SMITH BARNEY INCOME FUNDS, 497, 1999-12-03

SMITH BARNEY INCOME FUNDS
497, 1999-12-03

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P R O S P E C T U S

Exchange
Reserve Fund

Class B and L Shares
- --------------------
November 28, 1999

The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>

Exchange Reserve Fund

Contents

<TABLE>
<S>
<C>
Investments, risks and performance.......................................... 2
Management.................................................................. 7
Choosing a class of shares to buy........................................... 8
Comparing the fund's classes................................................ 9
Sales charges............................................................... 10
More about deferred sales charges........................................... 11
Buying shares............................................................... 12
Exchanging shares........................................................... 13
Redeeming shares............................................................ 15
Other things to know about share transactions............................... 17
Smith Barney 401(k) and ExecChoice(TM) programs............................. 19
Dividends, distributions and taxes.......................................... 20
Share price................................................................. 21
Financial highlights........................................................ 22
</TABLE>
You should know: An investment in the fund is not a bank deposit and is not
insured or guaranteed by the FDIC or any other government agency. There is no
assurance that the fund will be able to maintain a stable net asset value of
$1.00 per share.

Smith Barney Mutual
Funds

1
<PAGE>

Investments, Risks and Performance

Investment objective
The fund seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity.

Principal investment strategies
Key investments The fund invests in high quality, U.S. dollar denominated
short
term debt securities. These may include obligations issued by U.S. and
foreign
banks, the U.S. government, its agencies or instrumentalities, U.S. states
and
municipalities and U.S. and foreign corporate issuers. The fund normally will
invest at least 25% of its assets in obligations of domestic and foreign
banks.
Either the principal amount of each obligation must be fully insured by the
FDIC or the issuing bank must have more than $100 million of working capital
or
more than $1 billion of total assets.

The fund may invest in all types of money market securities including commer-
cial paper, certificates of deposit, time deposits, bankers' acceptances,
asset-backed securities, repurchase agreements and other short term debt
secu-
rities. The fund limits foreign investments to issuers located in major
indus-
trialized countries.

Minimum credit quality. The fund invests in commercial paper and short-term
obligations rated by at least one nationally recognized rating organization
in
the highest short term rating category, or if unrated, of equivalent quality,
and in other corporate obligations and municipal obligations rated in the two
highest rating categories, or if unrated, of equivalent quality.

Maximum maturity. The fund invests exclusively in securities having remaining
maturities of 397 days or less. The fund maintains a dollar-weighted average
portfolio maturity of 90 days or less.

Selection process In selecting investments for the funds, the manager looks
for:

.The best relative values based on an analysis of yield, price, interest rate
sensitivity and credit quality
.Issuers offering minimal credit risk
.Maturities consistent with the manager's outlook for interest rates

Exchange Reserve Fund

2
<PAGE>

All investments involve some degree of risk. However, the fund is a "money
mar-
ket fund" and, as such, seeks income by investing in short-term debt
securities
that meet strict standards established by the board of directors based on
spe-
cial rules for money market funds adopted under federal law.

Principal risks of investing in the fund
Although the fund seeks to preserve the value of your investment at $1 per
share, it is possible to lose money by investing in the fund, or the fund
could
underperform other short term debt instruments or money market funds if:

.Interest rates rise sharply
.An issuer or guarantor of the fund's securities defaults, or has its credit
rating downgraded
.The manager's judgment about the value or credit quality of a particular
secu-
rity proves to be incorrect

The fund invests at least 25% of its assets in obligations of domestic and
for-
eign banks and, as a result, is more susceptible to events affecting the
bank-
ing industry. The value of the fund's foreign bank securities may go down
because of unfavorable government actions or political instability. Compared
to
U.S. banks, there may be less publicly available information about foreign
banks. In addition, foreign banks are not subject to uniform accounting,
audit-
ing and financial reporting standards of U.S. banks. A decline in a foreign
currency relative to the U.S. dollar may indirectly increase credit risk and
default risk attributable to foreign bank obligations in which the fund
invests.

Who may want to invest The fund may be an appropriate investment if you:

.Are seeking current income
.Are looking for an investment with lower risk than most other types of funds
.Are looking to allocate a portion of your assets to money market securities

Smith Barney Mutual
Funds

3
<PAGE>

Risk return bar chart

This bar chart indicates the risks of investing in the fund by showing
changes
in the fund's performance from year to year. Past performance does not neces-
sarily indicate how the fund will perform in the future. This bar chart shows
the performance of the fund's Class B shares for each of the past 10 calendar
years. Class L shares would have different performance because of its
different
expenses. The performance information in the chart does not reflect sales
charges, which would reduce your return.

Total Return for Class B Shares

[BAR CHART APPEARS HERE]

89 90 91 92 93 94 95 96 97 98
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.62% 7.21% 5.44% 3.07% 1.84% 3.05% 4.89% 4.37% 4.51% 4.41%

Calendar years ended December 31
</TABLE>

Quarterly returns (past 10 years):

Highest: 2.27% in 2nd quarter 1989; Lowest: 0.39% in 3rd quarter 1993.

Year to date: 2.91% through 9/30/99.

Exchange Reserve Fund

4
<PAGE>

Risk return table
This table indicates the risks of investing in the fund by comparing the
aver-
age annual total return of each class for the periods shown with that of the
90-day Treasury bill. This table assumes imposition of the maximum sales
charge
applicable to the class, redemption of shares at the end of the period, and
reinvestment of distributions and dividends.

Average Annual Total Returns
Calendar Years Ended December 31, 1998
<TABLE>
<CAPTION>
Class 1 year 5 years 10 years Since Inception Inception Date
<S> <C> <C> <C> <C> <C>
B (0.59)% 4.07% 4.72% 4.90% 7/8/86
L 2.39% n/a n/a 4.26% 11/7/94
90-day T-bill 4.88% 5.02% 5.32% 5.49% *
</TABLE>

* Index comparison begins on 7/31/86.

<TABLE>
<CAPTION>
Class B Class L
<S> <C> <C>
7 day yield as of July 31, 1999: 3.97% 3.98%
</TABLE>

Smith Barney Mutual
Funds

5
<PAGE>

Fee table
This table sets forth the fees and expenses you will pay if you invest in
fund
shares.

Shareholder fees
<TABLE>
<CAPTION>
(fees paid directly from your investment) Class B Class L
<S> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a % of offering price) None(/1/) None(/1/)
Maximum deferred sales charge (load) (as a % of the
lower of net asset value at purchase or redemption) 4.50%(/2/) 1.00%(/2/)

Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets) Class B Class L
<S> <C> <C>
Management fee 0.50% 0.50%
Distribution and service (12b-1) fees 0.50% 0.50%
Other expenses 0.29% 0.32%
---------- ----------
Total annual fund operating expenses 1.29% 1.32%
</TABLE>

(/1/) Shares of the fund may be acquired by the general public only through
the
exchange of Class B or Class L shares of other Smith Barney mutual
funds.
Exchanges are made at net asset value, without a front-end sales
charge.
Shares of the fund may, however, be acquired directly through certain
retirement programs. Class L shares of other Smith Barney mutual funds
may be subject to initial sales charges of 1.00% or less.

(/2/) Class B or Class L shares of the fund acquired through exchanges with
shares of other Smith Barney mutual funds are subject to the deferred
sales charge, if any, applicable to the exchanged shares. This could be
4.50% or less for Class B shares and 1.00% or less for Class L shares.

.Your investment has a 5% return each year
.You reinvest all distributions and dividends without a sales charge
.The fund's operating expenses remain the same

Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class B (redemption at end of period) $581 $709 $808 $1,374
Class B (no redemption) $131 $409 $708 $1,374
Class L (redemption at end of period) $234 $418 $723 $1,590
Class L (no redemption) $134 $418 $723 $1,590
</TABLE>

Exchange Reserve Fund

6
<PAGE>

Management

Manager The fund's investment adviser and administrator is SSB Citi Fund Man-
agement LLC, an affiliate of Salomon Smith Barney Inc. The manager's address
is
388 Greenwich Street, New York, New York 10013. The manager selects the
fund's
investments and oversees its operations. The manager and Salomon Smith Barney
are subsidiaries of Citigroup Inc. Citigroup businesses produce a broad range
of financial services--asset management, banking and consumer finance, credit
and charge cards, insurance, investments, investment banking and trading--and
use diverse channels to make them available to consumer and corporate
customers
around the world.

Management fee For its services, the manager received an advisory fee during
the fund's last fiscal year equal to 0.30% of the fund's average daily net
assets. In addition, the manager received a fee for its administrative
services
to the fund equal to 0.20% of the fund's average daily net assets.

Distributor The fund has entered into an agreement with CFBDS, Inc. to
distrib-
ute the fund's shares. A selling group consisting of Salomon Smith Barney and
other broker-dealers sells fund shares to the public.

Distribution plans The fund has adopted Rule 12b-1 distribution plans for its
Class B and L shares. Under each plan, the fund pays distribution and service
fees. These fees are an ongoing expense and, over time, may cost you more
than
other types of sales charges.

Year 2000 issue Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if
sub-
stantial, could adversely affect companies and governments that issue securi-
ties held by the fund. The manager and Salomon Smith Barney are addressing
the
Year 2000 issue for their systems. The fund has been informed by other
service
providers that they are taking similar measures. Although the fund does not
expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
that the efforts of the fund, which are limited to requesting and receiving
reports from its service providers, or the efforts of its service providers
to
correct the problem will be successful.

Smith Barney Mutual
Funds

7
<PAGE>

Choosing a class of shares to buy

You can buy shares of the fund only by exchanging Class B or Class L shares
of
other Smith Barney mutual funds (in limited circumstances, you also may be
able
to buy shares of the fund directly through an investment in a participating
retirement plan). You should consult your Salomon Smith Barney Financial
Consultant or dealer representative for more information.

Class B and Class L shares have different sales charges and expenses. Class L
shares have a shorter deferred sales charge period than Class B shares.
However, because Class B shares convert to Class A shares of the Smith Barney
Money Funds, Inc. - Cash Portfolio ("Cash Portfolio"), and Class L shares do
not, Class B shares may be more attractive to long-term investors.

You may buy shares of Smith Barney mutual funds from:
.A Salomon Smith Barney Financial Consultant
.An investment dealer in the selling group or a broker that clears through
Sal-
omon Smith Barney--a dealer representative
.The fund, but only if you are investing through certain qualified plans or
certain dealer representatives

Investment minimums Minimum initial and additional investment amounts vary
depending on the nature of your investment account. Whether you are
exchanging
into the fund or buying shares directly through a participating retirement
plan, you must satisfy these minimums.

<TABLE>
<CAPTION>
Initial
Additional
<S> <C> <C>
General $1,000 $50
IRAs, Self Employed Retirement Plans, Uniform Gift to Minor
Accounts $250 $50
Qualified Retirement Plans* $25 $25
Simple IRAs $1 $1
</TABLE>

*Qualified Retirement Plans are retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Internal Revenue Code, including 401(k)
plans

Exchange Reserve Fund

8
<PAGE>

Comparing the fund's classes

Your Salomon Smith Barney Financial Consultant or dealer representative can
help you decide which class meets your goals. They may receive different com-
pensation depending upon which class you choose.

<TABLE>
<CAPTION>
Class B Class L
<S> <C> <C>
Key features .Available through .Available through
exchange only, except exchange only,
except
that for certain that for
participants
qualified and non- in the Smith Barney
qualified retirement 401(k) program or
the
plans may make direct Smith Barney
purchases ExecChoice(TM) pro-
.No initial sales gram may make direct
charge purchase
.Deferred sales .No initial sales
charge declines over charge (but may have
time been subject to ini-
.Converts to Class A tial sales charge
for
shares of Class L shares of
Cash Portfolio fund from which you
after 8 years are exchanging)
.Deferred sales
charge for only 1
year
.Does not convert to
Class A shares of
Cash Portfolio

- -----------------------------------------------------------------------------
- -
Initial sales None None
charge
(but may have been
subject to initial
sales charge for
Class
L shares of fund from
which you are
exchang-
ing)
- -----------------------------------------------------------------------------
- -
Deferred Up to 4.50% charged 1% if you redeem
sales charge when you redeem within 1 year of pur-
shares. The charge is chase
reduced over time and
there is no deferred
sales charge after 6
years
- -----------------------------------------------------------------------------
- -
Annual distribution and service 0.50% of average daily 0.50% of average
daily
fees net assets net assets
- -----------------------------------------------------------------------------
- -
Exchangeable into* Class B shares of most Class L shares of
most
Smith Barney funds Smith Barney funds
- -----------------------------------------------------------------------------
- -
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative
or
visit the web site for the Smith Barney funds available for exchange.

Smith Barney Mutual
Funds

9
<PAGE>

Sales charges

Class B shares
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of pur-
chase, you will pay a deferred sales charge. The deferred sales charge
decreases as the number of years since your purchase increases.

<TABLE>
<CAPTION>
Year after purchase 1st 2nd 3rd 4th 5th 6th through 8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.50% 4% 3% 2% 1% 0%
</TABLE>

Class B conversion After 8 years, Class B shares automatically convert into
Class A shares of Cash Portfolio. This helps you because Class A shares have
lower annual expenses. Your Class B shares will convert to Class A shares of
Cash Portfolio as follows:

<TABLE>
<CAPTION>
Shares issued: Shares issued: Shares issued:
At initial On reinvestment of Upon exchange from
purchase dividends and another Smith
distributions Barney fund
<S> <C> <C>

Eight years after the date of purchase In same proportion On the date the
as the number of shares originally
Class B shares acquired would
converting is to have converted
total Class B into Class A
shares you own shares of
(excluding shares Cash Portfolio
issued as a divi-
dend)

</TABLE>

Class L shares
You buy Class L shares of the fund without paying an initial sales charge.
How-
ever, if you redeem your Class L shares within one year of purchase, you will
pay a deferred sales charge of 1%. You buy Class L shares of other Smith
Barney
mutual funds (from which you may exchange into the fund) at the offering
price,
which is the net asset value plus a sales charge of 1% (1.01% of the net
amount
invested).

Exchange Reserve Fund

10
<PAGE>

More about deferred sales charges

The deferred sales charge is based on the net asset value at the time of pur-
chase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.

In addition, you do not pay a deferred sales charge on:

.Shares exchanged for shares of another Smith Barney fund
.Shares representing reinvested distributions and dividends
.Shares no longer subject to the deferred sales charge

Each time you place a request to sell shares that were acquired by
exchange from another Smith Barney fund subject to a deferred sales
charge, the fund will first sell any shares in your account that are
not subject to a deferred sales charge and then the shares in your
account that have been held the longest.

If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net
asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer
representative.

Salomon Smith Barney receives deferred sales charges as partial compensation
for its expenses in selling shares, including the payment of compensation to
your Salomon Smith Barney Financial Consultant or dealer representative.

Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:

.On payments made through certain systematic withdrawal plans
.On certain distributions from a retirement plan
.For involuntary redemptions of small account balances
.For 12 months following the death or disability of a shareholder

If you want to learn about additional waivers of deferred sales charges, con-
tact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the Statement of Additional Information ("SAI").

Smith Barney Mutual
Funds

11
<PAGE>

Buying shares

Available Generally, you may buy shares of the fund only by exchanging
only by Class B or Class L shares of another Smith Barney mutual
exchanging fund, except that:
shares .Class B shares may be purchased directly by certain quali-
fied and non-qualified retirement plans
.Class L shares may be purchased directly by participants in
the Smith Barney 401(k) program or the Smith Barney
ExecChoice(TM) program

You should contact your Salomon Smith Barney Financial Con-
sultant or dealer representative to exchange into the fund
from other Smith Barney funds.
- -----------------------------------------------------------------------------
- ---
Through the Qualified retirement plans and certain other investors who
fund's are clients of the selling group are eligible to buy shares
transfer directly from the fund.
agent

.Write the transfer agent at the following address:
Smith Barney Income Funds
Smith Barney Exchange Reserve Fund
Class B or Class L (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
.Enclose a check to pay for the shares. For initial pur-
chases, complete and send an account application.
.For more information, call the transfer agent at 1-800-451-
2010.

Exchange Reserve Fund

12
<PAGE>

Exchanging shares

Smith Barney You should contact your Salomon Smith Barney Financial Con-
offers a sultant or dealer representative to exchange into other
Smith
distinctive Barney funds. Be sure to read the prospectus of the Smith
family of Barney fund you are exchanging into. An exchange is a
taxable
funds transaction.
tailored to
help meet the
varying needs
of both large
and small
investors

.You may exchange shares only for shares of the same class
of
another Smith Barney fund. Not all Smith Barney funds
offer
all classes.
.Not all Smith Barney funds may be offered in your state of
residence. Contact your Salomon Smith Barney Financial
Con-
sultant, dealer representative or the transfer agent.
.You must meet the minimum investment amount for each fund.
.If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with
signed stock powers (documents transferring ownership of
certificates) before the exchange is effective.
.The fund may suspend or terminate your exchange privilege
if
you engage in an excessive pattern of exchanges.
- -----------------------------------------------------------------------------
- ---
Waiver of Your shares will not be subject to an initial sales charge
at
additional the time of the exchange. Your deferred sales charge (if
any)
sales charges will continue to be measured from the date of your original
purchase. If the fund you exchange into has a higher
deferred
sales charge, you will be subject to that charge. If you
exchange at any time into a fund with a lower charge, the
sales charge will not be reduced.

Smith Barney Mutual
Funds

13
<PAGE>

By telephone If you do not have a brokerage account, you may be eligible
to exchange shares through the transfer agent. You must com-
plete an authorization form to authorize telephone
transfers.
If eligible, you may make telephone exchanges on any day the
New York Stock Exchange is open. Call the transfer agent at
1-800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern
time). Requests received after the close of regular trading
on the Exchange are priced at the net asset value next
deter-
mined.

You can make telephone exchanges only between accounts that
have identical registrations.
- -----------------------------------------------------------------------------
- ---
By mail If you do not have a Salomon Smith Barney brokerage account,
contact your dealer representative or write to the transfer
agent at the address on the opposite page.

Exchange Reserve Fund

14
<PAGE>

Redeeming shares

Generally Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.

If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with
signed
stock powers before the redemption is effective.

If the shares are held by a fiduciary or corporation, other
documents may be required.

Your redemption proceeds will be sent within three business
days after your request is received in good order. However,
if you recently purchased your shares by check, your redemp-
tion proceeds will not be sent to you until your original
check clears, which may take up to 15 days.

If you have a Salomon Smith Barney brokerage account, your
redemption proceeds will be placed in your account and not
reinvested without your specific instruction. In other
cases,
unless you direct otherwise, your redemption proceeds will
be
paid by check mailed to your address of record.
- -----------------------------------------------------------------------------
- ---
By mail For accounts held directly at the fund, send written
requests
to the transfer agent at the following address:
Smith Barney Income Funds
Smith Barney Exchange Reserve Fund
Class B or Class C (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699

Your written request must provide the following:

.Your account number
.The class of shares and the dollar amount or number of
shares to be redeemed
.Signatures of each owner exactly as the account is regis-
tered

Smith Barney Mutual
Funds

15
<PAGE>

By telephone If you do not have a brokerage account, you may be eligible
to redeem shares (except those held in retirement plans) in
amounts up to $10,000 per day through the transfer agent.
You
must complete an authorization form to authorize telephone
redemptions. If eligible, you may request redemptions by
tel-
ephone on any day the New York Stock Exchange is open. Call
the transfer agent at 1-800-451-2010 between 9:00 a.m. and
5:00 p.m. (Eastern time). Requests received after the close
of regular trading on the Exchange are priced at the net
asset value next determined.

Your redemption proceeds can be sent by check to your
address
of record or by wire transfer to a bank account designated
on
your authorization form. You must submit a new authorization
form to change the bank account designated to receive wire
transfers and you may be asked to provide certain other
docu-
ments.
- -----------------------------------------------------------------------------
- ---
Automatic
cash You can arrange for the automatic redemption of a portion of
withdrawal your shares on a monthly or quarterly basis. To qualify you
plans must own shares of the fund with a value of at least $10,000
($5,000 for retirement plan accounts) and each automatic
redemption must be at least $50. If your shares are subject
to a deferred sales charge, the sales charge will be waived
if your automatic payments do not exceed 1% per month of the
value of your shares subject to a deferred sales charge.

The following conditions apply:

.Your shares must not be represented by certificates
.All dividends and distributions must be reinvested

For more information, contact your Salomon Smith Barney
Financial Consultant or dealer representative or consult the
SAI.

Exchange Reserve Fund

16
<PAGE>

Other things to know about share transactions

When you buy, exchange or redeem shares, your request must be in good order.
This means you have provided the following information, without which your
request will not be processed:

.Name of the fund
.Account number
.Class of shares being bought, exchanged or redeemed
.Dollar amount or number of shares being bought, exchanged or redeemed
.Signature of each owner exactly as the account is registered

The transfer agent will try to confirm that any telephone exchange or redemp-
tion request is genuine by recording calls, asking the caller to provide a
per-
sonal identification number for the account, sending you a written
confirmation
or requiring other confirmation procedures from time to time.

Signature guarantees To be in good order, your redemption request must
include
a signature guarantee if you:

.Are redeeming over $10,000 of shares
.Are sending signed share certificates or stock powers to the transfer agent
.Instruct the transfer agent to mail the check to an address different from
the
one on your account
.Changed your account registration
.Want the check paid to someone other than the account owner(s)
.Are transferring the redemption proceeds to an account with a different
regis-
tration

You can obtain a signature guarantee from most banks, dealers, brokers,
credit
unions and federal savings and loan institutions, but not from a notary
public.

The fund has the right to:

Smith Barney Mutual
Funds

17
<PAGE>

.Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securi-
ties and Exchange Commission
.Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities

Small account balances If your account falls below $500 because of a
redemption
of fund shares, the fund may ask you to bring your account up to $500. If
your
account is still below $500 after 60 days, the fund may close your account
and
send you the redemption proceeds.

Excessive exchange transactions The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other share-
holders. If so, the fund may limit additional purchases and/or exchanges by
the
shareholder.

Share certificates The fund does not issue share certificates unless a
written
request signed by all registered owners is made to the transfer agent. If you
hold share certificates it will take longer to exchange or redeem shares.

Exchange Reserve Fund

18
<PAGE>

Smith Barney 401(k) and ExecChoice(TM) programs

You may be eligible to participate in the Smith Barney 401(k) program or the
Smith Barney ExecChoice(TM) program. The fund offers Class L shares to
partici-
pating plans as investment alternatives under the programs. You can meet
mini-
mum investment and exchange amounts by combining the plan's investments in
any
of the Smith Barney mutual funds. There are no sales charges when you buy or
sell shares. All additional purchases must be of Class L shares.

.Class L shares may be purchased by plans investing less than $1 million.
Class L shares are eligible to exchange into Class A shares of the Cash
Portfolio not later than 8 years after the plan joined the program. They are
eligible for exchange sooner in the following circumstances:

If the account was opened on or after June 21, 1996 and a total of $1 mil-
lion is invested in Smith Barney Funds Class L shares (other than money
market funds), all Class L shares are eligible for exchange after the plan
is in the program 5 years.

If the account was opened before June 21, 1996 and a total of $500,000 is
invested in Smith Barney Funds Class L shares (other than money market
funds) on December 31 in any year, all Class L shares are eligible for
exchange on or about March 31 of the following year.

.Class B shares of Smith Barney Mutual Funds are not available for purchase
by
participating plans opened on or after June 21, 1996, but may continue to
be
purchased by any participating plan in the Smith Barney 401(k) Program
opened
before that date and originally investing in that class. Class B shares are
subject to a 3.00% deferred sales charge if the participating plan
terminates
within eight years of the date the participating plan first enrolled in the
Smith Barney 401(k) Program. At the end of the eighth year after the
partici-
pating plan enrolled in the Smith Barney 401(k) Program, the participating
plan will be offered the opportunity to exchange all of its Class B shares
for Class A shares of the Cash Portfolio.

For more information, call your Salomon Smith Barney Financial Consultant or
the transfer agent, or consult the SAI.

Smith Barney Mutual
Funds

19
<PAGE>

Dividends, distributions and taxes

Dividends The fund generally declares a dividend of substantially all of its
net investment income on each day the New York Stock Exchange is open. The
fund
generally makes capital gain distributions, if any, once a year, typically in
December. The fund may pay additional distributions and dividends at other
times if necessary for the fund to avoid a federal tax. Dividends and capital
gain distributions are reinvested in additional fund shares of the same class
you hold. The fund expects distributions to be primarily from income.
Alterna-
tively, you can instruct your Salomon Smith Barney Financial Consultant,
dealer
representative or the transfer agent to have your distributions and/or divi-
dends paid in cash. You can change your choice at any time to be effective as
of the next distribution or dividend, except that any change given to the
transfer agent less than five days before the payment date will not be effec-
tive until the next distribution or dividend is paid.

Taxes In general, redeeming shares, exchanging shares and receiving distribu-
tions (whether in cash or additional shares) are all taxable events.

<TABLE>
<CAPTION>
Transaction Federal tax status
<S> <C>
Redemption or exchange of shares Usually no gain or loss;
loss may result to the
extent of any deferred
sales charge
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
Dividends Ordinary income
</TABLE>

The fund anticipates that it will normally not earn or distribute any long-
term
capital gains.

After the end of each year, the fund will provide you with information about
the distributions and dividends you received during the previous year. If you
do not provide the fund with your correct taxpayer identification number and
any required certifications, you may be subject to back-up withholding of 31%
of your distributions and dividends. Because each shareholder's circumstances
are different and special tax rules may apply, you should consult your tax
adviser about your investment in the fund.

Exchange Reserve Fund

20
<PAGE>

Share price

You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in
good
order. The fund's net asset value is the value of its assets minus its
liabili-
ties. Net asset value is calculated separately for each class of shares. The
fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI.

The fund uses the amortized cost method to value its portfolio securities.
Using this method, the fund systematically amortizes over the remaining life
of a security the difference between the principal amount due at maturity and
the original cost of the security to the fund.

In order to buy, redeem or exchange shares at that day's price, you must
place
your order with your Salomon Smith Barney Financial Consultant or dealer
repre-
sentative before the New York Stock Exchange closes. If the Exchange closes
early, you must place your order prior to the actual closing time. Otherwise,
you will receive the next business day's price.

Salomon Smith Barney or members of the selling group must transmit all orders
to buy, exchange or redeem shares to the fund's agent before the agent's
close of business.

Smith Barney Mutual
Funds

21
<PAGE>

Financial highlights

The financial highlights tables are intended to help you understand the
perfor-
mance of each class for the past 5 years (or since inception if less than 5
years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or
lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by KPMG LLP, independent
accountants, whose report, along with the fund's financial statements, is
included in the annual report (available upon request).

For a Class B share of capital stock outstanding throughout each year ended
July 31:

<TABLE>
<CAPTION>
1999(1) 1998 1997 1996
1995
- -----------------------------------------------------------------------------
- --
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $1.00 $1.00 $1.00 $1.00
$1.00
- -----------------------------------------------------------------------------
- --
Net investment income 0.040 0.044 0.043 0.044
0.044
Dividends from net
investment income (0.040) (0.044) (0.043) (0.044)
(0.044)
- -----------------------------------------------------------------------------
- --
Net asset value, end of year $1.00 $1.00 $1.00 $1.00
$1.00
- -----------------------------------------------------------------------------
- --
Total return 4.05% 4.51% 4.43% 4.53%
4.49%
- -----------------------------------------------------------------------------
- --
Net assets, end of year
(000)'s $120,127 $74,186 $116,915 $150,421
$160,432
- -----------------------------------------------------------------------------
- --
Ratios to average net
assets:
Expenses 1.18% 1.21% 1.16% 1.17%
1.24%
Net investment income 3.98 4.43 4.34 4.45
4.35
- -----------------------------------------------------------------------------
- --
</TABLE>

(/1/)Per share amounts calculated using the monthly average shares method.

Exchange Reserve Fund

22
<PAGE>

For a Class L share of capital stock outstanding throughout each year ended
July 31:

<TABLE>
<CAPTION>
1999(/1/) 1998(/2/) 1997 1996 1995(/3/)
- -----------------------------------------------------------------------------
- -
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $1.00 $ 1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------
- -
Net investment income 0.040 0.044 0.043 0.044 0.035
Dividends from net
investment income (0.040) (0.044) (0.043) (0.044) (0.035)
- -----------------------------------------------------------------------------
- -
Net asset value, end of
year $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------
- -
Total return 4.04% 4.52% 4.42% 4.51%
3.52%(/4/)
- -----------------------------------------------------------------------------
- -
Net assets, end of year
(000)'s $27,337 $9,315 $5,808 $9,444 $2,850
- -----------------------------------------------------------------------------
- -
Ratios to average net
assets:
Expenses 1.21% 1.21% 1.16% 1.17%
1.21%(/5/)
Net investment income 3.95 4.43 4.34 4.39 4.76(/5/)
- -----------------------------------------------------------------------------
- -
</TABLE>

(/1/) Per share amounts calculated using the monthly average shares method.

(/2/) On June 12, 1998 Class C shares were renamed Class L shares.

(/3/) For the period from November 7, 1994 (inception date) to July 31, 1995.

(/4/) Not annualized.

(/5/) Annualized.

Smith Barney Mutual
Funds

23
<PAGE>

(This page is intentionally left blank.)
<PAGE>

SalomonSmithBarney
------------------------
- ---
A member of
citigroup[LOGO]

Exchange Reserve
Fund

An investment portfolio of Smith Barney Income Funds

Shareholder reports Annual and semiannual reports to shareholders provide
addi-
tional information about the fund's investments. These reports discuss the
mar-
ket conditions and investment strategies that affected the fund's
performance.

The fund sends only one report to a household if more than one account has
the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply
to
you.

Statement of additional information The statement of additional information
provides more detailed information about the fund and is incorporated by
refer-
ence into (is legally part of) this prospectus.

You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your
Salomon
Smith Barney Financial Consultant or dealer representative, by calling the
fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds,
388
Greenwich Street, MF2, New York, New York 10013.

Visit our web site Our web site is located at www.smithbarney.com

Information about the fund (including the SAI) can be reviewed and copied at
the Commission's Public Reference Room in Washington, D.C. In addition,
information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-202-942-8090. Reports and other information
about the fund are available on the EDGAR Database on the Commission's
Internet site at http://www.sec.gov. Copies of this information may be
obtained for a duplicating fee by electronic request at the following
E-mail address: [email protected], or by writing the Commission's Public
Reference Section, Washington, D.C. 20549-0102.

If someone makes a statement about the fund that is not in this prospectus,
you
should not rely upon that information. Neither the fund nor the distributor
is
offering to sell shares of the fund to any person to whom the fund may not
law-
fully sell its shares.

SMSalomon Smith Barney is a service mark of Salomon Smith Barney Inc.

(Investment Company Act file
no. 811-04254)

FD1208 11/99

<PAGE>

[SB] Smith Barney
[MF] Mutual Funds

P R O S P E C T U S

Exchange
Reserve Fund

Class B Shares
- ------------------------------------------------------------------
November 28, 1999

The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>

Exchange Reserve Fund

Contents

Investments, risks and performance.......................................... 2
Management.................................................................. 7
Class B shares.............................................................. 8
Sales charges............................................................... 9
More about deferred sales charges........................................... 9
Buying shares............................................................... 10
Exchanging shares........................................................... 11
Redeeming shares............................................................ 12
Other things to know about share transactions............................... 15
Dividends, distributions and taxes.......................................... 15
Share price................................................................. 16
Financial highlights........................................................ 17

</TABLE>
You should know: An investment in the fund is not a bank deposit and is not
insured or guaranteed by the FDIC or any other government agency. There is no
assurance that the fund will be able to maintain a stable net asset value of
$1.00 per share.

Smith Barney Mutual Funds

1
<PAGE>

Investments, Risks and Performance

Investment objective
The fund seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity.

Principal investment strategies
Key investments The fund invests in high quality, U.S. dollar denominated short
term debt securities. These may include obligations issued by U.S. and foreign
banks, the U.S. government, its agencies or instrumentalities, U.S. states and
municipalities and U.S. and foreign corporate issuers. The fund normally will
invest at least 25% of its assets in obligations of domestic and foreign banks.
Either the principal amount of each obligation must be fully insured by the
FDIC or the issuing bank must have more than $100 million of working capital or
more than $1 billion of total assets.

The fund may invest in all types of money market securities including commer-
cial paper, certificates of deposit, time deposits, bankers' acceptances,
asset-backed securities, repurchase agreements and other short term debt secu-
rities. The fund limits foreign investments to issuers located in major indus-
trialized countries.

