1,024,143       1,998,362         314,930
  Professional fees                                             157,460         318,739         575,843
  Other expenses                                                 34,184          32,365          49,940
                                                           ------------    ------------    ------------
                                                              4,679,735       5,902,903       3,486,415
                                                           ------------    ------------    ------------
Net income (loss)                                          $(21,048,896)   $ 12,979,536    $   (313,824)
                                                           ------------    ------------    ------------

Net income (loss) per Unit of Limited Partnership
  Interest and General Partner Unit equivalent (Notes 1    $    (193.59)   $      95.43    $      (1.30)
  and 6)                                                  --------------    -----------    -------------
</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, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                  Limited Partners   General Partner       Total
<S>                                                        <C>                 <C>              <C>
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
Net loss                                             (20,799,670)        (249,226)     (21,048,896)
Redemption of 24,591.7470 Units of Limited
  Partnership Interest                               (28,275,280)            --        (28,275,280)
                                                   -------------    -------------    -------------
Partners' capital at December 31, 1999             $ 101,153,257    $   1,320,349    $ 102,473,606
                                                   -------------    -------------    -------------
</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  continued 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  LLC  acts as the  general  partner  (the
    "General Partner") of the Partnership.  The General Partner changed its form
    of organization from a corporation to a limited liability company on October
    1, 1999.  The  Partnership's  commodity  broker is 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.  ("SSBHI"),  which is the
    sole owner of SSB. SSBHI 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>
                            Smith Barney Diversified
                              Futures Fund L.P. II
                          Notes to Financial Statements
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"),
       Campbell & Co., Inc.,  Willowbridge Associates Inc. and Beacon Management
       Corporation (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 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, as defined in the Management Agreements,  earned by each
       Advisor for the Partnership,  except JWH, which will receive an incentive
       fee of 15% of New Trading Profits.  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.
       Roy G. Neiderhoffer, Inc. was terminated as an advisor to the Partnership
       on August 31, 1999.
    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,  1999 and 1998,  the  amount  of cash  held for  margin
       requirements  was  $17,283,509  and  $18,983,738,  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

                                   F-8
<PAGE>
                            Smith Barney Diversified
                              Futures Fund L.P. II
                          Notes to Financial Statements

    purposes.  The average fair value  during the years ended  December 31, 1999
    and 1998,  based on a monthly  calculation,  was $7,397,780 and  $8,531,763,
    respectively. The fair value of these commodity interests, including options
    thereon,  if  applicable,  at December 31, 1999 and 1998 was  $4,026,105 and
    $7,931,171, respectively, as detailed below.

                                             Fair Value
                                   December 31,    December 31,
                                       1999           1998
Currencies:
    -Exchange Traded Contracts    $   320,385    $  (260,990)
    -OTC Contracts                    305,278     (1,219,718)
Energy                                880,171        316,796
Grains                                 93,138        446,680
Interest Rates U.S.                 1,254,924       (588,909)
Interest Rates Non-U.S               (106,494)     7,311,953
Livestock                             (71,300)       214,540
Metals                                318,282        790,656
Softs                                 548,382        853,554
Indices                               483,339         66,609
                                  -----------    -----------
Total                             $ 4,026,105    $ 7,931,171
                                  -----------    -----------
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.  Net Asset Value Per Unit:
    Changes  in the net asset  value per Unit of  Partnership  interest  for the
    years ended December 31, 1999, 1998 and 1997 were as follows:


<TABLE>
<CAPTION>
<S>                                                  <C>          <C>           <C>
                                                      1999       1998          1997

Net realized and unrealized gains (losses)       $ (193.82)   $  103.15     $  (0.92)
Interest income                                      40.81        41.25        43.48
Expenses                                            (40.58)      (48.97)      (43.86)
                                                  ---------    ---------    ---------
Increase (decrease) for period                     (193.59)       95.43        (1.30)
Net asset value per Unit, beginning of year       1,219.19     1,123.76     1,125.06
                                                  ---------    ---------    ---------
Net asset value per Unit, end of year            $1,025.60    $1,219.19    $1,123.76
                                                  ---------    ---------    ---------
</TABLE>