Minimum credit quality. The fund invests in commercial paper and short-term
obligations rated by at least one nationally recognized rating organization in
the highest short term rating category, or if unrated, of equivalent quality,
and in other corporate obligations and municipal obligations rated in the two
highest rating categories, or if unrated, of equivalent quality.

Maximum maturity. The fund invests exclusively in securities having remaining
maturities of 397 days or less. The fund maintains a dollar-weighted average
portfolio maturity of 90 days or less.

Selection process In selecting investments for the funds, the manager looks
for:

Exchange Reserve Fund

2
<PAGE>

All investments involve some degree of risk. However, the fund is a "money mar-
ket fund" and, as such, seeks income by investing in short-term debt securities
that meet strict standards established by the board of directors based on spe-
cial rules for money market funds adopted under federal law.

Principal risks of investing in the fund
Although the fund seeks to preserve the value of your investment at $1 per
share, it is possible to lose money by investing in the fund, or the fund could
underperform other short term debt instruments or money market funds if:

The fund invests at least 25% of its assets in obligations of domestic and for-
eign banks and, as a result, is more susceptible to events affecting the bank-
ing industry. The value of the fund's foreign bank securities may go down
because of unfavorable government actions or political instability. Compared to
U.S. banks, there may be less publicly available information about foreign
banks. In addition, foreign banks are not subject to uniform accounting, audit-
ing and financial reporting standards of U.S. banks. A decline in a foreign
currency relative to the U.S. dollar may indirectly increase credit risk and
default risk attributable to foreign bank obligations in which the fund
invests.

Who may want to invest The fund may be an appropriate investment if you:

.Are seeking current income
.Are looking for an investment with lower risk than most other types of funds
.Are looking to allocate a portion of your assets to money market securities

Smith Barney Mutual Funds

3
<PAGE>

Risk return bar chart

This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not neces-
sarily indicate how the fund will perform in the future. This bar chart shows
the performance of the fund's Class B shares for each of the past 10 calendar
years. The performance information in the chart does not reflect sales charges,
which would reduce your return.

Total Return for Class B Shares

[BAR CHART APPEARS HERE]

89 90 91 92 93 94 95 96 97 98
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
8.62% 7.21% 5.44% 3.07% 1.84% 3.05% 4.89% 4.37% 4.51% 4.41%

Calendar years ended December 31

Quarterly returns (past 10 years):
Highest: 2.27% in 2nd quarter 1989; Lowest: 0.39% in 3rd quarter 1993.
Year to date: 2.91% through 9/30/99.

Exchange Reserve Fund

4
<PAGE>

Risk return table
This table indicates the risks of investing in the fund by comparing the aver-
age annual total return of each class for the periods shown with that of the
90-day Treasury bill. This table assumes imposition of the maximum sales charge
applicable to the class, redemption of shares at the end of the period, and
reinvestment of distributions and dividends.

90-day T-bill 4.88% 5.02% 5.32% 5.49% *
</TABLE>

* Index comparison begins on 7/31/86.

7 day yield as of July 31, 1999: ClassB: 3.97%

Smith Barney Mutual Funds

5
<PAGE>

Fee table
This table sets forth the fees and expenses you will pay if you invest in fund
shares.

Shareholder fees
<TABLE>
<CAPTION>

(fees paid directly from your investment) Class B
<S> <C>
Maximum sales charge (load) imposed on purchases
(as a % of offering price) None(/1/)
Maximum deferred sales charge (load) (as a % of the lower of net
asset value at purchase or redemption) 4.50%(/2/)

Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets) Class B
<S> <C>
Management fee 0.50%
Distribution and service (12b-1) fees 0.50%
Other expenses 0.29%
----------
Total annual fund operating expenses 1.29%
</TABLE>

(/1/) Shares of the fund may be acquired by the general public only through the
exchange of Class B shares of other Smith Barney mutual funds. Exchanges
are made at net asset value, without a front-end sales charge.
(/2/) Class B shares of the fund acquired through exchanges with shares of
other Smith Barney mutual funds are subject to the deferred sales charge,
if any, applicable to the exchanged shares. This could be 4.50% or less
for Class B shares.

Example
This example helps you compare the costs of investing in the fund with the
costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
.You invest $10,000 in the fund for the period shown
.Your investment has a 5% return each year
.You reinvest all distributions and dividends without a sales charge
.The fund's operating expenses remain the same

</TABLE>

Exchange Reserve Fund

6
<PAGE>

Management

Manager The fund's investment adviser and administrator is SSB Citi Fund Man-
agement LLC, an affiliate of Salomon Smith Barney Inc. The manager's address is
388 Greenwich Street, New York, New York 10013. The manager selects the fund's
investments and oversees its operations. The manager and Salomon Smith Barney
are subsidiaries of Citigroup Inc. Citigroup businesses produce a broad range
of financial services--asset management, banking and consumer finance, credit
and charge cards, insurance, investments, investment banking and trading--and
use diverse channels to make them available to consumer and corporate customers
around the world.

Management fee For its services, the manager received an advisory fee during
the fund's last fiscal year equal to 0.30% of the fund's average daily net
assets. In addition, the manager received a fee for its administrative services
to the fund equal to 0.20% of the fund's average daily net assets.

Distributor The fund has entered into an agreement with CFBDS, Inc. to distrib-
ute the fund's shares. Through a selling agreement, PFS Investments Inc. (PFS
Investments) sells fund shares to the public.

Distribution plans The fund has adopted Rule 12b-1 distribution plans for the
Class B shares. Under the plan, the fund pays distribution and service fees.
These fees are an ongoing expense and, over time, may cost you more than other
types of sales charges.

Year 2000 issue Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if sub-
stantial, could adversely affect companies and governments that issue securi-
ties held by the fund. The manager and Salomon Smith Barney are addressing the
Year 2000 issue for their systems. The fund has been informed by other service
providers that they are taking similar measures. Although the fund does not
expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
that the efforts of the fund, which are limited to requesting and receiving
reports from its service providers, or the efforts of its service providers to
correct the problem will be successful.

Smith Barney Mutual Funds

7
<PAGE>

Class B Shares

You can buy shares of the fund only by exchanging Class B shares of certain
Smith Barney mutual funds. Class B shares convert to Class A shares of the
Smith Barney Money Funds, Inc. - Cash Portfolio ("Cash Portfolio"). You should
consult your PFS Investments Registered Representative for more information.

Initial purchases of shares must be made through a PFS Investments Registered
Representative.

Investment minimums Minimum initial and additional investment amounts vary
depending on the nature of your investment account.

<TABLE>
<CAPTION>
Initial Additional
<S> <C> <C>
General $1,000 $50
IRAs, Self Employed Retirement Plans, Uniform Gift to Minor
Accounts $250 $50
Qualified Retirement Plans* $25 $25
</TABLE>

*Qualified Retirement Plans are retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Internal Revenue Code, including 401(k)
plans

The fund offers Class B shares for exchange only of certain Smith Barney
mutual funds through a PFS Investments Registered Representative.

<TABLE>
<CAPTION>
Class B
<S> <C>
Key features .Available through exchange only
.No initial sales charge
.Deferred sales charge declines over
time
.Converts to Class A shares of Cash
Portfolio after 8 years
- ----------------------------------------------------------------
Initial sales None
charge

- ----------------------------------------------------------------
Deferred Up to 4.50% charged when you redeem
sales charge shares. The charge is reduced over time
and there is no deferred sales charge
after 6 years
- ----------------------------------------------------------------
Annual distribution and 0.50% of average daily net assets
service fees
- ----------------------------------------------------------------
Exchangeable into* Class B shares of certain Smith Barney
funds
- ----------------------------------------------------------------
</TABLE>

*Ask your PFS Investments Registered Representative for the Smith Barney funds
available for exchange.

Exchange Reserve Fund

8
<PAGE>

Sales charges

<TABLE>
<CAPTION>
Year after purchase 1st 2nd 3rd 4th 5th 6th through 8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.50% 4% 3% 2% 1% 0%
</TABLE>

<TABLE>
<CAPTION>
Shares issued: Shares issued: Shares issued:
At initial On reinvestment of Upon exchange from
purchase dividends and another Smith
distributions Barney fund
<S> <C> <C>

Eight years after the date of purchase In same proportion On the date the
as the number of shares originally
Class B shares acquired would
converting is to have converted
total Class B into Class A
shares you own shares of Cash
(excluding shares Portfolio
issued as a divi-
dend)

</TABLE>

More about deferred sales charges

In addition, you do not pay a deferred sales charge on:

.Shares exchanged for shares of another Smith Barney fund
.Shares representing reinvested distributions and dividends
.Shares no longer subject to the deferred sales charge

Each time you place a request to sell shares that were acquired by exchange
from another Smith Barney fund subject to a deferred sales charge, the fund
will first sell any shares in your account that are not subject to a deferred
sales charge and then the shares in your account that have been held the long-
est.

Smith Barney Mutual Funds

9
<PAGE>

If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value.

PFS Distributors Inc., an affiliate of PFS Investments Inc., receives deferred
sales charges as reimbursement for shares sold, including the payment of com-
pensation to your PFS Investments Registered Representative.

Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:

If you want to learn about additional waivers of deferred sales charges, con-
tact your PFS Investments Registered Representative or consult the Statement of
Additional Information ("SAI").

Buying shares

Available Generally, you may buy shares of the fund only by exchanging
only by Class B shares of certain Smith Barney mutual funds.
exchanging
shares

You should contact your PFS Investments Registered Represen-
tative to exchange into the fund from certain Smith Barney
funds.
- --------------------------------------------------------------------------------
Buying shares . Initial purchases of shares of the fund must be made
by mail through a PFS Investments Registered Representative by com-
pleting the appropriate application. The completed applica-
tion should be forwarded to the Fund's sub-transfer agent,
PFS Shareholder Services. Subsequent investments may be
sent by mail directly to PFS Shareholder Services.
- --------------------------------------------------------------------------------
Buying shares . Upon completion of certain automated systems, you will be
by telephone able to elect telephone transactions on your account appli-
cation and call PFS Shareholder Services and request a pur-
chase through a transfer from your bank account. Telephone
purchases can be made between 8:00 a.m. and 8:00 p.m. east-
ern time

Exchange Reserve Fund

10
<PAGE>

on any day the New York Stock Exchange is open. Purchase
orders received after the close of regular trading on the
Exchange are priced at the net asset value next determined.
The minimum telephone investment is $250 and the maximum is
$10,000. You will be charged a fee if you have insufficient
funds to complete the investment.
. The address and telephone number of PFS Shareholder Serv-
ices is: 3100 Breckinridge Blvd., Bldg. 200, Duluth, Geor-
gia 30099-0062; (800) 544-5445.
. You may also reach PFS Shareholder Services by calling
(800) 544-7278 for Spanish speaking representatives or
(800) 824-1721 for the TDD Line for the Hearing Impaired.
. Checks drawn on foreign banks must be payable in U.S. dol-
lars and have the routing number of the U.S. bank encoded
on the check.
- --------------------------------------------------------------------------------
Buying shares Initial purchases of shares for $10,000 may be made by wire
by wire order from your bank account. Contact your PFS Investments
Registered Representative for details. In addition, once an
account is open, you may make additional wire orders through
PFS Shareholder Services.

Exchanging shares

Smith Barney You should contact your PFS Investments Registered Represen-
offers a tative to exchange into other eligible Smith Barney funds. Be
distinctive sure to read the prospectus of the Smith Barney fund you are
family of exchanging into. An exchange is a taxable transaction.
funds
tailored to
help meet the
varying needs
of both large
and small
investors

.You may exchange shares only for shares of the same class of
certain Smith Barney funds. Not all Smith Barney funds
offer all classes.
.Not all Smith Barney funds may be offered in your state of
residence. Contact your PFS Investments Registered Repre-
sentative.

.You must meet the minimum investment amount for each fund.
.If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer

Smith Barney Mutual Funds

11
<PAGE>

or with signed stock powers (documents transferring owner-
ship of certificates) before the exchange is effective.
.The fund may suspend or terminate your exchange privilege if
you engage in an excessive pattern of exchanges.
- --------------------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial sales charge at
additional the time of the exchange. Your deferred sales charge (if any)
sales charges will continue to be measured from the date of your original
purchase. If the fund you exchange into has a higher deferred
sales charge, you will be subject to that charge. If you
exchange at any time into a fund with a lower charge, the
sales charge will not be reduced.

- -----------------------------------------------------------------------------
By telephone You can exchange shares by telephone if you elect telephone
transactions on your account application. Telephone exchanges
are subject to the same limitations as telephone redemptions.

To learn more about the exchange privilege and Smith Barney
mutual funds you may be eligible to exchange into, contact
your PFS Investments Registered Representative or consult the
SAI.

Redeeming shares

Redemptions Generally, a properly completed Redemption Form with any
by mail required signature guarantee is all that is required for a
redemption. In some cases, however, other documents may be
necessary.

You may redeem some or all of your shares by sending a
Redemption Form or other written request in proper form to
PFS Shareholder Services, 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30099-0062. You may also reach PFS Share-
holder Services by calling (800) 544-5445 or (800) 544-7278
for Spanish speaking representatives or (800) 824-1721 for
the TDD Line for the Hearing Impaired. The written request
for redemption must be in good order. This means that

Exchange Reserve Fund

12
<PAGE>

you have provided the following information. Your request
will not be processed without this information.

.Name of the fund
.Account number
.Dollar amount or number of shares to redeem
.Signature of each owner exactly as account is registered
.Other documentation required by PFS Shareholder Services

To be in good order, your request must include a signature
guarantee if:

.The proceeds of the redemption exceed $50,000
.The proceeds are not paid to the record owner(s) at the rec-
ord address
.The shareholder(s) has had an address change in the past 45
days
.The shareholder(s) is a corporation, sole proprietor, part-
nership, trust or fiduciary

You can obtain a signature guarantee from most banks, deal-
ers, brokers, credit unions and federal savings and loans,
but not from a notary public.

In all cases, your redemption price is the net asset value
next determined after your request is received in good
order. Redemption proceeds normally will be sent within three
days. However, if you recently purchased your shares by
check, your redemption proceeds will not be sent to you until
your original check clears, which may take up to 15 days. Any
request that your redemption proceeds be sent to a destina-
tion other than your bank account or address of record must
be in writing and must include signature guarantees.
- --------------------------------------------------------------------------------
Redemptions You may redeem shares by telephone if you elect the telephone
by telephone transaction option on your account application. This is
available only for redemptions of $50,000 or less, and the
proceeds must be mailed to your address of record. In addi-
tion, you must be able to provide proper identification
information. You may not redeem by telephone if your address
has changed

Smith Barney Mutual Funds

13
<PAGE>

within the past 45 days or if your shares are in certifi-
cate form. Telephone redemption requests may be made by
calling PFS Shareholder Services at (800) 544-5445 between
8:00 a.m. and 8:00 p.m. eastern time on any day the New
York Stock Exchange is open. Requests received after the
close of regular trading on the New York Stock Exchange are
priced at the net asset value next computed. If telephone
redemptions are not available for any reason, you may use
the Fund's regular redemption procedure described above.
- --------------------------------------------------------------------------------
Payment of Whether you redeem by mail, fax or telephone, your redemp-
redemption tion proceeds can be sent by check to your address of rec-
proceeds ord or by wire transfer to a bank account designated on
your application. You will be charged a service fee for
wire transfers and for transfers made directly to your bank
by the Automated Clearinghouse (ACH).
- --------------------------------------------------------------------------------
Automatic cash You can arrange for the automatic redemption of a portion
withdrawal of your shares on a monthly or quarterly basis. To qualify
plans you must own shares of the fund with a value of at least
$10,000 ($5,000 for retirement plan accounts) and each
automatic redemption must be at least $50. If your shares
are subject to a deferred sales charge, the sales charge
will be waived if your automatic payments are equal to or
less than 1% per month of the value of your shares subject
to a deferred sales charge. The following conditions apply:

.Shares may not be represented by certificates
.All dividends and distributions must be reinvested
.You can establish a withdrawal plan for a retirement
account only if you are eligible to receive distributions
from the account

Exchange Reserve Fund

14
<PAGE>

Other things to know about share transactions

The fund has the right to:

.Suspend the offering of shares
.Waive or change minimum and additional investment amounts
.Reject any purchase or exchange order
.Change, revoke or suspend the exchange privilege
.Suspend telephone transactions
.Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securi-
ties and Exchange Commission
.Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities

Small account balances If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.

Share certificates The fund does not issue share certificates unless a written
request signed by all registered owners is made to the transfer agent. If you
hold share certificates it will take longer to exchange or redeem shares.

Dividends, distributions and taxes

Dividends The fund generally declares a dividend of substantially all of its
net investment income on each day the New York Stock Exchange is open. The fund
generally makes capital gain distributions, if any, once a year, typically in
December. The fund expects distributions to be primarily from income. The fund
may pay additional distributions and dividends at other times if necessary for
the fund to avoid a federal tax. Dividends and capital gain distributions are
reinvested in additional fund shares of the same class you hold. Alternatively,
you can instruct your PFS Investments Registered Representative to have your
distributions and/or dividends paid in cash. You can change your choice at any
time to be effective as of the next distribution or dividend, except that any
change given to the transfer agent less than five days before the payment date
will not be effective until the next distribution or dividend is paid.

Smith Barney Mutual Funds

15
<PAGE>

Taxes In general, redeeming shares, exchanging shares and receiving distribu-
tions (whether in cash or additional shares) are all taxable events.

The fund anticipates that it will normally not earn or distribute any long-term
capital gains.

Share price

You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its liabili-
ties. Net asset value is calculated separately for each class of shares. The
fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI.

The fund uses the amortized cost method to value its portfolio securities.
Using this method, the fund systematically amortizes over the remaining life of
a security the difference between the principal amount due at maturity and the
original cost of the security to the fund.

In order to buy, redeem or exchange shares at that day's price, you must place
your order with PFS Shareholder Services before the New York Stock Exchange
closes. If the Exchange closes early, you must place your order prior to the
actual closing time. Otherwise, you will receive the next business day's price.

Exchange Reserve Fund

16
<PAGE>

Financial highlights

The financial highlights tables are intended to help you understand the perfor-
mance of the fund's Class B shares for the past 5 years (or since inception if
less than 5 years). Certain information reflects financial results for a single
share. Total return represents the rate that a shareholder would have earned
(or lost) on a fund share assuming reinvestment of all dividends and distribu-
tions. The information in the following tables was audited by KPMG LLP, inde-
pendent accountants, whose report, along with the fund's financial statements,
is included in the annual report (available upon request).

For a Class B share of capital stock outstanding throughout each year ended
July 31:

<TABLE>
<CAPTION>
1999(1) 1998 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------
Net investment income 0.040 0.044 0.043 0.044 0.044
Dividends from net
investment income (0.040) (0.044) (0.043) (0.044) (0.044)
- -------------------------------------------------------------------------------
Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------
Total return 4.05% 4.51% 4.43% 4.53% 4.49%
- -------------------------------------------------------------------------------
Net assets, end of year
(000)'s $120,127 $74,186 $116,915 $150,421 $160,432
- -------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.18% 1.21% 1.16% 1.17% 1.24%
Net investment income 3.98 4.43 4.34 4.45 4.35
- -------------------------------------------------------------------------------
</TABLE>
(/1/)Per share amounts calculated using the monthly average shares method.

Smith Barney Mutual Funds

17
<PAGE>

(This page is intentionally left blank.)
<PAGE>

Securities offered through
PFS INVESTMENTS INC.
----------------------------
A member of citigroup [LOGO]
Exchange Reserve
Fund
An investment portfolio of Smith Barney Income Funds

Shareholder reports Annual and semiannual reports to shareholders provide addi-
tional information about the fund's investments. These reports discuss the mar-
ket conditions and investment strategies that affected the fund's performance.

Statement of additional information The statement of additional information
provides more detailed information about the fund and is incorporated by refer-
ence into (is legally part of) this prospectus.

You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your PFS
Investments Registered Representative, by calling PFS Shareholder Services at
1-800-544-5445, or by writing to the fund at 3100 Breckinridge Boulevard,
Building 200, Duluth, Georgia 30099-0062.

Information about the fund (including the SAI) can be reviewed and copied at
the Commission's Public Reference Room in Washington, D.C. In addition, infor-
mation on the operation of the Public Reference Room may be obtained by calling
the Commission at 1-202-942-8090. Reports and other information about the fund
are available on the EDGAR Database on the Commission's Internet site at
http://www.sec.gov. Copies of this information may be obtained for a duplicat-
ing fee by electronic request at the following E-mail address:
[email protected], or by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102.

If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not law-
fully sell its shares.

(Investment Company Act file
no. 811-04254)
SB-1E(B)
PFS Investments Inc.
11/99

<PAGE>

[LOGO] Smith Barney
Mutual Funds

PROSPECTUS

Convertible
Fund

Class A, B, L, O and Y Shares

- ------------------------------------
NOVEMBER 28, 1999

The Securities and Exchange Commission has not approved the fund's
shares as an investment or determined whether this prospectus is
accurate or complete. Any statement to the contrary is a crime.
<PAGE>
Convertible Fund

CONTENTS
- ------------------------------------------------

<TABLE>
<S> <C>
Investments, risks and performance......................... 2

More on the fund's investments............................. 8

Management................................................. 9

Choosing a class of shares to buy.......................... 10

Comparing the fund's classes............................... 12

Sales charges.............................................. 13

More about deferred sales charges.......................... 16

Buying shares.............................................. 17

Exchanging shares.......................................... 19

Redeeming shares........................................... 20

Other things to know about share transactions.............. 23

Smith Barney 401(k) and ExecChoice-TM- programs............ 25

Dividends, distributions and taxes......................... 26

Share price................................................ 27

Financial highlights....................................... 28
</TABLE>

YOU SHOULD KNOW: AN INVESTMENT IN THE FUND IS NOT A BANK DEPOSIT AND IS NOT
INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
SMITH BARNEY MUTUAL FUNDS 1
<PAGE>
INVESTMENTS, RISKS AND PERFORMANCE
- --------------------------------------------------------------------------------
Investment objective

The fund seeks current income and capital appreciation.

Principal investment strategies

KEY INVESTMENTS The fund invests primarily in convertible securities. These are
securities that may be converted to common stock or other equity interests in
the issuer at a predetermined price or rate. The fund also may invest up to 35%
of its assets in "synthetic convertible securities," equity securities and debt
securities that are not convertible. Synthetic convertible securities are
created by combining non-convertible preferred stocks or debt securities with
warrants or call options. These synthetic instruments are designed to perform
like convertible securities of a particular company.

The fund may invest up to 25% of its assets in foreign securities. The fund may
invest in securities rated below investment grade and unrated securities of
comparable quality. These securities are commonly known as "junk bonds"
because they are rated in the lower rating categories of nationally and
internationally recognized rating agencies of if unrated, of similar credit
quality.

SELECTION PROCESS In evaluating a convertible security, the subadviser analyzes
fixed income characteristics of the security, as well as equity characteristics
of the underlying security.

Equity characteristics the subadviser looks for include:

/ / Companies with potential for real, sustainable growth
/ / Companies with competent and accessible management
/ / Favorable cash flow and management's use of cash
/ / Securities structured to reduce risk and add to return
/ / Securities of companies that the manager believes could benefit from
significant appreciation in 12-18 months

Fixed income characteristics the subadviser looks for include:

/ / Favorable financial condition and capital structure
/ / Risk reduction characteristics, such as avoiding companies that are
difficult to value or that have negative cash flows
/ / Favorable yield to maturity in light of risk

2 CONVERTIBLE FUND
<PAGE>
Principal risks of investing in the fund

Convertible securities are subject both to the stock market risk associated with
equity securities and to the credit and interest rate risks associated with
fixed income securities. As the market price of the equity security underlying a
convertible security falls, the convertible security tends to trade on the basis
of its yield and other fixed income characteristics. As the market price of such
equity security rises, the convertible security tends to trade on the basis of
its equity conversion features. Therefore, investors could lose money on their
investment in the fund, or the fund may not perform as well as other
investments, if:

/ / A common stock or other security into which a security owned by the fund is
convertible falls in value
/ / The stock market declines generally
/ / The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest or has its credit rating downgraded
/ / Interest rates increase, causing the prices of fixed income securities to
decline, thereby reducing the value of the fund's portfolio
/ / Companies in which the fund invests fail to meet earnings expectations, fall
out of favor with investors, or other events depress their stock prices
/ / The subadviser's judgment about interest rates or the attractiveness, value
or income potential of a particular security proves incorrect

Below investment grade bonds, commonly known as "junk bonds," are speculative
and their issuers may have diminished capacity to pay principal and interest.
These securities have a higher risk of default, tend to be less liquid, and may
be more difficult to value.

Investments in foreign securities involve special risks, such as risk of
political or economic instability, imposition of exchange controls or other
restrictions on investments, and losses due to currency fluctuations.

WHO MAY WANT TO INVEST The fund may be an appropriate investment if you:

/ / Are seeking to earn current income with some potential for capital
appreciation
/ / Are seeking limited exposure to the stock market, and understand the risks
of investing in equity securities

SMITH BARNEY MUTUAL FUNDS 3
<PAGE>
Risk return bar chart

This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future. This bar chart
shows the performance of the fund's Class B shares for each of the past
10 years. Class A, L, O and Y shares would have different performance because of
their different expenses. The performance information in the chart does not
reflect sales charges, which would reduce your return.

Total Return For Class B Shares
- --------------------------------------------------------------------------------

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
CALENDAR YEARS ENDED DECEMBER 31
<S> <C>
89 9.82%
90 -8.71%
91 24.91%
92 13.45%
93 12.53%
94 -6.76%
95 20.82%
96 10.72%
97 15.88%
98 -1.90%
</TABLE>

Quarterly Returns (Past 10 years): Highest: 10.54% in 1st quarter 1991; Lowest:
- -15.83% in 3rd quarter 1990.

Year to date: -3.12% through 9/30/99

4 CONVERTIBLE FUND
<PAGE>
Risk return table

This table indicates the risks of investing in the fund by comparing the average
annual total return of each class for the periods shown with that of the
Standard & Poor's 500 Index (the "S&P 500 Index"), an unmanaged broad-based
index of widely held common stocks,the Salomon Smmith Barney Broad Investment
Grade Index ("SSB BIG"), an unmanaged market-capitalization weighted index
which includes fixed-rate Treasury, Government-sponsored, mortgage and
investment-grade corporates (BBB-/Baa3) with a maturity of one year or longer
and the Lipper Convertible Securities Fund Peer Group Average Index, (the
"Lipper Index"), an unmanaged broad-based index
of the fund's peer group of 61 mutual funds investing in convertible securities.
This table assumes imposition of the maximum sales charge applicable to the
class, redemption of shares at the end of the period, and reinvestment of
distributions and dividends.

<TABLE>
<CAPTION>
Average Annual Total Returns
Calendar Years Ended December 31, 1998
- ------------------------------------------------------------------------------------------------
Class 1 year 5 years 10 years Since Inception Inception Date
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
A -6.40% 6.65% n/a 8.17% 11/06/92
- ------------------------------------------------------------------------------------------------
B -6.48% 7.08% 8.53% 8.14% 09/09/86
- ------------------------------------------------------------------------------------------------
L n/a n/a n/a -6.01% 06/15/98
- ------------------------------------------------------------------------------------------------
O -2.80% n/a n/a 10.00% 11/07/94
- ------------------------------------------------------------------------------------------------
Y -1.03% n/a n/a 8.26% 02/07/96
- ------------------------------------------------------------------------------------------------
S&P 500 Index* 28.60% 24.05% 19.19% 17.87% n/a
- ------------------------------------------------------------------------------------------------
SSB BIG Index* 8.72% 7.30% 9.31% 8.73% n/a
Lipper Index* 4.74% 10.68% 11.66% 9.45% n/a
- ------------------------------------------------------------------------------------------------
</TABLE>

*INDEX COMPARISON BEGINS ON 09/30/86.

SMITH BARNEY MUTUAL FUNDS 5
<PAGE>
Fee table

This table sets forth the fees and expenses you will pay if you invest in fund
shares.

<TABLE>
<CAPTION>
Shareholder fees
- -----------------------------------------------------------------------------------------
(FEES PAID DIRECTLY FROM YOUR
INVESTMENT) Class A Class B Class L Class O Class Y
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Maximum sales charge (load)
imposed on purchases
(AS A % OF OFFERING PRICE) 5.00% None 1.00% 1.00% None
- -----------------------------------------------------------------------------------------
Maximum deferred sales charge
(load) (AS A % OF THE LOWER
OF NET ASSET VALUE AT
PURCHASE OR REDEMPTION) None* 5.00% 1.00% 1.00% None

<CAPTION>
Annual fund operating expenses
- -----------------------------------------------------------------------------------------
(EXPENSES DEDUCTED FROM
FUND ASSETS) Class A Class B Class L Class O Class Y
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Management fee 0.70% 0.70% 0.70% 0.70% 0.70%
- -----------------------------------------------------------------------------------------
Distribution and service
(12b-1) fee 0.25% 0.75% 1.00% 0.70% None
- -----------------------------------------------------------------------------------------
Other expenses 0.34% 0.31% 0.60% 0.38% 0.13%
- -----------------------------------------------------------------------------------------
Total annual fund
operating expenses 1.29% 1.76% 2.30% 1.78% 0.83%
===== ===== ===== ===== =====
</TABLE>

*YOU MAY BUY CLASS A SHARES IN AMOUNTS OF $500,000 OR MORE AT NET ASSET VALUE
(WITHOUT AN INITIAL SALES CHARGE) BUT IF YOU REDEEM THOSE SHARES WITHIN 12
MONTHS OF THEIR PURCHASE, YOU WILL PAY A DEFERRED SALES CHARGE OF 1.00%.

6 CONVERTIBLE FUND
<PAGE>
Example

This example helps you compare the costs of investing in the fund with the costs
of investing in other mutual funds. Your actual costs may be higher or lower.
The example assumes:

/ / You invest $10,000 in the fund for the period shown
/ / Your investment has a 5% return each year
/ / You reinvest all distributions and dividends without a sales charge
/ / The fund's operating expenses remain the same

<TABLE>
<CAPTION>
Number of years you own your shares
- -------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Class A
(WITH OR WITHOUT REDEMPTION) $625 $889 $1,172 $1,979
- -------------------------------------------------------------------------------
Class B
(REDEMPTION AT END OF PERIOD) $679 $854 $1,054 $1,949
- -------------------------------------------------------------------------------
Class B
(NO REDEMPTION) $179 $554 $ 954 $1,949
- -------------------------------------------------------------------------------
Class L
(REDEMPTION AT END OF PERIOD) $431 $811 $1,318 $2,709
- -------------------------------------------------------------------------------
Class L
(NO REDEMPTION) $331 $811 $1,318 $2,709
- -------------------------------------------------------------------------------
Class O
(REDEMPTION AT END OF PERIOD) $379 $655 $1,055 $2,174
- -------------------------------------------------------------------------------
Class O
(NO REDEMPTION) $279 $655 $1,055 $2,174
- -------------------------------------------------------------------------------
Class Y
(WITH OR WITHOUT REDEMPTION) $ 85 $265 $ 460 $1,025
</TABLE>

SMITH BARNEY MUTUAL FUNDS 7
<PAGE>
MORE ON THE FUND'S INVESTMENTS
- --------------------------------------------------------------------------------

DERIVATIVE CONTRACTS The fund may, but need not, use derivative contracts, such
as options on securities or currencies, forward foreign currency contracts,
interest rate futures and options on interest rate futures:

/ / To hedge against the economic impact of adverse changes in the market value
of portfolio securities, because of changes in interest rates; or
/ / As a substitute for buying or selling securities
/ / To enhance the fund's return

A derivative contract will obligate or entitle the fund to deliver or receive an
asset or cash payment based on the change in value of one or more indices or
securities. Even a small investment in derivative contracts can have a big
impact on a fund's currency, securities market or interest rate exposure.
Therefore, using derivatives can disproportionately increase losses and reduce
opportunities for gains when interest rates, exchange rates or securities
markets are changing. The fund may not fully benefit from or may lose money on
derivatives if changes in their value do not correspond accurately to changes in
the value of the fund's holdings. The other parties to certain derivative
contracts present the same types of default risk as issuers of fixed income
securities. Derivatives can also make a fund less liquid and harder to value,
especially in declining markets. The fund may invest up to 10% of its assets in
options for hedging purposes.

SHORT SALES The fund may engage in short sales "against the box," by borrowing
and selling shares of common stock that the fund simultaneously holds in its
portfolio or has a right to hold through conversion of another portfolio
security.

DEFENSIVE INVESTING The fund may depart from its principal investment strategies
in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.

8 CONVERTIBLE FUND
<PAGE>
MANAGEMENT
- --------------------------------------------------------------------------------

MANAGER The fund's investment adviser and administrator is SSB Citi Fund
Management LLC, an affiliate of Salomon Smith Barney Inc. The manager's address
is 388 Greenwich Street, New York, New York 10013. The manager oversees the
selection of the fund's investments and its general operations. The manager and
Salomon Smith Barney are subsidiaries of Citigroup Inc. Citigroup businesses
produce a broad range of financial services -- asset management, banking and
consumer finance, credit and charge cards, insurance, investments, investment
banking and trading -- and use diverse channels to make them available to
consumer and corporate customers around the world. Salomon Brothers Asset
Management an affiliate of SSB Citi Fund Management LLC located at 7 World Trade
Center, New York, New York 10048, serves as subadviser to the fund. The
subadviser manages the fund's investment portfolio, subject to the supervision
of the manager. The subadviser provides investment management and advisory
services to mutual funds and currently manages over $27.6 billion.

Daniel Berkery and Ross Margolies serve as co-portfolio managers and are
responsible for fund's the day-to-day management. Mr. Berkery, a director of the
subadviser and portfolio manager, is responsible for U.S. convertible
securities. Mr. Berkery has over 8 years of investment experience.
Mr. Margolies, a managing director of the subadviser and senior portfolio
manager is responsible for U.S. equity, convertibles and arbitrage portfolios.
Mr. Margolies has over 18 years of investment experience.

MANAGEMENT FEE For its services, the manager received an advisory fee during the
fund's last fiscal year equal to 0.50% of the fund's average daily net assets.
In addition, the manager received a fee for its administrative services to the
fund equal to 0.20% of the fund's average daily net assets.

DISTRIBUTOR The fund has entered into an agreement with CFBDS, Inc. to
distribute the fund's shares. A selling group consisting of Salomon Smith Barney
and other broker-dealers sells fund shares to the public.

DISTRIBUTION PLANS The fund has adopted Rule 12b-1 distribution plans for its
Class A, B and L shares. Under each plan, the fund pays distribution and service
fees. These fees are an ongoing expense and, over time, may cost you more than
other types of sales charges.

YEAR 2000 ISSUE Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year

SMITH BARNEY MUTUAL FUNDS 9
<PAGE>
2000 issue, if substantial, could adversely affect companies and governments
that issue securities held by the fund. The manager and Salomon Smith Barney are
addressing the Year 2000 issue for their systems. The fund has been informed by
other service providers that they are taking similar measures. Although the fund
does not expect the Year 2000 issue to adversely affect it, the fund cannot
guarantee that the efforts of the fund, which are limited to requesting and
receiving reports from its service providers, or the efforts of its service
providers to correct the problem will be successful.

CHOOSING A CLASS OF SHARES TO BUY
- --------------------------------------------------------------------------------

You can choose among four classes of shares: Classes A, B, L and Y. In addition,
you can buy additional Class O shares if you are a Class O shareholder. Each
class has different sales charges and expenses, allowing you to choose the class
that best meets your needs. Which class is more beneficial to an investor
depends on the amount and intended length of the investment.

/ / If you plan to invest regularly or in large amounts, buying Class A shares
may help you reduce sales charges and ongoing expenses.
/ / For Class B shares, all of your purchase amount and, for Class L and
Class O shares, more of your purchase amount (compared to Class A shares)
will be immediately invested. This may help offset the higher expenses of
Class B, Class L and Class O shares, but only if the fund performs well.
/ / Class L and Class O shares have a shorter deferred sales charge period than
Class B shares. However, because Class B shares convert to Class A shares,
and Class L and Class O shares do not, Class B shares may be more attractive
to long-term investors.

You may buy shares from:

/ / A Salomon Smith Barney Financial Consultant
/ / An investment dealer in the selling group or a broker that clears through
Salomon Smith Barney--a dealer representative
/ / The fund, but only if you are investing through certain qualified plans or
certain dealer representatives

10 CONVERTIBLE FUND
<PAGE>
INVESTMENT MINIMUMS Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.

<TABLE>
<CAPTION>
Initial Additional
- --------------------------------------------------------------------------
Classes A, B, L Class Y All Classes
<S> <C> <C> <C>
- --------------------------------------------------------------------------
General $1,000 $15 million $50
- --------------------------------------------------------------------------
Individual Retirement Accounts,
Self Employed Retirement Plans,
Uniform Gift to Minor Accounts $ 250 $15 million $50
- --------------------------------------------------------------------------
Qualified Retirement Plans* $ 25 $15 million $25
- --------------------------------------------------------------------------
Simple IRAs $ 1 n/a $ 1
- --------------------------------------------------------------------------
Monthly Systematic Investment
Plans $ 25 n/a $25
- --------------------------------------------------------------------------
Quarterly Systematic Investment
Plans $ 50 n/a $50
</TABLE>

*QUALIFIED RETIREMENT PLANS ARE RETIREMENT PLANS QUALIFIED UNDER
SECTION 403(B)(7) OR SECTION 401(A) OF THE INTERNAL REVENUE CODE, INCLUDING
401(K) PLANS

SMITH BARNEY MUTUAL FUNDS 11
<PAGE>
COMPARING THE FUND'S CLASSES
- --------------------------------------------------------------------------------
Your Salomon Smith Barney Financial Consultant or dealer representative can help
you decide which class meets your goals. They may receive different compensation
depending upon which class you choose.

<TABLE>
<CAPTION>
Class A Class B Class L Class O Class Y
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Key Features / / Initial / / No / / Initial / / Available / / No
sales charge initial sales sales charge for purchase initial or
/ / You may charge is lower only by deferred
qualify / / Deferred than former sales
for sales Class A Class C charge
reduction charge / / Deferred shareholders / / Must
or waiver declines sales / / Deferred invest at
of over time charge sales least
initial / / Converts for only charge for $15 million
sales to Class A 1 year only 1 / / Lower
charge after / / Does not year annual
/ / Lower 8 years convert / / Does not expenses
annual / / Higher to convert to than the
expenses annual Class A Class A other
than expenses / / Higher / / Higher classes
Class B than annual annual
and Class A expenses expenses
Class L than than
Class A Class A
- -------------------------------------------------------------------------------------------------
Initial sales charge Up to 5.00%; None 1.00% 1.00% None
reduced for
large
purchases and
waived for
certain
investors. No
charge for
purchases of
$500,000 or
more
- -------------------------------------------------------------------------------------------------
Deferred sales charge 1.00% on Up to 5.00% 1.00% if you 1.00% if you None
purchases of charged when redeem within redeem within
$500,000 or you redeem 1 year of 1 year of
more if you shares. The purchase purchase
redeem within charge is
1 year of reduced over
purchase time and
there is no
deferred
sales charge
after 6 years
- -------------------------------------------------------------------------------------------------
Annual distribution 0.25% of 0.75% of 1.00% of 0.70% of None
and service fees average daily average daily average daily average daily
net assets net assets net assets net assets
- -------------------------------------------------------------------------------------------------
Exchange-privilege* Class A Class B Class L Class L shares Class Y
shares of shares of shares of of most Smith shares of
most Smith most Smith most Smith Barney funds most Smith
Barney funds Barney funds Barney funds Barney funds
</TABLE>

*ASK YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR DEALER REPRESENTATIVE OR
VISIT THE WEB SITE FOR THE SMITH BARNEY FUNDS AVAILABLE FOR EXCHANGE.

12 CONVERTIBLE FUND
<PAGE>
SALES CHARGES
- --------------------------------------------------------------------------------
Class A shares
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge on
the fund's distributions or dividends you reinvest in additional Class A shares.

<TABLE>
<CAPTION>
Sales Charge as a % of
Offering Net amount
Amount of purchase price (%) invested (%)
<S> <C> <C>
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Less than $25,000 5.00 5.26
- -----------------------------------------------------------------------
$25,000 but less than $50,000 4.00 4.17
- -----------------------------------------------------------------------
$50,000 but less than $100,000 3.50 3.63
- -----------------------------------------------------------------------
$100,000 but less than $250,000 3.00 3.09
- -----------------------------------------------------------------------
$250,000 but less than $500,000 2.00 2.04
- -----------------------------------------------------------------------
$500,000 or more -0- -0-
- -----------------------------------------------------------------------
</TABLE>

INVESTMENTS OF $500,000 OR MORE You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.

QUALIFYING FOR A REDUCED CLASS A SALES CHARGE There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.

/ / ACCUMULATION PRIVILEGE - lets you combine the current value of Class A
shares owned

/ / by you, or

/ / by members of your immediate family,

and for which a sales charge was paid, with the amount of your next purchase of
Class A shares for purposes of calculating the initial sales charge. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.

/ / LETTER OF INTENT - lets you purchase Class A shares of the fund and other
Smith Barney funds over a 13-month period and pay the same sales charge, if
any, as if all shares had been purchased at once. You may include purchases
on which you paid a sales charge within 90 days before you sign the letter.

SMITH BARNEY MUTUAL FUNDS 13
<PAGE>
WAIVERS FOR CERTAIN CLASS A INVESTORS Class A initial sales charges are waived
for certain types of investors, including:

/ / Employees of members of the NASD
/ / 403(b) or 401(k) retirement plans, if certain conditions are met
/ / Clients of newly employed Salomon Smith Barney Financial Consultants, if
certain conditions are met
/ / Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified

IF YOU WANT TO LEARN ABOUT ADDITIONAL WAIVERS OF CLASS A INITIAL SALES CHARGES,
CONTACT YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR DEALER REPRESENTATIVE
OR CONSULT THE STATEMENT OF ADDITIONAL INFORMATION ("SAI").

Class B shares
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of purchase,
you will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.

<TABLE>
<CAPTION>
Year after purchase 1st 2nd 3rd 4th 5th 6th through 8th
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Deferred sales charge 5% 4% 3% 2% 1% 0%
- ---------------------------------------------------------------------------------------------------
</TABLE>

CLASS B CONVERSION After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:

<TABLE>
<CAPTION>
Shares issued: Shares issued:
On reinvestment Upon exchange from
Shares issued: of dividends and another Smith Barney
At initial purchase distributions fund
<S> <C> <C>
- ---------------------------------------------------------------------
Eight years after the In same proportion On the date the
date of purchase as the number of shares originally
Class B shares acquired would have
converting is to converted into
total Class B shares Class A shares
you own (excluding
shares issued as a
dividend)
</TABLE>

14 CONVERTIBLE FUND
<PAGE>
Class L and Class O shares

You buy Class L or O shares at the offering price, which is the net asset value
plus a sales charge of 1% (1.01% of the net amount invested). In addition, if
you redeem your Class L or O shares within one year of purchase, you will pay a
deferred sales charge of 1%. If you held Class C shares of the fund on June 12,
1998, you will not pay an initial sales charge on Class L shares you buy before
June 22, 2001.

You may buy Class O shares only if you owned Class C shares of the fund on
June 12, 1998. You will not pay an initial sales charge on Class O shares you
buy before June 22, 2001.

Class Y shares

You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $15,000,000 initial
investment requirement. You can use a letter of intent to meet this requirement
by buying Class Y shares of the fund over a 13-month period. To qualify, you
must initially invest $5,000,000.

SMITH BARNEY MUTUAL FUNDS 15
<PAGE>
MORE ABOUT DEFERRED SALES CHARGES
- --------------------------------------------------------------------------------

The deferred sales charge is based on the net asset value at the time of
purchase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.

In addition, you do not pay a deferred sales charge on:

/ / Shares exchanged for shares of another Smith Barney fund
/ / Shares representing reinvested distributions and dividends
/ / Shares no longer subject to the deferred sales charge

Each time you place a request to sell shares, the fund will first sell any
shares in your account that are not subject to a deferred sales charge and then
the shares in your account that have been held the longest.

If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.

Salomon Smith Barney receives deferred sales charges as partial compensation for
its expenses in selling shares, including the payment of compensation to your
Salomon Smith Barney Financial Consultant or dealer representative.

Deferred sales charge waivers

The deferred sales charge for each share class will generally be waived:

/ / On payments made through certain systematic withdrawal plans
/ / On certain distributions from a retirement plan
/ / For involuntary redemptions of small account balances
/ / For 12 months following the death or disability of a shareholder

IF YOU WANT TO LEARN ABOUT ADDITIONAL WAIVERS OF DEFERRED SALES CHARGES, CONTACT
YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR DEALER REPRESENTATIVE OR
CONSULT THE SAI.

16 CONVERTIBLE FUND
<PAGE>
BUYING SHARES
- --------------------------------------------------------------------------------
THROUGH A SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR DEALER REPRESENTATIVE

You should contact your Salomon Smith Barney Financial Consultant or dealer
representative to open a brokerage account and make arrangements to buy shares.

If you do not provide the following information, your order will be rejected

/ / Class of shares being bought
/ / Dollar amount or number of shares being bought

You should pay for your shares through your brokerage account no later than the
third business day after you place your order. Salomon Smith Barney or your
dealer representative may charge an annual account maintenance fee.

- --------------------------------------------------------------------------------
THROUGH THE FUND'S TRANSFER AGENT

Qualified retirement plans and certain other investors who are clients of the
selling group are eligible to buy shares directly from the fund.

/ / Write the transfer agent at the following address:
Smith Barney Income Funds
Smith Barney Convertible Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc. P.O. BOX 9699
Providence, Rhode Island 02940-9699
/ / Enclose a check to pay for the shares. For initial purchases, complete and
send an account application.
/ / For more information, call the transfer agent at 1-800-451-2010.

- --------------------------------------------------------------------------------
THROUGH A SYSTEMATIC INVESTMENT PLAN

You may authorize Salomon Smith Barney, your dealer representative or the
transfer agent to transfer funds automatically from a regular bank account, cash
held in a Salomon Smith Barney brokerage account or Smith Barney money market
fund to buy shares on a regular basis.

SMITH BARNEY MUTUAL FUNDS 17
<PAGE>
/ / Amounts transferred should be at least: $25 monthly or $50 quarterly
/ / If you do not have sufficient funds in your account on a transfer date,
Salomon Smith Barney, your dealer representative or the transfer agent may
charge you a fee

FOR MORE INFORMATION, CONTACT YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT,
DEALER REPRESENTATIVE OR THE TRANSFER AGENT OR CONSULT THE SAI.

18 CONVERTIBLE FUND
<PAGE>
EXCHANGING SHARES
- --------------------------------------------------------------------------------
SMITH BARNEY OFFERS A DISTINCTIVE FAMILY OF FUNDS TAILORED TO HELP MEET THE
VARYING
NEEDS OF BOTH LARGE AND SMALL INVESTORS

You should contact your Salomon Smith Barney Financial Consultant or dealer
representative to exchange into other Smith Barney funds. Be sure to read the
prospectus of the Smith Barney fund you are exchanging into. An exchange is a
taxable transaction.

/ / You may exchange shares only for shares of the same class of another Smith
Barney fund. Class O shares may be exchanged for Class L shares of another
Smith Barney fund. Not all Smith Barney funds offer all classes.
/ / Not all Smith Barney funds may be offered in your state of residence.
Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent.
/ / You must meet the minimum investment amount for each fund.
/ / If you hold share certificates, the transfer agent must receive the
certificates endorsed for transfer or with signed stock powers (documents
transferring ownership of certificates) before the exchange is effective.
/ / The fund may suspend or terminate your exchange privilege if you engage in
an excessive pattern of exchanges.

- --------------------------------------------------------------------------------
WAIVER OF ADDITIONAL SALES CHARGES

Your shares will not be subject to an initial sales charge at the time of the
exchange.

Your deferred sales charge (if any) will continue to be measured from the date
of your original purchase. If the fund you exchange into has a higher deferred
sales charge, you will be subject to that charge. If you exchange at any time
into a fund with a lower charge, the sales charge will not be reduced.

- --------------------------------------------------------------------------------

SMITH BARNEY MUTUAL FUNDS 19
<PAGE>
BY TELEPHONE

If you do not have a brokerage account, you may be eligible to exchange shares
through the transfer agent. You must complete an authorization form to authorize
telephone transfers. If eligible, you may make telephone exchanges on any day
the New York Stock Exchange is open. Call the transfer agent at 1-800-451-2010
between 9:00 a.m. and 5:00 p.m. (Eastern time). Requests received after the
close of regular trading on the Exchange are priced at the net asset value next
determined.

You can make telephone exchanges only between accounts that have identical
registrations.

- --------------------------------------------------------------------------------
BY MAIL

If you do not have a Salomon Smith Barney brokerage account, contact your dealer
representative or write to the transfer agent at the address on the opposite
page.

REDEEMING SHARES
- --------------------------------------------------------------------------------
GENERALLY

Contact your Salomon Smith Barney Financial Consultant or dealer representative
to redeem shares of the fund.

If you hold share certificates, the transfer agent must receive the certificates
endorsed for transfer or with signed stock powers before the redemption is
effective.

If the shares are held by a fiduciary or corporation, other documents may be
required.

Your redemption proceeds will be sent within three business days after your
request is received in good order. However, if you recently purchased your
shares by check, your redemption proceeds will not be sent to you until your
original check clears, which may take up to 15 days.

20 CONVERTIBLE FUND
<PAGE>
If you have a Salomon Smith Barney brokerage account, your redemption proceeds
will be placed in your account and not reinvested without your specific
instruction. In other cases, unless you direct otherwise, your redemption
proceeds will be paid by check mailed to your address of record.

- --------------------------------------------------------------------------------
BY MAIL

For accounts held directly at the fund, send written requests to the transfer
agent at the following address:
Smith Barney Income Funds
Smith Barney Convertible Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699

Your written request must provide the following:

/ / Your account number
/ / The class of shares and the dollar amount or number of shares to be redeemed
/ / Signatures of each owner exactly as the account is registered

- --------------------------------------------------------------------------------
BY TELEPHONE

If you do not have a brokerage account, you may be eligible to redeem shares
(except those held in retirement plans) in amounts up to $10,000 per day through
the transfer agent. You must complete an authorization form to authorize
telephone redemptions. If eligible, you may request redemptions by telephone on
any day the New York Stock Exchange is open. Call the transfer agent at
1-800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern time). Requests received
after the close of regular trading on the Exchange are priced at the net asset
value next determined.

- --------------------------------------------------------------------------------

SMITH BARNEY MUTUAL FUNDS 21
<PAGE>
AUTOMATIC CASH WITHDRAWAL PLANS

You can arrange for the automatic redemption of a portion of your shares on a
monthly or quarterly basis. To qualify you must own shares of the fund with a
value of at least $10,000 ($5,000 for retirement plan accounts) and each
automatic redemption must be at least $50. If your shares are subject to a
deferred sales charge, the sales charge will be waived if your automatic
payments do not exceed 1% per month of the value of your shares subject to a
deferred sales charge.

The following conditions apply:

/ / Your shares must not be represented by certificates
/ / All dividends and distributions must be reinvested

FOR MORE INFORMATION, CONTACT YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR
DEALER REPRESENTATIVE OR CONSULT THE SAI.

22 CONVERTIBLE FUND
<PAGE>
OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
- --------------------------------------------------------------------------------

When you buy, exchange or redeem shares, your request must be in good order.
This means you have provided the following information, without which your
request will not be processed:

/ / Name of the fund
/ / Account number
/ / Class of shares being bought, exchanged or redeemed M Dollar amount or
number of shares being bought, exchanged or redeemed
/ / Signature of each owner exactly as the account is registered

The transfer agent will try to confirm that any telephone exchange or redemption
request is genuine by recording calls, asking the caller to provide a personal
identification number for the account, sending you a written confirmation or
requiring other confirmation procedures from time to time.

SIGNATURE GUARANTEES To be in good order, your redemption request must include a
signature guarantee if you:

/ / Are redeeming over $10,000 of shares
/ / Are sending signed share certificates or stock powers to the transfer agent
/ / Instruct the transfer agent to mail the check to an address different from
the one on your account
/ / Changed your account registration
/ / Want the check paid to someone other than the account owner(s)
/ / Are transferring the redemption proceeds to an account with a different
registration

You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.

The fund has the right to:

/ / Suspend the offering of shares
/ / Waive or change minimum and additional investment amounts
/ / Reject any purchase or exchange order
/ / Change, revoke or suspend the exchange privilege
/ / Suspend telephone transactions

SMITH BARNEY MUTUAL FUNDS 23
<PAGE>
/ / Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the
Securities and Exchange Commission
/ / Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities

SMALL ACCOUNT BALANCES If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.

EXCESSIVE EXCHANGE TRANSACTIONS The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other
shareholders. If so, the fund may limit additional purchases and/ or exchanges
by the shareholder.

SHARE CERTIFICATES The fund does not issue share certificates unless a written
request signed by all registered owners is made to the transfer agent. If you
hold share certificates it will take longer to exchange or redeem shares.

24 CONVERTIBLE FUND
<PAGE>
SMITH BARNEY 401(K) AND EXECCHOICE-TM- PROGRAMS
- --------------------------------------------------------------------------------

You may be eligible to participate in the Smith Barney 401(k) program or the
Smith Barney ExecChoice-TM- program. The fund offers Class A, Class L and, in
limited circumstances, Class O shares to participating plans as investment
alternatives under the programs. You can meet minimum investment and exchange
amounts by combining the plan's investments in any of the Smith Barney mutual
funds.

There are no sales charges when you buy or sell shares and the class of shares
you may purchase depends on the amount of your initial investment. Once a class
of shares is chosen, all additional purchases must be of the same class.

/ / Class A shares may be purchased by plans investing at least $1 million.
/ / Class L shares may be purchased by plans investing less than $1 million.
Class O shares may be purchased by plans investing less than $1 million if
the plan opened its account on or before June 12, 1998. Class L and Class O
shares are eligible to exchange into Class A shares not later than 8 years
after the plan joined the program. They are eligible for exchange in the
following circumstances:

If the account was opened on or after June 21, 1996 and a total of $1
million is invested in Smith Barney Funds Class L and O shares (other than
money market funds), all Class L and O shares are eligible for exchange
after the plan is in the program 5 years.

If the account was opened before June 21, 1996 and a total of$500,000
is invested in Smith Barney Funds Class L and O shares (other than money
market funds)on December 31 in any year, all Class L and O shares are
eligible for exchange on or about March 31 of the following year.

FOR MORE INFORMATION, CALL YOUR SALOMON SMITH BARNEY FINANCIAL CONSULTANT OR THE
TRANSFER AGENT, OR CONSULT THE SAI.

SMITH BARNEY MUTUAL FUNDS 25
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------

DIVIDENDS The fund generally pays dividends, if any, monthly, and makes capital
gain distributions, if any, once a year, typically in December. The fund may pay
additional distributions and dividends at other times if necessary for the fund
to avoid a federal tax. Capital gain distributions and dividends are reinvested
in additional fund shares of the same class you hold. The fund expects
distributions to be from both income and gain. You do not pay a sales charge on
reinvested distributions or dividends. Alternatively, you can instruct your
Salomon Smith Barney Financial Consultant, dealer representative or the transfer
agent to have your distributions and/ or dividends paid in cash. You can change
your choice at any time to be effective as of the next distribution or dividend,
except that any change given to the transfer agent less than five days before
the payment date will not be effective until the next distribution or dividend
is paid.

TAXES In general, redeeming shares, exchanging shares and receiving
distributions (whether in cash or additional shares) are all taxable events.

<TABLE>
<CAPTION>
Transaction Federal tax status
<S> <C>
- ------------------------------------------------------------------
Redemption or exchange of Usually capital gain or loss;
shares long-term only if shares owned
more than one year
- ------------------------------------------------------------------
Long-term capital gain Long-term capital gain
distributions
- ------------------------------------------------------------------
Short-term capital gain Ordinary income
distributions
- ------------------------------------------------------------------
Dividends Ordinary income
- ------------------------------------------------------------------
</TABLE>

Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when the fund is about to declare a capital gain distribution or a
dividend, because it will be taxable to you even though it may actually be a
return of a portion of your investment.

After the end of each year, the fund will provide you with information about the
distributions and dividends you received and any redemptions of shares during
the previous year. If you do not provide the fund with your correct taxpayer
identification number and any required certifications, you may be subject to
back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special tax
rules may apply, you should consult your tax adviser about your investment in
the fund.

26 CONVERTIBLE FUND
<PAGE>
SHARE PRICE
- --------------------------------------------------------------------------------

You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its
liabilities. Net asset value is calculated separately for each class of shares.
The fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This
calculation is done when regular trading closes on the Exchange (normally
4:00 p.m., Eastern time).

The fund generally values its fund securities based on market prices or
quotations. The fund's currency conversions are done when the London stock
exchange closes, which is 12 noon Eastern time. When reliable market prices or
quotations are not readily available,
or when the value of a security has been materially affected by events occurring
after a foreign exchange closes, the fund may price those securities at fair
value. Fair value is determined in accordance with procedures approved by the
fund's board. A fund that uses fair value to price securities may value those
securities higher or lower than another fund using market quotations to price
the same securities.

International markets may be open on days when U.S. markets are closed and the
value of foreign securities owned by the fund could change on days when you
cannot buy or redeem shares.

In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the Exchange closes
early, you must place your order prior to the actual closing time. Otherwise,
you will receive the next business day's price.

Salomon Smith Barney or members of the selling group must transmit all orders to
buy, exchange or redeem shares to the fund's agent before the agent's close of
business.

SMITH BARNEY MUTUAL FUNDS 27
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The financial highlights tables are intended to help you understand the
performance of each class for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by KPMG LLP, independent
accountants, whose report, along with the fund's financial statements, is
included in the annual report (available upon request).

<TABLE>
<CAPTION>
For a Class A Share of beneficial interest outstanding
throughout each year ended July 31:
- ----------------------------------------------------------------------------------------
1999(1) 1998 1997 1996(1) 1995
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Net asset value,
beginning of year $ 16.90 $ 18.61 $ 15.66 $ 15.27 $ 14.56
- ----------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.69 0.73 0.78 0.74 0.74
Net realized and unrealized
gain/(loss) (1.24) (0.39) 3.28 0.38 0.70
- ----------------------------------------------------------------------------------------
Total income (loss) from
operations (0.55) 0.34 4.06 1.12 1.44
- ----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.66) (0.79) (0.75) (0.73) (0.73)
Net realized gain (0.44) (1.26) (0.36) -- --
- ----------------------------------------------------------------------------------------
Total distributions (1.10) (2.05) (1.11) (0.73) (0.73)
- ----------------------------------------------------------------------------------------
Net asset value, end of year $ 15.25 $ 16.90 $ 18.61 $ 15.66 $ 15.27
- ----------------------------------------------------------------------------------------
Total return (3.11)% 1.97% 26.94% 7.41% 10.35%
- ----------------------------------------------------------------------------------------
Net assets, end of year
(000)'s $26,141 $35,780 $38,803 $34,888 $35,238
- ----------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 1.29% 1.25% 1.27% 1.40% 1.40%
Net investment income 4.45 4.09 4.61 4.68 5.13
- ----------------------------------------------------------------------------------------
Portfolio turnover rate 27% 49% 57% 59% 48%
- ----------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<C> <S>
(1) PER SHARE AMOUNTS CALCULATED USING THE MONTHLY AVERAGE
SHARES METHOD.
</TABLE>

28 CONVERTIBLE FUND
<PAGE>

<TABLE>
<CAPTION>
For a Class B Share of beneficial interest outstanding
throughout each year ended July 31:
- ----------------------------------------------------------------------------------------
1999(1) 1998 1997 1996(1) 1995
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Net asset value,
beginning of year $ 16.89 $ 18.60 $ 15.66 $ 15.27 $ 14.56
- ----------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.61 0.64 0.69 0.66 0.67
Net realized and unrealized
gain/(loss) (1.24) (0.38) 3.28 0.39 0.70
- ----------------------------------------------------------------------------------------
Total income (loss) from
operations (0.63) 0.26 3.97 1.05 1.37
- ----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.60) (0.71) (0.67) (0.66) (0.66)
Net realized gain (0.44) (1.26) (0.36) -- --
- ----------------------------------------------------------------------------------------
Total distributions (1.04) (1.97) (1.03) (0.66) (0.66)
- ----------------------------------------------------------------------------------------
Net asset value, end of year $ 15.22 $ 16.89 $ 18.60 $ 15.66 $ 15.27
- ----------------------------------------------------------------------------------------
Total return (3.61)% 1.51% 26.29% 6.91% 9.80%
- ----------------------------------------------------------------------------------------
Net assets, end of year
(000)'s $21,559 $35,570 $42,927 $42,420 $45,524
- ----------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 1.76% 1.74% 1.77% 1.90% 1.90%
Net investment income 3.98 3.60 4.12 4.18 4.63
- ----------------------------------------------------------------------------------------
Portfolio turnover rate 27% 49% 57% 59% 48%
- ----------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<C> <S>
(1) PER SHARE AMOUNTS CALCULATED USING THE MONTHLY AVERAGE
SHARES METHOD.
</TABLE>

SMITH BARNEY MUTUAL FUNDS 29
<PAGE>

<TABLE>
<CAPTION>
For a Class L Share of beneficial interest outstanding
throughout each year ended July 31:
- ----------------------------------------------------------------------------------
1999(1) 1998(2)
<S> <C> <C>
- ----------------------------------------------------------------------------------
Net asset value,
beginning of year $16.90 $17.14
- ----------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.53 0.05
Net realized and unrealized loss (1.24) (0.17)
- ----------------------------------------------------------------------------------
Total loss from operations (0.71) (0.12)
- ----------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.57) (0.12)
Net realized gain (0.44) --
- ----------------------------------------------------------------------------------
Total distributions (1.01) (0.12)
- ----------------------------------------------------------------------------------
Net asset value, end of year $15.18 $16.90
- ----------------------------------------------------------------------------------
Total return (4.08)% (0.74)(3)
- ----------------------------------------------------------------------------------
Net assets, end of year (000)'s $ 540 $ 210
- ----------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 2.30% 1.98%(4)
Net investment income 3.39 2.51(4)
- ----------------------------------------------------------------------------------
Portfolio turnover rate 27% 49%
- ----------------------------------------------------------------------------------
</TABLE>

<TABLE>
<C> <S>
(1) PER SHARE AMOUNTS HAVE BEEN CALCULATED USING THE MONTHLY
AVERAGE SHARES METHOD.
(2) FOR THE PERIOD FROM JUNE 15, 1998 (INCEPTION DATE) TO
JULY 31, 1998.
(3) NOT ANNUALIZED.
(4) ANNUALIZED.
</TABLE>

30 CONVERTIBLE FUND
<PAGE>

<TABLE>
<CAPTION>
For a Class O Share of beneficial interest outstanding
throughout each year ended July 31:
- -----------------------------------------------------------------------------------------
1999(1) 1998(2) 1997 1996(1) 1995(3)(4)
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Net asset value,
beginning of year $16.87 $18.58 $15.64 $15.27 $14.09
- -----------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.61 0.63 0.67 0.67 0.50
Net realized and
unrealized gain/(loss) (1.25) (0.37) 3.31 0.37 1.17
- -----------------------------------------------------------------------------------------
Total income (loss) from
operations (0.64) 0.26 3.98 1.04 1.67
- -----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.60) (0.71) (0.68) (0.67) (0.49)
Net realized gain (0.44) (1.26) (0.36) -- --
- -----------------------------------------------------------------------------------------
Total distributions (1.04) (1.97) (1.04) (0.67) (0.49)
- -----------------------------------------------------------------------------------------
Net assets value, end of
year $15.19 $16.87 $18.58 $15.64 $15.27
- -----------------------------------------------------------------------------------------
Total return (3.66)% 1.53% 26.37% 6.82% 12.17%(5)
- -----------------------------------------------------------------------------------------
Net assets, end of year
(000)'s $ 572 $1,557 $1,252 $ 641 $ 83
- -----------------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.78% 1.70% 1.74% 1.86% 1.87%(6)
Net investment income 4.00 3.63 4.14 4.17 4.77(6)
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 27% 49% 57% 59% 48%
- -----------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<C> <S>
(1) PER SHARE AMOUNTS CALCULATED USING THE MONTHLY AVERAGE
SHARES METHOD.
(2) ON JUNE 12, 1998, CLASS C SHARES WERE RENAMED CLASS O
SHARES.
(3) ON NOVEMBER 7, 1994, THE FORMER CLASS D SHARES WERE RENAMED
CLASS C SHARES.
(4) FOR THE PERIOD FROM NOVEMBER 7, 1994 (INCEPTION DATE) TO
JULY 31, 1995.
(5) NOT ANNUALIZED.
(6) ANNUALIZED.
</TABLE>

SMITH BARNEY MUTUAL FUNDS 31
<PAGE>

<TABLE>
<CAPTION>
For a Class Y Share of beneficial interest outstanding
throughout each year ended July 31:
- --------------------------------------------------------------------------------------
1999(1) 1998 1997 1996(1)(2)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
Net asset value,
beginning of year $ 16.98 $ 18.66 $ 15.68 $ 16.15
- --------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.76 0.77 0.83 0.38
Net realized and unrealized
gain/(loss) (1.25) (0.35) 3.31 (0.46)
- --------------------------------------------------------------------------------------
Total income (loss) from operations (0.49) 0.42 4.14 (0.08)
- --------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.71) (0.84) (0.80) (0.39)
Capital (0.44) (1.26) (0.36) --
- --------------------------------------------------------------------------------------
Total distributions (1.15) (2.10) (1.16) (0.39)
- --------------------------------------------------------------------------------------
Net assets value, end of year $ 15.34 $ 16.98 $ 18.66 $ 15.68
- --------------------------------------------------------------------------------------
Total return (2.68)% 2.42% 27.44% (0.56)%(3)
- --------------------------------------------------------------------------------------
Net assets, end of year (000)'s $95,707 $72,870 $29,080 $ 9,189
- --------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 0.83% 0.83% 0.85% 1.00%(4)
Net investment income 4.87 4.49 5.04 4.98(4)
- --------------------------------------------------------------------------------------
Portfolio turnover rate 27% 49% 57% 59%
- --------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<C> <S>
(1) PER SHARE AMOUNTS CALCULATED USING THE MONTHLY AVERAGE
SHARES METHOD.
(2) FOR THE PERIOD FROM FEBRUARY 7, 1996 (INCEPTION DATE) TO
JULY 31, 1996.
(3) NOT ANNUALIZED.
(4) ANNUALIZED.
</TABLE>

32 CONVERTIBLE FUND
<PAGE>
(This page intentionally left blank)

SMITH BARNEY MUTUAL FUNDS 33
<PAGE>

[LOGO]

CONVERTIBLE FUND

An investment portfolio of Smith Barney Income Funds

SHAREHOLDER REPORTS Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.