7.  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,  through physical delivery 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


                                   F-9
<PAGE>
                            Smith Barney Diversified
                              Futures Fund L.P. II
                          Notes to Financial Statements

    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  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
    (see  table  in Note  4).  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.
    The  majority of these  instruments  mature  within one year of December 31,
    1999.  However,  due to the  nature  of the  Partnership's  business,  these
    instruments may not be held to maturity.
8.  Subsequent Event:
    On January 31, 2000 there were additional  redemptions  of 2,044.0347  Units
    totaling $2,134,831.
9.  New Accounting Pronouncements
    The Partnership adopted Statement on Financial  Accounting Standards No. 133
    ("SFAS 133"),  Accounting for Derivative  Financial  Instruments and Hedging
    Activities,  on January 1, 1999. SFAS 133 requires that an entity  recognize
    all  derivative  instruments  in the  statement of financial  condition  and
    measure those financial instruments at fair value. SFAS 133 has no impact on
    Partners'  Capital and operating  results as all derivative  instruments are
    recorded at fair value,  with changes  therein  reported in the statement of
    income and expenses.

                                   F-10

<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  LLC. As of
December  31,  1999,  investment  decisions  were  being made by John W. Henry &
Company Inc., Campbell and Company Inc., Willowbridge Associates Inc. and Beacon
Management Corporation (collectively, the "Advisors").
Item 11.  Executive Compensation.
          The  Partnership   has  no  directors  or  officers.   Its affairs are
managed by Smith Barney Futures  Management  LLC, 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 $8,857,532 were paid
for the year ended  December 31, 1999.  Management  fees and  incentive  fees of
$3,463,948 and $1,024,143,  respectively, were paid to the Advisors for the year
ended December 31, 1999.


                                       34
<PAGE>


Item 12.  Security Ownership of Certain Beneficial Owners and Management.
                 (a).  Security  ownership of certain  beneficial  owners. As of
March 1, 2000, 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 (1.3%) of Limited  Partnership  Interest as of
December 31, 1999.
                 (c).  Changes in control.   None.
Item 13.   Certain Relationship and Related Transactions.
                   Salomon   Smith   Barney   Inc.  and   Smith  Barney  Futures
Management  LLC 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",  "Item 8.
Financial   Statements  and   Supplementary   Data."  and  AItem  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, 1999
                 and 1998.
                 Statement  of Income and  Expenses for the years ended
                 December  31,  1999,  1998  and  1997.


                                        35
<PAGE>

                    Statement of Partners'  Capital for the years ended December
                         31, 1999, 1998 and 1997.
              (2)   Financial  Statement  Schedules: Financial Data Schedule for
                    the year ended December 31, 1999.
              (3)  Exhibits:
               3.1  - Limited Partnership Agreement (filed as Exhibit 3.1 to the
                    Registration  Statement  on Form S-1  (FileNo.  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  General
                    Partner and Chesapeake Capital Corporation (filed as


                                       36
<PAGE>

                         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).

                                       37
<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  the  General   Partner   terminating
                         Management    Agreement   with   Millburn    Ridgefield
                         Corporation
                          (previously filed).

                    10.13-  Letter   from  the   General   Partner   terminating
                         Management  Agreement  with  ARA  Portfolio  Management
                         (previously filed)

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

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

                    10.16- Letters extending Management  Agreements with John W.
                         Henry & Company Inc., Campbell & and Company,  Inc. and
                         Willowbridge   Associates  Inc.  for  1998  (previously
                         filed).



                                       38
<PAGE>


                    10.17- Letters extending the Management Agreements with John
                         W. Henry & Company  Inc.,  Campbell  &  Company,  Inc.,
                         Willowbridge  Associates  Inc.  and  Beacon  Management
                         Corporation for 1999 (filed herein)

                    10.18-  Letter   from  the   General   Partner   terminating
                         Management Agreement with Roy G. Neiderhoffer Co., 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 annual report on Form
10-K 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 30th day of March 2000.


SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II


By:       Smith Barney Futures Management LLC
          (General Partner)



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


Pursuant to the requirements of the Securities Exchange Act of 1934, this annual
report  on Form  10-K 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