The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.

Statement of additional information
The statement of additional information provides more detailed information about
the fund and is incorporated by reference into (is legally part of) this
prospectus.

You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.

Visit our web site. Our web site is located at www.smithbarney.com

Information about the fund(including the SAI) can be reviewed and copied at the
Commission's Public Reference Room in Washington D.C. In addition, information
on the operation of the Public Reference Room may be obtained by calling the
Commission at 1-202-942-8090. Reports and other information about the fund is
available on the EDGAR Database on the Commission's Internet site at
http://www.sec.gov. Copies of this information may be obtained for
a duplicationg fee by electronic request at the following E-mail
address:[email protected], or by writing the Commission's Public Reference
Section, Washington D.C. 20549-0102.

If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.

SALOMON SMITH BARNEY IS A SERVICE MARK OF SALOMON SMITH BARNEY INC.

(Investment Company Act
file no. 811-04254)
[FD1210 11/99]

Smith Barney
INCOME FUNDS

388 Greenwich Street
New York, New York 10013
(800) 451-2010

Statement of Additional Information
November 28, 1999

This statement of additional information expands upon and
supplements the information contained in the current prospectuses
of Smith Barney Income Funds (the "trust"), relating to seven
investment funds offered by the trust: Smith Barney Balanced Fund
(the "Balanced Fund") (formerly Smith Barney Utilities Fund), Smith
Barney Convertible Fund (the "Convertible Fund"), Smith Barney
Diversified Strategic Income Fund (the "Diversified Strategic
Income Fund"), Smith Barney Exchange Reserve Fund (the "Exchange
Reserve Fund"), Smith Barney High Income Fund (the "High Income
Fund"), Smith Barney Municipal High Income Fund (the "Municipal
High Income Fund") and Smith Barney Total Return Bond Fund ("Total
Return Bond Fund"), each dated November 28, 1999, as amended or
supplemented from time to time, and should be read in conjunction
with these prospectuses. The funds' prospectuses may be obtained
from any Salomon Smith Barney Financial Consultant or by writing or
calling the trust at the address or telephone number set forth
above. This statement of additional information, although not in
itself a prospectus, is incorporated by reference into the funds'
prospectuses in its entirety.

CONTENTS

For ease of reference, the same section headings are used in both
the funds' prospectuses and this statement of additional
information, except where shown below:

Management of the Trust and the Funds 2
Investment Objectives and Policies. 7
Risk Factors 35
Purchase of Shares 46
Redemption of Shares 54
Exchange Privilege 57
Distributor.. 59
Valuation of Shares 63
Performance Data (See in the prospectuses "Performance" or "Yield
Information") 63
Taxes (See in the prospectuses "Dividends, Distributions and
Taxes") 68
Additional Information 72
Voting Rights 73
Financial Statements 80
Appendix A-1

MANAGEMENT OF THE TRUST AND THE FUNDS

The executive officers of the trust are employees of certain of the
organizations that provide services to the trust. These
organizations are the following:

Name
Service

CFBDS, Inc. ("CFBDS")
Distributor

SSB Citi Fund Management LLC
(formerly known as SSBC Fund
Management Inc.) ("SSB Citi" or
the "manager")

Investment adviser and administrator
to the funds

Smith Barney Global Capital
Management Inc. ("Global Capital
Management")

Sub-investment adviser to Diversified
Strategic Income Fund

Salomon Brothers Asset Management
("SaBAM")
Sub-investment adviser to Convertible
Fund

PNC Bank, National Association
("PNC Bank")
Custodian to Convertible Fund,
Exchange Reserve Fund, High Income
Fund, Municipal High Income Fund,
Total Return Bond Fund and Balanced
Fund

Chase Manhattan Bank ("Chase")
Custodian to Diversified Strategic
Income Fund

First Data Investors Services
Group, Inc. ("First Data")
Transfer Agent

These organizations and the functions they perform for the trust
are discussed in the funds' prospectuses and in this statement of
additional information.

Trustees and Executive Officers of the Trust

The trustees and executive officers of the trust, together with
information as to their principal business occupations during the
past five years, are shown below. The executive officers of the
trust are employees of organizations that provide services to the
funds. Each trustee who is an "interested person" of the trust, as
defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), is indicated by an asterisk.

Lee Abraham, Trustee (Age 72). Retired; Director or trustee of 11
investment companies associated with Citigroup; formerly Chairman
and Chief Executive Officer of Associated Merchandising
Corporation, a major retail merchandising and sourcing
organization. His address is 106 Barnes Road, Stamford, Connecticut
06902.

Allan J. Bloostein, Trustee (Age 69). Consultant; Director or
trustee of 18 investment companies associated with Citigroup;
formerly Vice Chairman of the Board of and Consultant to The May
Department Stores Company; Director of Crystal Brands, Inc.,
Melville Corp. and R.G. Barry Corp. His address is 27 West 67th
Street, New York, New York 10023.

Richard E. Hanson, Jr., Trustee (Age 58). Head of School, The New
Atlanta Jewish Community High School, Atlanta Georgia; Director or
trustee of 11 investment companies associated with Citigroup;
prior to July 1, 1994, Headmaster, Lawrence Country Day School-
Woodmere Academy, Woodmere, New York; prior to July 1, 1990,
Headmaster of Woodmere Academy. His address is 58 Ivy Chase,
Atlanta, GA 30342.

Jane Dasher, Director (Age 50). Investment Officer of Korsant
Partners, a family investment company; Director or trustee of 11
investment companies associated with Citigroup. Prior to 1997, an
Independent Financial Consultant; From 1975 to 1987 held various
positions with Philip Morris Companies, Inc. including Director of
Financial Services, Treasurers Department; Her address is 283
Greenwich Avenue, Greenwich Connecticut 06830.

Donald R. Foley, Director (Age 77). Retired; Director or trustee
of 12 investment companies associated with Citigroup. Formerly
Vice President of Edwin Bird Wilson, Incorporated (an advertising
agency). His address is 3668 Freshwater Drive, Jupiter, Florida
33477.

Paul Hardin, Director (Age 68). Professor of Law at University of
North Carolina at Chapel Hill; Director of The Summit
Bancorporation; Director or trustee of 14 investment companies
associated with Citigroup. Formerly, Chancellor of the University
of North Carolina at Chapel Hill. His address is 12083 Morehead,
Chapel Hill, North Carolina 27514.

Roderick C. Rasmussen, Director (Age 73). Investment Counselor;
Director or trustee of 12 investment companies associated with
Citigroup.Formerly Vice President of Dresdner and Company Inc.
(investment counselors). ; His address is 9 Cadence Court,
Morristown, New Jersey 07960;

John P. Toolan, Director (Age 69). Retired; Director or trustee of
12 investment companies associated with Citigroup. Trustee of John
Hancock Funds; Formerly, Director and Chairman of Salomon Smith
Barney Trust Company, Director of Smith Barney Holdings Inc. and
various subsidiaries, Senior Executive Vice President, Director
and Member of the Executive Committee of Smith Barney. His address
is 13 Chadwell Place, Morristown, New Jersey 07960.

*Heath B. McLendon, Chairman of the Board and Investment Officer
(Age 66). Managing Director of Salomon Smith Barney Inc. ("Salomon
Smith Barney") and Chairman of the Board of Smith Barney Strategy
Advisers Inc.; and President of SSB Citi and Travelers Investment
Adviser, Inc. ("TIA"). Mr. McLendon is Chairman or Co-Chairman of
the Board and Director of 64 investment companies associated with
Citigroup Inc. ("Citigroup") His address is 388 Greenwich Street,
New York, New York 10013.

John C. Bianchi, Vice President and Investment Officer (Age 44).
Managing Director of Salomon Smith Barney; Investment Officer of
six Smith Barney Mutual Funds. His address is 388 Greenwich Street,
New York, New York 10013.

James E. Conroy, Vice President and Investment Officer (Age 48).
Managing Director of Salomon Smith Barney. Investment Officer of
four Smith Barney Mutual Funds. His address is 388 Greenwich
Street, New York, New York 10013.

Joseph P. Deane, Vice President and Investment Officer (Age 52).
Managing Director of Salomon Smith Barney; Investment Officer of
nine Smith Barney Mutual Funds. His address is 388 Greenwich
Street, New York, New York 10013.

Simon R. Hildreth, Vice President and Investment Officer (Age 47).
Managing Director of Salomon Smith Barney, member of the
Investment Policy of Smith Barney Global Capital Management Inc.;
Mr. Hildreth is Vice President and Investment Officer of three
Smith Barney Mutual Funds. Prior to 1994, a Director of Mercury
Asset Management Ltd., a fund manager located in the United
Kingdom. His address is 10 Piccadilly, London, WIV 9LA, UK.

Charles P. Graves, III, Vice President and Investment Officer (Age
37). Managing Director of Salomon Smith Barney. His address is 388
Greenwich Street, New York, New York 10013.

Daniel J. Berkery, CFA, Vice President and Investment Officer (Age
32). A Director of SaBAM. His address is 7 World Trade Center, New
York, New York 10048.

Ross S. Margolies Vice President and Investment Officer (Age 40)
A Managing Director of SaBAM; Senior Portfolio Manager for all
SaBAM U.S. equity, convertibles and arbitrage portfolios;
Portfolio Manager of 25 other investment companies associated with
Citigroup. His address is 7 World Trade Center, New York, New York
10048.

Phyllis M. Zahorodny, Vice President and Investment Officer (Age
41). Managing Director of Salomon Smith Barney. Investment Officer
of four Smith Barney Mutual Funds. Her address is 388 Greenwich
Street, New York, New York 10013.

Lewis E. Daidone, Senior Vice President and Treasurer (Age 42).
Managing Director of Salomon Smith Barney; Director and Senior
Vice President of SSB Citi and TIA. Mr. Daidone serves as Senior
Vice President and Treasurer or Executive Vice President and
Treasurer of 59 investment companies associated with Citigroup.
His address is 388 Greenwich Street, New York, New York 10013.

Paul Brook, Controller (Age 45). Director of Salomon Smith
Barney; Mr. Brook serves as Controller or Assistant Secretary of
43 investment companies associated with Citigroup. from 1997-1998
Managing Director of AMT Capital Services Inc.; prior to 1997
Partner with Ernst & Young LLP.

Christina T. Sydor, Secretary (Age 48). Managing Director of
Salomon Smith Barney; General Counsel and Secretary of SSB Citi and
TIA. Ms. Sydor serves as Secretary or Executive Vice President and
General Counsel of 59 investment companies associated with
Citigroup. Her address is 388 Greenwich Street, New York, New York
10013.

Each trustee also serves as a director, trustee and/or general
partner of certain other Smith Barney Mutual Funds. Global Capital
Management and SSB Citi are "affiliated persons" of the trust as
defined in the 1940 Act by virtue of their positions as investment
advisers to the funds. As of November 12, 1999, the trustees and
officers of the funds, as a group, owned less than 1% of the
outstanding shares of beneficial interest of each fund.

No officer, director or employee of Salomon Smith Barney or any
Salomon Smith Barney parent or subsidiary receives any compensation
from the trust for serving as an officer or trustee of the trust.
The trust pays each trustee who is not an officer, director or
employee of Salomon Smith Barney or any of its affiliates a fee of
$17,000 per year plus $3,250 per meeting attended, and reimburses
them for travel and out-of-pocket expenses. For the calendar year
ended December 31, 1998, such travel and out-of-pocket expenses
totaled $16,595.

For the fiscal year ended July 31, 1999 and the calendar year ended
December 31, 1998, the trustees of the trust were paid the
following compensation:

Trustee

Aggregate
Compensation
from the Funds
for the Fiscal
Year ended
July 31, 1999

Total
Pension or
Retirement
Benefits
Accrued
from the
Funds

Aggregate
Compensation
from the Funds
and the Fund
Complex for the
Year Ended
December 31,
1998

Number of
Funds for
Which Person
Served
Within Fund
Complex

Lee Abraham
$37,383
$0
$47,750
11

Allan J.
Bloostein
33,633
0
90,500
18

Richard E.
Hanson, Jr.
35,783
0
47,950
11

Jane Dasher+
16,433
0
N/A
11

Donald R.
Foley**+
12,000
0
57,100
12

Paul Hardin+
10,600
0
71,400
14

Heath B.
McLendon*
0
0
0
64

Roderick
C.Rasmussen+
10,600
0
57,100
12

John P.
Toolan**+
10,600
0
54,700
12
* Designates a director who is an "interested person" of the
fund.

** Pursuant to the fund's deferred compensation plan, the indicated
directors have elected to defer the following amounts of their
compensation from the fund: Donald R Foley: $4,200 and John P.
Toolan: $10,600, and the following amounts of their total
compensation from the Fund Complex: Donald R. Foley: $21,000 and
John P. Toolan: $54,700.

+ Elected by the fund's board of directors on May 14, 1999.

Note: Upon attainment of age 72 the fund's current directors may
elect to change to emeritus status. Any directors elected or
appointed to the Board of Directors in the future will be
required to change to emeritus status upon attainment of age
80. Directors Emeritus are entitled to serve in emeritus
status for a maximum of 10 years during which time they are
paid 50% of the annual retainer fee and meeting fees otherwise
applicable to the fund's directors, together with reasonable
out-of-pocket expenses for each meeting attended. During the
fund's last fiscal year, aggregate compensation from the fund
to Emeritus Directors totaled $0.

Investment Adviser, Sub-Investment Advisers and Administrator

SSB Citi serves as investment adviser to one or more funds pursuant
to a separate written agreement with the relevant fund (an
"advisory agreement"). SSB Citi is a wholly owned subsidiary of
Salomon Salomon Smith Barney Holdings Inc. ("Holdings"). Holdings
is a wholly owned subsidiary of Citigroup. The advisory agreements
were most recently approved by the board of trustees, including a
majority of the trustees who are not "interested persons" of the
trust or the Advisers ("Independent Trustees"), on June 16, 1999.
SSB Citi also serves as administrator (the "Administrator") to each
fund pursuant to a separate written agreement dated May 4, 1994
(the "administration agreement") which was most recently approved
by the board on June 16, 1999. Global Capital Management serves as
a sub-investment adviser to Diversified Strategic Income Fund,
pursuant to a written agreement dated March 21, 1994, respectively.
SaBAM serves as sub-investment adviser to Convertible Fund pursuant
to a written agreement dated November 22, 1999. The agreements
between each, Global Capital Management and SaBAM, and SSB Citi
were most recently approved by the fund's board of trustees,
including a majority of the Independent Trustees, on June 16, 1999
and September 17, 1999, respectively.

Certain of the services provided to the trust by SSB Citi and the
sub-investment advisers are described in the prospectuses under
"Management of the Trust and the Fund." SSB Citi, each sub-
investment adviser, and the Administrator pays the salaries of all
officers and employees who are employed by both it and the trust,
and maintains office facilities for the trust. In addition to those
services, SSB Citi furnishes the trust with statistical and
research data, clerical help and accounting, data processing,
bookkeeping, internal auditing and legal services and certain other
services required by the trust, prepares reports to the funds'
shareholders and prepares tax returns, reports to and filings with
the Securities and Exchange Commission (the "SEC") and state Blue
Sky authorities. SSB Citi and the sub-investment advisers bear all
expenses in connection with the performance of their services. SSB
Citi renders investment advice to investment companies that had
aggregate assets under management as of October 31, 1999 in excess
of $114 billion.

As compensation for investment advisory services, each fund pays
SSB Citi a fee computed daily and paid monthly at the following
annual rates:

Fund

Investment Advisory

Fee As a Percentage
of Average Net
Assets

Convertible Fund
0.50%*
Diversified Strategic Income Fund
0.45%**
Exchange Reserve Fund
0.30%
High Income Fund
0.50%
Municipal High Income Fund
0.40%
Total Return Bond Fund
0.65%
Balanced Fund
0.45%
* As compensation for sub-advisory services, the SSB
Citi pays SaBAM a fee in an amount agreed to from time to
time by the parties but not to exceed the fee paid to SSB
Citi under its current advisory agreement.

** From SSB Citi's fee, Global Capital Management
receives 0.10%.

For the periods below, the funds paid investment advisory fees to
SSB Citi as follows:

For the Fiscal Year Ended July 31:
Fund
1997
1998
1999
Convertible Fund
$
489,663
$
665,663
$727,464
Diversified Strategic
Income Fund
12,546,98
0
13,233,25
8
13,056,066
Exchange Reserve Fund
442,557
326,309
423,119
High Income Fund
5,646,405
7,363,535
8,208,808
Municipal High Income
Fund
3,395,338
3,103,442
2,832,068
Total Return Bond Fund
(1)
N/A
378,792
1,169,060
Balanced Fund
6,431,624
5,097,517
4,222,260

____________________________
(1) Total Return Bond Fund waived $155,458 and $124,974 in
management fees for the fiscal year ended July 31, 1999 and the
fiscal period ended July 31, 1998, respectively. The
administrative fees have been included in the total for
management fees.

As compensation for administrative services, each fund pays the
Administrator a fee computed daily and paid monthly at the annual
rate of 0.20% of the fund's average daily net assets. For the
periods shown below, the funds paid administrative fees to SSB
Citi:

For the Fiscal Year Ended July 31:
Fund
1997
1998
1999
Convertible Fund
$195,865
$266,265
$290,986
Diversified Strategic
Income Fund
5,576,436
5,881,448
5,802,695
Exchange Reserve Fund
295,038
217,539
282,079
High Income Fund
2,258,562
2,945,414
3,283,523
Municipal High Income
Fund
1,697,669
1,551,721
1,416,034
Total Return Bond Fund*
N/A
N/A
N/A
Balanced Fund
2,858,500
2,265,563
1,876,560

___________________________
*The administrative fees have been included in the total for
management fees.

For the fiscal years ended July 31, 1997, 1998 and 1999,
Diversified Strategic Income Fund paid Global Capital Management
sub-investment advisory fees of $2,788,218, $2,940,724 and
$2,908,014, respectively. Prior to November 22, 1999, Convertible
Fund did not utilize a sub-investment adviser.

The trust bears expenses incurred in its operations, including:
taxes, interest, brokerage fees and commissions, if any; fees of
trustees who are not officers, directors, shareholders or employees
of Salomon Smith Barney or SSB Citi; SEC fees and state Blue Sky
qualification fees; charges of custodians; transfer and dividend
disbursing agent fees; certain insurance premiums; outside auditing
and legal expenses; costs of maintaining corporate existence; costs
of investor services (including allocated telephone and personnel
expenses); costs of preparing and printing of prospectuses for
regulatory purposes and for distribution to existing shareholders;
costs of shareholders' reports and shareholder meetings; and
meetings of the officers or board of trustees of the trust.

Auditors

KPMG LLP, 757 Third Avenue, New York, New York 10017 has been
selected as the trust's independent auditor to examine and report
on the trust's financial statements and highlights for the fiscal
year ending July 31, 2000.

INVESTMENT OBJECTIVES AND POLICIES

The prospectuses discuss the investment objectives of the funds and
the policies to be employed to achieve those objectives. This
section contains supplemental information concerning the types of
securities and other instruments in which the funds may invest, the
investment policies and portfolio strategies that the funds may
utilize and certain risks attendant to such investments, policies
and strategies.

Balanced Fund

The fund is managed as a balanced fund and invests in equity and
debt securities. The fund will maintain a target asset allocation
of approximately 60% of its total assets in equity securities and
approximately 40% of its total assets in fixed-income securities.
The fund has the additional flexibility to invest a minimum of 50%
and a maximum of 70% of its total assets in equity securities and
a minimum of 30% and a maximum of 50% of its total assets in
fixed-income securities. The fund may also invest up to 25% of
its total assets in fixed-income securities rated less than
investment grade by a nationally recognized statistical rating
organization ("NRSRO") such as Moody's Investors Services, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P"). Such
securities are commonly referred to as "junk bonds." There are no
maturity restrictions on the fixed-income securities in which the
fund invests. Under normal market conditions the weighted average
portfolio maturity for the fixed-income portfolio will be in the 5
to 15 year range.

The fund may also invest up to 25% of its total assets in
fixed-income securities rated below investment grade by any NRSRO
such as Moody's and S&P. Such securities are commonly referred to
as "junk bonds." The fund may also hold, from time to time,
securities rated Caa by Moody's or CCC by S&P or, if unrated or
rated by other NRSROs, securities of comparable quality as
determined by SSB Citi. While this portion of the securities held
by the fund are expected to provide greater income and possibly,
opportunity for greater gain than investments in more highly rated
securities, they may be subject to greater risk of loss of income
and principal and are more speculative in nature.

Convertible Fund

The fund invests primarily in convertible securities. These are
securities that may be converted to common stock or other equity
interests in the issuer at a predetermined price or rate. The fund
also may invest up to 35% of its assets in "synthetic convertible
securities," equity securities and debt securities that are not
convertible. Synthetic convertible securities are created by
combining non-convertible preferred stocks or debt securities with
warrants or call options. These synthetic instruments are designed
to perform like convertible securities of a particular company.

The fund may invest up to 25% of its assets in foreign securities.
The fund may invest in securities rated below investment grade and
unrated securities of comparable quality. These securities are
commonly known as "junk bonds" because they are rated in the lower
rating categories of nationally and internationally recognized
rating agencies or if unrated, of similar credit quality.

For temporary defensive purposes when deemed appropriate by the
fund's investment adviser in light of current market conditions,
may invest in these securities without limitation. In seeking to
achieve its investment objective, the fund may write covered call
options, lend portfolio securities and enter into short sales
"against the box." The fund may utilize up to 10% of its assets
to purchase put options on securities for hedging purposes and may
invest up to 10% of its assets in foreign securities. The fund may
utilize up to 50% of its assets as collateral for short sales
against the box.

Diversified Strategic Income Fund

At any given time, the fund may be entirely or only partially
invested in a particular type of fixed-income security. Under
normal conditions, at least 65% of the fund's assets will be
invested in fixed-income securities, which for this purpose will
include non-convertible preferred stocks. Up to 20% of the fund's
assets may be invested in common stock or other equity-related
securities, including convertible securities, preferred stock,
warrants and rights.

The fund may invest up to 35% of its assets in corporate fixed
income securities of domestic issuers and foreign issuers of
developed countries rated Ba or lower by Moody's or BB or lower by
S&P or an equivalent rating by any other NRSRO or in nonrated
securities deemed by SSB Citi or Global Capital Management to be
of comparable quality. The fund may invest in fixed income
securities rated as low as Caa by Moody's or CCC by S&P or an
equivalent rating by any other NRSRO.

Corporate fixed-income securities of foreign issuers in which the
fund may invest will include securities of companies, wherever
organized, that have their principal business activities and
interests outside the United States. Foreign government
securities in which the fund may invest consist of fixed-income
securities issued by foreign governments. In general, the fund
may invest in debt securities issued by foreign governments or any
of their political subdivisions that are considered stable by
Global Capital Management. Up to 5% of the fund's assets,
however, may be invested in foreign securities issued by countries
with developing economies.

The fund may invest in fixed-income securities issued by
supranational organizations, which are entities designated or
supported by a government or governmental entity to promote
economic development, and include, among others, the Asian
Development Bank, the European Coal and Steel Community, the
European Economic Community and the World Bank. These
organizations have no taxing authority and are dependent upon
their members for payments of interest and principal. Moreover,
the lending activities of supranational entities are limited to a
percentage of their total capital (including "callable capital"
contributed by members at an entity's call), reserves and net
income.

Up to 20% of the fund's assets may be invested in cash and money
market instruments at any time. The Fund will invest in
obligations of a foreign bank or foreign branch of a domestic bank
only if the manager determines that the obligations present
minimum credit risks. These obligations may be traded in the
United States or outside the United States, but will be
denominated in U.S. dollars.

Exchange Reserve Fund

U.S. Government Securities in which the fund may invest include:
direct obligations of the United States Treasury such as Treasury
Bills, Treasury Notes and Treasury Bonds; obligations which are
supported by the full faith and credit of the United States such
as Government National Mortgage Association pass-through
certificates; obligations which are supported by the right of the
issuer to borrow from the United States Treasury, such as
securities of Federal Home Loan Banks; and obligations which are
supported by the credit of the instrumentality, such as Federal
National Mortgage Association and Federal Home Loan Mortgage
Association bonds. Because the U. S. government is not obligated
by law to provide support for an instrumentality that it sponsors,
the fund will invest in obligations issued by such an
instrumentality only when the fund's investment adviser determines
that the credit risk with respect to the instrumentality does not
make its securities unsuitable for investment by the fund.

Certificates of Deposit, Time Deposits and Bankers' Acceptances in
which the fund may invest generally are limited to those
instruments issued by domestic and foreign banks, including
branches of such banks, savings and loan associations and other
banking institutions having total assets in excess of $1 billion.
Certificates of deposit ("CDs") are short-term negotiable
obligations of commercial banks; time deposits ("TDs") are
non-negotiable deposits maintained in banking institutions for
specified periods of time at stated interest rates; and bankers'
acceptances are time drafts drawn on commercial banks by borrowers
usually in connection with international transactions. The fund
may invest in U.S. dollar-denominated bank obligations, such as
CDs, bankers' acceptances and TDs, including instruments issued or
supported by the credit of domestic or foreign banks or savings
institutions having total assets at the time of purchase in excess
of $1 billion. The fund generally will invest at least 25% of its
assets in these securities. The fund will invest in an obligation
of a foreign bank or foreign branch of a domestic bank only if the
fund's investment adviser deems the obligation to present minimal
credit risks. Nevertheless, this kind of obligation entails risks
that are different from those of investments in domestic
obligations of domestic banks due to differences in political,
regulatory and economic systems and conditions. The fund will not
purchase TDs maturing in more than six months and will limit to no
more than 10% of its assets its investment in TDs maturing from
two business days through six months.

Commercial Paper in which the fund may invest is limited to debt
obligations of domestic and foreign issuers that at the time of
purchase are Eligible Securities (as defined below under "Fund
Quality and Diversification") that are (a) rated by at least one
NRSRO in the highest rating category for short-term debt
securities or (b) comparable unrated securities. The fund also
may invest in variable rate master demand notes, which are
unsecured demand notes typically purchased directly from large
corporate issuers providing for variable amounts of principal
indebtedness and periodic adjustments in the interest rate
according to the terms of the instrument. Demand notes normally
are not traded in a secondary market. However, the fund may
demand payment of principal and accrued interest in full at any
time without penalty. In addition, while demand notes generally
are not rated, their issuers must satisfy the same criteria as
those set forth above for issuers of commercial paper. SSB Citi
will consider the earning power, cash flow and other liquidity
ratios of issuers of demand notes and continually will monitor
their financial ability to meet payment on demand.

The fund invests only in securities which are purchased with and
payable in U.S. dollars and which have (or, pursuant to
regulations adopted by the SEC, will be deemed to have) remaining
maturities of thirteen months or less at the date of purchase by
the fund. For this purpose, variable rate master demand notes (as
described above under "Commercial Paper"), which are payable on
demand or, under certain conditions, at specified periodic
intervals not exceeding thirteen months, in either case on not
more than 30 days' notice, win be deemed to have remaining
maturities of thirteen months or less. The fund maintains a
dollar-weighted average portfolio maturity of 90 days or less.
The fund follows these policies to maintain a constant net asset
value of $1.00 per share, although there is no assurance that it
can do so on a continuing basis.

The fund will limit its investments to securities that the board
of trustees determines present minimal credit risks and which are
"Eligible Securities" at the time of acquisition by the fund. The
term Eligible Securities includes securities rated by the
"Requisite NRSROs" in one of the two highest short-term rating
categories, securities of issuers that have received such ratings
with respect to other short-term debt securities and comparable
unrated securities. "Requisite NRSROs" means (a) any two NRSROs
that have issued a rating with respect to a security or class of
debt obligations of an issuer, or (b) one NRSRO, if only one NRSRO
has issued such a rating at the time that the fund acquires the
security. If the fund acquires securities that are unrated or
that have been rated by a single NRSRO, the acquisition must be
approved or ratified by the board of trustees. The NRSROs
currently designated as such by the SEC are S&P, Moody's, Thomson
BankWatch, Fitch IBCA, Inc. and Duff & Phelps Credit Rating Co. A
discussion of the ratings categories of the NRSROs is contained in
the Appendix to this Statement of Additional Information.

The fund generally may not invest more than 5% of its total assets
in the securities of any one issuer, except for U.S. government
securities. In addition, the fund may not invest more than 5% of
its total assets in Eligible Securities that have not received the
highest rating from the Requisite NRSROs and comparable unrated
securities ("Second Tier Securities") and may not invest more than
1% of its total assets in the Second Tier Securities of any one
issuer. The fund may invest more than 5% (but no more than 25%)
of the then-current value of the fund's total assets in the
securities of a single issuer for a period of up to three business
days, provided that (a) the securities are rated by the Requisite
NRSROs in the highest short-term rating category, are securities
of issuers that have received such rating with respect to other
short-term debt securities or are comparable unrated securities,
and (b) the fund does not make more than one such investment at
any one time.

The fund will concentrate its investments in the banking industry
except during temporary defensive periods. Up to 25% of the
assets of the fund may be invested at any time in the obligations
of issuers conducting their principal business activities in any
industry other than banking. The fund may not acquire more than
10% of the voting or any other class of securities of any one
issuer, except that U.S. government securities may be purchased
without regard to these limits.

High Income Fund

The fund will seek high current income by investing, under normal
circumstances, at least 65% of its assets in high-yielding
corporate bonds, debentures and notes denominated in U.S. dollars
or foreign currencies. Up to 40% of the fund's assets may be
invested in fixed-income obligations of foreign issuers, and up to
20% of its assets may be invested in common stock or other equity
or equity-related securities, including convertible securities,
preferred stock, warrants and rights. Securities purchased by the
fund generally will be rated in the lower rating categories, as
low as Caa by Moody's or D by S&P or an equivalent rating by any
NRSRO, or in unrated securities that SSB Citi deems of comparable
quality. However, the fund will not purchase securities rated
lower than B by both Moody's and S&P unless, immediately after
such purchase, no more than 10% of its total assets are invested
in such securities. The fund may hold securities with higher
ratings when the yield differential between low-rated and
higher-rated securities narrows and the risk of loss may be
reduced substantially with only a relatively small reduction in
yield.

The fund may also invest in zero coupon bonds and payment-in-kind
bonds. The fund also may invest in higher-rated securities when
SSB Citi believes that a more defensive investment strategy is
appropriate in light of market or economic conditions. The fund
also may lend its portfolio securities, purchase or sell
securities on a when-issued or delayed-delivery basis and write
covered call options on securities. In order to mitigate the
effects of uncertainty in future exchange rates, the fund may
engage in currency exchange transactions and purchase options on
foreign currencies. The fund also may hedge against the effects
of changes in the value of its investments by purchasing put and
call options on interest rate futures contracts.

Corporate securities in which the fund may invest include
corporate fixed-income securities of both domestic and foreign
issuers, such as bonds, debentures, notes, equipment lease
certificates, equipment trust certificates, and preferred stock.
The fund's investments in each of equipment leases or equipment
trust certificates will not exceed 5% of its assets.

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

Municipal High Income Fund

Under normal market conditions, the fund will invest at least 80%
of its net assets in (a) "Municipal Bonds," which generally are
intermediate- and long-term debt obligations issued by or on
behalf of states, territories and possessions of the United States
and the District of Columbia and their political subdivisions,
agencies and instrumentalities, or multistate agencies or
authorities and (b) municipal leases. Under normal market
conditions, the fund's assets will be invested primarily in
Municipal Bonds and municipal leases (collectively, "Municipal
Securities") rated A, Baa or Ba by Moody's, or A, BBB or BB by
S&P, or have an equivalent rating by any nationally recognized
statistical rating organization, or obligations determined by SSB
Citi to be equivalent, or in unrated Municipal Securities that are
deemed to be of comparable quality by SSB Citi. Up to 50% of the
fund's assets may be invested in Municipal Securities rated Ba or
below by Moody's or BB or below by S&P or, if unrated, judged by
SSB Citi, to be of comparable quality.

The fund may invest without limit in municipal leases, which
generally are participations in intermediate- and short-term debt
obligations issued by municipalities consisting of leases or
installment purchase contracts for property or equipment.
Municipal leases may take the form of a lease or an installment
purchase contract issued by state and local government authorities
to obtain funds to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, computer
equipment and other capital assets. Although lease obligations do
not constitute general obligations of the municipality for which
the municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to
make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. In
addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more
conventional bonds. Although "non-appropriation" lease
obligations are often secured by the underlying property,
disposition of the property in the event of foreclosure might
prove difficult. There is no limitation on the percentage of the
fund's assets that may be invested in municipal lease obligations.
In evaluating municipal lease obligations, SSB Citi will consider
such factors as it deems appropriate, which may include: (a)
whether the lease can be canceled; (b) the ability of the lease
obligee to direct the sale of the underlying assets; (c) the
general creditworthiness of the lease obligor, (d) the likelihood
that the municipality will discontinue appropriating funding for
the leased property in the event such property is no longer
considered essential by the municipality; (e) the legal recourse
of the lease obligee in the event of such a failure-to appropriate
funding; (f) whether the security is backed by a credit
enhancement such as insurance; and (g) any limitations which are
imposed on the lease obligor's ability to utilize substitute
property or services rather than those covered by the lease
obligation.

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

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

Total Return Bond Fund

At any given time, the fund may be entirely or partially invested
in a particular type of fixed-income security. Under normal
conditions, at least 65% of the fund's assets will be invested in
fixed-income securities. The "total return" sought by the fund
will consist of interest and dividends from underlying securities,
capital appreciation reflected in unrealized increases in value of
fund securities (realized by the shareholder only upon selling
shares), or realized from the purchase and sale of securities and
the use of futures and options. The change in market value of
fixed-income securities (and therefore their capital appreciation)
is largely a function of changes in the current level of interest
rates.

The fund may invest up to 10% of its assets in securities rated
below investment grade and unrated securities of comparable
quality. These securities are commonly known as "junk bonds"
because they are rated in the lower rating categories of
nationally and internationally recognized rating agencies or if
unrated, of similar credit quality. These securities are
considered speculative in that their issues may have diminished
capacity to pay principal and interest. These securities have a
higher risk of default, tend to be less liquid, and may be more
difficult to value.

Under normal market conditions, the fund may hold up to 20% of its
total assets in cash or money market instruments, including
taxable money market instruments.

Other Investment Policies

U.S. Government Securities (All funds). United States government
securities include debt obligations of varying maturities issued or
guaranteed by the United States government or its agencies or
instrumentalities ("U.S. government securities"). U.S. government
securities include not only direct obligations of the United States
Treasury, but also securities issued or guaranteed by the Federal
Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration,
Government National Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal Intermediate
Credit Banks, Federal Land Banks, Federal National Mortgage
Association ("FNMA"), Maritime Administration, Tennessee Valley
Authority, District of Columbia Armory Board, Student Loan
Marketing Association, International Bank for Reconstruction and
Development, and Resolution Trust Corporation. Certain U.S.
government securities, such as those issued or guaranteed by GNMA,
FNMA and Federal Home Loan Mortgage Corporation ("FHLMC"), are
mortgage-related securities. Because the United States government
is not obligated by law to provide support to an instrumentality
that it sponsors, a fund will invest in obligations issued by such
an instrumentality only if SSB Citi determines that the credit risk
with respect to the instrumentality does not make its securities
unsuitable for investment by the fund.

Bank Obligations (All funds). Domestic commercial banks organized
under Federal law are supervised and examined by the Comptroller of
the Currency and are required to be members of the Federal Reserve
System and to be insured by the Federal Deposit Insurance
Corporation (the "FDIC"). Domestic banks organized under state law
are supervised and examined by state banking authorities, but are
members of the Federal Reserve System only if they elect to join.
Most state banks are insured by the FDIC (although such insurance
may not be of material benefit to a fund, depending upon the
principal amount of certificates of deposit ("CDs") of each held by
the fund) and are subject to Federal examination and to a
substantial body of Federal law and regulation. As a result of
Federal and state laws and regulations, domestic branches of
domestic banks are, among other things, generally required to
maintain specified levels of reserves, and are subject to other
supervision and regulation designed to promote financial soundness.

Obligations of foreign branches of U.S. banks, such as CDs and time
deposits ("TDs"), may be general obligations of the parent bank in
addition to the issuing branch, or may be limited by the terms of a
specific obligation and governmental regulation. Obligations of
foreign branches of U.S. banks and foreign banks are subject to
different risks than are those of U.S. banks or U.S. branches of
foreign banks. These risks include foreign economic and political
developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes
on interest income. Foreign branches of U.S. banks are not
necessarily subject to the same or similar regulatory requirements
that apply to U.S. banks, such as mandatory reserve requirements,
loan limitations and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be
publicly available about a foreign branch of a U.S. bank than about
a U.S. bank. CDs issued by wholly owned Canadian subsidiaries of
U.S. banks are guaranteed as to repayment of principal and
interest, but not as to sovereign risk, by the U.S. parent bank.

Obligations of U.S. branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch,
or may be limited by the terms of a specific obligation and by
Federal and state regulation as well as governmental action in the
country in which the foreign bank has its head office. A U.S.
branch of a foreign bank with assets in excess of $1 billion may or
may not be subject to reserve requirements imposed by the Federal
Reserve System or by the state in which the branch is located if
the branch is licensed in that state. In addition, branches
licensed by the Comptroller of the Currency and branches licensed
by certain states ("State Branches") may or may not be required to:
(a) pledge to the regulator by depositing assets with a designated
bank within the state, an amount of its assets equal to 5% of its
total liabilities; and (b) maintain assets within the state in an
amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its
agencies or branches within the state. The deposits of State
Branches may not necessarily be insured by the FDIC. In addition,
there may be less publicly available information about a U.S.
branch of a foreign bank than about a U.S. bank.

In view of the foregoing factors associated with the purchase of
CDs and TDs issued by foreign banks and foreign branches of U.S.
banks, SSB Citi will carefully evaluate such investments on a case-
by-case basis.

The Exchange Reserve Fund may purchase a CD issued by a bank,
savings and loan association or other banking institution with less
than $1 billion in assets (a "Small Issuer CD") so long as the
issuer is a member of the FDIC or Office of Thrift Supervision and
is insured by the Savings Association Insurance Fund ("SAIF"), and
so long as the principal amount of the Small Issuer CD is fully
insured and is no more than $100,000. The Exchange Reserve Fund
will at any one time hold only one Small Issuer CD from any one
issuer. Savings and loan associations whose CDs may be purchased by
the funds are members of the Federal Home Loan Bank and are insured
by the SAIF. As a result, such savings and loan associations are
subject to regulation and examination.

Corporate Debt Securities (Balanced, Convertible, Diversified
Strategic Income, High Income and Total Return Bond Funds).
Corporate debt securities include corporate bonds, debentures,
notes and other similar debt securities issued by companies.

Ratings as Investment Criteria (All funds). In general, the ratings
of NRSROs represent the opinions of these agencies as to the
quality of securities that they rate. Such ratings, however, are
relative and subjective, and are not absolute standards of quality
and do not evaluate the market value risk of the securities. These
ratings will be used by the funds as initial criteria for the
selection of portfolio securities, but the funds also will rely
upon the independent advice of SSB Citi and/or sub-investment
advisers to evaluate potential investments. Among the factors that
will be considered are the long-term ability of the issuer to pay
principal and interest, and general economic trends. The Appendix
to this statement of additional information contains further
information concerning the rating categories of NRSROs and their
significance.

Subsequent to its purchase by a fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum
required for purchase by the fund. In addition, it is possible that
an NRSRO might not change its rating of a particular issue to
reflect subsequent events. None of these events will require sale
of such securities by a fund, but SSB Citi and/or a fund's sub-
investment adviser will consider such events in its determination
of whether the fund should continue to hold the securities. In
addition, to the extent that the ratings change as a result of
changes in such organizations or their rating systems, or due to a
corporate reorganization, a fund will attempt to use comparable
ratings as standards for its investments in accordance with its
investment objective and policies.

When-Issued Securities and Delayed-Delivery Transactions
(Balanced, Diversified Strategic Income, High Income, Total Return
Bond and Municipal High Income). In order to secure yields or
prices deemed advantageous at the time, the funds may purchase or
sell securities on a when-issued or delayed-delivery basis. A
fund will enter into a when-issued transaction for the purpose of
acquiring portfolio securities and not for the purpose of
leverage.] In such transactions delivery of the securities occurs
beyond the normal settlement periods, but no payment or delivery
is made by the fund prior to the actual delivery or payment by the
other party to the transaction. Due to fluctuations in the value
of securities purchased or sold on a when-issued or
delayed-delivery basis, the yields obtained on those securities
may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the
buyers. Each fund will establish a segregated account consisting
of cash and liquid securitieshaving a value equal to or greater
than the fund's purchase commitments, provided such securities
have been determined by SSB Citi to be liquid and unencumbered and
are marked to market daily pursuant to guidelines established by
the trustees. Placing securities rather than cash in the
segregated account may have a leveraging effect on the fund's net
assets.

U.S. government securities and Municipal Securities (as defined
below) are normally subject to changes in value based upon changes,
real or anticipated, in the level of interest rates and, although
to a lesser extent in the case of U.S. government securities, the
public's perception of the creditworthiness of the issuers. In
general, U.S. government securities and Municipal Securities tend
to appreciate when interest rates decline and depreciate when
interest rates rise. Purchasing these securities on a when-issued
or delayed-delivery basis, therefore, can involve the risk that the
yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself.
Similarly, the sale of U.S. government securities for delayed
delivery can involve the risk that the prices available in the
market when the delivery is made may actually be higher than those
obtained in the transaction itself.

In the case of the purchase of securities on a when-issued or
delayed-delivery basis by a fund, the fund will meet its
obligations on the settlement date from then-available cash flow,
the sale of securities held in the segregated account, the sale of
other securities or, although it would not normally expect to do
so, from the sale of the securities purchased on a when-issued or
delayed-delivery basis (which may have a value greater or less than
the fund's payment obligations).

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

Mortgage-Related Securities (Balanced, Diversified Strategic
Income, Exchange Reserve and Total Return Bond Funds).
Mortgage-related securities provide a monthly payment consisting
of interest and principal payments. Additional payments may be
made out of unscheduled repayments of principal resulting from the
sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs that may be incurred.
Prepayments of principal on mortgage-related securities may tend
to increase due to refinancing of mortgages as interest rates
decline. Mortgage pools created by private organizations
generally offer a higher rate of interest than government and
government-related pools because no direct or indirect guarantees
of payments are applicable with respect to the former pools.
Timely payment of interest and principal in these pools, however,
may be supported by various forms of private insurance or
guarantees, including individual loan, title, pool and hazard
insurance. There can be no assurance that the private insurers
can meet their obligations under the policies. Prompt payment of
principal and interest on GNMA mortgage pass-through certificates
is backed by the full faith and credit of the United States. FNMA
guaranteed mortgage pass-through certificates and FHLMC
participation certificates are solely the obligations of those
entities but are supported by the discretionary authority of the
United States government to purchase the agencies' obligations.
Collateralized mortgage obligations are a type of bond secured by
an underlying pool of mortgages or mortgage pass-through
certificates that are structured to direct payments on underlying
collateral to different series or classes of the obligations.

To the extent that a fund purchases mortgage-related securities at
a premium, mortgage foreclosures and prepayments of principal by
mortgagors (which may be made at any time without penalty) may
result in some loss of the fund's principal investment to the
extent of the premium paid. A fund's yield may be affected by
reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the
values of mortgage-related securities, including government and
government-related mortgage pools, generally will fluctuate in
response to market interest rates.
The average maturity of pass-through pools of mortgage-related
securities varies with the maturities of the underlying mortgage
instruments. In addition, a pool's stated maturity may be shortened
by unscheduled payments on the underlying mortgages. Factors
affecting mortgage prepayments include the level of interest rates,
general economic and social conditions, the location of the
mortgaged property and age of the mortgage. Because prepayment
rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. Common
practice is to assume that prepayments will result in an average
life ranging from 2 to 10 years for pools of fixed-rate 30-year
mortgages. Pools of mortgages with other maturities or different
characteristics will have varying average life assumptions.

Mortgage-related securities may be classified as private,
governmental or government-related, depending on the issuer or
guarantor. Private mortgage-related securities represent pass-
through pools consisting principally of conventional residential
mortgage loans created by non-governmental issuers, such as
commercial banks, savings and loan associations and private
mortgage insurance companies. Governmental mortgage-related
securities are backed by the full faith and credit of the United
States. GNMA, the principal guarantor of such securities, is a
wholly owned United States government corporation within the
Department of Housing and Urban Development. Government-related
mortgage-related securities are not backed by the full faith and
credit of the United States government. Issuers of such securities
include FNMA and FHLMC. FNMA is a government-sponsored corporation
owned entirely by private stockholders, which is subject to general
regulation by the Secretary of Housing and Urban Development. Pass-
through securities issued by FNMA are guaranteed as to timely
payment of principal and interest by FNMA. FHLMC is a corporate
instrumentality of the United States, the stock of which is owned
by the Federal Home Loan Banks. Participation certificates
representing interests in mortgages from FHLMC's national portfolio
are guaranteed as to the timely payment of interest and ultimate
collection of principal by FHLMC.

Private, U.S. governmental or government-related entities create
mortgage loan pools offering pass-through investments in addition
to those described above. The mortgages underlying these securities
may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose
terms to maturity may be shorter than previously customary. As new
types of mortgage-related securities are developed and offered to
investors, Diversified Strategic Income Fund, consistent with its
investment objective and policies, will consider making investments
in such new types of securities.

Forward Roll Transactions (Balanced, Diversified Strategic Income
Fund and Total Return Bond Funds). In order to enhance current
income, these funds may enter into forward roll transactions with
respect to mortgage-related securities issued by Government
National Mortgage Association ("GNMA"), FNMA and Federal Home Loan
Mortgage Corporation ("FHLMC"). In a forward roll transaction, a
fund sells a mortgage security to a financial institution, such as
a bank or broker-dealer and simultaneously agrees to repurchase a
similar security from the institution at a later date at an
agreed-upon price. The mortgage securities that are repurchased
will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different
prepayment histories than those sold. During the period between
the sale and repurchase, the fund will not be entitled to receive
interest and principal payments on the securities sold. Proceeds
of the sale will be invested in short-term instruments,
particularly repurchase agreements, and the income from these
investments, together with any additional fee income received on
the sale will generate income for the fund exceeding the yield on
the securities sold. Forward roll transactions involve the risk
that the market value of the securities sold by the fund may
decline below the repurchase price of those securities. At the
time a fund enters into forward roll transactions, it will place
in a segregated account with the fund's custodian cash, U.S.
government securities, equity securities or debt securities of any
grade having a value equal to or greater than the fund's purchase
commitments, provided such securities have been determined by SSB
Citi to be liquid and unencumbered and are marked to market daily
pursuant to guidelines established by the trustees. The fund will
subsequently monitor the account to insure that such equivalent
value is maintained.

Asset-Backed Securities (Balanced, Exchange Reserve, Diversified
Strategic Income Fund and Total Return Bond Funds). An
asset-backed security represents an interest in a pool of assets
such as receivables from credit card loans, automobile loans and
other trade receivables. Changes in the market's perception of
the asset backing the security, the creditworthiness of the
servicing agent for the loan pool, the originator of the loans, or
the financial institution providing any credit enhancement will
all affect the value of an asset-backed security, as will the
exhaustion of any credit enhancement. The risks of investing in
asset-backed securities ultimately depend upon the payment of the
consumer loans by the individual borrowers. In its capacity as
purchaser of an asset-backed security, a fund would generally have
no recourse to the entity that originated the loans in the event
of default by the borrower. Additionally, in the same manner as
described above under "Mortgage-Related Securities" with respect
to prepayment of a pool of mortgage loans underlying
mortgage-related securities, the loans underlying asset-backed
securities are subject to prepayments, which may shorten the
weighted average life of such securities and may lower their
return.

Non-Taxable Municipal Securities (Municipal High Income Fund). Non-
taxable Municipal securities include debt obligations issued to
fund various public purposes, such as constructing public
facilities, refunding outstanding obligations, paying general
operating expenses and extending loans to public institutions and
facilities. Private activity bonds that are issued by or on behalf
of public authorities to finance privately operated facilities are
considered to be Municipal Securities if the interest paid thereon
may be excluded from gross income (but not necessarily from
alternative minimum taxable income) for Federal income tax purposes
in the opinion of bond counsel to the issuer.

Municipal bonds may be issued to finance life care facilities. Life
care facilities are an alternative form of long-term housing for
the elderly which offer residents the independence of condominium
life style and, if needed, the comprehensive care of nursing home
services. Bonds to finance these facilities have been issued by
various state industrial development authorities. Because the bonds
are secured only by the revenues of each facility and not by state
or local government tax payments, they are subject to a wide
variety of risks, including a drop in occupancy levels, the
difficulty of maintaining adequate financial reserves to secure
estimated actuarial liabilities, the possibility of regulatory cost
restrictions applied to health care delivery and competition from
alternative health care or conventional housing facilities.

Municipal leases are Municipal Securities that may take the form of
a lease or an installment purchase contract issued by state and
local governmental authorities to obtain funds to acquire a wide
variety of equipment and facilities such as fire and sanitation
vehicles, computer equipment and other capital assets. These
obligations make it possible for state and local government
authorities to acquire property and equipment without meeting
constitutional and statutory requirements for the issuance of debt.
Thus, municipal leases have special risks not normally associated
with municipal bonds. These obligations frequently contain "non-
appropriation" clauses providing that the governmental issuer of
the obligation has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by
the legislative body on a yearly or other periodic basis. In
addition to the "non-appropriation" risk, municipal leases
represent a type of financing that has not yet developed the depth
of marketability associated with municipal bonds; moreover,
although the obligations will be secured by the leased equipment,
the disposition of the equipment in the event of foreclosure might
prove to be difficult. In order to limit such risks, Municipal High
Income Fund proposes to purchase either (a) municipal leases rated
in the four highest categories by Moody's or S&P or (b) unrated
municipal leases purchased principally from domestic banks or other
responsible third parties which enter into an agreement with the
fund, which provides that the seller will either remarket or
repurchase the municipal lease within a short period after demand
by the fund.

Taxable Municipal Securities (Total Return Bond Fund). The Total
Return Bond Fund will invest in a diversified portfolio of taxable
long-term investment-grade securities issued by or on behalf of
states and municipal governments, U.S. territories and possessions
of the United States and their authorities, agencies,
instrumentalities and political subdivisions ("Taxable Municipal
Obligations"). The Taxable Municipal Obligations in which the
fund may invest are within the four highest ratings of Moody's
(Aaa, Aa, A, Baa) or S&P (AAA, AA, A, BBB). Although securities
rated in these categories are commonly referred to as investment
grade, they may have speculative characteristics. In addition,
changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and
interest payments than is the case with higher-grade securities.
Furthermore, the market for Taxable Municipal Obligations is
relatively small, which may result in a lack of liquidity and in
price volatility of those securities. Interest on Taxable
Municipal Obligations is includable in gross income for Federal
income tax purposes and may be subject to personal income taxes
imposed by any state of the United States or any political
subdivision thereof, or by the District of Columbia.

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

Stand-by Commitments (Municipal High Income Fund). Municipal High
Income Fund may acquire "stand-by commitments" with respect to
Municipal Securities held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase, at the fund's option,
specified Municipal Securities at a specified price. The fund may
pay for stand-by commitments either separately in cash or by
paying a higher price for the securities acquired with the
commitment, thus increasing the cost of the securities and
reducing the yield otherwise available for them. The fund intends
to enter into stand-by commitments only with brokers, dealers and
banks that, in the view of SSB Citi, present minimal credit risks.
In evaluating the creditworthiness of the issuer of a stand-by
commitment, SSB Citi will periodically review relevant financial
information concerning the issuer's assets, liabilities and
contingent claims. The fund will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.

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

Reverse Repurchase Agreements (Balanced, Diversified Strategic
Income Fund and Total Return Bond Funds). These funds may enter
into reverse repurchase agreement transactions with member banks
of the Federal Reserve Bank of New York's list of reporting
dealers. A reverse repurchase agreement, which is considered a
borrowing by the fund, involves a sale by the fund of securities
that it holds concurrently with an agreement by the fund to
repurchase the same securities at an agreed-upon price and date.
The fund typically will invest the proceeds of a reverse
repurchase agreement in money market instruments or repurchase
agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as
leverage. The fund will enter into a reverse repurchase agreement
for leverage purposes only when the interest income to be earned
from the investment of the proceeds is greater than the interest
expense of the transaction. The fund also may use the proceeds of
reverse repurchase agreements to provide liquidity to meet
redemption requests when the sale of the fund's securities is
considered to be disadvantageous.

Lending of Portfolio Securities (Convertible, Diversified Strategic
Income, High Income, Total Return Bond and Balanced Funds). These
funds have the ability to lend portfolio securities to brokers,
dealers and other financial organizations. Such loans, if and when
made, may not exceed 20% of a fund's total assets taken at value,
except Total Return Bond Fund, which may lend its portfolio
securities to the fullest extent allowed under the 1940 Act. A fund
will not lend portfolio securities to Salomon Smith Barney unless
it has applied for and received specific authority to do so from
the SEC. Loans of portfolio securities will be collateralized by
cash, letters of credit or U.S. government securities which are
maintained at all times in an amount at least equal to the current
market value of the loaned securities. From time to time, a fund
may pay a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a
third party which is unaffiliated with the fund and is acting as a
"finder."

By lending its securities, a fund can increase its income by
continuing to receive interest on the loaned securities as well as
by either investing the cash collateral in short-term instruments
or obtaining yield in the form of interest paid by the borrower
when U.S. government securities are used as collateral. A fund will
comply with the following conditions whenever its portfolio
securities are loaned: (a) the fund must receive at least 100% cash
collateral or equivalent securities from the borrower; (b) the
borrower must increase such collateral whenever the market value of
the securities loaned rises above the level of such collateral; (c)
the fund must be able to terminate the loan at any time; (d) the
fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned
securities, and any increase in market value; (e) the fund may pay
only reasonable custodian fees in connection with the loan; and (f)
voting rights on the loaned securities may pass to the borrower;
provided, however, that if a material event adversely affecting the
investment in the loaned securities occurs, the trust's board of
trustees must terminate the loan and regain the right to vote the
securities. The risks in lending portfolio securities, as with
other extensions of secured credit, consist of a possible delay in
receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the
borrower fail financially. Loans will be made to firms deemed by
SSB Citi to be of good standing and will not be made unless, in the
judgment SSB Citi, the consideration to be earned from such loans
would justify the risk.

Medium-, Low- and Unrated Securities (Convertible, Diversified
Strategic Income, High Income, Total Return Bond and Municipal
High Income Funds). These funds may invest in medium- or low-
rated securities and unrated securities of comparable quality.
Generally, these securities offer a higher current yield than the
yield offered by higher-rated securities, but involve greater
volatility of price and risk of loss of income and principal,
including the probability of default by or bankruptcy of the
issuers of such securities. Medium- and low-rated and comparable
unrated securities: (a) will likely have some quality and
protective characteristics that, in the judgment of the rating
organization, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (b) are predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the
obligation. Thus, it is possible that these types of factors
could, in certain instances, reduce the value of securities held
by a fund with a commensurate effect on the value of the fund's
shares.

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

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

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

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

Options on Securities (Convertible, Diversified Strategic Income,
High Income, and Balanced Funds). High Income Fund may write
(sell) covered call options. Balanced Fund may write covered call
options and may purchase and write secured put options.
Convertible Fund and Diversified Strategic Income Fund may
purchase and write covered call and secured put options. Each of
these funds may enter into closing transactions with respect to
the options transactions in which it may engage. Balanced Fund
also may write "straddles," which are combinations of secured puts
and covered calls on the same underlying security.

The aggregate value of the obligations underlying calls on
securities which are written by Balanced Fund and covered with
cash or other eligible segregated assets, together with the
aggregate value of the obligations underlying put options written
by the fund, will not exceed 50% of the fund's net assets.
Balanced Fund will not purchase puts or calls on securities if
more than 5% of its assets would be invested in premiums on puts
and calls, not including that portion of the premium which
reflects the value of the securities owned by the fund and
underlying a put at the time of purchase. Convertible Fund may
utilize up to 10% of its assets to purchase put options on
portfolio securities and may do so at or about the same time that
it purchases the underlying security or at a later time.
Diversified Strategic Income Fund may utilize up to 15% of its
assets to purchase options and may do so at or about the same time
that it purchases the underlying security or at a later time.

The Diversified Strategic Income Fund may purchase and sell put,
call and other types of option securities that are traded on
domestic or foreign exchanges or the over-the-counter market
including, but not limited to, "spread" options, "knock-out"
options, "knock-in" options and "average rate" or "look-back"
options. "Spread" options are dependent upon the difference
between the price of two securities or futures contracts. "Knock-
out" options are canceled if the price of the underlying asset
reaches a trigger level prior to expiration. "Knock-in" options
only have value if the price of the underlying asset reaches a
trigger level. "Average rate" or "Look-back" options are options
where the option's strike price at expiration is set based on
either the average, maximum or minimum price of the asset over the
period of the option.

A call is covered if the fund (a) owns the optioned securities,
(b) maintains in a segregated account cash or liquid securities
having a value equal to or greater than the fund's obligations
under the call, provided such securities have been determined by
SSB Citi to be liquid and unencumbered pursuant to guidelines
established by the trustees ("eligible segregated assets") or (c)
owns an offsetting call option.

Writing call and put options. When a fund writes a call, it
receives a premium and gives the purchaser the right to buy the
underlying security at any time during the call period (usually
not more than nine months in the case of common stock or fifteen
months in the case of U.S. government securities) at a fixed
exercise price regardless of market price changes during the call
period. If the call is exercised, the fund forgoes any gain from
an increase in the market price of the underlying security over
the exercise price. When a fund writes a put, it receives a
premium and gives the purchaser of the put the right to sell the
underlying security to the fund at the exercise price at any time
during the option period. When a fund purchases a put, it pays a
premium in return for the right to sell the underlying security at
the exercise price at any time during the option period. For the
purchase of a put to be profitable, the market price of the
underlying security must decline sufficiently below the exercise
price to cover the premium and transaction costs, unless the put
is sold in a closing sale transaction; otherwise, the purchase of
the put effectively increases the cost of the security and thus
reduces its yield.

A fund may write puts on securities only if they are "secured." A
put is "secured" if the fund maintains cash or other eligible
segregated assets with a value equal to the exercise price in a
segregated account or holds a put on the same underlying security
at an equal or greater exercise price.

The principal reason for writing covered call options on securities
is to attempt to realize, through the receipt of premiums, a
greater return than would be realized on the securities alone.
Diversified Strategic Income Fund, however, may engage in option
transactions only to hedge against adverse price movements in the
securities that it holds or may wish to purchase and the currencies
in which certain portfolio securities may be denominated. In return
for a premium, the writer of a covered call option forfeits the
right to any appreciation in the value of the underlying security
above the strike price for the life of the option (or until a
closing purchase transaction can be effected). Nevertheless, the
call writer retains the risk of a decline in the price of the
underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums.
The writer of a covered put option accepts the risk of a decline in
the price of the underlying security. The size of the premiums that
a fund may receive may be adversely affected as new or existing
institutions, including other investment companies, engage in or
increase their option-writing activities.

Options written by a fund normally will have expiration dates
between one and nine months from the date written. The exercise
price of the options may be below, equal to or above the market
values of the underlying securities at the times the options are
written. In the case of call options, these exercise prices are
referred to as "in-the-money," "at-the-money" and "out-of-the-
money," respectively. A fund with option-writing authority may
write (a) in-the-money call options when SSB Citi or its sub-
investment adviser expects that the price of the underlying
security will remain flat or decline moderately during the option
period, (b) at-the-money call options when SSB Citi expects that
the price of the underlying security will remain flat or advance
moderately during the option period and (c) out-of-the-money call
options when SSB Citi expects that the price of the underlying
security may increase but not above a price equal to the sum of the
exercise price plus the premiums received from writing the call
option. In any of the preceding situations, if the market price of
the underlying security declines and the security is sold at this
lower price, the amount of any realized loss will be offset wholly
or in part by the premium received. Out-of-the-money, at-the-money
and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be utilized in the
same market environments that such call options are used in
equivalent transactions.

So long as the obligation of a fund as the writer of an option
continues, the fund may be assigned an exercise notice by the
broker-dealer through which the option was sold, requiring the fund
to deliver (in the case of a call) or take delivery of (in the case
of a put) the underlying security against payment of the exercise
price. This obligation terminates when the option expires or the
fund effects a closing purchase transaction. A fund can no longer
effect a closing purchase transaction with respect to an option
once it has been assigned an exercise notice. To secure its
obligation to deliver the underlying security when it writes a call
option, or to pay for the underlying security when it writes a put
option, a fund will be required to deposit in escrow the underlying
security or other assets in accordance with the rules of the
Options Clearing Corporation (the "Clearing Corporation") or
similar foreign clearing corporation and of the securities exchange
on which the option is written.

Purchasing call and put options. A fund may purchase put and call
options that are traded on a domestic securities exchange. By
buying a put, the fund limits the risk of loss from a decline in
the market value of the security until the put expires. Any
appreciation in the value of the yield otherwise available from
the underlying security, however, will be partially offset by the
amount of the premium paid for the put option and any related
transaction costs. call option may be purchased by the fund in
order to acquire the underlying securities for the fund at a price
that avoids any additional cost that would result from a
substantial increase in the market value of a security. The fund
also may purchase call options to increase its return to investors
at a time when the call is expected to increase in value due to
anticipated appreciation of the underlying security.

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

There can be no assurance that a liquid secondary market will
exist at a given time for any particular option. In this regard,
trading in options on U.S. government securities is relatively
new, so that it is impossible to predict to what extent liquid
markets will develop or continue.

An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized
securities exchange or in the over-the-counter market. In light of
this fact and current trading conditions, the fund expects to
purchase only call or put options issued by the Clearing
Corporation. The funds with option-writing authority expect to
write options only on U.S. securities exchanges, except that the
Diversified Strategic Income Fund also may write options on foreign
exchanges and in the over-the-counter market.

A fund may realize a profit or loss upon entering into a closing
transaction. In cases in which a fund has written an option, it
will realize a profit if the cost of the closing purchase
transaction is less than the premium received upon writing the
original option and will incur a loss if the cost of the closing
purchase transaction exceeds the premium received upon writing the
original option. Similarly, when a fund has purchased an option and
engages in a closing sale transaction, whether the fund realizes a
profit or loss will depend upon whether the amount received in the
closing sale transaction is more or less than the premium that the
fund initially paid for the original option plus the related
transaction costs.

Although a fund generally will purchase or write only those options
for which SSB Citi or its sub-investment adviser believes there is
an active secondary market, there is no assurance that sufficient
trading interest to create a liquid secondary market on a
securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option may cease to exist
for a variety of reasons. At times in the past, for example, higher
than anticipated trading activity or order flow or other unforeseen
events have rendered inadequate certain of the facilities of the
Clearing Corporation as well U.S. and foreign securities exchanges
and resulted in the institution of special procedures such as
trading rotations, restrictions on certain types of orders or
trading halts or suspensions in one or more options. There can be
no assurance that similar events, or events that may otherwise
interfere with the timely execution of customers' orders, will not
recur. In such event, it might not be possible to effect closing
transactions in particular options. If a fund as a covered call
option writer is unable to effect a closing purchase transaction in
a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying
security upon exercise.

Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class that
may be held, written or exercised within certain time periods by an
investor or group of investors acting in concert (regardless of
whether the options are written on the same or different securities
exchanges or are held, written or exercised in one or more accounts
or through one or more brokers). It is possible that the funds with
authority to engage in options transactions, and other clients of
SSB Citi and certain of its affiliates, may be considered to be
such a group. A securities exchange may order the liquidation of
positions found to be in violation of these limits and it may
impose certain other sanctions.

In the case of options that are deemed covered by virtue of the
fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain
physical delivery of the underlying common stocks with respect to
which the fund has written options may exceed the time within which
the fund must make delivery in accordance with an exercise notice.
In these instances, a fund may purchase or borrow temporarily the
underlying securities for purposes of physical delivery. By so
doing, the fund will not bear any market risk because the fund will
have the absolute right to receive from the issuer of the
underlying security an equal number of shares to replace the
borrowed stock, but the fund may incur additional transaction costs
or interest expenses in connection with any such purchase or
borrowing.

Additional risks exist with respect to certain of U.S. government
securities for which a fund may write covered call options. If a
fund writes covered call options on mortgage-backed securities, the
securities that it holds as cover may, because of scheduled
amortization or unscheduled prepayments, cease to be sufficient
cover. The fund will compensate for the decline in the value of the
cover by purchasing an appropriate additional amount of those
securities.

Stock Index Options (Balanced Fund). Balanced Fund may purchase and
write put and call options on U.S. stock indexes listed on U.S.
exchanges for the purpose of hedging its portfolio. A stock index
fluctuates with changes in the market values of the stocks included
in the index. Some stock index options are based on a broad market
index such as the New York Stock Exchange Composite Index or a
narrower market index such as the Standard & Poor's 100. Indexes
also are based on an industry or market segment such as the AMEX
Oil and Gas Index or the Computer and Business Equipment Index. In
writing a call on a stock index, the fund receives a premium and
agrees that during the call period purchasers of a call, upon
exercise of the call, will receive an amount of cash if the
closing level of the stock index upon which the call is based is
greater than the exercise price of the call. When the fund buys a
call on a stock index, it pays a premium and during the call
period the fund, upon exercise of the call, receives an amount of
cash if the closing level of the stock index upon which the call
is based is greater than the exercise price of the call. The fund
also may purchase and sell stock index puts, which differ from
puts on individual securities in that they are settled in cash
based on the values of the securities in the underlying index,
rather than by delivery of the underlying securities. Purchase of
a stock index put is designed to protect against a decline in the
value of the fund's portfolio generally, rather than an individual
security in the portfolio. Stock index puts are sold primarily to
realize income from the premiums received on the sale of such
options. If any put is not exercised or sold, it will become
worthless on its expiration date.

Options on stock indexes are similar to options on stock except
that (a) the expiration cycles of stock index options are monthly,
while those of stock options are currently quarterly and (b) the
delivery requirements are different. Instead of giving the right to
take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive a cash "exercise
settlement amount" equal to (a) the amount, if any, by which the
fixed exercise price of the option exceeds (in the case of a put)
or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed
"index multiplier." Receipt of this cash amount will depend upon
the closing level of the stock index upon which the option is based
being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash
received will be equal to such difference between the closing price
of the index and the exercise price of the option expressed in
dollars times a specified multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in stock index
options prior to expiration by entering into a closing transaction
on an exchange or it may let the option expire unexercised.

The effectiveness of purchasing or writing stock index options as a
hedging technique will depend upon the extent to which price
movements in the portion of a securities portfolio being hedged
correlate with price movements of the stock index selected. Because
the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, whether
Balanced Fund will realize a gain or loss from the purchase or
writing of options on an index depends upon movements in the level
of stock prices in the stock market generally or, in the case of
certain indexes, in an industry or market segment, rather than
movements in the price of a particular stock. Accordingly,
successful use by a fund of options on stock indexes will be
subject to SSB Citi's ability to predict correctly movements in the
direction of the stock market generally or of a particular
industry. This requires different skills and techniques than
predicting changes in the prices of individual stocks.

The Balanced Fund will engage in stock index options transactions
only when determined by SSB Citi to be consistent with the funds'
efforts to control risk. There can be no assurance that such
judgment will be accurate or that the use of these portfolio
strategies will be successful. When the fund writes an option on a
stock index, it will establish a segregated account in the name of
the fund consisting of cash, equity securities or debt securities
of any grade in an amount equal to or greater than the market value
of the option, provided such securities are liquid and unencumbered
and are marked to market daily pursuant to guidelines established
by the trustees.

Currency Transactions (Diversified Strategic Income, Balanced and
High Income Funds). The funds' dealings in forward currency
exchange transactions will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging
is the purchase or sale of forward currency contracts with respect
to specific receivables or payables of the fund generally arising
in connection with the purchase or sale of its securities. Position
hedging, generally, is the sale of forward currency contracts with
respect to portfolio security positions denominated or quoted in
the currency. A fund may not position hedge with respect to a
particular currency to an extent greater than the aggregate market
value of the security at any time, or securities held in its
portfolio denominated or quoted in, or currently convertible into
(such as through exercise of an option or consummation of a forward
currency contract) that particular currency. If a fund enters into
a transaction hedging or position hedging transaction, it will
cover the transaction through one or more of the following methods:
(a) ownership of the underlying currency or an option to purchase
such currency; (b) ownership of an option to enter into an
offsetting forward currency contract; (c) entering into a forward
contract to purchase currency being sold, or to sell currency being
purchased, provided that such covering contract is itself covered
by any one of these methods unless the covering contract closes out
the first contract; or (d) depositing into a segregated account
with the custodian or a sub-custodian of the fund cash or readily
marketable securities in an amount equal to the value of the fund's
total assets committed to the consummation of the forward currency
contract and not otherwise covered. In the case of transaction
hedging, any securities placed in the account must be liquid debt
securities. In any case, if the value of the securities placed in
the segregated account declines, additional cash or securities will
be placed in the account so that the value of the account will
equal the above amount. Hedging transactions may be made from any
foreign currency into dollars or into other appropriate currencies.

At or before the maturity of a forward contract, a fund may either
sell a portfolio security and make delivery of the currency or
retain the security and offset its contractual obligation to
deliver the currency by purchasing a second contract pursuant to
which the relevant fund will obtain, on the same maturity date, the
same amount of the currency which it is obligated to deliver. If a
fund retains the portfolio security and engages in an offsetting
transaction, the fund, at the time of execution of the offsetting
transaction, will incur a gain or loss to the extent movement has
occurred in forward contract prices. Should forward prices decline
during the period between a fund's entering into a forward contract
for the sale of a currency and the date that it enters into an
offsetting contract for the purchase of the currency, the fund will
realize a gain to the extent that the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, the fund will suffer a
loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.

The cost to a fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because
transactions in currency exchange are usually conducted on a
principal basis, no fees or commissions are involved. The use of
forward currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate
of exchange that can be achieved in the future. In addition,
although forward currency contracts limit the risk of loss due to a
decline in the value of the hedged currency, at the same time they
limit any potential gain that might result should the value of the
currency increase.

If a devaluation is generally anticipated, the Diversified
Strategic Income and High Income Funds may not be able to contract
to sell the currency at a price above the devaluation level they
anticipate.

Foreign Currency Options (Diversified Strategic Income and High
Income Funds). The High Income Fund may only purchase put and call
options on foreign currencies, whereas the Diversified Strategic
Income Fund may purchase or write put and call options on foreign
currencies for the purpose of hedging against changes in future
currency exchange rates. Foreign currency options generally have
three, six and nine month expiration cycles. Put options convey the
right to sell the underlying currency at a price which is
anticipated to be higher than the spot price of the currency at the
time the option expires. Call options convey the right to buy the
underlying currency at a price which is expected to be lower than
the spot price of the currency at the time that the option expires.

The fund may use foreign currency options under the same
circumstances that it could use forward currency exchange
transactions. A decline in the dollar value of a foreign currency
in which a fund's securities are denominated, for example, will
reduce the dollar value of the securities even if their value in
the foreign currency remains constant. In order to protect against
such diminutions in the value of securities that it holds, the fund
may purchase put options on the foreign currency. If the value of
the currency declines, the fund will have the right to sell the
currency for a fixed amount in dollars and will thereby offset, in
whole or in part, the adverse effect on its securities that
otherwise would have resulted. Conversely, if a rise in the dollar
value of a currency in which securities to be acquired are
denominated is projected, thereby potentially increasing the cost
of the securities, the fund may purchase call options on the
particular currency. The purchase of these options could offset, at
least partially, the effects of the adverse movements in exchange
rates. The benefit to the fund derived from purchases of foreign
currency options, like the benefit derived from other types of
options, will be reduced by the amount of the premium and related
transaction costs. In addition, if currency exchange rates do not
move in the direction or to the extent anticipated, the fund could
sustain losses on transactions in foreign currency options that
would require it to forego a portion or all of the benefits of
advantageous changes in the rates.

Futures Activities (Convertible, Diversified Strategic Income, High
Income, Municipal High Income, Total Return Bond and Balanced
Funds). These funds may enter into futures contracts and/or options
on futures contracts that are traded on a U.S. exchange or board of
trade. These investments may be made by a fund for the purpose of
hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in interest rates,
currency values and/or market conditions but not for purposes of
speculation. In the case of Municipal High Income Fund, investments
in futures contracts will be made only in unusual circumstances,
such as when SSB Citi anticipates an extreme change in interest
rates or market conditions. See "Taxes" below.

Futures Contracts (Convertible, Diversified Strategic Income,
Municipal High Income, Total Return Bond and Balanced Funds). The
funds may acquire or sell a futures contract to mitigate the effect
of fluctuations in interest rates, currency values or market
conditions (depending on the type of contract) on portfolio
securities without actually buying or selling the securities. For
example, if Municipal High Income Fund owns long-term bonds and
tax-exempt rates are expected to increase, the fund might enter
into a short position in municipal bond index futures contracts.
Such a sale would have much the same effect as the fund's selling
some of the long-term bonds in its portfolio. If tax-exempt rates
increase as anticipated, the value of certain long-term Municipal
Securities in the fund would decline, but the value of the fund's
futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of the fund from declining as
much as it otherwise would have. Of course, because the value of
portfolio securities will far exceed the value of the futures
contracts sold by a fund, an increase in the value of the futures
contracts could only mitigate, not totally offset, the decline in
the value of the fund.

In purchasing and selling futures contracts and related options, a
fund will comply with rules and interpretations of the Commodity
Futures Trading Commission ("CFTC"), under which the fund is
excluded from regulation as a "commodity pool." CFTC regulations
require, among other things, that (a) futures and related options
be used solely for bona fide hedging purposes (or that the
underlying commodity value of a fund's long positions not exceed
the sum of certain identified liquid investments) and (b) a fund
not enter into futures and related options for which the aggregate
initial margin and premiums exceed 5% of the fair market value of
the fund's assets. In order to prevent leverage in connection
with the purchase of futures contracts by a fund, an amount of
cash or other eligible segregated assets equal to the market value
of futures contracts purchased will be maintained in a segregated
account on the books of the fund or with PNC Bank. A fund will
engage only in futures contracts and related options which are
listed on a national commodities exchange.

Interest Rate Futures Contracts. A fund may purchase and sell
interest rate futures contracts as a hedge against changes in
interest rates. An interest rate futures contract is an agreement
between two parties to buy and sell a security for a set price on
a future date. Interest rate futures contracts are traded on
designated "contracts markets" which, through their clearing
corporations, guarantee performance of the contracts. Currently,
there are interest rate futures contracts based on securities such
as long-term Treasury bonds, Treasury notes, GNMA certificates and
three-month Treasury bills.

Generally, if market interest rates increase, the value of
outstanding debt securities declines (and vice versa). Entering
into an interest rate futures contract for the sale of securities
has an effect similar to the actual sale of securities, although
sale of the interest rate futures contract might be accomplished
more easily and quickly. For example, if a fund holds long-term
U.S. government securities and SSB Citi anticipates a rise in
long-term interest rates, the fund could, in lieu of disposing of
its portfolio securities, enter into interest rate futures
contracts for the sale of similar long-term securities. If
interest rates increased and the value of the fund's securities
declined, the value of the fund's interest rate futures contracts
would increase, thereby protecting the fund by preventing the net
asset value from declining as much as it otherwise would have
declined. Similarly, entering into interest rate futures
contracts for the purchase of securities has an effect similar to
the actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying
securities. For example, if SSB Citi expects long-term interest
rates to decline, the fund might enter into interest rate futures
contracts for the purchase of long-term securities, so that it
could gain rapid market exposure that may offset anticipated
increases in the cost of securities that it intends to purchase,
while continuing to hold higher-yielding short-term securities or
waiting for the long-term market to stabilize.

Stock Index Futures Contracts. A fund may purchase and sell stock
index futures contracts. These transactions, if any, by the fund
will be made solely for the purpose of hedging against the effects
of changes in the value of its portfolio securities due to
anticipated changes in market conditions and will be made when the
transactions are economically appropriate to the reduction of
risks inherent in the management of the fund. A stock index
futures contract is an agreement under which two parties agree to
take or make delivery of the amount of cash based on the
difference between the value of a stock index at the beginning and
at the end of the contract period. When the fund enters into a
stock index futures contract, it must make an initial deposit,
known as "initial margin," as a partial guarantee of its
performance under the contract. As the value of the stock index
fluctuates, either party to the contract is required to make
additional margin deposits, known as "variation margin," to cover
any additional obligation that it may have under the contract.

Successful use of stock index futures contracts by a fund is
subject to certain special risk considerations. A liquid stock
index futures market may not be available when the fund seeks to
offset adverse market movements. In addition, there may be an
imperfect correlation between movements in the securities included
in the index and movements in the securities in the fund.
Successful use of stock index futures contracts is further
dependent on SSB Citi's ability to predict correctly movements in
the direction of the stock markets and no assurance can be given
that its judgment in this respect will be correct.

The Diversified Strategic Income Fund may enter into futures
contracts or related options on futures contracts that are traded
on a domestic or foreign exchange or in the over-the-counter
market. These investments may be made for the purpose of hedging
against changes in the value of its portfolio securities but not
for purposes of speculation. The ability of the fund to trade in
futures contracts may be limited by the requirements of the
Internal Revenue Code of 1986 as amended (the "Code"), applicable
to a regulated investment company.

When deemed advisable by SSB Citi, Total Return Bond Fund may
enter into futures contracts or related options traded on a
domestic exchange or board of trade. Such investments, if any, by
the fund will be made solely for the purpose of hedging against
the effects of changes in the value of the fund's securities due
to anticipated changes in interest rates and market conditions,
and when the transactions are economically appropriate for the
reduction of risks inherent in the management of the fund. Total
Return Bond Fund may hedge up to 50% of its assets using futures
contracts or related options transactions.

Balanced Fund may not purchase futures contracts or related
options if, immediately thereafter, more than 30% of the fund's
total assets would be so invested. In addition, Balanced Fund may
not at any time commit more than 5% of its total assets to initial
margin deposits on futures contracts.

No consideration is paid or received by a fund upon entering into a
futures contract. Initially, a fund will be required to deposit
with its custodian an amount of cash or cash equivalents equal to
approximately 1% to 10% of the contract amount (this amount is
subject to change by the board of trade on which the contract is
traded and members of such board of trade may charge a higher
amount). This amount, known as initial margin, is in the nature of
a performance bond or good faith deposit on the contract and is
returned to a fund upon termination of the futures contract,
assuming that all contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as variation
margin, will be made daily as the price of the securities, currency
or index underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less
valuable, a process known as "marking-to-market." At any time prior
to expiration of a futures contract, a fund may elect to close the
position by taking an opposite position, which will terminate the
fund's existing position in the contract.

Several risks are associated with the use of futures contracts as a
hedging device. Successful use of futures contracts by a fund is
subject to the ability of SSB Citi to predict correctly movements
in interest rates, stock or bond indices or foreign currency
values. These predictions involve skills and techniques that may be
different from those involved in the management of the portfolio
being hedged. In addition, there can be no assurance that there
will be a correlation between movements in the price of the
underlying securities, currency or index and movements in the price
of the securities which are the subject of the hedge. A decision of
whether, when and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of market behavior or unexpected trends in
interest rates or currency values.

Although the funds with authority to engage in futures activity
intend to enter into futures contracts only if there is an active
market for such contracts, there is no assurance that an active
market will exist for the contracts at any particular time. Most
futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single
trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that
limit. It is possible that futures contract prices could move to
the daily limit for several consecutive trading days with little or
no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial
losses. In such event, and in the event of adverse price movements,
a fund would be required to make daily cash payments of variation
margin and an increase in the value of the portion of the portfolio
being hedged, if any, may partially or completely offset losses on
the futures contract. As described above, however, there is no
guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract.

If a fund has hedged against the possibility of a change in
interest rates or currency or market values adversely affecting the
value of securities held in its portfolio and rates or currency or
market values move in a direction opposite to that which the fund
has anticipated, the fund will lose part or all of the benefit of
the increased value of securities which it has hedged because it
will have offsetting losses in its futures positions. In addition,
in such situations, if the fund had insufficient cash, it may have
to sell securities to meet daily variation margin requirements at a
time when it may be disadvantageous to do so. These sales of
securities may, but will not necessarily, be at increased prices
which reflect the change in interest rates or currency values, as
the case may be.

Options on Futures Contracts. An option on an interest rate futures
contract, as contrasted with the direct investment in such a
contract, gives the purchaser the right, in return for the premium
paid, to assume a position in the underlying interest rate futures
contract at a specified exercise price at any time prior to the
expiration date of the option. A fund may purchase put options on
interest rate futures contracts in lieu of, and for the same
purpose as, sale of a futures contract. It also may purchase such
put options in order to hedge a long position in the underlying
interest rate futures contract in the same manner as it may
purchase puts on securities provided they are similarly "secured."
An option on a foreign currency futures contract, as contrasted
with the direct investment in such a contract, gives the purchaser
the right, but not the obligation, to assume a long or short
position in the relevant underlying future currency at a
predetermined exercise price at a time in the future. Upon exercise
of an option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin
account, which represents the amount by which the market price of
the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the
futures contract. The potential for loss related to the purchase of
an option on futures contracts is limited to the premium paid for
the option (plus transaction costs). Because the value of the
option is fixed at the point of sale, there are no daily cash
payments to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and
that change would be reflected in the net asset value of a fund
investing in the option. The purchase of call options on futures
contracts is intended to serve the same purpose as the actual
purchase of the futures contract, and the fund will set aside cash
and liquid securities sufficient to purchase the amount of
portfolio securities represented by the underlying futures
contracts.

Several risks are associated with options on futures contracts. The
ability to establish and close out positions on such options will
be subject to the existence of a liquid market. In addition, the
purchase of put or call options on interest rate and foreign
currency futures will be based upon predictions by SSB Citi or a
fund's sub-investment adviser as to anticipated trends in interest
rates and currency values, as the case may be, which could prove to
be incorrect. Even if the expectations of SSB Citi or a fund's sub-
investment adviser are correct, there may be an imperfect
correlation between the change in the value of the options and of
the portfolio securities or the currencies being hedged.

Foreign Investments (Convertible, Diversified Strategic Income,
High Income and Balanced Funds). Investors should recognize that
investing in foreign companies involves certain considerations
which are not typically associated with investing in U.S. issuers.
Since these funds may be investing in securities denominated in
currencies other than the U.S. dollar, and since these funds may
temporarily hold funds in bank deposits or other money-market
investments denominated in foreign currencies, the funds may be
affected favorably or unfavorably by exchange control regulations
or changes in the exchange rate between such currencies and the
dollar. A change in the value of a foreign currency relative to the
U.S. dollar will result in a corresponding change in the dollar
value of the fund's assets denominated in that foreign currency.
Changes in foreign currency exchange rates may also affect the
value of dividends and interest earned, gains and losses realized
on the sale of securities and net investment income and gain, if
any, to be distributed to shareholders by the fund.

The rate of exchange between the U.S. dollar and other currencies
is determined by the forces of supply and demand in the foreign
exchange markets. Changes in the exchange rate may result over time
from the interaction of many factors directly or indirectly
affecting economic conditions and political developments in other
countries. Of particular importance are rates of inflation,
interest rate levels, the balance of payments and the extent of
government surpluses or deficits in the Unites States and the
particular foreign country. All these factors are in turn
sensitive to the monetary, fiscal and trade policies pursued by the
governments of the United States and other foreign countries
important to international trade and finance. Government
intervention may also play a significant role. National governments
rarely voluntarily allow their currencies to float freely in
response to economic forces. Sovereign governments use a variety of
techniques, such as intervention by a country's central bank or
imposition of regulatory controls or taxes, to affect the exchange
rates of their currencies.

Many of the securities held by the funds will not be registered
with, nor the issuers thereof be subject to reporting requirements
of, the SEC. Accordingly, there may be less publicly available
information about the securities and about the foreign company or
government issuing them than is available about a domestic company
or government entity. Foreign issuers are generally not subject to
uniform financial reporting standards, practices and requirements
comparable to those applicable to U.S. issuers. In addition, with
respect to some foreign countries, there is the possibility of
expropriation or confiscatory taxation, limitations on the removal
of funds or other assets of the fund, political or social
instability, or domestic developments which could affect U.S.
investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy
in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and
balance of payment positions. The funds may invest in securities of
foreign governments (or agencies or instrumentalities thereof), and
many, if not all, of the foregoing considerations apply to such
investments as well.

Securities of some foreign companies are less liquid, and their
prices are more volatile, than securities of comparable domestic
companies. Certain foreign countries are known to experience long
delays between the trade and settlement dates of securities
purchased or sold. Due to the increased exposure of a fund to
market and foreign exchange fluctuations brought about by such
delays, and to the corresponding negative impact on fund liquidity,
the fund will avoid investing in countries which are known to
experience settlement delays which may expose the fund to
unreasonable risk of loss.

The interest payable on a fund's foreign securities may be subject
to foreign withholding taxes, and while investors may be able to
claim some credit or deductions for such taxes with respect to
their allocated shares of such foreign tax payments, the general
effect of these taxes will be to reduce the fund's income.
Additionally, the operating expenses of the funds can be expected
to be higher than those of an investment company investing
exclusively in U.S. securities, since the expenses of the fund,
such as custodial costs, valuation costs and communication costs,
as well as the rate of the investment advisory fees, though similar
to such expenses of some other international funds, are higher than
those costs incurred by other investment companies.

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

Eurodollar or Yankee Obligations (Balanced, Total Return Bond
Funds). These funds may invest in Eurodollar and Yankee
obligations. Eurodollar bank obligations are dollar denominated
debt obligations issued outside the U.S. capital markets by
foreign branches of U.S. banks and by foreign banks. Yankee
obligations are dollar denominated obligations issued in the U.S.
capital markets by foreign issuers. Eurodollar (and to a limited
extent, Yankee) obligations are subject to certain sovereign
risks. One such risk is the possibility that a foreign government
might prevent dollar denominated funds from flowing across its
borders. Other risks include: adverse political and economic
developments in a foreign country; the extent and quality of
government regulation of financial markets and institutions; the
imposition of foreign withholding taxes; and expropriation or
nationalization of foreign issuers.

Securities of Developing Countries (Diversified Strategic Income
and High Income Funds). These funds may invest in securities of
developing (or "emerging market") countries. A developing country
generally is considered to be a country that is in the initial
stages of its industrialization cycle. Investing in the equity
and fixed-income markets of developing countries involves exposure
to economic structures that are generally less diverse and mature,
and to political systems that can be expected to have less
stability, than those of developed countries. Historical
experience indicates that the markets of developing countries have
been more volatile than the markets of the more mature economies
of developed countries.

Foreign Government Securities (Diversified Strategic Income fund
and High Income Fund). Among the foreign government securities in
which the fund may invest are those issued by countries with
developing economies, i.e., countries in the initial stages of
their industrialization cycles. Investing in securities of
countries with developing economies involves exposure to economic
structures that are generally less diverse and less mature, and to
political systems that can be expected to have less stability, than
those of developed countries. The markets of countries with
developing economies historically have been more volatile than
markets of the more mature economies of developed countries, but
often have provided higher rates of return to investors.

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

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

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

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

Temporary Investments (Balanced, Convertible, Diversified
Strategic Income, High Income, Municipal High Income and Total
Return Bond Funds). When SSB Citi believes that market conditions
warrant, these funds may adopt a temporary defensive posture and
may invest in short-term instruments without limitation.
Short-term instruments in which the funds may invest (except for
Municipal High Income, as described below) include: U.S.
government securities; certain bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loan associations
and similar institutions); commercial paper rated no lower than
A-2 by S&P or Prime-2 by Moody's or an equivalent rating by any
other NRSRO or, if unrated, of an issuer having an outstanding,
unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements with respect to securities
in which a fund may invest.

When Municipal High Income Fund is maintaining a defensive position
it may invest in Temporary Investments consisting of: (a) the
following tax-exempt securities: (i) tax-exempt notes of municipal
issuers having, at the time of purchase, a rating of MIG 1 through
MIG 4 by Moody's or rated SP-1 or SP-2 by S&P or, if not rated, of
issuers having an issue of outstanding Municipal Securities rated
within the four highest grades by Moody's or S&P; (ii) tax-exempt
commercial paper having a rating not lower than A-2 by S&P or
Prime-2 by Moody's at the time of purchase; and (iii) variable-rate
demand notes rated within the two highest ratings by any major
rating service, or determined to be of comparable quality to
instruments with such rating, at the time of purchase; and (b) the
following taxable securities: (i) U.S. government securities,
including repurchase agreements with respect to such securities;
(ii) other debt securities rated within the four highest grades by
Moody's or S&P; (iii) commercial paper rated in the highest grade
by either of these rating services; and (iv) CDs of domestic banks
with assets of $1 billion or more. Among the tax-exempt notes in
which the fund may invest are Tax Anticipation Notes, Bond
Anticipation Notes and Revenue Anticipation Notes, which are issued
in anticipation of receipt of tax funds, proceeds of bond
placements or other revenues, respectively. At no time will more
than 20% of the fund's total assets be invested in Temporary
Investments unless the fund has adopted a defensive investment
policy in anticipation of a market decline. The fund, however,
intends to purchase tax-exempt Temporary Investments pending the
investment of the proceeds of the sale of shares of the fund and of
its portfolio securities, or in order to have highly liquid
securities available to meet anticipated redemptions.

Short Sales Against the Box (Convertible and Balanced Funds). These
funds may enter into a short sale of common stock such that, when
the short position is open, the fund involved owns an equal amount
of preferred stocks or debt securities convertible or exchangeable
without payment of further consideration into an equal number of
shares of the common stock sold short. A fund will enter into this
kind of short sale,, described as "against the box," for the
purpose of receiving a portion of the interest earned by the
executing broker from the proceeds of the sale. The proceeds of the
sale will be held by the broker until the settlement date, when the
fund delivers the convertible securities to close out its short
position. Although a fund will have to pay an amount equal to any
dividends paid on the common stock sold short prior to delivery, it
will receive the dividends from the preferred stock or interest
from the debt securities convertible into the stock sold short,
plus a portion of the interest earned from the proceeds of the
short sale. The funds will deposit, in a segregated account with
their custodian, convertible preferred stock or convertible debt
securities in connection with short sales against the box

Short Sales (Balanced Fund). In addition to selling securities
short "against the box" (described above) Balanced Fund may, from
time to time, sell securities short but the value of securities
sold short will not exceed 5% of the value of the fund's net assets
. In addition, the fund may not (a) sell short the securities of a
single issuer to the extent of more than 2% of the value of the
fund's net assets or (b) sell short the securities of any class of
an issuer to the extent of more than 2% of the outstanding
securities of the class at the time of the transaction. A short
sale is a transaction in which the fund sells securities that it
does not own (but has borrowed) in anticipation of a decline in the
market price of the securities.

When the fund makes a short sale, the proceeds it receives from the
sale are retained by a broker until the fund replaces the borrowed
securities. To deliver the securities to the buyer, the fund must
arrange through a broker to borrow the securities and, in so doing,
the fund becomes obligated to replace the securities borrowed at
their market price at the time of replacement, whatever that price
may be. The fund may have to pay a premium to borrow the securities
and must pay any dividends or interest payable on the securities
until they are replaced.

The fund's obligation to replace the securities borrowed in
connection with a short sale will be secured by collateral
deposited with the broker that consists of cash, U.S. government
securities, equity securities or debt securities of any grade,
providing such securities have been determined by SSB Citi to be
liquid and unencumbered and are marked to market daily pursuant to
guidelines established by the trustees. In addition, the fund will
place in a segregated account with its custodian an amount of cash
or U.S. government securities equal to the difference, if any,
between the market value of the securities at the time they were
sold short and the value of any assets deposited as collateral with
the broker in connection with the short sale (not including the
proceeds of the short sale). Until it replaces the borrowed
securities, the fund will maintain the segregated account daily
such that the amount deposited in the account plus the amount
deposited with the broker, not including the proceeds from the
short sale, will equal the current market value of the securities
sold short and will not be less than the market value of the
securities at the time they were sold short.

Rule 144A Securities (Balanced, Exchange Reserve and Convertible
Funds). These funds may purchase Rule 144A Securities, which are
unregistered securities restricted to purchase by "qualified
institutional buyers" pursuant to Rule 144A under the 1933 Act.
Because Rule 144A Securities are freely transferable among
qualified institutional buyers, a liquid market may exist among
such buyers. The board of trustees has adopted guidelines and
delegated to SSB Citi the daily function of determining and
monitoring liquidity of Rule 144A Securities. However, the board
of trustees maintains sufficient oversight and is ultimately
responsible for the liquidity determinations. Investments in
restricted securities such as Rule 144A Securities could have the
effect of increasing the level of illiquidity in the fund to the
extent that there is temporarily no market for these securities
among qualified institutional buyers.

Real Estate Investment Trusts (Balanced, Convertible and
Diversified Strategic Income Funds). These funds may invest in
real estate investment trusts ("REITs"). REITs are pooled
investment vehicles that invest primarily in either real estate or
real estate related loans. The value of the REIT is affected by
changes in the value of the properties owned by the REIT or
security mortgage loans held by the REIT. REITS are dependent
upon cash flow from its investments to repay financing costs and
the management skill of the REIT's manager. REITS are also
subject to risks generally associated with investments in real
estate.

Restricted and Illiquid Securities (All funds.) Each fund may
invest up to 15% (except for Exchange Reserve Fund and Municipal
High Income Fund, each of which may invest up to 10%) of its total
assets in securities with contractual or other restrictions on
resale and other instruments that are not readily marketable,
including (a) repurchase agreements with maturities greater than
seven days, (b) futures contracts and related options (and with
respect to Municipal High Income Fund, certain variable rate
demand notes) for which a liquid secondary market does not exist
and (c) time deposits maturing in more than seven calendar days
(except for Exchange Reserve Fund, time deposits maturing in two
business days to six months, and for Municipal High Income Fund,
time deposits maturing in two business days to seven calendar
days). The above restriction does not apply to Rule 144A
Securities. In addition, each fund, except Convertible Fund,
which is not restricted may invest up to 5% of its assets in the
securities of issuers which have been in continuous operation for
less than three years. Not withstanding the foregoing, Total
Return Bond Fund shall not invest more that 10% of its net assets
in securities that are restricted, excluding Rule 144A Securities.

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

RISK FACTORS

The following risk factors are intended to supplement the risks
described above and those in the funds' prospectuses.

General. Investors should realize that risk of loss is inherent
in the ownership of any securities and that each fund's net asset
value will fluctuate, reflecting fluctuations in the market value
of its portfolio positions.

Warrants. Because a warrant does not carry with it the right to
dividends or voting rights with respect to the securities that the
warrant holder is entitled to purchase, and because a warrant does
not represent any rights to the assets of the issuer, a warrant
may be considered more speculative than certain other types of
investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying security and a
warrant ceases to have value if it is not exercised prior to its
expiration date. The investment in warrants, valued at the lower
of cost or market, may not exceed 10% of the value of the fund's
net assets. Included within that amount, but not to exceed 5% of
the value of the fund's net assets, may be warrants that are not
listed on the NYSE or the American Stock Exchange. Warrants
acquired by the fund in units or attached to securities may be
deemed to be without value.

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

Fixed Income Securities. Investments in fixed income securities
may subject the funds to risks, including the following.

Interest Rate Risk. When interest rates decline, the market
value of fixed income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed income
securities tends to decline. The volatility of a security's
market value will differ depending upon the security's duration,
the issuer and the type of instrument.

Default Risk/Credit Risk. Investments in fixed income
securities are subject to the risk that the issuer of the security
could default on its obligations, causing a fund to sustain losses
on such investments. A default could impact both interest and
principal payments.

Call Risk and Extension Risk. Fixed income securities may
be subject to both call risk and extension risk. Call risk exists
when the issuer may exercise its right to pay principal on an
obligation earlier than scheduled, which would cause cash flows to
be returned earlier than expected. This typically results when
interest rates have declined and a fund will suffer from having to
reinvest in lower yielding securities. Extension risk exists when
the issuer may exercise its right to pay principal on an
obligation later than scheduled, which would cause cash flows to
be returned later than expected. This typically results when
interest rates have increased, and a fund will suffer from the
inability to invest in higher yield securities.

Lower Rated Fixed Income Securities. Securities which are rated
BBB by S&P or Baa by Moody's are generally regarded as having
adequate capacity to pay interest and repay principal, but may
have some speculative characteristics. Securities rated below Baa
by Moody's or BBB by S&P may have speculative characteristics,
including the possibility of default or bankruptcy of the issuers
of such securities, market price volatility based upon interest
rate sensitivity, questionable creditworthiness and relative
liquidity of the secondary trading market. Because high yield
bonds ("junk bonds") have been found to be more sensitive to
adverse economic changes or individual corporate developments and
less sensitive to interest rate changes than higher-rated
investments, an economic downturn could disrupt the market for
high yield bonds and adversely affect the value of outstanding
bonds and the ability of issuers to repay principal and interest.
In addition, in a declining interest rate market, issuers of high
yield bonds may exercise redemption or call provisions, which may
force a fund, to the extent it owns such securities, to replace
those securities with lower yielding securities. This could
result in a decreased return.

Repurchase Agreements. The fund bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its
obligations and the fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the
risk of a possible decline in the value of the underlying
securities during the period in which the fund seeks to assert its
rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or a part of the
income from the agreement.

Foreign Securities. Investments in securities of foreign issuers
involve certain risks not ordinarily associated with investments
in securities of domestic issuers. Such risks include
fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions.
Since each fund will invest heavily in securities denominated or
quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates will, to the extent the fund does
not adequately hedge against such fluctuations, affect the value
of securities in its portfolio and the unrealized appreciation or
depreciation of investments so far as U.S. investors are
concerned. In addition, with respect to certain countries, there
is the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic
developments which could adversely affect investments in those
countries.

There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not
be subject to accounting, auditing, and financial reporting
standards and requirements comparable to or as uniform as those of
U.S. companies. Foreign securities markets, while growing in
volume, have, for the most part, substantially less volume than
U.S. markets, and securities of many foreign companies are less
liquid and their price more volatile than securities of comparable
U.S. companies. Transaction costs on foreign securities markets
are generally higher than in the U.S. There is generally less
government supervision and regulation of exchanges, brokers and
issuers than there is in the U.S. A fund might have greater
difficulty taking appropriate legal action in foreign courts.
Dividend and interest income from foreign securities will
generally be subject to withholding taxes by the country in which
the issuer is located and may not be recoverable by the fund or
the investors. Capital gains are also subject to taxation in some
foreign countries.

Currency Risks. The U.S. dollar value of securities denominated
in a foreign currency will vary with changes in currency exchange
rates, which can be volatile. Accordingly, changes in the value
of the currency in which a fund's investments are denominated
relative to the U.S. dollar will affect the fund's net asset
value. Exchange rates are generally affected by the forces of
supply and demand in the international currency markets, the
relative merits of investing in different countries and the
intervention or failure to intervene of U.S. or foreign
governments and central banks. However, currency exchange rates
may fluctuate based on factors intrinsic to a country's economy.
Some emerging market countries also may have managed currencies,
which are not free floating against the U.S. dollar. In addition,
emerging markets are subject to the risk of restrictions upon the
free conversion of their currencies into other currencies. Any
devaluations relative to the U.S. dollar in the currencies in
which a fund's securities are quoted would reduce the fund's net
asset value per share.

Special Risks of Countries in the Asia Pacific Region. Certain
of the risks associated with international investments are
heightened for investments in these countries. For example, some
of the currencies of these countries have experienced devaluations
relative to the U.S. dollar, and adjustments have been made
periodically in certain of such currencies. Certain countries,
such as Indonesia, face serious exchange constraints.
Jurisdictional disputes also exist, for example, between South
Korea and North Korea. In addition, Hong Kong reverted to Chinese
administration on July 1, 1997. The long-term effects of this
reversion are not known at this time.

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

One or more of the risks discussed above could affect adversely
the economy of a developing market or a fund's investments in such
a market. In Eastern Europe, for example, upon the accession to
power of Communist regimes in the past, the governments of a
number of Eastern European countries expropriated a large amount
of property. The claims of many property owners against those of
governments may remain unsettled. There can be no assurance that
any investments that a fund might make in such emerging markets
would not be expropriated, nationalized or otherwise confiscated
at some time in the future. In such an event, the fund could lose
its entire investment in the market involved. Moreover, changes
in the leadership or policies of such markets could halt the
expansion or reverse the liberalization of foreign investment
policies now occurring in certain of these markets and adversely
affect existing investment opportunities.

Many of a fund's investments in the securities of emerging markets
may be unrated or rated below investment grade. Securities rated
below investment grade (and comparable unrated securities) are the
equivalent of high yield, high risk bonds, commonly known as "junk
bonds." Such securities are regarded as predominantly speculative
with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations and
involve major risk exposure to adverse business, financial,
economic, or political conditions.

Derivative Instruments. In accordance with its investment
policies, each fund may invest in certain derivative instruments
which are securities or contracts that provide for payments based
on or "derived" from the performance of an underlying asset, index
or other economic benchmark. Essentially, a derivative instrument
is a financial arrangement or a contract between two parties (and
not a true security like a stock or a bond). Transactions in
derivative instruments can be, but are not necessarily, riskier
than investments in conventional stocks, bonds and money market
instruments. A derivative instrument is more accurately viewed as
a way of reallocating risk among different parties or substituting
one type of risk for another. Every investment by a fund,
including an investment in conventional securities, reflects an
implicit prediction about future changes in the value of that
investment. Every fund investment also involves a risk that the
portfolio manager's expectations will be wrong. Transactions in
derivative instruments often enable a fund to take investment
positions that more precisely reflect the portfolio manager's
expectations concerning the future performance of the various
investments available to the fund. Derivative instruments can be
a legitimate and often cost-effective method of accomplishing the
same investment goals as could be achieved through other
investment in conventional securities.

Derivative contracts include options, futures contracts, forward
contracts, forward commitment and when-issued securities
transactions, forward foreign currency exchange contracts and
interest rate, mortgage and currency transactions. The following
are the principal risks associated with derivative instruments.

Market risk: The instrument will decline in value or that
an alternative investment would have appreciated more, but this is
no different from the risk of investing in conventional
securities.

Leverage and associated price volatility: Leverage causes
increased volatility in the price and magnifies the impact of
adverse market changes, but this risk may be consistent with the
investment objective of even a conservative fund in order to
achieve an average portfolio volatility that is within the
expected range for that type of fund.

Credit risk: The issuer of the instrument may default on
its obligation to pay interest and principal.

Liquidity and valuation risk: Many derivative instruments
are traded in institutional markets rather than on an exchange.
Nevertheless, many derivative instruments are actively traded and
can be priced with as much accuracy as conventional securities.
Derivative instruments that are custom designed to meet the
specialized investment needs of a relatively narrow group of
institutional investors such as the funds are not readily
marketable and are subject to a fund's restrictions on illiquid
investments.

Correlation risk: There may be imperfect correlation
between the price of the derivative and the underlying asset. For
example, there may be price disparities between the trading
markets for the derivative contract and the underlying asset.

Each derivative instrument purchased for a fund's portfolio is
reviewed and analyzed by the fund's portfolio manager to assess
the risk and reward of each such instrument in relation the fund's
portfolio investment strategy. The decision to invest in
derivative instruments or conventional securities is made by
measuring the respective instrument's ability to provide value to
the fund and its shareholders.

Special Risks of Writing Options. Option writing for the fund may
be limited by position and exercise limits established by national
securities exchanges and by requirements of the Code for
qualification as a regulated investment company. In addition to
writing covered call options to generate current income, the fund
may enter into options transactions as hedges to reduce investment
risk, generally by making an investment expected to move in the
opposite direction of a portfolio position. A hedge is designed
to offset a loss on a portfolio position with a gain on the hedge
position; at the same time, however, a properly correlated hedge
will result in a gain on the portfolio position being offset by a
loss on the hedge position. The fund bears the risk that the
prices of the securities being hedged will not move in the same
amount as the hedge. The fund will engage in hedging transactions
only when deemed advisable by SSB Citi. Successful use by the
fund of options will be subject to SSB Citi' ability to predict
correct movements in the direction of the stock or index
underlying the option used as a hedge. Losses incurred in hedging
transactions and the costs of these transactions will affect the
fund's performance.

The ability of the fund to engage in closing transactions with
respect to options depends on the existence of a liquid secondary
market. While the fund generally will write options only if a
liquid secondary market appears to exist for the options purchased
or sold, for some options no such secondary market may exist or
the market may cease to exist. If the fund cannot enter into a
closing purchase transaction with respect to a call option it has
written, the fund will continue to be subject to the risk that its
potential loss upon exercise of the option will increase as a
result of any increase in the value of the underlying security.
The fund could also face higher transaction costs, including
brokerage commissions, as a result of its options transactions.

Special Risks of Using Futures Contracts. The prices of Futures
Contracts are volatile and are influenced by, among other things,
actual and anticipated changes in interest rates, which in turn
are affected by fiscal and monetary policies and national and
international political and economic events.

At best, the correlation between changes in prices of Futures
Contracts and of the securities or currencies being hedged can be
only approximate. The degree of imperfection of correlation
depends upon circumstances such as: variations in speculative
market demand for Futures and for debt securities or currencies,
including technical influences in Futures trading; and differences
between the financial instruments being hedged and the instruments
underlying the standard Futures Contracts available for trading,
with respect to interest rate levels, maturities, and
creditworthiness of issuers. A decision of whether, when, and how
to hedge involves skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of unexpected
market behavior or interest rate trends.

Because of the low margin deposits required, Futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a Futures Contract may result
in immediate and substantial loss, as well as gain, to the
investor. For example, if at the time of purchase, 10% of the
value of the Futures Contract is deposited as margin, a subsequent
10% decrease in the value of the Futures Contract would result in
a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original
margin deposit, if the Futures Contract were closed out. Thus, a
purchase or sale of a Futures Contract may result in losses in
excess of the amount invested in the Futures Contract. A fund,
however, would presumably have sustained comparable losses if,
instead of the Futures Contract, it had invested in the underlying
financial instrument and sold it after the decline. Where a fund
enters into Futures transactions for non-hedging purposes, it will
be subject to greater risks and could sustain losses which are not
offset by gains on other fund assets.

Furthermore, in the case of a Futures Contract purchase, in order
to be certain that each fund has sufficient assets to satisfy its
obligations under a Futures Contract, the fund segregates and
commits to back the Futures Contract an amount of cash and liquid
securities equal in value to the current value of the underlying
instrument less the margin deposit.

Most U.S. Futures exchanges limit the amount of fluctuation
permitted in Futures Contract prices during a single trading day.
The daily limit establishes the maximum amount that the price of a
Futures Contract may vary either up or down from the previous
day's settlement price at the end of a trading session. Once the
daily limit has been reached in a particular type of Futures
Contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential
losses, because the limit may prevent the liquidation of
unfavorable positions. Futures Contract prices have occasionally
moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of
Futures positions and subjecting some Futures traders to
substantial losses.

Year 2000. The investment management services provided to each
fund by SSB Citi depend on the smooth functioning of its computer
systems and those of its service providers. Many computer software
systems in use today cannot recognize the year 2000, but revert to
1900 or some other date, due to the manner in which dates were
encoded and calculated. That failure could have a negative impact
on each fund's operations, including the handling of securities
trades, pricing and account services. SSB Citi has advised each
fund that it has been reviewing all of its computer systems and
actively working on necessary changes to its systems to prepare
for the year 2000 and expect that its systems will be compliant
before that date. In addition, SSB Citi has been advised by each
fund's custodian, distributor, transfer agent sub-transfer agent
and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be
no assurance that SSB Citi or any other service provider will be
successful, or that interaction with other non-complying computer
systems will not impair fund services at that time.

Portfolio Turnover. Each fund may purchase or sell securities
without regard to the length of time the security has been held
and thus may experience a high rate of portfolio turnover. A 100%
turnover rate would occur, for example, if all the securities in a
portfolio were replaced in a period of one year. A fund may
experience a high rate of portfolio turnover if, for example, it
writes a substantial number of covered call options and the market
prices of the underlying securities appreciate. The rate of
portfolio turnover is not a limiting factor when the SSB Citi
deems it desirable to purchase or sell securities or to engage in
options transactions. High portfolio turnover involves
correspondingly greater transaction costs, including any brokerage
commissions, which are borne directly by the respective fund and
may increase the recognition of short-term, rather than long-term,
capital gains if securities are held for one year or less and may
be subject to applicable income taxes.

Investment Restrictions

The trust has adopted investment restrictions 1 through 8 below as
fundamental policies with respect to the funds, which, under the
terms of the 1940 Act, may not be changed without the vote of a
majority of the outstanding voting securities of a fund. A
"majority" is defined in the 1940 Act as the lesser of (a) 67% or
more of the shares present at a shareholder meeting, if the holders
of more than 50% of the outstanding shares of the trust are present
or represented by proxy, or (b) more than 50% of the outstanding
shares. Investment restrictions 9 through 16 may be changed by vote
of a majority of the board of trustees at any time.

The investment policies adopted by the trust prohibit a fund from:

1. Investing in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.

2. Investing in "senior securities" as defined in the 1940
Act and the rules, regulations and orders thereunder
except as permitted under the 1940 Act and the rules,
regulations and orders thereunder.

3. Investing more than 25% of its total assets in
securities, the issuers of which conduct their principal
business activities in the same industry. For purposes
of this limitation, securities of the U.S. government
(including its agencies and instrumentalities) and
securities of state or municipal governments and their
political subdivisions are not considered to be issued by
members of any industry.

4. Borrowing money, except that (a) the fund may borrow from
banks for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests
which might otherwise require the untimely disposition of
securities, and (b) the fund may to the extent consistent
with its investment policies, enter into reverse
repurchase agreements, forward roll transactions and
similar investment strategies and techniques. To the
extent that it engages in transactions described in (a)
and (b), the fund will be limited so that no more than
33-1/3% of the value of its total assets (including the
amount borrowed), valued at the lesser of cost or market,
less liabilities (not including the amount borrowed)
valued at the time the borrowing is made, is derived from
such transaction.

5. Purchasing securities on margin (except for such short-
term credits as are necessary for the clearance of
purchases and sales of portfolio securities) or sell any
securities short (except "against the box" and for the
Balanced Fund which may make short sales or maintain a
short position to the extent of 5% of its net assets).
For purposes of this restriction the deposit or payment
by the fund of underlying securities and other assets in
escrow and collateral agreements with respect to initial
or maintenance margin in connection with futures
contracts and related options and options on securities,
indexes or similar items is not considered to be the
purchase of a security on margin.

6. Making Loans. This restriction does not apply to: (a)
the purchase of debt obligations in which the fund may
invest consistent with its investment objective and
policies; (b) repurchase agreements; and (c) loans of its
portfolio securities, to the fullest extent permitted
under the 1940 Act.

7. Underwriting securities issued by other persons, except
to the extent that the fund may technically be deemed an
underwriter under the Securities Act of 1933, as amended,
in disposing of portfolio securities.

8. Purchasing or selling real estate, real estate mortgages,
commodities or commodity contracts, but this restriction
shall not prevent the fund from (a) investing in
securities of issuers engaged in the real estate business
or the business of investing in real estate (including
interests in limited partnerships owning or otherwise
engaging in the real estate business or the business of
investing in real estate) and securities which are
secured by real estate or interests therein; (b) holding
or selling real estate received in connection with
securities it holds or held; (c) trading in futures
contracts and options on futures contracts (including
options on currencies to the extent consistent with the
fund's investment objective and policies); (d) investing
in real estate investment trust securities; or (e)
investing in gold bullion and coins or receipts for gold.

9. Investing in oil, gas or other mineral exploration or
development programs, except that the Convertible,
Diversified Strategic Income, Balanced and High Income
Funds may invest in the securities of companies that
invest in or sponsor those programs.

10. Writing or selling puts, calls, straddles, spreads or
combinations thereof, except, with respect to funds other
than Exchange Reserve Fund, as permitted under the fund's
investment objective and policies.

11. With respect to all funds except the Exchange Reserve
Fund and Municipal High Income Fund, purchasing
restricted securities, illiquid securities (such as
repurchase agreements with maturities in excess of seven
days and, in the case of Exchange Reserve Fund, TDs
maturing from two business days through six months) or
other securities that are not readily marketable if more
than 15% or, in the case of the Municipal High Income and
Exchange Reserve Funds, 10% of the total assets of the
fund would be invested in such securities. With respect
to the Exchange Reserve Fund, securities subject to Rule
144A of the 1933 Act (provided at least two dealers make
a market in such securities) and certain privately issued
commercial paper eligible for resale without registration
pursuant to Section 4(2) of the 1933 Act will not be
subject to this restriction

12. Purchasing any security if as a result the fund, except
Convertible Fund, would then have more than 5% of its
total assets invested in securities of companies
(including predecessors) that have been in continuous
operation for fewer than three years; provided that, in
the case of private activity bonds purchased for
Municipal High Income Fund, this restriction shall apply
to the entity supplying the revenues from which the issue
is to be paid.

13. Making investments for the purpose of exercising control
or management.

14. Purchasing or retaining securities of any company if, to
the knowledge of the trust, any of the trust's officers
or trustees or any officer or director of SSB Citi
individually owns more than 1/2 of 1% of the outstanding
securities of such company and together they own
beneficially more than 5% of the securities.

15. Investing in warrants other than those acquired by the
fund, except Convertible Fund, as part of a unit or
attached to securities at the time of purchase (except as
permitted under a fund's investment objective and
policies) if, as a result, the investments (valued at the
lower of cost or market) would exceed 5% of the value of
the fund's net assets (for Convertible Fund, would exceed
10% of the value of the fund's net assets). At no time
may more than 2% of the fund's net assets (for
Convertible Fund, at no time may more than 5% of the
fund's net assets) be invested in warrants not listed on
a recognized U.S. or foreign stock exchange, to the
extent permitted by applicable state securities laws.

16. With respect to Balanced Fund, purchasing in excess of 5%
of the voting securities of a public utility or public
utility holding company, so as to become a public utility
holding company as defined in the Public Utility Holding
Company Act of 1935, as amended.

The trust has adopted two additional investment restrictions
applicable to Exchange Reserve Fund, the first of which is a
fundamental policy, which prohibit the fund from:

1. Investing in common stocks, preferred stocks, warrants,
other equity securities, corporate bonds or debentures,
state bonds, municipal bonds or industrial revenue bonds.

2. Investing more than 10% of its assets in variable rate
master demand notes providing for settlement upon more
than seven days' notice by the fund.

Portfolio Turnover

The funds do not intend to seek profits through short-term trading.
Nevertheless, the funds will not consider portfolio turnover rate a
limiting factor in making investment decisions.

Under certain market conditions, a fund authorized to engage in
transactions in options may experience increased portfolio turnover
as a result of its investment strategies. For instance, the
exercise of a substantial number of options written by a fund (due
to appreciation of the underlying security in the case of call
options on securities or depreciation of the underlying security in
the case of put options on securities) could result in a turnover
rate in excess of 100%. A portfolio turnover rate of 100% also
would occur if all of a fund's securities that are included in the
computation of turnover were replaced once during a one-year
period. A fund's turnover rate is calculated by dividing the lesser
of purchases or sales of its portfolio securities for the year by
the monthly average value of the portfolio securities. Securities
or options with remaining maturities of one year or less on the
date of acquisition are excluded from the calculation.

Certain other practices which may be employed by a fund also could
result in high portfolio turnover. For example, portfolio
securities may be sold in anticipation of a rise in interest rates
(market decline) or purchased in anticipation of a decline in
interest rates (market rise) and later sold. In addition, a
security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what SSB Citi or a
fund's sub-investment adviser believes to be a temporary disparity
in the normal yield relationship between the two securities. These
yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for, or
supply of, various types of securities.

For the fiscal years ended July 31, 1997, 1998 and 1999, the
portfolio turnover rates were as follows:

For the Fiscal Year Ended
July 31:

Fund
1997
1998
1999

Convertible Fund
57%
49%

27 %
Diversified Strategic
Income Fund
85
128

150
High Income Fund
78
102

96
Municipal High Income
Fund
51
84

50
Total Return Bond Fund
N/A
0

32
Balanced Fund
45
110

For regulatory purposes, the turnover rate of Exchange Reserve Fund
is zero.

Portfolio Transactions

Most of the purchases and sales of securities by a fund, whether
transacted on a securities exchange or over the counter, will be
made in the primary trading market for the securities, except for
Eurobonds which are principally traded over the counter. The
primary trading market for a given security is generally located in
the country in which the issuer has its principal office. Decisions
to buy and sell securities for a fund are made by SSB Citi, who is
also responsible for placing these transactions subject to the
overall review of the board of trustees. With respect to
Diversified Strategic Income Fund, decisions to buy and sell
domestic securities for the fund are made by SSB Citi, which is
also responsible for placing these transactions; the responsibility
to make investment decisions with respect to foreign securities and
to place these transactions rests with Global Capital Management.
With respect to Convertible Fund, day-to-day investment decisions
are made by SaBAM, subject to the supervision of SSB Citi.
Although investment decisions for each fund are made independently
from those of the other accounts managed by SSB Citi, investments
of the type that the fund may make also may be made by those other
accounts. When a fund and one or more other accounts managed by SSB
Citi are prepared to invest in, or desire to dispose of, the same
security, available investments or opportunities for sales will be
allocated in a manner believed by SSB Citi or a fund's sub-
investment adviser to be equitable to each. In some cases this
procedure may adversely affect the price paid or received by a
fund, or the size of the position obtained or disposed of by the
fund.

Transactions on domestic stock exchanges and some foreign stock
exchanges involve the payment of negotiated brokerage commissions.
On exchanges on which commissions are negotiated, the cost of
transactions may vary among different brokers. Commissions
generally are fixed on most foreign exchanges. There is generally
no stated commission in the case of securities traded in U.S. or
foreign over-the-counter markets, but the prices of those
securities include undisclosed commissions or mark-ups. The cost of
securities purchased from underwriters includes an underwriting
commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or
mark-down. U.S. government securities generally are purchased from
underwriters or dealers, although certain newly issued U.S.
government securities may be purchased directly from the United
States Treasury or from the issuing agency or instrumentality. The
following table sets forth certain information regarding each
fund's payment of brokerage commissions:

Total Brokerage Commissions Paid

Fiscal
Year

Convertible Fund

High
Income
Fund

Balanced
Fund

Diversified
Strategic
Income Fund

Total
Return
Bond
Fund

1997
$0
$0
$2,094,394
$0
N/A

1998
$23,753
$34,725
$2,187,805
$20,200
- --
1999
$13,850
$3,634
$592,637
$20,619
$0

Brokerage Commissions Paid to Salomon Smith Barney

Fiscal
Year

Convertib
le Fund
High
Income
Fund

Balanced
Fund

Diversified
Strategic
Income Fund

Total
Return
Bond
Fund

1997
- --
- --
$138,150
- --
N/A

1998
- --
- --
$139,236
- --
- --
1999
- --
- --

$13,080*
- --
- --
*Includes $2,520 for execution, research and statistical services.

% of Total Brokerage Commissions Paid to Salomon Smith Barney

Fiscal
Year

Convertible Fund

High
Income
Fund

Balanced
Fund

Diversified
Strategic
Income Fund

Total
Return
Bond
Fund

1997
- --
- --

6.60%
- --
N/A

1998
- --
- --

6.36%
- --
- --

1999
- --
- --
2.21%
- --
- --

% of Total Dollar Amount of Transactions Involving Commissions
Paid to Salomon Smith Barney

Fiscal
Year

Convertible Fund

High
Income
Fund

Balanced
Fund

Diversified
Strategic
Income Fund

Total
Return
Bond
Fund

1997
- --
- --
5.85%
- --
N/A

1998
- --
- --
6.54%
- --
- --
1999
- --
- --
1.95%
- --
- --

In selecting brokers or dealers to execute securities transactions
on behalf of a fund, SSB Citi seeks the best overall terms
available. In assessing the best overall terms available for any
transaction, SSB Citi will consider the factors that it deems
relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution
capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a
continuing basis. In addition, each advisory agreement between the
trust and SSB Citi authorizes SSB Citi, in selecting brokers or
dealers to execute a particular transaction and in evaluating the
best overall terms available, to consider the brokerage and
research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934, as amended) provided to the
trust, the other funds and/or other accounts over which SSB Citi or
its affiliates exercise investment discretion. The fees under the
advisory agreements and the Sub-Advisory and/or administration
agreements are not reduced by reason of their receiving such
brokerage and research services. Further, Salomon Smith Barney will
not participate in commissions brokerage given by the fund to other
brokers or dealers and will not receive any reciprocal brokerage
business resulting therefrom. The trust's board of trustees
periodically will review the commissions paid by the funds to
determine if the commissions paid over representative periods of
time were reasonable in relation to the benefits inuring to the
trust.

To the extent consistent with applicable provisions of the 1940 Act
and the rules and exemptions adopted by the SEC thereunder, the
board of trustees has determined that transactions for a fund may
be executed through Salomon Smith Barney and other affiliated
broker-dealers if, in the judgment of SSB Citi, the use of such
broker-dealer is likely to result in price and execution at least
as favorable as those of other qualified broker-dealers, and if, in
the transaction, such broker-dealer charges the fund a rate
consistent with that charged to comparable unaffiliated customers
in similar transactions. In addition, under rules recently adopted
by the SEC, Salomon Smith Barney may directly execute such
transactions for the funds on the floor of any national securities
exchange, provided (a) the trust's board of trustees has expressly
authorized Salomon Smith Barney to effect such transactions, and
(b) Salomon Smith Barney annually advises the trust of the
aggregate compensation it earned on such transactions. Over-the-
counter purchases and sales are transacted directly with principal
market makers except in those cases in which better prices and
executions may be obtained elsewhere. The funds will not purchase
any security, including U.S. government securities or Municipal
Securities, during the existence of any underwriting or selling
group relating thereto of which Salomon Smith Barney is a member,
except to the extent permitted by the SEC.

The funds may use Salomon Smith Barney as a commodities broker in
connection with entering into futures contracts and options on
futures contracts. Salomon Smith Barney has agreed to charge the
funds commodity commissions at rates comparable to those charged by
Salomon Smith Barney to its most favored clients for comparable
trades in comparable accounts.

PURCHASE OF SHARES

Sales Charge Alternatives

The following classes of shares are available for purchase. See
the prospectus for a discussion of factors to consider in
selecting which Class of shares to purchase.

Class A Shares. Class A shares are sold to investors at the
public offering price, which is the net asset value plus an
initial sales charge as follows:

Sales Charge
(Diversified Strategic Income, High Income, Municipal High Income and Total
Return Bond Funds)

Amount of
Investment

% of Offering
Price

% of Amount
Invested
Dealers'
Reallowance as %
of Offering Price
Less than $25,000
4.50%
4.71%
4.00%
$25,000 - 49,999
4.00
4.17
3.60
50,000 - 99,999
3.50
3.63
3.15
100,000-249,999
2.50
2.56
2.25
250,000-499,999
1.50
1.52
1.35
500,000 - and
over
*
*
*

Sales Charge
(Balanced and Convertible Funds)

Amount of
Investment

% of Offering
Price

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

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

The Deferred Sales Charge is waived in the same circumstances in
which the Deferred Sales Charge applicable to Class B and Class L
shares is waived. See "Deferred Sales Charge Alternatives" and
"Waivers of Deferred Sales Charge."

Members of the selling group may receive up to 90% of the sales
charge and may be deemed to be underwriters of the fund as defined
in the 1933 Act. The reduced sales charges shown above apply to
the aggregate of purchases of Class A shares of the fund made at
one time by "any person," which includes an individual and his or
her immediate family, or a trustee or other fiduciary of a single
trust estate or single fiduciary account.

Class B Shares. Class B shares are sold without an initial sales
charge but are subject to a deferred sales charge payable upon
certain redemptions. See "Deferred Sales Charge Provisions"
below.

Class L Shares. (except Exchange Reserve Fund) Class L shares are
sold with an initial sales charge of 1.00% (which is equal to
1.01% of the amount invested) and are subject to a deferred sales
charge payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below. Until June 22, 2001 purchases of Class
L shares by investors who were holders of Class C shares of the
fund on June 12, 1998 will not be subject to the 1% initial sales
charge.

Class O Shares. Class O shares are sold without an initial sales
charge or deferred sales charge and are available only to existing
Class O shareholders.

Class Y Shares. Class Y shares are sold without an initial sales
charge or deferred sales charge and are available only to
investors investing a minimum of $15,000,000 (except for purchases
of Class Y shares (i) of the International Equity Portfolio, for
which the minimum initial investment is $5,000,000 and (ii) by
Smith Barney Concert Allocation Series Inc., for which there is no
minimum purchase amount).

General

Investors may purchase shares from a Salomon Smith Barney
Financial Consultant or a broker that clears through Salomon Smith
Barney ("Dealer Representative"). In addition, certain investors,
including qualified retirement plans purchasing through certain
Dealer Representatives, may purchase shares directly from the
fund. When purchasing shares of the fund, investors must specify
whether the purchase is for Class A, Class B, Class L or Class Y
shares. Salomon Smith Barney and Dealer Representatives may
charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at First Data
Investor Services Group, Inc. ("First Data" or "transfer agent")
are not subject to a maintenance fee.

Investors in Class A, Class B and Class L shares may open an
account in the fund by making an initial investment of at least
$1,000 for each account, or $250 for an IRA or a Self-Employed
Retirement Plan, in the fund. Investors in Class Y shares may open
an account by making an initial investment of $15,000,000.
Subsequent investments of at least $50 may be made for all
Classes. For participants in retirement plans qualified under
Section 403(b)(7) or Section 401(c) of the Code, the minimum
initial investment required for Class A, Class B and Class L
shares and the subsequent investment requirement for all Classes
in the fund is $25. For shareholders purchasing shares of the
fund through the Systematic Investment Plan on a monthly basis,
the minimum initial investment requirement for Class A, Class B
and Class L shares and subsequent investment requirement for all
Classes is $25. For shareholders purchasing shares of the fund
through the Systematic Investment Plan on a quarterly basis, the
minimum initial investment required for Class A, Class B and Class
L shares and the subsequent investment requirement for all Classes
is $50. There are no minimum investment requirements for Class A
shares for employees of Citigroup Inc. ("Citigroup") and its
subsidiaries, including Salomon Smith Barney, unitholders who
invest distributions from a Unit Investment Trust ("UIT")
sponsored by Salomon Smith Barney, and Directors/Trustees of any
of the Smith Barney Mutual Funds, and their spouses and children.
The fund reserves the right to waive or change minimums, to
decline any order to purchase its shares and to suspend the
offering of shares from time to time. Shares purchased will be
held in the shareholder's account by First Data. Share
certificates are issued only upon a shareholder's written request
to First Data.

Purchase orders received by the fund or a Salomon Smith Barney
Financial Consultant prior to the close of regular trading on the
New York Stock Exchange ("NYSE"), on any day the fund calculates
its net asset value, are priced according to the net asset value
determined on that day (the ''trade date''). Orders received by a
Dealer Representative prior to the close of regular trading on the
NYSE on any day the fund calculates its net asset value, are
priced according to the net asset value determined on that day,
provided the order is received by the fund or the fund's agent
prior to its close of business. For shares purchased through
Salomon Smith Barney or a Dealer Representative purchasing through
Salomon Smith Barney, payment for shares of the fund is due on the
third business day after the trade date. In all other cases,
payment must be made with the purchase order.

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

Sales Charge Waivers and Reductions

Initial Sales Charge Waivers. Purchases of Class A shares may be
made at net asset value without a sales charge in the following
circumstances: (a) sales to (i) Board Members and employees of
Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board
Members and employees); the immediate families of such persons
(including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan
for such persons and (ii) employees of members of the National
Association of Securities Dealers, Inc., provided such sales are
made upon the assurance of the purchaser that the purchase is made
for investment purposes and that the securities will not be resold
except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect the combination
of such company with the fund by merger, acquisition of assets or
otherwise; (c) purchases of Class A shares by any client of a
newly employed Salomon Smith Barney Financial Consultant (for a
period up to 90 days from the commencement of the Financial
Consultant's employment with Salomon Smith Barney), on the
condition the purchase of Class A shares is made with the proceeds
of the redemption of shares of a mutual fund which (i) was
sponsored by the Financial Consultant's prior employer, (ii) was
sold to the client by the Financial Consultant and (iii) was
subject to a sales charge; (d) purchases by shareholders who have
redeemed Class A shares in the fund (or Class A shares of another
Smith Barney Mutual Fund that is offered with a sales charge) and
who wish to reinvest their redemption proceeds in the fund,
provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered
investment advisory subsidiaries of Citigroup; (f) direct
rollovers by plan participants of distributions from a 401(k) plan
offered to employees of Citigroup or its subsidiaries or a 401(k)
plan enrolled in the Smith Barney 401(k) Program (Note: subsequent
investments will be subject to the applicable sales charge); (g)
purchases by a separate account used to fund certain unregistered
variable annuity contracts; (h) investments of distributions from
a UIT sponsored by Salomon Smith Barney; (i) purchases by
investors participating in a Salomon Smith Barney fee-based
arrangement; (j) purchases by Section 403(b) or Section 401(a) or
(k) accounts associated with Copeland Retirement Programs; and (k)
accounts associated with "k" Choice and Collective Choice. In
order to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination
of the sales charge.

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

Letter of Intent - Class A Shares. A Letter of Intent for an
amount of $50,000 or more provides an opportunity for an investor
to obtain a reduced sales charge by aggregating investments over a
13 month period, provided that the investor refers to such Letter
when placing orders. For purposes of a Letter of Intent, the
''Amount of Investment'' as referred to in the preceding sales
charge table includes (i) all Class A shares of the fund and other
Smith Barney Mutual Funds offered with a sales charge acquired
during the term of the letter plus (ii) the value of all Class A
shares previously purchased and still owned. Each investment made
during the period receives the reduced sales charge applicable to
the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference
between the sales charges applicable to the purchases made and the
charges previously paid, or an appropriate number of escrowed
shares will be redeemed. The term of the Letter will commence
upon the date the Letter is signed, or at the options of the
investor, up to 90 days before such date. Please contact a
Salomon Smith Barney Financial Consultant or First Data to obtain
a Letter of Intent application.

Letter of Intent - Class Y Shares. A Letter of Intent may also be
used as a way for investors to meet the minimum investment
requirement for Class Y shares (except purchases of Class Y shares
by Smith Barney Concert Allocation Series Inc., for which there is
no minimum purchase amount).
For each fund, investors must make an initial minimum purchase of
$5,000,000 in Class Y shares of the fund and agree to purchase a
total of $15,000,000 of Class Y shares of the fund within 13
months from the date of the Letter. If a total investment of
$15,000,000 is not made within the 13-month period, all Class Y
shares purchased to date will be transferred to Class A shares,
where they will be subject to all fees (including a service fee of
0.25%) and expenses applicable to the fund's Class A shares, which
may include a deferred sales charge of 1.00%. Please contact a
Salomon Smith Barney Financial Consultant or First Data for
further information.

Deferred Sales Charge Provisions

''Deferred Sales Charge Shares'' are: (a) Class B shares; (b)
Class L shares; and (c) Class A shares that were purchased without
an initial sales charge but are subject to a deferred sales
charge. A deferred sales charge may be imposed on certain
redemptions of these shares.

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

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

Year Since
Purchase Payment
Was Made
Deferred Sales Charge

(Diversified Strategic Income,
High Income, Municipal High Income
and Total Return Bond Funds)

(Balanced and
Convertible Funds)
First
4.50%
5.00%
Second
4.00
4.00
Third
3.00
3.00
Fourth
2.00
2.00
Fifth
1.00
1.00
Sixth and
thereafter
0.00
0.00

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

In determining the applicability of any Deferred Sales Charge, it
will be assumed that a redemption is made first of shares
representing capital appreciation, next of shares representing the
reinvestment of dividends and capital gain distributions and
finally of other shares held by the shareholder for the longest
period of time. The length of time that Deferred Sales Charge
Shares acquired through an exchange have been held will be
calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and fund
shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain
distribution reinvestments in such other funds. For Federal income
tax purposes, the amount of the deferred sales charge will reduce
the gain or increase the loss, as the case may be, on the amount
realized on redemption. The amount of any deferred sales charge
will be paid to Salomon Smith Barney.

To provide an example, assume an investor purchased 100 Class B
shares of the fund at $10 per share for a cost of $1,000.
Subsequently, the investor acquired 5 additional shares of the
fund through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or
her investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of the
investor's shares would be $1,260 (105 shares at $12 per share).
The deferred sales charge would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested
dividend shares ($60). Therefore, $240 of the $500 redemption
proceeds ($500 minus $260) would be charged at a rate of 4.00%
(the applicable rate for Class B shares) for a total deferred
sales charge of $9.60.

Waivers of Deferred Sales Charge

The deferred sales charge will be waived on: (a) exchanges (see
''Exchange Privilege''); (b) automatic cash withdrawals in amounts
equal to or less than 1.00% per month of the value of the
shareholder's shares at the time the withdrawal plan commences
(see ''Automatic Cash Withdrawal Plan'') (provided, however, that
automatic cash withdrawals in amounts equal to or less than 2.00%
per month of the value of the shareholder's shares will be
permitted for withdrawal plans that were established prior to
November 7, 1994); (c) redemptions of shares within 12 months
following the death or disability of the shareholder; (d)
redemptions of shares made in connection with qualified
distributions from retirement plans or IRAs upon the attainment of
age 591/2; (e) involuntary redemptions; and (f) redemptions of
shares to effect a combination of the fund with any investment
company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other Smith
Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro
rata credit for any deferred sales charge imposed on the prior
redemption.

Deferred sales charge waivers will be granted subject to
confirmation (by Salomon Smith Barney in the case of shareholders
who are also Salomon Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or
holdings, as the case may be.

PFS Accounts

Initial purchase of shares of the Exchange Reserve Fund must be
made through a PFS Investments Registered Representative by
completing the appropriate application found in this prospectus.
The completed application should be forwarded to the sub-transfer
agent, 3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30099-
0062. Checks drawn on foreign banks must be payable in U.S.
dollars and have the routing number of the U.S. bank encoded on
the check. Subsequent investments may be sent directly to the sub-
transfer agent. In processing applications and investments, the
transfer agent acts as agent for the investor and for PFS
Investments and also as agent for the distributor, in accordance
with the terms of the prospectus. If the transfer agent ceases to
act as such, a successor company named by the fund will act in the
same capacity so long as the account remains open.

Shares purchased will be held in the shareholder's account by the
sub-transfer agent. Share certificates are issued only upon a
shareholder's written request to the sub-transfer agent. A
shareholder that has insufficient funds to complete any purchase
will be charged a fee of $27.50 per returned purchase by PFS.

Investors in Class B shares may open an account by making an
initial investment of at least $1,000 for each account in Class B
(except for Systematic Investment Plan accounts), or $250 for an
IRA or a Self-Employed Retirement Plan in a Fund. Subsequent
investments of at least $50 may be made for each Class. For
participants in retirement plans qualified under Section 403(b)(7)
or Section 401(a) of the Code, the minimum initial investment
requirement for Class B shares and the subsequent investment
requirement for each Class in the Fund is $25. For the fund's
Systematic Investment Plan, the minimum initial investment
requirement for Class B shares and the subsequent investment
requirement for each Class is $25. The fund reserves the right to
waive or change minimums, to decline any order to purchase its
shares and to suspend the offering of shares from time to time.
Purchase orders received by the transfer agent or sub-transfer
agent prior to the close of regular trading on the NYSE, on any
day the fund calculates its net asset value, are priced according
to the net asset value determined on that day.

Upon completion of certain automated systems, initial purchases of
fund shares may be made by wire. The minimum investment that can
be made by wire is $10,000. Before sending the wire, the PFS
Investments Registered Representative must contact the sub-
transfer agent at (800) 665-8677 to obtain proper wire
instructions. Once an account is open, a shareholder may make
additional investments by wire. The shareholder should contact
the sub-transfer agent at (800) 544-5445 to obtain proper wire
instructions.

Upon completion of certain automated systems, shareholders who
establish telephone transaction authority on their account and
supply bank account information may make additions to their
accounts at any time. Shareholders should contact the sub-
transfer agent at (800) 544-5445 between 8:00 a.m. and 8:00 p.m.
eastern time any day that the NYSE is open. If a shareholder does
not wish to allow telephone subsequent investments by any person
in his account, he should decline the telephone transaction option
on the account application. The minimum telephone subsequent
investment is $250 and can be up to a maximum of $10,000. By
requesting a subsequent purchase by telephone, you authorize the
sub-transfer agent to transfer funds from the bank account
provided for the amount of the purchase. A shareholder that has
insufficient funds to complete the transfer will be charged a fee
of up to $27.50 by PFS or the sub-transfer agent. A shareholder
who places a stop payment on a transfer or the transfer is
returned because the account has been closed, will also be charged
a fee of up to $27.50 by PFS or the sub-transfer agent.
Subsequent investments by telephone may not be available if the
shareholder cannot reach the sub-transfer agent whether because
all telephone lines are busy or for any other reason; in such
case, a shareholder would have to use the fund's regular
subsequent investment procedure described above.

Redemption proceeds can be sent by check to the address of record
or by wire transfer to a bank account designated on the
application. A shareholder will be charged a $25 service fee for
wire transfers and a nominal service fee for transfers made
directly to the shareholder's bank by the Automated Clearing
House.

An Account Transcript is available at a shareholder's request,
which identifies every financial transaction in an account since
it has opened. To defray administrative expenses involved with
providing multiple years worth of information, there is a $15
charge for each Account Transcript requested. Additional copies
of tax forms are available at the shareholder's request. A $10
fee for each tax form will be assessed.

The sub-transfer agent will process and mail a shareholder's
redemption check usually within two to three business days after
receiving the redemption request in good order. The shareholder
may request the proceeds to be mailed by two-day air express for
an $8 fee that will be deducted from the shareholder's account or
by one-day air express for a $15 fee that will be deducted from
the shareholder's account.

Additional information regarding the sub-transfer agent's services
may be obtained by contacting the Client Services Department at
(800) 544-5445.

Smith Barney 401(k) and ExecChoiceTM Programs

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

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

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

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

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

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

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

Participating Plans wishing to acquire shares of the fund through
the Smith Barney 401(k) Program or the Smith Barney ExecChoiceTM
Program must purchase such shares directly from the transfer
agent. For further information regarding these Programs, investors
should contact a Salomon Smith Barney Financial Consultant.

REDEMPTION OF SHARES

General.

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

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

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

Smith Barney Income Funds
Name of Fund (please specify)
Class A, B, L, O or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, RI 02940-9699

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

Automatic Cash Withdrawal Plan.

An automatic cash withdrawal plan (the "Withdrawal Plan") is
available to shareholders who own shares with a value of at least
$10,000 ($5,000 for retirement plan accounts) and who wish to
receive specific amounts of cash monthly or quarterly.
Withdrawals of at least $50 may be made under the Withdrawal Plan
by redeeming as many shares of a Fund as may be necessary to cover
the stipulated withdrawal payment. Any applicable Deferred Sales
Charge will not be waived on amounts withdrawn by shareholders
that exceed 1.00% per month of the value of a shareholder's shares
at the time the Withdrawal Plan commences. To the extent
withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in a Fund, there will be a reduction in
the value of the shareholder's investment and continued withdrawal
payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as
income from investment in the Fund. Furthermore, as it generally
would not be advantageous to a shareholder to make additional
investments in the Fund at the same time that he or she is
participating in the Withdrawal Plan, purchases by such
shareholders in amounts of less than $5,000 will not ordinarily be
permitted. The withdrawal plan will be carried over on exchanges
between funds or classes of a Fund.

Shareholders who wish to participate in the Withdrawal Plan and
who hold their shares in certificate form must deposit their share
certificates with First Data as agent for Withdrawal Plan members.
All dividends and distributions on shares in the Withdrawal Plan
are automatically reinvested at net asset value in additional
shares of the Company. Withdrawal Plans should be set up with a
Salomon Smith Barney Financial Consultant. A shareholder who
purchases shares directly through First Data may continue to do so
and applications for participation in the Withdrawal Plan must be
received by First Data no later than the eighth day of the month
to be eligible for participation beginning with that month's
withdrawal. For further information regarding the automatic cash
withdrawal plan, shareholders should contact a Salomon Smith
Barney Financial Consultant.

Telephone Redemption and Exchange Program.

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

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

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

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

Additional Information regarding Telephone Redemption and Exchange
Program. Neither a Fund nor its agents will be liable for
following instructions communicated by telephone that are
reasonably believed to be genuine. Each fund and its agents will
employ procedures designed to verify the identity of the caller
and legitimacy of instructions (for example, a shareholder's name
and account number will be required and phone calls may be
recorded). Each fund reserves the right to suspend, modify or
discontinue the telephone redemption and exchange program or to
impose a charge for this service at any time following at least
seven (7) days' prior notice to shareholders.

Suspension or Postponment

The right of redemption may be suspended or the date of payment
postponed (a) for any period during which the NYSE is closed
(other than for customary weekend and holiday closings), (b) when
trading in markets a Fund normally utilizes is restricted, or an
emergency as determined by the SEC exists, so that disposal of the
Fund's investments or determination of net asset value is not
reasonably practicable or (c) for such other periods as the SEC by
order may permit for the protection of the Fund's shareholders.

Distributions in Kind

If the board of directors of the Company determines that it would
be detrimental to the best interests of the remaining shareholders
of a Fund to make a redemption payment wholly in cash, the Fund
may pay, in accordance with the SEC rules, any portion of a
redemption in excess of the lesser of $250,000 or 1% of the Fund's
net assets by a distribution in kind of portfolio securities in
lieu of cash. Shareholders should expect to incur brokerage costs
when subsequently selling shares redeemed in kind.

EXCHANGE PRIVILEGE

General

Except as noted below, shareholders of any fund of the Smith
Barney mutual funds may exchange all or part of their shares for
shares of the same class of other funds of the Smith Barney mutual
funds, to the extent such shares are offered for sale in the
shareholder's state of residence and provided your registered
representative or your investment dealer is authorized to
distribute shares of the fund, on the basis of relative net asset
value per share at the time of exchange. Class B shares of any
fund may be exchanged without a Deferred Sales Charge. Class B
shares of the Fund exchanged for Class B shares of another fund
will be subject to the higher applicable Deferred Sales Charge of
the two funds and, for the purposes of calculating Deferred Sales
Charge rates and conversion periods, will be deemed to have been
held since the date the shares being exchanged were deemed to be
purchased. Exchanges of Class A, Class B and Class L shares are
subject to minimum investment requirements and all shares are
subject to the other requirements of the fund into which exchanges
are made.

The exchange privilege enables shareholders to acquire shares of
the same class in a fund with different investment objectives when
they believe that a shift between funds is an appropriate
investment decision. This privilege is available to shareholders
residing in any state in which the fund shares being acquired may
legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund
into which an exchange is being considered. Prospectuses may be
obtained from a Salomon Smith Barney Financial Consultant.

Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the
then-current net asset value and, subject to any applicable
Deferred Sales Charge, the proceeds are immediately invested at a
price as described above, in shares of the fund being acquired.
Salomon Smith Barney reserves the right to reject any exchange
request. The exchange privilege may be modified or terminated at
any time after written notice to shareholders.

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

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

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

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

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

DISTRIBUTOR

CFBDS serves as the trust's distributor on a best efforts basis
pursuant to a distribution agreement (the "Distribution
Agreement").

When payment is made by the investor before the settlement date,
unless otherwise directed by the investor, the funds will be held
as a free credit balance in the investor's brokerage account, and
Salomon Smith Barney may benefit from the temporary use of the
funds. The investor may designate another use for the funds prior
to settlement date, such as an investment in a money market fund
(other than the Exchange Reserve Fund) of the Smith Barney Mutual
Funds. If the investor instructs Salomon Smith Barney to invest the
funds in a Salomon Smith Barney money market fund, the amount of
the investment will be included as part of the average daily net
assets of both the relevant fund and the Salomon Smith Barney money
market fund, and affiliates of Salomon Smith Barney that serve the
funds in an investment advisory or administrative capacity will
benefit from the fact they are receiving fees from both such
investment companies for managing these assets computed on the
basis of their average daily net assets. The trust's board of
trustees has been advised of the benefits to Salomon Smith Barney
resulting from these settlement procedures and will take such
benefits into consideration when reviewing the advisory,
administration and Distribution agreements for continuance.

For the fiscal year ended July 31, 1999, Salomon Smith Barney
and/or PFS incurred distribution expenses for advertising, printing
and mailing prospectuses, support services and overhead expenses,
to Salomon Smith Barney Financial Consultants or PFS Investments Registered
Representatives and for accruals for interest on the excess of Salomon Smith
Barney and/or PFS expenses incurred in the distribution of the fund's shares
over the sum of the distribution fees and Deferred Sales Charge received
by Salomon Smith Barney and/or PFS are expressed in the following
table:

Fund Name

Financial
Consultant
Compensatio
n

Branch
Expenses

Advertisin
g
Expenses

Printin
g
Expense
s

Interes
t
Expense
s

Other
Expenses
Div.
Strat.
$1,727,061
$901,748
$127,769
$40,702
$81,352
$1,188,28
0
Balanced

508,037

280,078
32,704

11,511

19,426

229,036
High
Income
1,573,010

440,969
94,828

18,200

82,073

787,001
Muni High

234,359

153,156
22,768

7,238

8,300

157,890
Convertibl
e

11,648

13,342

1,566

462

37,848
Ex.
Reserve

(259,138)

35,492

2,551

(8,226)

933
Total
Return

44,151

52,714

8,052

2,204

3,615

78,685

Distribution Arrangements

Shares of the trust are sold on a best efforts basis by CFBDS as
sales agent of the trust pursuant to the Distribution Agreement.
To compensate Salomon Smith Barney for the services it provides
and for the expense it bears under the Distribution Agreement, the
trust has adopted a services and distribution plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, each
fund, except Exchange Reserve Fund, pays Salomon Smith Barney a
service fee, accrued daily and paid monthly, calculated at the
annual rate of 0.25% (0.15% in the case of Municipal High Income
Fund) of the value of the fund's average daily net assets
attributable to its Class A, Class B, Class L and Class O shares.
In addition, each fund except the Exchange Reserve Fund, pays
Salomon Smith Barney, with respect to its Class B, Class L and
Class O shares, a distribution fee. The Exchange Reserve Fund
pays PFS a distribution fee with respect to its Class B shares.
The distribution fee is primarily intended to compensate Salomon
Salomon Smith Barney and/or PFS for its initial expense of paying
Financial Consultants a commission upon sales of those shares. The
Class B and Class L shares' distribution fees, accrued daily and
paid monthly, are calculated at the annual rate of 0.50% for Class
B shares of each fund and 0.45% for Class L shares, except the
Smith Barney Balanced Fund and the Smith Barney Convertible Fund
(0.50% for Class L shares in the case of Exchange Reserve Fund and
0.55% for Class L shares in the case of Municipal High Fund) of
the value of a fund's average daily net assets attributable to the
shares of the respective Class. For the Smith Barney Convertible
Fund and the Smith Barney Balanced Fund, Class L and Class O
shares' distribution fees, accrued daily and paid monthly, are
calculated at the annual rate of 0.75% for Class L shares and
0.45% for Class O shares.

For the fiscal year ended July 31, 1999, Salomon Smith Barney
received $37,248,100, in the aggregate from the trust under the
Plan.

The following expenses were incurred during the periods indicated:

Initial Sales Charges

Class A

For the Fiscal Year Ended July 31:

Fund
1997*
1998*
1999**
Convertible Fund
$
19,000
$ 19,000

$16,000
Diversified Strategic
Income Fund

983,000

1,344,000

1,022,000
High Income Fund
726,000
1,571,000

1,302,000
Municipal High Income
Fund
46,000
70,000

101,000
Total Return Bond Fund
N/A

1,146,000

215,000
Balanced Fund
55,000
68,000

140,000

* Salomon Smith Barney received the total amount.
** Salomon Smith Barney and CFBDS, each, received a portion
of the total amount.

Class L

For the Fiscal Year Ended July 31:

Fund
1997*
1998*
1999**
Convertible Fund
N/A
$2,000

$2,000
Diversified Strategic
Income Fund
N/A
78,000

977,000
High Income Fund
N/A
112,000

739,000
Municipal High Income
Fund
N/A
3,000

19,000
Total Return Bond Fund
N/A
21,000

110,000
Balanced Fund
N/A
4,000

59,000

* Salomon Smith Barney received the total amount.
** Salomon Smith Barney and CFBDS, each, received a portion
of the total amount.

Deferred Sales Charge (paid to Salomon Smith Barney)

Class A

For the Fiscal Year Ended
July 31:
Fund
1998
1999
Convertible Fund
N/A

N/A
Diversified Strategic Income Fund
$23,000
$12,000
Exchange Reserve Fund
N/A
N/A
High Income Fund
12,000
32,000
Municipal High Income Fund
N/A
3,000
Total Return Bond Fund
1,000
19,000
Balanced Fund
N/A
1,000

Class B

For the Fiscal Year Ended July 31:

Fund
1997
1998
1999
Convertible Fund
$
59,000
$
50,000
$35,000
Diversified Strategic
Income Fund
2,858,00
0
2,494,000
2,298,00
0
Exchange Reserve Fund
618,000
349,000
491,000
High Income Fund
831,000
936,000
1,545,00
0
Municipal High Income Fund
535,000
231,000
127,000
Total Return Bond Fund
N/A
34,000
348,000
Balanced Fund
2,514,00
0
829,000
255,000

Class L

Fund
1998
1999
Convertible Fund
$0

$1,000
Diversified Strategic Income Fund
35,000
58,000
Exchange Reserve Fund
N/A
14,000
High Income Fund
20,000
60,000
Municipal High Income Fund
0
3,000
Total Return Bond Fund
20,000
17,000
Balanced Fund
0
0

Class O

For the Fiscal Year Ended
July 31:

Fund
1998
1999

Balanced Fund
$1,000

Convertible Fund
0

Service Fees and Distribution Fees

For the Fiscal Year Ended July 31:

Fund
1997
1998
1999
Convertible Fund
$
413,173
$
400,232
$295,113
Diversified Strategic
Income Fund
19,195,740
19,373,20
3
18,209,0
44
Exchange Reserve Fund
737,595
543,651
705,198
High Income Fund
5,818,152
7,255,916
8,242,83
7
Municipal High Income Fund
4,316,732
3,724,428
3,182,23
1
Total Return Bond Fund
N/A
329,050
1,034,86
5
Balanced Fund
9,205,137
7,016,893
5,578,81
2

Under its terms, the Plan continues from year to year, provided
such continuance is approved annually by vote of the board of
trustees, including a majority of the Independent Trustees who have
no direct or indirect financial interest in the operation of the
Plan. The Plan may not be amended to increase the amount to be
spent for the services provided by Salomon Smith Barney or PFS
without shareholder approval, and all amendments of the Plan must
be approved by the trustees in the manner described above. The Plan
may be terminated with respect to a Class at any time, without
penalty, by vote of a majority of the Independent Trustees or, with
respect to any fund, by vote of a majority of the outstanding
voting securities of the Class (as defined in the 1940 Act).
Pursuant to the Plan, Salomon Smith Barney and PFS will provide the
board of trustees with periodic reports of amounts expended under
the Plan and the purpose for which such expenditures were made.

VALUATION OF SHARES

Each Class' net asset value per share is calculated on each day,
Monday through Friday, except days on which the NYSE is closed. The
NYSE currently is scheduled to be closed on New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas, and on the
preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Because of the
differences in distribution fees and Class-specific expenses, the
per share net asset value of each Class may differ. The following
is a description of procedures used by a fund in valuing its
assets.

Because of the need to obtain prices as of the close of trading on
various exchanges throughout the world, the calculation of the net
asset value of funds investing in foreign securities may not take
place contemporaneously with the determination of the prices of
many of their respective portfolio securities used in such
calculation. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to
be the primary market for such security. All assets and liabilities
initially expressed in foreign currency values will be converted
into U.S. dollar values at the mean between the bid and offered
quotations of such currencies against U.S. dollars as last quoted
by any recognized dealer. If such quotations are not available, the
rate of exchange will be determined in good faith by the trust's
board of trustees. In carrying out the board's valuation policies,
SSB Citi, as administrator, may consult with an independent pricing
service (the "Pricing Service") retained by the trust.

Debt securities of United States issuers (other than U.S.
government securities and short-term investments), including
Municipal Securities held by Municipal High Income Fund, are valued
by SSB Citi, as administrator, after consultation with the Pricing
Service approved by the trust's board of trustees. When, in the
judgment of the Pricing Service, quoted bid prices for investments
are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted
bid prices and asked prices. Investments for which, in the judgment
of the Pricing Service, there are no readily obtainable market
quotations are carried at fair value as determined by the Pricing
Service. The procedures of the Pricing Service are reviewed
periodically by the officers of the trust under the general
supervision and responsibility of the board of trustees.

PERFORMANCE DATA

From time to time, the trust may quote the funds' yield or total
return in advertisements or in reports and other communications to
shareholders. The trust may include comparative performance
information in advertising or marketing each fund's shares. Such
performance information may include the following industry and
financial publications: Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune, Institutional
Investor, Investors Daily, Money, Morningstar Mutual Fund Values,
The New York Times, USA Today and The Wall Street Journal. To the
extent any advertisement or sales literature of a fund describes
the expenses or performance of Class A, Class B, Class L, Class O
or Class Y, it will also disclose such information for the other
Classes.

Yield

Exchange Reserve Fund. The current yield for the fund is computed
by (a) determining the net change in the value of a hypothetical
pre-existing account in the fund having a balance of one share at
the beginning of a seven-calendar-day period for which yield is to
be quoted, (b) dividing the net change by the value of the account
at the beginning of the period to obtain the base period return and
(c) annualizing the results (i.e., multiplying the base period
return by 365/7). The net change in the value of the account
reflects the value of additional shares purchased with dividends
declared on the original share and any such additional shares, but
does not include realized gains and losses or unrealized
appreciation and depreciation. In addition, the fund may calculate
a compound effective annualized yield by adding 1 to the base
period return (calculated as described above), raising the sum to a
power equal to 365/7 and subtracting 1.

For the seven-day period ended July 31, 1999 the annualized yield
was 3.97% and 3.98% for Class B and Class C shares, respectively.
The compound effective yield was 4.05% and 4.06% for Class B and
Class C shares, respectively. As of July 31, 1999, the fund's
average portfolio maturity was 12 days.

Other Funds. The 30-day yield figure of a fund other than Exchange
Reserve Fund is calculated according to a formula prescribed by the
SEC. The formula can be expressed as follows:

YIELD =2[(a-b+1)^6)-1]

cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of waiver and
reimbursement).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last
day of the period.

For the purpose of determining the interest earned (variable "a" in
the formula) on debt obligations that were purchased by a fund at a
discount or premium, the formula generally calls for amortization
of the discount or premium; the amortization schedule will be
adjusted monthly to reflect changes in the market values of the
debt obligations.

Investors should recognize that, in periods of declining interest
rates, a fund's yield will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates
the fund's yield will tend to be somewhat lower. In addition, when
interest rates are falling, the inflow of net new money to the fund
from the continuous sale of its shares will likely be invested in
portfolio instruments producing lower yields than the balance of
such fund's investments, thereby reducing the current yield of the
fund. In periods of rising interest rates, the opposite can be
expected to occur.

Average Annual Total Return

The "average annual total return" figures for each fund, other than
Exchange Reserve Fund, are computed according to a formula
prescribed by the SEC. The formula can be expressed as follows:

P(1+T)n = ERV

Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV= Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of the 1-, 5-
or 10-year period at the end of the 1-, 5- or
10-year period (or fractional portion thereof),
assuming reinvestment of all dividends and
distributions.

The average annual total returns with sales charges of the fund's
Class A shares were as follows for the periods indicated:

Fund*

One-Year
Period

Five-Year
Period
Since Inception
Convertible Fund
(7.96)%
7.14%
7.45%
Diversified Strategic
Income Fund
(4.17)
6.53
6.39
High Income Fund
(7.97)
7.31
8.25
Municipal High Income Fund
(2.04)
5.44
5.70
Total Return Bond Fund
(6.18)
N/A
(2.63)
Balanced Fund
6.65
12.19
9.93

*Each fund, except Total Return Bond Fund, commenced selling Class
A shares on November 6, 1992. The Total Return Bond Fund commenced
operations on February 27, 1998.
Each portfolio may, from time to time, advertise its average annual
total return calculated as shown above but without including the
deduction of the maximum applicable initial sales charge or deferred
sales charge. The average annual total return for each portfolio's
Class A shares for the periods shown ended July 31, 1999 without
including the deduction of the maximum applicable sales charge is as
follows:

Fund*

One-Year
Period

Five-Year
Period
Since Inception
Convertible Fund
(3.11)%
8.25%
8.28%
Diversified Strategic
Income Fund
0.41
7.53
7.12
High Income Fund
(3.65)
8.31
8.99
Municipal High Income Fund
2.06
6.30
6.35
Total Return Bond Fund
(1.79)
N/A
0.57
Balanced Fund
12.27
13.35
10.78
*Each fund, except Total Return Bond Fund, commenced selling Class
A shares on November 6, 1992. The Total Return Bond Fund commenced
operations on February 27, 1998.

The average annual total returns with Deferred Sales Charges (with
fees waived) of the fund's Class B shares were as follows for the
periods indicated:

Fund
One-Year
Period
Five-Year
Period
Ten-Year
Period

Since
Inception
Convertible Fund (1)

(8.12)%
7.57%
7.27%
7.74%
Diversified Strategic Income
Fund (2)(6)
(4.27
)
6.90
N/A
7.93
High Income Fund(3)(6)
(8.10
)
7.65
7.99
8.21
Municipal High Income
Fund(4)(6)
(2.77
)
5.61
6.31
7.67
Total Return Bond Fund(7)
(6.46
)
N/A
N/A
(2.54)
Balanced Fund(5)
7.59
12.69
10.19
10.86

(1) Fund commenced operations on September 9, 1986.
(2) Fund commenced operations on December 28, 1989.
(3) Fund commenced operations on September 2, 1986.
(4) Fund commenced operations on September 16, 1985.
(5) Fund commenced operations on March 28, 1988.
(6) Prior to November 6, 1992, the maximum Deferred Sales Charge
imposed on redemptions was 5.00%.
(7) Fund commenced operations on February 27, 1998.

The average annual total return for each portfolio's Class B shares
for the periods shown end July 31, 1999 without including the
deduction of the maximum applicable deferred sales charge is as
follows:

Fund
One-Year
Period
Five-Year
Period
Ten-Year
Period

Since
Inception
Convertible Fund (1)
(3.61
)%
7.72%
7.27%
7.74%
Diversified Strategic Income
Fund (2)(6)
(0.06
)
7.04
N/A
7.93
High Income Fund(3)(6)
(4.15)
7.79
7.99
8.21
Municipal High Income
Fund(4)(6)
1.48
5.77
6.31
7.67
Total Return Bond Fund(7)
(2.29
)
N/A
N/A
0.09
Balanced Fund(5)
11.78
12.82
10.19
10.86

The average annual total returns with sales charges (with fees
waived) of the fund's Class L shares were as follows for the
periods indicated: