SMITH BARNEY INCOME FUNDS, 497, 2000-12-04

SMITH BARNEY INCOME FUNDS
497, 2000-12-04

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<PAGE>

[SB] Smith Barney
[MF] Mutual Funds
Your Serious Money. Professionally Managed.(SM)

[GRAPHIC]

P R O S P E C T U S

Smith Barney

Balanced Fund

Class A, B, L, O and Y Shares
-----------------------------
November 28, 2000

--------------------------------------------------------------------------------
INVESTMENT PRODUCTS: NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE
--------------------------------------------------------------------------------

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>

Smith Barney
Balanced Fund

Contents

<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
More on the fund's investments.............................................. 7
Management.................................................................. 8
Choosing a class of shares to buy........................................... 9
Comparing the fund's classes................................................ 10
Sales charges............................................................... 12
More about deferred sales charges........................................... 14
Buying shares............................................................... 15
Exchanging shares........................................................... 16
Redeeming shares............................................................ 18
Other things to know about share transactions............................... 20
Dividends, distributions and taxes.......................................... 22
Share price................................................................. 23
Financial highlights........................................................ 24
</TABLE>

Smith Barney Mutual Funds

1
<PAGE>

Investments, risks and performance

Investment objective
The fund seeks current income and long-term capital appreciation.

Principal investment strategies
Key investments The fund invests in both equity and debt securities. The fund
normally maintains approximately 60% of its portfolio in equity securities and
40% in fixed income securities. These percentages, however, may vary based on
the manager's outlook.

Equity investments will primarily consist of common stocks, but also may
include other types of equity securities, such as preferred stocks, warrants
and securities convertible into common stocks. Fixed income securities will
include securities issued by the U.S. government (or its agencies and instru-
mentalities), corporate securities, mortgage-backed and asset-backed securi-
ties. Although there are no restrictions on the maturity of the fund's
individual securities, the fund normally expects to maintain an average portfo-
lio maturity for the fixed income portion of its portfolio of between five and
15 years. The fund may invest up to 25% of its total assets in fixed income
securities rated below investment grade. These securities are commonly known as
"junk bonds" because they are rated in the lower rating categories by a nation-
ally rated statistical rating organization or if unrated of similar credit
quality.

Selection process
Equity Investments
The fund invests in equity securities in a broad range of companies, industries
and sectors. The manager attempts to identify securities with favorable valua-
tions relative to their growth characteristics. This strategy is commonly known
as "growth at a reasonable price" and offers style diversification within a
single mutual fund. Specifically, the manager looks for:

. Long-term value, based on expected growth of earnings or cash flow and yield
characteristics
. Short-term, or tactical, attractiveness, based on earnings cycle analysis
. Favorable earnings estimate revision

Fixed Income Investments
The fund invests in a broad range of fixed-income securities. In selecting
individual fixed income securities for the fund's portfolio, the manager pri-
marily focuses on the relative yields of securities and at various maturities.
The manager looks for:

. Favorable sector and maturity weightings based on interest rate outlook
. Stable or improving credit quality
. Low price relative to credit and interest rate characteristics

Balanced Fund

2
<PAGE>

Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:

. The stock market declines generally, thereby reducing the value of the equity
portion of the fund
. Companies in which the fund invests fail to meet earnings expectations, fall
out of favor with investors, or other events depress the prices of their
securities
. Interest rates increase, causing the prices of fixed income securities to
decline, thereby reducing the value of the fixed income portion of the fund
. The issuer of a fixed income security owned by the fund defaults on its obli-
gation to pay principal and/or interest or has its credit rating downgraded

. Interest rates decline, the issuers of fixed income securities held by the
fund may pay principal earlier than scheduled or exercise a right to call the
securities, forcing the fund to reinvest in lower yielding securities. This
is known as prepayment or call risk
. Interest rates rise above the coupon rate on one or more fixed income
securities held by the fund, the issuers of these securities may extend the
effective maturity date, causing increased price sensitivity. This is known
as extension risk
. The manager's judgment about interest rates or the attractiveness, value or
income potential of a particular security proves incorrect

Below investment grade bonds, which are 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 liq-
uid, and may be more difficult to value. Changes in economic conditions or
other circumstances are likely to weaken the capacity of issuers of these secu-
rities to make principal and interest payments.

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

. Are seeking to invest in a portfolio that includes both equity and fixed
income securities
. Are willing to accept the risks of both the stock market and the bond markets

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 A, L, O and Y shares 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

[BAR CHART]

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
3.26% 21.52% 7.35% 11.40% (10.10)% 30.89% 1.90% 20.30% 11.71% 11.15%

Calendar years ended December 31

Quarterly returns (past 10 years):

Highest: 14.37% in 4th quarter 1998; Lowest: (7.64)% in 3rd quarter 1998. Year
to date: 3.52% through 9/30/00.

* Prior to June 1998, the fund was a utilities sector fund with different
investment goals, policies and strategies and different portfolio managers.

Balanced 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
Standard & Poor's 500 Index ("S&P 500 Index"), an unmanaged broad-based index
of widely held common stocks, and the Lehman Brothers Government/Corporate Bond
Index ("Lehman Gov/Corp Index"), an unmanaged index which tracks the perfor-
mance of the overall bond market. 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, 1999
<TABLE>
<CAPTION>
Class 1 year 5 years 10 years Since Inception Inception Date
<S> <C> <C> <C> <C> <C>
A 6.15% 14.15% n/a 10.48% 11/06/92
B 6.15% 14.67% 10.39% 11.15% 3/28/88
L 8.78% n/a n/a 10.05% 6/15/98
O 10.19% 14.82% n/a 9.95% 2/4/93
Y** n/a n/a n/a n/a 10/09/95
S&P 500 Index 21.04% 28.56% 18.21% 19.01% ***
Lehman Gov/Corp Index (2.15)% 7.61% 7.65% n/a ****
</TABLE>

* Prior to June 1998, the fund was a utilities sector fund with different
investment goals, policies and strategies and different portfolio managers.

** There were no Class Y shares outstanding for the calendar year ended
December 31, 1999.

*** Index comparison begins on 3/28/88.

**** Index comparison begins on 12/31/89.

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 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

Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets) Class A Class B Class L Class O Class Y**
<S> <C> <C> <C> <C> <C>
Management fee 0.65% 0.65% 0.65% 0.65% 0.65%
Distribution and service (12b-1) fees 0.25% 0.75% 1.00% 0.70% None
Other expenses 0.14% 0.15% 0.15% 0.18% 0.14%
----- ----- ----- ----- -----
Total annual fund operating expenses 1.04% 1.55% 1.80% 1.53% 0.79%
</TABLE>

*You may buy Class A shares in amounts of $1,000,000 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%.

**For Class Y shares, "Other Expenses" have been estimated based on expenses
incurred by Class A shares because no Class Y shares were outstanding as of the
fiscal year ended July 31, 2000.

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

Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A (with or without redemption) $601 $814 $1,045 $1,707
Class B (redemption at end of period) $658 $790 $ 945 $1,708
Class B (no redemption) $158 $490 $ 845 $1,708
Class L (redemption at end of period) $381 $661 $1,065 $2,195
Class L (no redemption) $281 $661 $1,065 $2,195
Class O (redemption at end of period) $354 $579 $ 926 $1,905
Class O (no redemption) $254 $579 $ 926 $1,905
Class Y (with or without redemption) $ 81 $252 $ 439 $ 978
</TABLE>

Balanced Fund

6
<PAGE>

More on the fund's investments

Derivative contracts The fund may, but need not, use derivative contracts, such
as options on securities, 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 exchange
rates; or
. As a substitute for buying or selling securities

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 securities market or interest rate exposure. Therefore,
using derivatives can disproportionately increase losses and reduce opportuni-
ties 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 pres-
ent 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.

Defensive investing The fund may depart from its principal investment strate-
gies 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.

Smith Barney Mutual Funds

7
<PAGE>

Management

Manager The fund's investment adviser and administrator is SSB Citi Fund Man-
agement LLC ("SSB Citi"), an affiliate of Salomon Smith Barney Inc. ("Salomon
Smith Barney"). The manager's address is 7 World Trade Center, New York, New
York 10048. The manager selects the fund's investments and oversees its opera-
tions. The manager and Salomon Smith Barney are subsidiaries of Citigroup Inc.
Citigroup businesses produce a broad range of financial services--asset manage-
ment, banking and consumer finance, credit and charge cards, insurance, invest-
ments, investment banking and trading--and use diverse channels to make them
available to consumer and corporate customers around the world.

Chad Graves is responsible for the day-to-day management of the equity portion
of the fund's portfolio, and James Conroy and John Bianchi are responsible for
the day-to-day management of the fixed income portion. Messrs. Graves, Conroy
and Bianchi are investment officers of the manager and vice presidents of Salo-
mon Smith Barney.

Management fee For its services, the manager received an advisory fee during
the fund's last fiscal year equal to 0.45% 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.

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

In addition, the distributor may make payments for distribution and/or share-
holder servicing activities out of its past profits and other available sourc-
es. The distributor may also make payments for marketing, promotional or
related expenses to dealers. The amount of these payments is determined by the
distributor and may be substantial. The manager or an affiliate may make simi-
lar payments under similar arrangements.

Transfer agent and shareholder servicing agent Citi Fiduciary Trust Company
serves as the fund's transfer agent and shareholder servicing agent (the
"transfer agent"). The transfer agent has entered into a sub-transfer agency
and services agreement with PFPC Global Fund Services to serve as the fund's
sub-transfer agent (the "sub-transfer agent"). The sub-transfer agent will per-
form certain functions including shareholder recordkeeping and accounting serv-
ices.

Balanced Fund

8
<PAGE>

Choosing a class of shares to buy

You can choose among four classes of shares: Classes A, B, L and Y. In addi-
tion, 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 broker/dealer, financial intermediary, financial institution or a distribu-
tor's financial consultants (each called a "Service Agent")

. The fund, but only if you are investing through certain qualified plans or
Service Agents

All Classes of shares are not available through all Service Agents. You should
contact your Service Agent for further information.

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
IRA, 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

9
<PAGE>

Comparing the fund's classes

Your Service Agent can help you decide which class meets your goals. The Serv-
ice Agent 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 ini- .Initial .Available .No ini-
sales tial sales for pur- tial or
charge sales charge chase deferred
.You may charge is lower only by sales
qualify .Deferred than former charge
for sales Class A Class C .Must
reduction charge .Deferred share- invest
or waiver declines sales holders at
of ini- over charge .Deferred least
tial time for only sales $15
sales .Converts 1 year charge million
charge to Class .Does for only .Lower
.Lower A after not con- 1 year annual
annual 8 years vert to .Does not expenses
expenses .Higher Class A convert than
than annual .Higher to Class the
Class B expenses annual A other
and Class than expenses .Higher classes
L Class A than annual
Class A expenses
than
Class A
-------------------------------------------------------------------------
Initial sales charge Up to None 1.00% 1.00% None
5.00%;
reduced
for large
purchases
and waived
for cer-
tain
investors.
No charge
for pur-
chases of
$1,000,000
or more
-------------------------------------------------------------------------
</TABLE>

Balanced Fund

10
<PAGE>

<TABLE>
<CAPTION>
Class A Class B Class L Class O Class Y
<S> <C> <C> <C> <C> <C>
Deferred sales charge 1.00% on Up to 1.00% if 1.00% if None
purchases 5.00% you you
of charged redeem redeem
$1,000,000 when you within 1 within 1
or more if redeem year of year of
you redeem shares. purchase purchase
within 1 The
year of charge
purchase is
reduced
over
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 average average average
daily net daily daily daily
assets net net net
assets assets assets
------------------------------------------------------------------------
Exchangeable into* Class A Class B Class L Class L Class Y
shares of shares shares shares shares
most Smith of most of most of most of most
Barney Smith Smith Smith Smith
funds Barney Barney Barney Barney
funds funds funds funds
------------------------------------------------------------------------
</TABLE>

*Ask your Service Agent for the Smith Barney funds available for exchange.

Smith Barney Mutual Funds

11
<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.

The table below shows the rate of sales charge you pay, depending on the amount
you purchase.

The table below also shows the amount of broker/dealer compensation that is
paid out of the sales charge. This compensation includes commissions and other
fees which Service Agents that sell shares of the fund receive. The distributor
keeps up to approximately 10% of the sales charge imposed on Class A shares.
Service Agents also will receive the service fee payable on Class A shares at
an annual rate equal to 0.25% of the average daily net assets represented by
the Class A shares sold by them.

<TABLE>
<CAPTION>
Broker/Dealer
Sales Charge as a % of Commission
Offering Net amount as a % of
Amount of purchase price (%) invested (%) offering price
<S> <C> <C> <C>
Less than $25,000 5.00 5.26 4.50
$25,000 but less than $50,000 4.25 4.44 3.83
$50,000 but less than $100,000 3.75 3.90 3.38
$100,000 but less than $250,000 3.25 3.36 2.93
$250,000 but less than $500,000 2.75 2.83 2.48
$500,000 but less than $1,000,000 2.00 2.04 1.80
$1,000,000 or more -0- -0- up to 1.00*
</TABLE>

*A distributor pays up to 1.00% to a Service Agent.

Investments of $1,000,000 or more You do not pay an initial sales charge when
you buy $1,000,000 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.

Balanced Fund

12
<PAGE>

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. Cer-
tain trustees and fiduciaries may be entitled to combine accounts in deter-
mining 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.

Waivers for certain Class A investors Class A initial sales charges are waived
for certain types of investors, including:

. Employees of NASD members

. Investors participating in a fee-based program sponsored by certain
broker/dealers affiliated with Citigroup

. Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Service Agent is notified

If you want to learn about additional waivers of Class A initial sales charges,
contact your Service Agent 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 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 5% 4% 3% 2% 1% 0%
</TABLE>

Service Agents selling Class B shares receive a commission of up to 4.50% of
the purchase price of the Class B shares they sell. Service Agents also receive
a service fee at an annual rate equal to 0.25% of the average daily net assets
represented by the Class B shares they are servicing.

Smith Barney Mutual Funds

13
<PAGE>

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:
Shares issued: On reinvestment of Upon exchange from
At initial dividends and another Smith Barney
purchase distributions fund
<S> <C> <C>
Eight years after the date of In same proportion On the date the
purchase 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
(excluding shares
issued as dividends)
</TABLE>

Class L and 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 any Smith Barney
fund on June 12, 1998, you will not pay an initial sales charge on Class L
shares of the fund you may 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.

Service Agents selling Class L shares receive a commission of up to 2.00% of
the purchase price of the Class L shares they sell. Starting in the thirteenth
month, Service Agents also receive an annual fee of up to 1.00% of the average
daily net assets represented by the Class L shares held by their clients.

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.

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.

Balanced Fund

14
<PAGE>

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 redeem shares, the fund will first redeem 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 Service Agent.

The fund's distributor receives deferred sales charges as partial compensation
for its expenses in selling shares, including the payment of compensation to
your Service Agent.

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 Service Agent or consult the SAI.

Buying shares

Through a You should contact your Service Agent to open a brokerage
Service Agent 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

Your Service Agent may charge an annual account maintenance
fee.
--------------------------------------------------------------------------------

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

Smith Barney Mutual Funds

15
<PAGE>

. Write the fund at the following address:
Smith Barney Income Funds
Smith Barney Balanced Fund
(Specify class of shares)

c/o PFPC Global Fund Services
P.O. Box 9699

Providence, RI 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.
--------------------------------------------------------------------------------

Through a
systematic You may authorize your Service Agent or the sub-transfer
investment agent to transfer funds automatically from (i) a regular bank
plan account, (ii) cash held in a brokerage account opened with a
Service Agent or (iii) certain money market funds, in order
to buy shares on a regular basis.

. 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, your Service Agent or the sub-transfer agent
may charge you a fee

For more information, contact your Service Agent or the
transfer agent or consult the SAI.

Exchanging shares

Smith Barney
offers a You should contact your Service Agent to exchange into other
distinctive Smith Barney funds. Be sure to read the prospectus of the
family of Smith Barney fund you are exchanging into. An exchange is a
funds taxable 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. 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 Service Agent or the transfer agent
for further information.

Balanced Fund

16
<PAGE>

. You must meet the minimum investment amount for each fund
(except for systematic investment plan exchanges).
. 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.
sales charges

Your deferred sales charge (if any) will continue to be mea-
sured 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
If you do not have a brokerage account with a Service Agent,
you may be eligible to exchange shares through the fund. 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 trans-
fer agent at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(Eastern time).

You can make telephone exchanges only between accounts that
have identical registrations.
--------------------------------------------------------------------------------
By mail
If you do not have a brokerage account, contact your Service
Agent or write to the sub-transfer agent at the address on
the following page.

Smith Barney Mutual Funds

17
<PAGE>

Redeeming shares

Generally
Contact your Service Agent to redeem shares of the fund.

If you hold share certificates, the sub-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 brokerage account with a Service Agent, 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 fund at the following address:
Smith Barney Income Funds
Smith Barney Balanced Fund
(Specify class of shares)

c/o PFPC Global Fund Services
P.O. Box 9699

Providence, RI 02940-9699

Your written request must provide the following:

. The fund and 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

Balanced Fund

18
<PAGE>

By telephone
If you do not have a brokerage account with a Service Agent,
you may be eligible to redeem shares (except those held in
retirement plans) in amounts up to $50,000 per day through
the fund. You must complete an authorization form to autho-
rize 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 4:00 p.m. (Eastern time).

Your redemption proceeds can be sent by check to your address
of record or by wire or electronic transfer (ACH) to a bank
account designated on your authorization form. You must sub-
mit a new authorization form to change the bank account des-
ignated to receive wire or electronic transfers and you may
be asked to provide certain other documents. The sub-transfer
agent may charge a fee on an electronic transfer (ACH)
--------------------------------------------------------------------------------
Automatic You can arrange for the automatic redemption of a portion of
cash your shares on a monthly or quarterly basis. To qualify you
withdrawal must own shares of the fund with a value of at least $10,000
plans ($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 Service Agent or consult
the SAI.

Smith Barney Mutual Funds

19
<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 fund will try to confirm that any telephone exchange or redemption request
is genuine by recording calls, asking the caller to provide certain personal
identification information, 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 $50,000

. Are sending signed share certificates or stock powers to the sub-transfer
agent

. Instruct the sub-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 reg-
istration

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

Balanced Fund

20
<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 ($250 for IRA accounts)
because of a redemption of fund shares, the fund may ask you to bring your
account up to the applicable minimum investment amounts. If you choose not to
do so within 60 days, the fund may close your account and send you the redemp-
tion 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 sub-transfer agent. If
you hold share certificates it will take longer to exchange or redeem shares.

Smith Barney Mutual Funds

21
<PAGE>

Dividends, distributions and taxes

Dividends The fund generally pays dividends, if any, quarterly, and makes capi-
tal 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 gains. You do not pay a sales
charge on reinvested distributions or dividends. Alternatively, you can
instruct your Service Agent, the transfer agent or the sub-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 your Service Agent, the transfer agent or the
sub-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 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 capital gain or
loss; long-term only if
shares owned more than one
year
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
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 dur-
ing the previous year. If you do not provide the fund with your correct tax-
payer 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.

Balanced Fund

22
<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. This calcu-
lation 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 quota-
tions. When reliable market prices or quotations are not readily available, 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.

In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Service Agent or the fund's sub-transfer agent 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.

Service Agents must transmit all orders to buy, exchange or redeem shares to
the fund's sub-transfer agent before the sub-transfer agent's close of busi-
ness.

Smith Barney Mutual Funds

23
<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 audi-
tors, whose report, along with the fund's financial statements, is included in
the annual report (available upon request).

For a Class A share of capital stock outstanding throughout each year ended
July 31:
<TABLE>
<CAPTION>
2000(/1/) 1999(/1/) 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $13.86 $16.52 $15.53 $14.51 $14.03
----------------------------------------------------------------------
Income from operations:
Net investment income 0.45 0.45 0.70 0.80 0.83
Net realized and
unrealized gain 1.00 0.92 1.80 1.36 0.47
----------------------------------------------------------------------
Total income from
operations 1.45 1.37 2.50 2.16 1.30
----------------------------------------------------------------------
Less distributions from:
Net investment income (0.40) (0.37) (0.68) (0.82) (0.82)
Net realized gains (0.08) (3.66) (0.83) (0.32) --
----------------------------------------------------------------------
Total distributions (0.48) (4.03) (1.51) (1.14) (0.82)
----------------------------------------------------------------------
Net asset value, end of
year $14.83 $13.86 $16.52 $15.53 $14.51
----------------------------------------------------------------------
Total return 10.62% 12.27% 16.70% 15.48% 9.21%
----------------------------------------------------------------------
Net assets, end of year
(millions) $436 $310 $279 $248 $266
----------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.04% 1.08% 1.05% 1.06% 1.04%
Net investment income 3.10 3.26 4.29 5.29 5.55
----------------------------------------------------------------------
Portfolio turnover rate 43% 60% 110% 45% 58%
----------------------------------------------------------------------
</TABLE>
(/1/)Per share amounts calculated using the monthly average shares method.

Balanced Fund

24
<PAGE>

For a Class B share of capital stock outstanding throughout each year ended
July 31:
<TABLE>
<CAPTION>
2000(/1/) 1999(/1/) 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $13.82 $16.49 $15.52 $14.51 $14.02
----------------------------------------------------------------------
Income from operations:
Net investment income 0.37 0.38 0.62 0.73 0.77
Net realized and
unrealized gain 1.01 0.93 1.80 1.35 0.47
----------------------------------------------------------------------
Total income from
operations 1.38 1.31 2.42 2.08 1.24
----------------------------------------------------------------------
Less distributions from:
Net investment income (0.34) (0.32) (0.62) (0.75) (0.75)
Net realized gain (0.08) (3.66) (0.83) (0.32) --
----------------------------------------------------------------------
Total distributions (0.42) (3.98) (1.45) (1.07) (0.75)
----------------------------------------------------------------------
Net asset value, end of
year $14.78 $13.82 $16.49 $15.52 $14.51
----------------------------------------------------------------------
Total return 10.09% 11.78% 16.17% 14.88% 8.78%
----------------------------------------------------------------------
Net assets, end of year
(millions) $353 $568 $740 $951 $1,310
----------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.55% 1.56% 1.52% 1.52% 1.55%
Net investment income 2.60 2.81 3.87 4.85 5.13
----------------------------------------------------------------------
Portfolio turnover rate 43% 60% 110% 45% 58%
----------------------------------------------------------------------
</TABLE>
(/1/)Per share amounts calculated using the monthly average shares method.

Smith Barney Mutual Funds

25
<PAGE>

For a Class L share of capital stock outstanding throughout each year ended
July 31:
<TABLE>
<CAPTION>
2000(/1/) 1999(/1/) 1998(/2/)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $13.83 $16.52 $17.14
-----------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.34 0.35 0.02
Net realized and unrealized gain (loss) 1.01 0.91 (0.41)
-----------------------------------------------------------------------------
Total income (loss) from operations 1.35 1.26 (0.39)
-----------------------------------------------------------------------------
Less distributions from:
Net investment income (0.31) (0.29) --
Net realized gain (0.08) (3.66) (0.23)
-----------------------------------------------------------------------------
Total distributions (0.39) (3.95) (0.23)
-----------------------------------------------------------------------------
Net assets value, end of year $14.79 $13.83 $16.52
-----------------------------------------------------------------------------
Total return 9.87% 11.43% (2.28)%(/3/)
-----------------------------------------------------------------------------
Net assets, end of year (000)'s $14,943 $7,508 $486
-----------------------------------------------------------------------------
Ratios to average net assets:
Expenses 1.80% 1.85% 1.74%(/4/)
Net investment income 2.34 2.54 2.51(/4/)
-----------------------------------------------------------------------------
Portfolio turnover rate 43% 60% 110%
-----------------------------------------------------------------------------
</TABLE>
(/1/) Per share amounts calculated using the monthly average shares method.
(/2/) For the period June 15, 1998 (inception date) to July 31, 1998.
(/3/) Not annualized.

(/4/) Annualized.

Balanced Fund

26
<PAGE>

For a Class O share of capital stock outstanding throughout each year ended
July 31:
<TABLE>
<CAPTION>
2000(/1/) 1999(/1/) 1998(/1/)(/2/) 1997(/1/) 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $13.83 $16.50 $15.53 $14.51 $14.02
--------------------------------------------------------------------------------
Income from operations:
Net investment income 0.37 0.39 0.64 0.73 0.77
Net realized and
unrealized gain 1.01 0.92 1.79 1.36 0.47
--------------------------------------------------------------------------------
Total income from
operations 1.38 1.31 2.43 2.09 1.24
--------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.34) (0.32) (0.63) (0.75) (0.75)
Net realized gains (0.08) (3.66) (0.83) (0.32) --
--------------------------------------------------------------------------------
Total distributions (0.42) (3.98) (1.46) (1.07) (0.75)
--------------------------------------------------------------------------------
Net asset value, end of
year $14.79 $13.83 $16.50 $15.53 $14.51
--------------------------------------------------------------------------------
Total return 10.13% 11.79% 16.19% 15.01% 8.80%
--------------------------------------------------------------------------------
Net assets, end of year
(000)'s $5,738 $6,606 $8,838 $9,381 $11,441
--------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.53% 1.50% 1.48% 1.47% 1.50%
Net investment income 2.62 2.83 3.89 4.89 5.19
--------------------------------------------------------------------------------
Portfolio turnover rate 43% 60% 110% 45% 58%
--------------------------------------------------------------------------------
</TABLE>
(/1/) Per share amounts calculated using the monthly average shares method.
(/2/) On June 12, 1998, Class C shares were renamed Class O shares.

Smith Barney Mutual Funds

27
<PAGE>

For a Class Y(/1/) share of capital stock outstanding throughout each year
ended July 31:
<TABLE>
<CAPTION>
1998(/2/) 1997 1996(/3/)
---------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $15.56 $14.52 $14.88
---------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.76 0.83 0.64
Net realized and unrealized gain (loss) 1.74 1.38 (0.29)
---------------------------------------------------------------------------
Total income from operations 2.50 2.21 0.35
---------------------------------------------------------------------------
Less distributions from:
Net investment income (0.71) (0.85) (0.71)
Net realized gains (0.83) (0.32) --
---------------------------------------------------------------------------
Total distributions (1.54) (1.17) (0.71)
---------------------------------------------------------------------------
Net assets value, end of year $16.52 $15.56 $14.52
---------------------------------------------------------------------------
Total return 16.67% 15.88% 2.28%(/4/)
---------------------------------------------------------------------------
Net assets, end of year (000)'s $1 $24,676 $7,617
---------------------------------------------------------------------------
Ratios to average net assets:
Expenses 0.67% 0.67% 0.78%(/5/)
Net investment income 5.00 5.58 5.54(/5/)
---------------------------------------------------------------------------
Portfolio turnover rate 110% 45% 58%
---------------------------------------------------------------------------
</TABLE>

(/1/) There were no Class Y shares outstanding for the fiscal years ended July
31, 1999 and 2000.
(/2/) Per share amounts calculated using the monthly average shares method.
(/3/) For the period from October 9, 1995 (inception date) to July 31, 1996.
(/4/) Not annualized.
(/5/) Annualized.

Balanced Fund

28
<PAGE>

[SB] Smith Barney
[MF] Mutual Funds
Your Serious Money. Professionally Managed.(SM)

Smith Barney Balanced 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 significantly affected the fund's
performance, during its last fiscal year or period.

The fund sends only one report to a household if more than one account has the
same address. Contact your Service Agent 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 Service
Agent, by calling the fund at 1-800-451-2010, or by writing to the fund at
Smith Barney Mutual Funds, 7 World Trade Center, 39th floor, New York, New York
10048.

Information about the fund (including the SAI) can be reviewed and copied at
the Securities and Exchange Commission's (the "Commission") Public Reference
Room in Washington, D.C. In addition, information on the operation of the Pub-
lic 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 Data-
base 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.

Your Serious Money. Professionally Managed. is a service mark of Salomon Smith
Barney Inc.

(Investment Company Act file no. 811-04254) FD0229 11/00
<PAGE>

[LOGO] Smith Barney
Mutual Funds

PROSPECTUS

Convertible
Fund

Class A, B, L and Y Shares
------------------------------------
NOVEMBER 28, 2000

--------------------------------------------------------------------------------
INVESTMENT PRODUCTS : NOT FDIC INSURED . NO BANK GUARANTEE . MAY LOSE VALUE
--------------------------------------------------------------------------------

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>
Smith Barney 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.......................... 17

Buying shares.............................................. 18

Exchanging shares.......................................... 20

Redeeming shares........................................... 21

Other things to know about share transactions.............. 24

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

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

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

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 or 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 SMITH BARNEY 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 have different performance because of
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

CALENDAR YEARS ENDED DECEMBER 31

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

Year to date: 10.05% through 9/30/00

4 SMITH BARNEY 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 Smith Barney Broad Investment
Grade Index ("SSB BIG"), an unmanaged market-capitalization weighted index which
includes fixed-rate Treasury, Government-sponsored, mortage, 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, 1999
------------------------------------------------------------------------------------------------
Class 1 year 5 years 10 years Since Inception Inception Date
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------
A -7.09% 7.57% n/a 6.66% 11/06/92
------------------------------------------------------------------------------------------------
B -7.41% 8.00% 7.22% 7.29% 09/09/86
------------------------------------------------------------------------------------------------
L -5.14% n/a n/a -5.37% 06/15/98
------------------------------------------------------------------------------------------------
O -3.70% 8.13% n/a 7.39% 11/07/94
------------------------------------------------------------------------------------------------
Y -1.78% n/a n/a 5.59% 02/07/96
------------------------------------------------------------------------------------------------
S&P 500 Index* 21.04% 28.56% 18.21% n/a n/a
------------------------------------------------------------------------------------------------
SSB BIG Index* -0.83% 13.23% 7.75% n/a n/a
------------------------------------------------------------------------------------------------
Lipper Index* 30.86% 17.65% 13.14% n/a n/a
</TABLE>

*INDEX COMPARISON BEGINS ON 12/31/89.

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 0.39% 0.41% 0.64% 0.50% 0.17%
-----------------------------------------------------------------------------------------
Total annual fund
operating expenses 1.34% 1.86% 2.34% 1.90% 0.87%
===== ===== ===== ===== =====
</TABLE>

*YOU MAY BUY CLASS A SHARES IN AMOUNTS OF $1,000,000 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 SMITH BARNEY 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) $630 $903 $1,197 $2,032
-------------------------------------------------------------------------------
Class B
(REDEMPTION AT END OF PERIOD) $689 $885 $1,106 $2,044
-------------------------------------------------------------------------------
Class B
(NO REDEMPTION) $189 $585 $1,006 $2,044
-------------------------------------------------------------------------------
Class L
(REDEMPTION AT END OF PERIOD) $435 $823 $1,338 $2,749
-------------------------------------------------------------------------------
Class L
(NO REDEMPTION) $335 $823 $1,338 $2,749
-------------------------------------------------------------------------------
Class O
(REDEMPTION AT END OF PERIOD) $391 $691 $1,116 $2,300
-------------------------------------------------------------------------------
Class O
(NO REDEMPTION) $291 $691 $1,116 $2,300
-------------------------------------------------------------------------------
Class Y
(WITH OR WITHOUT REDEMPTION) $ 89 $278 $ 482 $1,073
</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; or
/ / 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 SMITH BARNEY 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 7 World Trade Center, New York, New York 10048. 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 also 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 $9 billion.

Ross Margolies serves as portfolio manager and is responsible for the fund's
day-to-day management. 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 19 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.

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

In addition, a distributor may make payments for distribution and/or shareholder
servicing activities out of its past profits and other available sources. A
distributor may also make payments for marketing, promotional or related
expenses to dealers. The amount of these payments is determined by the
distributor and may be substantial. The manager or an affiliate may make similar
payments under similar arrangements.

SMITH BARNEY MUTUAL FUNDS 9
<PAGE>
agency and services agreement with PFPC Global Fund Services to serve as the
fund's sub-transfer agent (the "sub-transfer agent"). The sub-transfer agent
performs certain shareholder recordkeeping and accounting services and
functions.

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 broker/dealer, financial intermediary, financial institution or a
distributor's financial consultants (each called a "Service Agent")
/ / The fund, but only if you are investing through certain qualified plans or
Service Agents

10 SMITH BARNEY CONVERTIBLE FUND
<PAGE>
All Classes of shares are not available through all Service Agents. You should
contact your Service Agent for further information.

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 Service Agent can help you decide which class meets your goals. The Service
Agent 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
$1,000,000 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
$1,000,000 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 SERVICE AGENT FOR THE SMITH BARNEY FUNDS AVAILABLE FOR EXCHANGE.

12 SMITH BARNEY 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.

The table below shows the rate of sales charge you pay, depending on the amount
you purchase. The table below also shows the amount of broker/ dealer
compensation that is paid out of the sales charge. This compensation includes
commissions and other fees Service Agents that sell shares of the fund receive.
The distributors keep up to approximately 10% of the sales charge imposed on
Class A shares. Service Agents also will receive the service fee payable on
Class A shares at an annual rate equal to 0.25% of the average daily net assets
represented by the Class A shares sold by them.

<TABLE>
<CAPTION>
Broker/Dealer
Sales Charge as a % of commission
Offering Net amount as a % of
Amount of purchase price (%) invested (%) offering price
<S> <C> <C> <C>
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Less than $25,000 5.00 5.26 4.50
----------------------------------------------------------------------------
$25,000 but less than
$50,000 4.25 4.44 3.83
----------------------------------------------------------------------------
$50,000 but less than
$100,000 3.75 3.90 3.38
----------------------------------------------------------------------------
$100,000 but less
than $250,000 3.25 3.36 2.93
----------------------------------------------------------------------------
$250,000 but less
than $500,000 2.75 2.83 2.48
----------------------------------------------------------------------------
$500,000 but less
than $1,000,000 2.00 2.04 1.80
----------------------------------------------------------------------------
$1,000,000 or more -0- -0- up to 1.00*
</TABLE>

*A DISTRIBUTOR PAYS UP TO 1.00% TO A SERVICE AGENT.

INVESTMENTS OF $1,000,000 OR MORE You do not pay an initial sales charge when
you buy $1,000,000 or more of Class A shares. However, if you redeem

SMITH BARNEY MUTUAL FUNDS 13
<PAGE>
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.

WAIVERS FOR CERTAIN CLASS A INVESTORS Class A initial sales charges are waived
for certain types of investors, including:

/ / Employees of NASD members
/ / Investors participating in a fee-based program sponsored by certain
broker/dealers affiliated with Citigroup
/ / Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Service Agent is notified

IF YOU WANT TO LEARN ABOUT ADDITIONAL WAIVERS OF CLASS A INITIAL SALES CHARGES,
CONTACT YOUR SERVICE AGENT OR CONSULT THE STATEMENT OF ADDITIONAL INFORMATION
("SAI").

14 SMITH BARNEY CONVERTIBLE FUND
<PAGE>
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>

Service Agents selling Class B shares receive a commission of up to 4.50% of the
purchase price of the Class B shares they sell. Service Agents also receive a
service fee at an annual rate equal to 0.25% of the average daily net assets
represented by the Class B shares they are servicing.

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>

SMITH BARNEY MUTUAL FUNDS 15
<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 and/or other
Smith Barney Mutual Funds 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.

Service Agents selling Class L shares receive a commission of up to 2.00% of the
purchase price of the Class L shares they sell. Starting in the thirteenth
month, Service Agents also receive an annual fee of up to 1.00% of the average
daily net assets represented by the Class L shares held by their clients.

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.

16 SMITH BARNEY CONVERTIBLE FUND
<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

The fund's distributor receives deferred sales charges as partial compensation
for its expenses in selling shares, including the payment of compensation to
your Service Agent.

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 SERVICE AGENT OR CONSULT THE SAI.

SMITH BARNEY MUTUAL FUNDS 17
<PAGE>
BUYING SHARES
--------------------------------------------------------------------------------
THROUGH A SERVICE AGENT

You should contact your Service Agent 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

Your Service Agent may charge an annual account maintenance fee.

--------------------------------------------------------------------------------
THROUGH THE FUND

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

/ / Write the fund at the following address:
Smith Barney Income Funds
Smith Barney Convertible Fund
(Specify class of shares)
c/o PFPC Global Fund Services
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 your Service Agent or the sub-transfer agent to transfer funds
automatically from (i) a regular bank account, (ii) cash held in a brokerage
account opened with a Service Agent or (iii) certain money market funds, in
order to buy shares on a regular basis.

18 SMITH BARNEY CONVERTIBLE FUND
<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, your
Service Agent or the sub-transfer agent may charge you a fee

FOR MORE INFORMATION, CONTACT YOUR SERVICE AGENT OR THE TRANSFER AGENT OR
CONSULT THE SAI.

SMITH BARNEY MUTUAL FUNDS 19
<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 Service Agent 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 Service Agent or the transfer agent for further information.
/ / You must meet the minimum investment amount for each fund (except for
systematic investment plan exchanges).
/ / 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.

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

20 SMITH BARNEY CONVERTIBLE FUND
<PAGE>
BY TELEPHONE

If you do not have a brokerage account with a Service Agent, you may be eligible
to exchange shares through the fund. 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 4:00 p.m. (Eastern time).

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

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

If you do not have a brokerage account, contact your Service Agent or write to
the sub-transfer agent at the address on the following page.

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

Contact your Service Agent to redeem shares of the fund.

If you hold share certificates, the sub-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.

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

SMITH BARNEY MUTUAL FUNDS 21
<PAGE>
BY MAIL

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

Your written request must provide the following:

/ / The fund and 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 with a Service Agent, you may be eligible
to redeem shares (except those held in retirement plans) in amounts up to
$50,000 per day through the fund. 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 4:00 p.m. (Eastern time).

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

22 SMITH BARNEY CONVERTIBLE FUND
<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 plans 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 SERVICE AGENT OR CONSULT THE SAI.

SMITH BARNEY MUTUAL FUNDS 23
<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 fund will try to confirm that any telephone exchange or redemption request
is genuine by recording calls, asking the caller to provide certain personal
identification information 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 $50,000
/ / Are sending signed share certificates or stock powers to the sub-transfer
agent
/ / Instruct the sub-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

24 SMITH BARNEY CONVERTIBLE FUND
<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 ($250 for IRA accounts)
because of a redemption of fund shares, the fund may ask you to bring your
account up to the applicable minimum investment amounts. If you choose not to do
so within 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 sub-transfer agent. If
you hold share certificates it will take longer to exchange or redeem shares.

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
Service Agent, the transfer agent or the sub-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 your Service Agent, transfer agent or the sub-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 SMITH BARNEY 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. 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.

Service Agents must transmit all orders to buy, exchange or redeem shares to the
fund's sub-transfer agent before the sub-transfer 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
auditors, 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:
---------------------------------------------------------------------------------------
2000(1) 1999(1) 1998 1997 1996(1)
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------
Net asset value,
beginning of year $ 15.25 $ 16.90 $ 18.61 $ 15.66 $ 15.27
---------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.69 0.69 0.73 0.78 0.74
Net realized and unrealized
gain/(loss) 0.21 (1.24) (0.39) 3.28 0.38
---------------------------------------------------------------------------------------
Total income (loss) from
operations 0.90 (0.55) 0.34 4.06 1.12
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.65) (0.66) (0.79) (0.75) (0.73)
Net realized gain -- (0.44) (1.26) (0.36) --
---------------------------------------------------------------------------------------
Total distributions (0.65) (1.10) (2.05) (1.11) (0.73)
---------------------------------------------------------------------------------------
Net asset value, end of year $ 15.50 $ 15.25 $ 16.90 $ 18.61 $ 15.66
---------------------------------------------------------------------------------------
Total return 6.13% (3.11)% 1.97% 26.94% 7.41%
---------------------------------------------------------------------------------------
Net assets, end of year
(000)'s $21,794 $26,141 $35,780 $38,803 $34,888
---------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 1.34% 1.29% 1.25% 1.27% 1.40%
Net investment income 4.62 4.45 4.09 4.61 4.68
---------------------------------------------------------------------------------------
Portfolio turnover rate 167% 27% 49% 57% 59%
---------------------------------------------------------------------------------------
</TABLE>

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

28 SMITH BARNEY CONVERTIBLE FUND
<PAGE>

<TABLE>
<CAPTION>
For a Class B Share of beneficial interest outstanding
throughout each year ended July 31:
---------------------------------------------------------------------------------------
2000(1) 1999(1) 1998 1997 1996(1)
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------
Net asset value,
beginning of year $ 15.22 $ 16.89 $ 18.60 $ 15.66 $ 15.27
---------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.61 0.61 0.64 0.69 0.66
Net realized and unrealized
gain/(loss) 0.21 (1.24) (0.38) 3.28 0.39
---------------------------------------------------------------------------------------
Total income (loss) from
operations 0.82 (0.63) 0.26 3.97 1.05
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.59) (0.60) (0.71) (0.67) (0.66)
Net realized gain -- (0.44) (1.26) (0.36) --
---------------------------------------------------------------------------------------
Total distributions (0.59) (1.04) (1.97) (1.03) (0.66)
---------------------------------------------------------------------------------------
Net asset value, end of year $ 15.45 $ 15.22 $ 16.89 $ 18.60 $ 15.66
---------------------------------------------------------------------------------------
Total return 5.59% (3.61)% 1.51% 26.29% 6.91%
---------------------------------------------------------------------------------------
Net assets, end of year
(000)'s $13,216 $21,559 $35,570 $42,927 $42,420
---------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 1.86% 1.76% 1.74% 1.77% 1.90%
Net investment income 4.10 3.98 3.60 4.12 4.18
---------------------------------------------------------------------------------------
Portfolio turnover rate 167% 27% 49% 57% 59%
---------------------------------------------------------------------------------------
</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:
------------------------------------------------------------------------------------
2000(1) 1999(1) 1998(2)
<S> <C> <C> <C>
------------------------------------------------------------------------------------
Net asset value,
beginning of year $15.18 $16.90 $17.14
------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.53 0.53 0.05
Net realized and unrealized gain (loss) 0.21 (1.24) (0.17)
------------------------------------------------------------------------------------
Total income (loss) from operations 0.74 (0.71) (0.12)
------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.56) (0.57) (0.12)
Net realized gain -- (0.44) --
------------------------------------------------------------------------------------
Total distributions (0.56) (1.01) (0.12)
------------------------------------------------------------------------------------
Net asset value, end of year $15.36 $15.18 $16.90
------------------------------------------------------------------------------------
Total return 5.07% (4.08)% (0.74)(3)
------------------------------------------------------------------------------------
Net assets, end of year (000)'s $ 270 $ 540 $ 210
------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 2.34% 2.30% 1.98%(4)
Net investment income 3.64 3.39 2.51(4)
------------------------------------------------------------------------------------
Portfolio turnover rate 167% 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 SMITH BARNEY CONVERTIBLE FUND
<PAGE>

<TABLE>
<CAPTION>
For a Class O Share of beneficial interest outstanding
throughout each year ended July 31:
---------------------------------------------------------------------------------------
2000(1) 1999(1) 1998(2) 1997 1996(1)
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------
Net asset value,
beginning of year $15.19 $16.87 $18.58 $15.64 $15.27
---------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.60 0.61 0.63 0.67 0.67
Net realized and
unrealized gain/(loss) 0.21 (1.25) (0.37) 3.31 0.37
---------------------------------------------------------------------------------------
Total income (loss) from
operations 0.81 (0.64) 0.26 3.98 1.04
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.59) (0.60) (0.71) (0.68) (0.67)
Net realized gain -- (0.44) (1.26) (0.36) --
---------------------------------------------------------------------------------------
Total distributions (0.59) (1.04) (1.97) (1.04) (0.67)
---------------------------------------------------------------------------------------
Net assets value, end of
year $15.41 $15.19 $16.87 $18.58 $15.64
---------------------------------------------------------------------------------------
Total return 5.57% (3.66)% 1.53% 26.37% 6.82%
---------------------------------------------------------------------------------------
Net assets, end of year
(000)'s $ 321 $ 572 $1,557 $1,252 $ 641
---------------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.90% 1.78% 1.70% 1.74% 1.86%
Net investment income 4.06 4.00 3.63 4.14 4.17
---------------------------------------------------------------------------------------
Portfolio turnover rate 167% 27% 49% 57% 59%
---------------------------------------------------------------------------------------
</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.
</TABLE>

SMITH BARNEY MUTUAL FUNDS 31
<PAGE>

<TABLE>
<CAPTION>
For a Class Y Share of beneficial interest outstanding
throughout each year ended July 31:
----------------------------------------------------------------------------------------
2000(1) 1999(1) 1998 1997 1996(1)(2)
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------
Net asset value,
beginning of year $ 15.34 $ 16.98 $ 18.66 $ 15.68 $ 16.15
----------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.78 0.76 0.77 0.83 0.38
Net realized and
unrealized gain/(loss) 0.19 (1.25) (0.35) 3.31 (0.46)
----------------------------------------------------------------------------------------
Total income (loss) from
operations 0.97 (0.49) 0.42 4.14 (0.08)
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.70) (0.71) (0.84) (0.80) (0.39)
Capital -- (0.44) (1.26) (0.36) --
----------------------------------------------------------------------------------------
Total distributions (0.70) (1.15) (2.10) (1.16) (0.39)
----------------------------------------------------------------------------------------
Net assets value, end of
year $ 15.61 $ 15.34 $ 16.98 $ 18.66 $ 15.68
----------------------------------------------------------------------------------------
Total return 6.62% (2.68)% 2.42% 27.44% (0.56)%(3)
----------------------------------------------------------------------------------------
Net assets, end of year
(000)'s $90,472 $95,707 $72,870 $29,080 $ 9,189
----------------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 0.87% 0.83% 0.83% 0.85% 1.00%(4)
Net investment income 5.10 4.87 4.49 5.04 4.98(4)
----------------------------------------------------------------------------------------
Portfolio turnover rate 167% 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 SMITH BARNEY CONVERTIBLE FUND
<PAGE>
(This page intentionally left blank)

SMITH BARNEY MUTUAL FUNDS 33
<PAGE>

[LOGO]

SMITH BARNEY 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 significantly affected the
fund's performance during its last fiscal year or period.

The fund sends only one report to a household if more than one account has the
same address. Contact your Service Agent 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 Service
Agent by calling the fund at 1-800-451-2010, or by writing to the fund at Smith
Barney Mutual Funds, 7 World Trade Center, 39th Floor, New York, New York 10048.

Information about the fund (including the SAI) can be reviewed and copied at the
Securities and Exchange Commission's (the "Commission") 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.

YOUR SERIOUS MONEY. PROFESSIONALLY MANAGED. is a service mark of Salomon Smith
Barney Inc.

(Investment Company Act
file no. 811-04254)
[FD1210 11/00]

<PAGE>

[SB] Smith Barney
[MF] Mutual Funds

Your Serious Money. Professionally Managed.(SM)

P R O S P E C T U S

Smith Barney
Diversified
Strategic Income
Fund

Class Z Shares
-----------------------
November 28, 2000

--------------------------------------------------------------------------
INVESTMENT PRODUCTS: NOT FDIC INSURED . NO BANK GUARANTEE . MAY LOSE VALUE
--------------------------------------------------------------------------
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>

Smith Barney Diversified Strategic Income Fund

Contents

<TABLE>
<S> <C>
Share price................................................................. 12
Dividends, distributions and taxes.......................................... 13
Financial highlights........................................................ 14
</TABLE>

The Class Z shares described in this prospectus are offered exclusively for
sale to tax-exempt employee benefit and retirement plans of Salomon Smith
Barney Inc. or any of its affiliates.

Smith Barney Mutual Funds

1
<PAGE>

Investments, risks and performance

Investment objective
The fund seeks high current income.

Principal investment strategies

Key investments The fund invests primarily in three types of fixed income secu-
rities:

. U.S. government securities and U.S. government mortgage-related securities
. foreign government securities, including securities issued by supranational
organizations
. U.S. and foreign corporate debt securities

Allocation: The manager allocates and reallocates the fund's assets from time
to time among the types of fixed income securities described above based on its
analysis of economic and market conditions and the relative returns and risks
then represented by each type. The manager normally expects to maintain approx-
imately 50% of the fund's assets in government and mortgage-related securities,
25% in foreign government securities and 25% in corporate debt. However, these
percentages may vary significantly over time.

Maturity: The fund will invest primarily in intermediate-term securities. As a
result, the weighted average effective maturity of the fund's portfolio is nor-
mally expected to be between four and 10 years.

Credit quality: Up to 35% of the fund's assets may be invested in U.S. or for-
eign securities rated below investment grade or comparable unrated securities.
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. The portion of the fund's
portfolio invested in corporate debt securities will be primarily invested in
below investment grade securities.

Selection process

Government and mortgage-related securities
In selecting government and mortgage-related securities, the manager focuses on
identifying undervalued sectors and securities. Specifically, the manager:

Diversified Strategic Income Fund

2
<PAGE>

. Emphasizes those sectors and maturities that seem to be most undervalued or
appropriate based on the manager's economic and interest rate outlook
. Monitors the yield spreads between U.S. Treasury and government agency or
instrumentality securities and purchases agency and instrumentality securi-
ties when their additional yield justifies their additional risk
. Uses research to uncover inefficient sectors of the government and mortgage
markets and adjusts portfolio positions to take advantage of new information
. Measures the potential impact of supply/demand imbalances, changes in the
relative yields for securities with different maturities, and changing pre-
payment patterns to identify individual securities that balance potential
return and risk

Foreign government securities
In selecting foreign government securities, the subadviser considers and com-
pares the relative yields of various foreign government obligations. The
subadviser diversifies this portion of the portfolio by spreading assets among
countries and regions. The subadviser also may attempt to preserve the U.S.
dollar value of securities by using currency derivatives to hedge foreign cur-
rency exposure. The subadviser looks for:

. Political and economic stability, and favorable inflation and government def-
icit prospects
. Favorable yield and maturity
. Strong financial condition and high credit quality
. Low sensitivity to interest rate changes

Corporate debt securities
In selecting corporate debt securities, the manager considers and compares the
relative yields of various types of obligations and employs a forward looking
strategy seeking to identify companies that exhibit favorable earnings pros-
pects or demonstrate a potential for higher ratings over time. The manager
looks for:

. "Fallen angels" or companies that are repositioning in the marketplace and
that the manager believes are temporarily undervalued
. Younger companies with smaller capitalizations that have exhibited improving
financial strength or improving credit ratings over time

The manager also employs an active sell strategy to dispose of securities that
have a rising risk of default due to material changes in management, opera-
tions, earnings, or other internal or external factors.

Smith Barney Mutual Funds

3
<PAGE>

Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:

. Interest rates increase, causing the prices of fixed income securities to
decline, reducing the value of the fund's portfolio

. Interest rates decline, the issuers of securities held by the fund may pay
principal earlier than scheduled or exercise a right to call the securities,
forcing the fund to reinvest in lower yielding securities. This is known as
prepayment or call risk

. Interest rates increase, slower than expected principal payments may extend
the average life of fixed income securities held by the fund, locking in
below market interest rates and reducing the value of these securities. This
is known as extension risk
. The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest, or the security's credit rating is downgraded.
This risk is higher for below investment grade bonds, as described below
. Adverse governmental action or, political, economic or market instability
affects a foreign country or region
. An unhedged currency in which a security is priced declines in value relative
to the U.S. dollar
. The manager's or subadviser's judgment about the attractiveness, relative
yield, value or potential appreciation of a particular security, or the
proper allocation among types of investments, proves to be incorrect

Payments of principal and interest on mortgage pools issued by instrumentali-
ties of the U.S. government are not guaranteed by the U.S. government. Although
payments of principal and interest on mortgage pools issued by some U.S. agen-
cies are guaranteed, this guarantee does not apply to losses resulting from
declines in their market values.

Less developed foreign countries in which the fund may invest have less liquid
and more volatile markets than in the U.S. In some of these countries, there is
also less information available about issuers and markets because of less rig-
orous accounting and regulatory standards than in the U.S. Currency fluctua-
tions could erase investment gains or add to investment losses.

Diversified Strategic Income Fund

4
<PAGE>

economic conditions or other circumstances are likely to weaken the capacity of
issuers of these securities to make principal and interest payments.

The fund may engage in active and frequent trading to achieve its principal
investment strategies. This may lead to the realization and distribution to
shareholders of higher capital gains, which would increase their tax liability.
Transaction costs of frequent trading may also result in increased fund
expenses.

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

. Are seeking to invest in fixed income securities for high current income
. Are willing to accept the risks of mortgage-related securities, foreign secu-
rities and below investment grade bonds

Smith Barney Mutual Funds

5
<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. The bar chart shows
the performance of the fund's Class Z shares since inception on November 6,
1992.

Total Return for Class Z Shares

[BAR CHART]

93 94 95 96 97 98 99
------ ------- ------ ------ ----- ----- -----
13.49% (2.60%) 15.92% 10.86% 7.82% 6.24% 0.06%

Calendar years ended December 31

Quarterly returns:

Highest: 4.50% in 1st quarter 1993; Lowest: -1.93% in 1st quarter 1994. Year to
date: 2.95% through 9/30/00

Risk return table
This table indicates the risks of investing in the fund by comparing the aver-
age annual total return of Class Z shares of the fund for the periods shown
with that of the Lehman Brothers Aggregate Bond Index, an unmanaged broad-based
index consisting of government, corporate, mortgage-related and asset-backed
fixed income securities. This table assumes reinvestment of distributions and
dividends.

Average Annual Total Returns

Calendar Years Ended December 31, 1999
<TABLE>
<CAPTION>
Class 1 year 5 years 10 years Since Inception Inception Date
<S> <C> <C> <C> <C> <C>
Z 0.06% 8.05% n/a 7.20% 11/06/92
Lehman Brothers
Aggregate Bond Index -0.82% 7.73% n/a 6.51% *

* Index comparison begins on November 6, 1992.
</TABLE>

Diversified Strategic Income Fund

6
<PAGE>

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

Annual fund operating expenses
<TABLE>
<CAPTION>
(expenses deducted from fund assets)
<S> <C>
Management fee 0.65%
Other expenses 0.04%
-----
Total annual fund operating expenses 0.69%
</TABLE>

Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class Z (with or without redemption) $70 $221 $384 $859
</TABLE>

Smith Barney Mutual Funds

7
<PAGE>

MORE ON THE FUND'S INVESTMENTS

- 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

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.

6 Smith Barney High Income Fund
<PAGE>

which are also subject to the risks generally associated with investments in
illiquid securities.

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.

Smith Barney Mutual Funds 7
<PAGE>

MANAGEMENT

John C. Bianchi, investment officer of the manager and managing director of
Salomon Smith Barney, has been responsible for the day-to-day management of the
fund since 1988.

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.

TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT Citi Fiduciary Trust Company
serves as the fund's transfer agent and shareholder servicing agent (the
"transfer agent"). Pursuant to a sub-transfer agency and services agreement with
the transfer agent, PFPC Global Fund Services serves as the fund's sub-transfer
agent to render certain shareholder recordkeeping and accounting services and
functions.

8 Smith Barney High Income Fund
<PAGE>

BUYING, SELLING AND EXCHANGING CLASS Z SHARES

<TABLE>
<C> <S>
Through a You may buy, sell or exchange Class Z shares
qualified plan only through a 'qualified plan.' A qualified
plan is a tax-exempt employee benefit or
retirement plan of Salomon Smith Barney or one
of its affiliates.

There are no minimum investment requirements for
Class Z shares. However, the fund reserves the
right to change this policy at any time.
-----------------------------------------------------------------------
Buying Orders to buy Class Z shares must be made in
accordance with the terms of a qualified plan.
If you are a participant in a qualified plan,
you may place an order with your plan to buy
Class Z shares at net asset value, without any
sales charge. Payment is due to Salomon Smith
Barney on settlement date, which is the third
business day after your order is accepted. If
you make payment prior to this date, you may
designate a temporary investment (such as a
money market fund of the Smith Barney funds) for
payment until settlement date. The fund reserves
the right to reject any order to buy shares and
to suspend the offering of shares for a period
of time.
-----------------------------------------------------------------------
Selling Qualified plans may redeem their shares on any
day on which the fund calculates its net asset
value. You should consult the terms of your
qualified plan for special redemption
provisions.
-----------------------------------------------------------------------
Exchanging You should consult your qualified plan for
information about available exchange options.
</TABLE>

Smith Barney Mutual Funds 9
<PAGE>

SHARE PRICE

Qualified plans may buy, exchange or redeem Class Z shares of the fund at the
net asset value 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 Statement of Additional
Information. 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. 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 that uses 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 your
qualified plan 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 qualified plan before the New York Stock Exchange closes.
If the New York Stock Exchange closes early, you must place your order with your
qualified plan prior to the actual closing time. Otherwise, you will receive the
next business day's price.

Your qualified plan must transmit all orders to buy, exchange or redeem shares
to the fund's agent before the agent's close of business.

10 Smith Barney High Income Fund
<PAGE>

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS The fund generally pays dividends 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 primarily from income. 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 Provided that a qualified plan has not borrowed to finance its investment
in the fund, it will not be taxable on the receipt of dividends and
distributions from the fund.

Dividends and interest received by the fund from investing in foreign securities
may give rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. The fund's foreign tax payments will reduce the amount of
its dividends and distributions.

Smith Barney Mutual Funds 11
<PAGE>

FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the
performance of Class Z shares for the past 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 table was
audited by KPMG LLP, independent auditors, whose report, along with the fund's
financial statements, is included in the annual report (available upon request).

FOR A CLASS Z SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH YEAR ENDED JULY 31:

<TABLE>
<CAPTION>
2000(1) 1999(1) 1998(1) 1997(1) 1996
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------
Net asset value, beginning of
year $10.29 $11.74 $11.80 $10.99 $11.09
---------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.68 1.01 1.04 1.12 1.11
Net realized and unrealized
gain/(loss) (1.06) (1.43) 0.01 0.80 (0.10)
---------------------------------------------------------------------------------
Total income (loss) from
operations (0.38) (0.42) 1.05 1.92 1.01
---------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.98) (1.02) (1.11) (1.11) (1.11)
Capital -- (0.01) -- -- --
---------------------------------------------------------------------------------
Total distributions (0.98) (1.03) (1.11) (1.11) (1.11)
---------------------------------------------------------------------------------
Net asset value, end of year $8.93 $10.29 $11.74 $11.80 $10.99
---------------------------------------------------------------------------------
Total return (3.88)% (3.49)% 9.33% 18.29% 9.42%
---------------------------------------------------------------------------------
Net assets, end of year (000)'s $81 $99 $107 $104 $7,158
---------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 4.46% 0.89% 0.85% 0.75% 0.77%
Net investment income 7.00 9.28 8.82 9.88 9.98
---------------------------------------------------------------------------------
Portfolio turnover rate 65% 96% 102% 78% 72%
---------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
</TABLE>

12 Smith Barney High Income Fund
<PAGE>

(This page intentionally left blank)
<PAGE>

[SALOMON SMITH BARNEY LOGO]

SMITH BARNEY HIGH INCOME FUND

An investment portfolio of Smith Barney Income Funds

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, 7
World Trade Center, 39th Floor, New York, New York 10048.

Information about the fund (including the SAI) can be reviewed and copied at the
Securities and Exchange Commission's (the "Commission") 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.

YOUR SERIOUS MONEY.
PROFESSIONALLY MANAGED. is a service mark of Salomon Smith Barney Inc.
(Investment Company Act
file no. 811-04254)
[FD0792 11/00]

<PAGE>

[LOGO]

PROSPECTUS

SMITH BARNEY
TOTAL RETURN
BOND FUND
CLASS A, B, L AND Y SHARES
--------------------------------------

NOVEMBER 28, 2000

--------------------------------------------------------------------------
INVESTMENT PRODUCTS: NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE
--------------------------------------------------------------------------

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>

SMITH BARNEY
TOTAL RETURN BOND FUND

CONTENTS

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

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

More on the fund's investments............................. 7

Management................................................. 8

Choosing a class of shares to buy.......................... 9

Comparing the fund's classes............................... 10

Sales charges.............................................. 11

More about deferred sales charges.......................... 14

Buying shares.............................................. 15

Exchanging shares.......................................... 17

Redeeming shares........................................... 19

Other things to know about share transactions.............. 21

Dividends, distributions and taxes......................... 23

Share price................................................ 24

Financial highlights....................................... 25
</TABLE>

SMITH BARNEY MUTUAL FUNDS 1
<PAGE>
INVESTMENTS, RISKS AND PERFORMANCE
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE

The fund seeks to maximize total return consisting of capital appreciation and
income.

PRINCIPAL INVESTMENT STRATEGIES

KEY INVESTMENTS The fund invests primarily in the following types of
fixed-income securities:

/ / Securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities ("U.S. government securities")
/ / High grade mortgage-related securities issued by various governmental and
non-governmental entities
/ / Investment grade corporate debt securities
/ / Investment grade taxable municipal securities
/ / Investment grade asset backed securities

The fund may invest in securities of any maturity, and its effective portfolio
maturity will vary based on the manager's outlook for interest rates.

SELECTION PROCESS The manager actively allocates and reallocates the fund's
investments among the above securities categories. In allocating investments
among categories, the manager considers economic and market conditions and the
relative risks and opportunities of each category. The manager looks for:

/ / Categories most favorably positioned in light of the manager's interest rate
outlook

/ / Categories with favorable relative yields of securities and at various
maturities

/ / Categories with the highest availability of attractive securities

Once the fund's category allocation has been determined, the manager selects
individual securities within each category. The manager uses fundamental and
quantitative analysis to select individual securities. The manager looks for:

/ / Stable or improving credit quality
/ / Low price relative to credit and interest characteristics
/ / Potential for credit upgrades, unique structural characteristics or
innovative features

2 TOTAL RETURN BOND FUND
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND

Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:

/ / Interest rates increase, causing the prices of fixed income securities to
decline, reducing the value of the fund's portfolio

/ / Interest rates decline, the issuers of securities held by the fund may
pay principal earlier than scheduled or exercise a right to call the
securities, forcing the fund to reinvest in lower yielding securities. This
is known as prepayment or call risk
/ / Interest rates increase, slower than expected principal payments may
extend the average life of fixed income securities held by the fund, locking
in below market interest rates and reducing the value of these securities.
This is known as extension risk
/ / The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest, or the security's credit rating is downgraded
/ / The manager's judgment about the attractiveness, relative yield, value or
potential appreciation of a particular security or a particular category of
fixed income securities proves to be incorrect

The fund's ability to achieve its investment goal of total return, consisting of
interest income and capital appreciation, is limited in certain markets because
the fund invests primarily in fixed-income securities.

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

/ / Are seeking total return through an investment in fixed income securities
/ / Are willing to accept the risks of various categories of fixed income
investments

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 A shares for the past calendar year.
Class B, L and Y shares 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 A SHARES

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

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

CALENDAR YEARS ENDED DECEMBER 31

QUARTERLY RETURNS:

Highest: (0.51)% in 3rd quarter 1999; Lowest: (2.27)% in 2nd quarter 1999
Year to date: 6.5% through 9/30/00

4 TOTAL RETURN BOND 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 Merrill
Lynch U.S. Corporate & Government 10+ Years Index (the "Merrill Lynch Index"),
an unmanaged broad-based total return index consisting of U.S. government
agencies, treasury securities and all investment grade corporate debt securities
with maturities of ten years or more. 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, 1999
-------------------------------------------------------------------------------------------
CLASS 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
A (10.10)% n/a n/a (2.59)% 2/27/98
-------------------------------------------------------------------------------------------
B (10.27)% n/a n/a (2.60)% 2/27/98
-------------------------------------------------------------------------------------------
L (8.06)% n/a n/a (1.13)% 2/27/98
-------------------------------------------------------------------------------------------
Y* n/a n/a n/a n/a 2/27/98
-------------------------------------------------------------------------------------------

Merrill Lynch Index (7.65)% n/a n/a 1.19% **

-------------------------------------------------------------------------------------------
</TABLE>

*THERE WERE NO CLASS Y SHARES OUTSTANDING FOR THE CALENDAR YEAR ENDED
DECEMBER 31, 1999.

**INDEX COMPARISON BEGINS ON 2/27/98.

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 Y
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
Maximum sales charge (load)
imposed on purchases
(AS A % OF OFFERING PRICE) 4.50% None 1.00% None
-----------------------------------------------------------------------------
Maximum deferred sales charge
(load) (AS A % OF THE LOWER
OF NET ASSET VALUE AT
PURCHASE OR REDEMPTION) None* 4.50% 1.00% None

<CAPTION>
ANNUAL FUND OPERATING EXPENSES
-------------------------------------------------------------------------------------
(EXPENSES DEDUCTED FROM FUND ASSETS) CLASS A CLASS B CLASS L CLASS Y**
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Management fee 0.65% 0.65% 0.65% 0.65%
-------------------------------------------------------------------------------------
Distribution and service (12b-1)
fees 0.25% 0.75% 0.70% None
-------------------------------------------------------------------------------------
Other expenses 0.18% 0.21% 0.22% 0.18%
----- ----- ----- -----
-------------------------------------------------------------------------------------
Total annual fund operating
expenses 1.08% 1.61% 1.57% 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%.

**FOR CLASS Y SHARES, "OTHER EXPENSES" HAVE BEEN ESTIMATED BASED ON EXPENSES
INCURRED BY CLASS A SHARES BECAUSE NO CLASS Y SHARES WERE OUTSTANDING AS OF THE
FISCAL YEAR ENDED JULY 31, 2000.

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:

<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) $555 $778 $1,019 $1,708
-------------------------------------------------------------------------------
Class B (REDEMPTION AT END OF
PERIOD) $614 $808 $ 976 $1,769
-------------------------------------------------------------------------------
Class B (NO REDEMPTION) $164 $508 $ 876 $1,769
-------------------------------------------------------------------------------
Class L (REDEMPTION AT END OF
PERIOD) $358 $591 $ 947 $1,949
-------------------------------------------------------------------------------
Class L (NO REDEMPTION) $258 $591 $ 947 $1,949
-------------------------------------------------------------------------------
Class Y (WITH OR WITHOUT
REDEMPTION) $85 $265 $ 460 $1,025
</TABLE>

6 TOTAL RETURN BOND FUND
<PAGE>
MORE ON THE FUND'S INVESTMENTS
--------------------------------------------------------------------------------

DERIVATIVE CONTRACTS The fund may, but need not, use derivative contracts, such
as options on securities, 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 exchange
rates; or

/ / As a substitute for buying or selling securities.

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 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-TERM INVESTMENTS Under normal market conditions, the fund may invest up to
20% of its assets in cash or short-term money market instruments, including U.S.
government securities, bank obligations and commercial paper.

YANKEE BONDS The fund may invest in Yankee Bonds, which are U.S. dollar
denominated fixed income securities of foreign issuers. The value of these
securities may decline (i) if the U.S. and/or foreign fixed income markets
decline, (ii) if an adverse event depresses the value of an issuer's securities,
or (iii) because of foreign government actions, political instability or limited
availability of accurate information about foreign companies.

SMITH BARNEY MUTUAL FUNDS 7
<PAGE>
MANAGEMENT
--------------------------------------------------------------------------------

MANAGER The fund's investment adviser and administrator is SSB Citi Fund
Management LLC ("SSB Citi"), an affiliate of Salomon Smith Barney Inc.
("Salomon Smith Barney"). The manager's address is 7 World Trade Center,
New York, New York 10048. 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.

Joseph P. Deane, investment officer of the manager and managing director of
Salomon Smith Barney, has been responsible for the day-to-day management of the
fund's portfolio since its inception in 1998. Mr. Deane has 30 years of
investment management experience.

MANAGEMENT FEE For its services, the manager received a fee during the fund's
last fiscal year equal to 0.56% of the fund's average daily net assets.

In addition, the distributor may make payments for distribution and/or
shareholder servicing activities out of its past profits and other available
sources. The distributor may also make payments for marketing, promotional or
related expenses to dealers. The amount of these payments is determined by the
distributor and may be substantial. The manager or an affiliate may make similar
payments under similar arrangements.

TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT Citi Fiduciary Trust Company
serves as the fund's transfer agent and shareholder servicing agent (the
"transfer agent"). The transfer agent has entered into a sub-transfer agency and
services agreement with PFPC Global Fund Services to serve as the fund's
sub-transfer agent (the "sub-transfer agent"). The sub-transfer agent will
perform certain functions including shareholder recordkeeping and accounting
services.

8 TOTAL RETURN BOND FUND
<PAGE>
CHOOSING A CLASS OF SHARES TO BUY
--------------------------------------------------------------------------------

/ / 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 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
and Class L shares, but only if the fund performs well.
/ / Class L 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 shares do not, Class B shares may be more attractive to long-term
investors.

You may buy shares from:

/ / A broker/dealer, financial intermediary, financial institution or a
distributor's financial consultants (each called a "Service Agent")

/ / The fund, but only if you are investing through certain qualified plans or
Service Agents

All Classes of shares are not available through all Service Agents. You should
contact your Service Agent for further information.

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
--------------------------------------------------------------------------
IRAs, 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 9
<PAGE>
COMPARING THE FUND'S CLASSES
--------------------------------------------------------------------------------

Your Service Agent can help you decide which class meets your goals. The Service
Agent receives different compensation depending upon which class you choose.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS L CLASS Y
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------
KEY FEATURES / / Initial / / No initial / / Initial / / No initial
sales charge sales charge sales charge is or deferred
/ / You may / / Deferred lower than sales
qualify for sale charge Class A / / Must invest
reduction or declines over / / Deferred at least
waiver of time sales charge $15 million
initial / / Converts to for only 1 / / Lower
sales Class A year annual expenses
charge after 8 / / Does not than other
/ / Lower years convert to classes
annual expenses / / Higher Class A
than the annual / / Higher
Class B expenses annual
and than expenses
Class L Class A than
Class A
-----------------------------------------------------------------------------------------
INITIAL SALES CHARGE Up to 4.50%; None 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 4.50% 1.00% if you None
purchases of charged when redeem within
$500,000 or you redeem 1 year of
more if you shares. The 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 0.70% of None
AND SERVICE FEES average daily average daily average daily
net assets net assets net assets
-----------------------------------------------------------------------------------------
EXCHANGEABLE INTO* Class A shares Class B shares Class L shares Class Y shares
of most Smith of most Smith of most Smith of most Smith
Barney funds Barney funds Barney funds Barney funds
</TABLE>

*ASK YOUR SERVICE AGENT FOR THE SMITH BARNEY FUNDS AVAILABLE FOR EXCHANGE.

10 TOTAL RETURN BOND 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.

The table below shows the rate of sales charge you pay, depending on the amount
you purchase.

The table below also shows the amount of broker/dealer compensation that is paid
out of the sales charge. This compensation includes commissions and other fees
which Service Agents that sell shares of the fund receive. The distributor keeps
up to approximately 10% of the sales charge imposed on Class A shares. Service
Agents also will receive the service fee payable on Class A shares at an annual
rate equal to 0.25% of the average daily net assets represented by the Class A
shares sold by them.

<TABLE>
<CAPTION>
SALES CHARGE AS A % OF BROKER/DEALER
OFFERING NET AMOUNT COMMISSION AS A %
AMOUNT OF PURCHASE PRICE (%) INVESTED (%) OF OFFERING PRICE
<S> <C> <C> <C>
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Less than $25,000 4.50 4.71 4.05
-------------------------------------------------------------------------
$25,000 but less than
$50,000 4.00 4.17 3.60
-------------------------------------------------------------------------
$50,000 but less than
$100,000 3.50 3.63 3.15
-------------------------------------------------------------------------
$100,000 but less than
$250,000 2.50 2.56 2.25
-------------------------------------------------------------------------
$250,000 but less than
$500,000 1.50 1.52 1.35
-------------------------------------------------------------------------
$500,000 or more -0- -0- up to 1.00*
-------------------------------------------------------------------------
</TABLE>

*A DISTRIBUTOR PAYS UP TO 1.00% TO A SERVICE AGENT.

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

SMITH BARNEY MUTUAL FUNDS 11
<PAGE>
these Class A shares within one year of purchase, you will pay a deferred sales
charge of 1%.

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.

WAIVERS FOR CERTAIN CLASS A INVESTORS Class A initial sales charges are waived
for certain types of investors, including:

/ / Employees of NASD members

/ / Investors participating in a fee-based program sponsored by certain
broker/dealers affiliated with Citigroup

/ / Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Service Agent is notified

IF YOU WANT TO LEARN ABOUT ADDITIONAL WAIVERS OF CLASS A INITIAL SALES CHARGES,
CONTACT YOUR SERVICE AGENT 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 4.50% 4% 3% 2% 1% 0%
---------------------------------------------------------------------------------------------------
</TABLE>

12 TOTAL RETURN BOND FUND
<PAGE>

<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 Class
total Class B shares A shares
you own (excluding
shares issued as
dividends)
</TABLE>

CLASS L SHARES

You buy Class L 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 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.

Service Agents selling Class L shares receive a commission of up to 1.75% of the
purchase price of the Class L shares they sell. Starting in the thirteenth
month, Service Agents also receive an annual fee of up to 0.70% of the average
daily net assets represented by the Class L shares held by their clients.

CLASS Y SHARES

SMITH BARNEY MUTUAL FUNDS 13
<PAGE>
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

The fund's distributor receives deferred sales charges as partial compensation
for its expenses in selling shares, including the payment of compensation to
your Service Agent.

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, CONTACT
YOUR SERVICE AGENT OR CONSULT THE SAI.

14 TOTAL RETURN BOND FUND
<PAGE>
BUYING SHARES
--------------------------------------------------------------------------------
THROUGH A SERVICE AGENT

You should contact your Service Agent 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

Your Service Agent may charge an annual account maintenance fee.

--------------------------------------------------------------------------------
THROUGH THE FUND

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

/ / Write the fund at the following address:
SMITH BARNEY INCOME FUNDS
SMITH BARNEY TOTAL RETURN BOND FUND
(SPECIFY CLASS OF SHARES)
C/O PFPC GLOBAL FUND SERVICES
P.O. BOX 9699
PROVIDENCE, RI 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

SMITH BARNEY MUTUAL FUNDS 15
<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, your
Service Agent or the sub-transfer agent may charge you a fee

FOR MORE INFORMATION, CONTACT YOUR SERVICE AGENT OR THE TRANSFER AGENT OR
CONSULT THE SAI.

16 TOTAL RETURN BOND 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 Service Agent to exchange into other Smith Barney funds.
Be sure to read the prospectus of the Smith Barney fund youare exchanging into.
An exchange is a taxable transaction.

/ / 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 Service Agent or the transfer agent for further information.

/ / You must meet the minimum investment amount for each fund (except for
systematic plan exchanges).

/ / 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.

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

SMITH BARNEY MUTUAL FUNDS 17
<PAGE>
BY TELEPHONE

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

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

If you do not have a brokerage account, contact your Service Agent or write to
the sub-transfer agent at the address on the following page.

18 TOTAL RETURN BOND FUND
<PAGE>
REDEEMING SHARES
--------------------------------------------------------------------------------
GENERALLY

Contact your Service Agent to redeem shares of the fund.

If you hold share certificates, the sub-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.

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

For accounts held directly at the fund, send written requests to the fund at the
following address:

SMITH BARNEY INCOME FUNDS
SMITH BARNEY TOTAL RETURN BOND FUND
(SPECIFY CLASS OF SHARES)
C/O PFPC GLOBAL FUND SERVICES
P.O. BOX 9699
PROVIDENCE, RI 02940-9699

Your written request must provide the following:

/ / The fund and 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

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

SMITH BARNEY MUTUAL FUNDS 19
<PAGE>
BY TELEPHONE

--------------------------------------------------------------------------------
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 SERVICE AGENT OR CONSULT THE SAI.

20 TOTAL RETURN BOND 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:

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

/ / Are redeeming over $50,000

/ / Are sending signed share certificates or stock powers to the sub-transfer
agent

/ / Instruct the sub-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:

SMITH BARNEY MUTUAL FUNDS 21
<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

22 TOTAL RETURN BOND FUND
<PAGE>

DIVIDENDS, DISTRIBUTIONS AND TAXES

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

DIVIDENDS The fund generally pays dividends 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 primarily from income. You do not pay a sales charge on
reinvested distributions or dividends. Alternatively, you can instruct your
Service Agent, the transfer agent or the sub-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 your Service Agent, the transfer agent or the sub-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.

SMITH BARNEY MUTUAL FUNDS 23
<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. 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.

Service Agents must transmit all orders to buy, exchange or redeem shares to the
fund's sub-transfer agent before the sub-transfer agent's close of business.

24 TOTAL RETURN BOND FUND
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The financial highlights tables are intended to help you understand the
performance of each class since inception. 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 auditors, whose report, along with the fund's
financial statements, is included in the annual report (available upon request).
No information is presented for Class Y shares, because no Class Y shares were
outstanding for the periods shown.

<TABLE>
<CAPTION>
FOR A CLASS A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED JULY 31:
------------------------------------------------------------------------------------------
2000(1) 1999(1) 1998(2)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 10.67 $ 11.53 $ 11.46
------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(3) 0.70 0.67 0.25
Net realized and unrealized gain (loss) (0.35) (0.85) 0.05
------------------------------------------------------------------------------------------
Total income (loss) from operations 0.35 (0.18) 0.30
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.68) (0.68) (0.23)
------------------------------------------------------------------------------------------
Total distributions (0.68) (0.68) (0.23)
------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.34 $ 10.67 $ 11.53
------------------------------------------------------------------------------------------
Total return 3.40% (1.79)% 2.64%(4)
------------------------------------------------------------------------------------------
Net assets, end of year (000)'s $32,972 $52,101 $54,674
------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(3) 1.08% 1.02% 1.00%(5)
Net investment income 6.69 5.88 5.39(5)
------------------------------------------------------------------------------------------
Portfolio turnover rate 8% 32% 0%
------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<C> <S>
(1) Per share amounts calculated using the monthly average
shares method.
(2) For the period from February 27, 1998 (inception date)
through July 31, 1998.
(3) The manager waived part of its fees for the year ended July
31, 1999 and the period ended July 31, 1998. If such fees
were not waived, the per share effect on net investment
income and the expense ratios would have been as follows:
</TABLE>

<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
--------------------------------------------------------------------------------------------------
1999 1998 1999 1998(5)
<S> <C> <C> <C> <C>
------------------------------------------------------------------ ----------------------------
Class A $0.01 $0.01 1.11% 1.21%
------------------------------------------------------------------ ----------------------------
</TABLE>

<TABLE>
<C> <S>
(4) Not annualized.
(5) Annualized.
</TABLE>

SMITH BARNEY MUTUAL FUNDS 25
<PAGE>

<TABLE>
<CAPTION>
FOR A CLASS B SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED JULY 31:
------------------------------------------------------------------------------------------
2000(1) 1999(1) 1998(2)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 10.67 $ 11.53 $ 11.46
------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(3) 0.64 0.62 0.23
Net realized and unrealized gain (loss) (0.35) (0.86) 0.05
------------------------------------------------------------------------------------------
Total income (loss) from operations 0.29 (0.24) 0.28
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.62) (0.62) (0.21)
------------------------------------------------------------------------------------------
Total distributions (0.62) (0.62) (0.21)
------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.34 $ 10.67 $ 11.53
------------------------------------------------------------------------------------------
Total return 2.83% (2.29)% 2.48%(4)
------------------------------------------------------------------------------------------
Net assets, end of year (000)'s $64,843 $85,991 $81,797
------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(3) 1.61% 1.52% 1.50%(5)
Net investment income 6.15 5.39 4.90(5)
------------------------------------------------------------------------------------------
Portfolio turnover rate 8% 32% 0%
------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
--------------------------------------------------------------------------------------------------
1999 1998 1999 1998(5)
<S> <C> <C> <C> <C>
------------------------------------------------------------------ ----------------------------
Class B $0.01 $0.01 1.61% 1.71%
------------------------------------------------------------------ ----------------------------
</TABLE>

<TABLE>
<C> <S>
(4) Not annualized.
(5) Annualized.
</TABLE>

26 TOTAL RETURN BOND FUND
<PAGE>

<TABLE>
<CAPTION>
FOR A CLASS L SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED JULY 31:
------------------------------------------------------------------------------------------
2000(1) 1999(1) 1998(2)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 10.67 $ 11.53 $ 11.46
------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(3) 0.65 0.62 0.22
Net realized and unrealized gain (loss) (0.35) (0.86) 0.06
------------------------------------------------------------------------------------------
Total income (loss) from operations 0.30 (0.24) 0.28
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.63) (0.62) (0.21)
------------------------------------------------------------------------------------------
Total distributions (0.63) (0.62) (0.21)
------------------------------------------------------------------------------------------
Net assets value, end of year $ 10.34 $ 10.67 $ 11.53
------------------------------------------------------------------------------------------
Total return 2.89% (2.24)% 2.49%(4)
------------------------------------------------------------------------------------------
Net assets, end of year (000)'s $16,711 $24,253 $20,386
------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(3) 1.57% 1.47% 1.45%(5)
Net investment income 6.18 5.44 4.97(5)
------------------------------------------------------------------------------------------
Portfolio turnover rate 8% 32% 0%
------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
--------------------------------------------------------------------------------------------------
1999 1998 1999 1998(5)
<S> <C> <C> <C> <C>
------------------------------------------------------------------ ----------------------------
Class L $0.01 $0.01 1.56% 1.66%
------------------------------------------------------------------ ----------------------------
</TABLE>

<TABLE>
<C> <S>
(4) Not annualized.
(5) Annualized.
</TABLE>

SMITH BARNEY MUTUAL FUNDS 27
<PAGE>

[LOGO]

SMITH BARNEY
TOTAL RETURN
BOND FUND
An investment portfolio of Smith Barney Income Funds

The fund sends only one report to a household if more than one account has the
same address. Contact your Service Agent 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 Service
Agent, by calling the fund at 1-800-451-2010, or by writing to the fund at Smith
Barney Mutual Funds, 7 World Trade Center, 39th Floor, New York, New York 10048.

Information about the fund (including the SAI) can be reviewed and copied at the
Securities and Exchange Commission's (the "Commission") 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.

YOUR SERIOUS MONEY. PROFESSIONALLY MANAGED. is a service mark of Salomon

Smith Barney Inc.

(Investment Company Act
file no. 811-04254)
FD01376 11/00

Smith Barney
INCOME FUNDS

7 World Trade Center
New York, New York 10048
(800) 451-2010

Statement of Additional Information November 28, 2000

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, a "fund" individually), each is dated
November 28, 2000, as amended or supplemented from time to
time, and should be read in conjunction with this Statement
of Additional Information. 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
their 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 36
Purchase of Shares 46
Redemption of Shares 54
Exchange Privilege 57
Distributor.. 58
Valuation of Shares 62
Performance Data (See in the prospectuses "Performance" or
"Yield Information") 62
Taxes (See in the prospectuses "Dividends, Distributions and
Taxes") 67
Additional Information 71
Voting Rights 72
Financial Statements 78
Other Information 78
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
Salomon Smith Barney Inc. ("Salomon
Smith Barney")
Distributor
PFS Distributors, Inc. ("PFSDI")
Distributor
SSB Citi Fund Management LLC ("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
PFPC Trust Company (successor by
assignment from PNC Bank, National
Association ("PFPC")
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
Citi Fiduciary Trust Company
("transfer agent")
Transfer Agent
PFPC Global Fund Services ("PFPC
Global")
PFS Shareholder Services ("PFS")
Sub-Transfer Agent
Sub-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 73). Retired; Director or trustee
of 12 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 70). Consultant; Director
or trustee of 19 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 59). Head of School, The
New Atlanta Jewish Community High School, Atlanta Georgia;
Director or trustee of 12 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, Trustee (Age 51). Investment Officer of Korsant
Partners, a family investment company; Director or trustee of
12 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, Trustee (Age 78). 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, Trustee (Age 69). 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, Trustee (Age 74). 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, Trustee (Age 70). 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 67). Managing Director of 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 78 investment companies
associated with Citigroup Inc. ("Citigroup") His address is
7 World Trade Center, New York, New York 10048.

John C. Bianchi, Vice President and Investment Officer (Age
45). Managing Director of Salomon Smith Barney; Investment
Officer of six Smith Barney Mutual Funds. His address is 7
World Trade Center, New York, New York 10048.

James E. Conroy, Vice President and Investment Officer (Age
49). Managing Director of Salomon Smith Barney. Investment
Officer of four Smith Barney Mutual Funds. His address is 7
World Trade Center, New York, New York 10048.

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 7
World Trade Center, New York, New York 10048.

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. His
address is 10 Piccadilly, London, WIV 9LA, UK.

Charles P. Graves, III, Vice President and Investment Officer
(Age 38). Managing Director of Salomon Smith Barney. 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 42). Managing Director of Salomon Smith Barney.
Investment Officer of four Smith Barney Mutual Funds. Her
address is 7 World Trade Center, New York, New York 10048.

Lewis E. Daidone, Senior Vice President and Treasurer (Age
43). 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 61 investment companies
associated with Citigroup. His address is 125 Broad
Street, New York, New York 10004.

Paul Brook, Controller (Age 46). 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. His address is 125 Broad Street, New York, New York
10004.

Christina T. Sydor, Secretary (Age 49). 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 61 investment companies
associated with Citigroup. Her address is 7 World Trade
Center, New York, New York 10048.

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 17, 2000, 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. Officers and interested trustees of
the trust are compensated by Salomon Smith Barney. 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
$60,000 per annum and are allocated based on relative net
assets of each fund in the group of funds sponsored by
Salomon Smith Barney plus a per meeting fee of $2,500 with
respect to in-person meetings. In addition, these directors
received $100 per fund for each telephone meeting plus travel
and out-of-pocket expenses incurred in connection with board
meetings. The board meeting fees and out-of-pocket expenses
are borne proportionately by each individual fund or
portfolio in the group. For the calendar year ended December
31, 1999, such travel and out-of-pocket expenses for the
group totaled $13,469.

For the fiscal year ended July 31, 2000 and the calendar year
ended December 31, 1999, the trustees of the trust were paid
the following compensation:

Trustee
Aggregate
Compensation
from the
Funds for the
Fiscal Year
ended
July 31, 2000
Total
Pension or
Retirement
Benefits
Accrued
from the
Funds
Aggregate
Compensation
from the Funds
and the Fund
Complex for the
Year Ended
December 31,
1999
Number of
Funds for
Which
Person
Served
Within Fund
Complex

Lee Abraham
$23,000
$0
$71,133
12
Allan J. Bloostein
23,100
0
112,483
19
Jane Dasher
23,300
0
65,733
12
Donald R. Foley*
16,580
0
71,300
12
Richard E. Hanson,
Jr.
23,200
0
68,233
12
Paul Hardin
23,200
0
90,450
14
Heath B. McLendon+
0
0
0
78
Roderick C.
Rasmussen*
16,900
0
71,200
12
John P. Toolan*
23,200
0
69,100
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: $10,080, John P. Toolan: $23,200, and Roderick C.
Rasmussen: $6,300, and the following amounts of their
total compensation from the Fund Complex: Donald R.
Foley: $21,600 and John P. Toolan: $69,100.

Note: Upon attainment of age 72 the fund's current trustees
may elect to change to emeritus status. Any directors
elected or appointed to the Board of Trustees in the
future will be required to change to emeritus status
upon attainment of age 80. Trustees 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 trustees, together with
reasonable out-of-pocket expenses for each meeting
attended. During the fund's last fiscal year, no
aggregate compensation was paid from a fund to Emeritus
Trustees.

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 21, 2000. 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 21, 2000. 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 21, 2000.

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, 2000 in excess of $140 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 to SaBAM a fee of 0.40% from SSB
Citi's fee.

** 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
1998
1999
2000
Convertible Fund
$
665,663
$
727,464
$
685,152
Diversified Strategic
Income Fund

13,233,25
8

13,056,066
10,518,800
Exchange Reserve Fund

326,309

423,119

464,866
High Income Fund

7,363,535

8,208,808

7,716,387
Municipal High Income
Fund

3,103,442

2,832,068

2,232,146
Total Return Bond Fund
(1)

378
,79
2

1,169,060

807,065
Balanced Fund

5,097,517

4,222,260

3,836,390
___________________________
(1) Total Return Bond Fund waived $155,458 and $124,974 in
investment advisory 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
1998
1999
2000
Convertible Fund
$
266,265
$
290,986
$ 274,061
Diversified Strategic
Income Fund

5,881,448

5,802,695
4,675,022
Exchange Reserve Fund

217,539

282,079

309,911
High Income Fund

2,945,414

3,283,523
3,086,555
Municipal High Income
Fund

1,551,721

1,416,034
1,116,073
Total Return Bond Fund*

N/A
N/A
N/A
Balanced Fund

2,265,563

1,876,560
1,705,062

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

For the fiscal years ended July 31, 1998, 1999 and 2000,
Diversified Strategic Income Fund paid Global Capital
Management sub-investment advisory fees of $2,940,724,
$2,908,014 and $2,337,511, respectively. For the fiscal
period ended July 31, 2000, Convertible Fund paid SaBAM sub-
investment advisory fees of $415,500. 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, 2001.

Code of Ethics

Pursuant to Rule 17j-1 of the 1940 Act, the fund, its
investment adviser and principal underwriter has adopted a
code of ethics that permits personnel to invest in
securities for their own accounts, including securities
that may be purchased or held by the fund. All personnel
must place the interests of clients first and avoid
activities, interests and relationships that might
interfere with the duty to make decisions in the best
interests of the clients. All personal securities
transactions by employees must adhere to the requirements
of the code and must be conducted in such a manner as to
avoid any actual or potential conflict of interest, the
appearance of such a conflict, or the abuse of an
employee's position of trust and responsibility.

A copy of the fund's code of ethics is on file with the
Securities and Exchange Commission.

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 generally
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 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
total 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 total 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 total
assets to purchase put options on securities for hedging
purposes. The fund may utilize up to 50% of its total
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 total 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
total 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 total 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 total
assets, however, may be invested in foreign securities
issued by countries with emerging markets.

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 total assets may be invested in
cash and money market instruments at any time. The Fund
may invest in obligations of a foreign bank or foreign
branch of a domestic bank only if the manager determines
that the obligations present minimal 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 total
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 total
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, will 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. In
addition, securities in which the fund will invest may not
yield as high level of current income as might be achieved
by investing in securities with less liquidity and safety
and longer maturities.

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 total 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 total assets in
high-yielding corporate bonds, debentures and notes
denominated in U.S. dollars or foreign currencies. Up to
40% of the fund's total assets may be invested in fixed-
income obligations of foreign issuers, and up to 20% of its
total 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 total 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 total 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 total 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
total 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.
In addition, the fund may invest in obligations rated as
low as Caa by Moody's or CCC by S&P or having an equivalent
rating by any NRSRO. Securities that are rated Caa or CCC
are of poor standing. These issues may be in default or
present elements of danger that may exist with respect to
principal or interest.

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 total 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 total 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 total
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 total 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 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 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
securities 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. Placing securities rather
than cash in the segregated account may have a leveraging
effect on the fund's total 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. The funds may also invest in hybrid zero coupon
securities which possess qualities of both, zero coupon and
coupon bonds.

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 GNMA, FNMA and 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). Consistent with applicable regulatory requirements,
each fund may lend portfolio securities to brokers, dealers
and other financial organizations meeting capital and other
credit requirements or other criteria established by the
board. 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 (Balanced,
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 total assets. Balanced Fund will not purchase puts
or calls on securities if more than 5% of its total 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 total 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 total 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 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 (Convertible, 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 total 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 total
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 total 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 of Emerging Markets
(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
(Balanced, Convertible Fund, Diversified Strategic Income
Fund and High Income 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 total 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 total
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, High Income Fund,
Diversified Strategic Income Fund, 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 total 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 total 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 total assets could be adversely affected.

Corporation Loans (Balanced Fund, High Income Fund and
Diversified Strategic Income Fund). These funds may invest
up to 15% of its total assets in corporate loans.
Corporate loans are negotiated and underwritten by a bank
or syndicate of banks and other institutional investors.
The funds may acquire an interest in corporate loans
through the primary market by acting as one of a group of
lenders of a corporate loan. The primary risk in an
investment in corporate loans is that the borrower may be
unable to meet their interest and/or principal payment
obligations. The occurrence of such default with regard to
a corporate loan in which the funds had invested would have
an adverse affect on each fund's net asset value.
Corporate loans in that the funds may invest may be
collateralized or uncollateralized and senior or
subordinate. Investments in uncollateralized and/or
subordinate loans entail a greater risk of nonpayment than
do investments in corporate loans which hold a more senior
position in the borrower's capital structure or that are
secured with collateral.

The funds may also acquire an interest in corporate loans
by purchasing both participations ("Participations") in and
assignments ("Assignments") of portions of corporate loans
from third parties. By purchasing a Participation, the
funds acquire some or all of the interest of a bank or
other leading institution in a loan to a corporate
borrower. The Participations typically will result in the
funds having a contractual relationship only with the
lender and not the borrower. The funds will have the right
to receive payments or principal, interest and any fees to
which it is entitled only from the lender selling the
Participation and only upon receipt by the lender of the
payments from the borrower. In connection with purchasing
Participations, the funds generally will have no right to
enforce compliance by the borrower with the terms of the
loan agreement relating to the loan, nor any rights of set-
off against the borrower, and the funds may not directly
benefit from any collateral supporting the loan in which it
has purchased the Participation. As a result, the funds
will assume the credit risk of both the borrower and the
lender that is selling the Participation. The funds will
acquire Participations only if the lender interpositioned
between the funds and the borrower is determined by
management to be creditworthy. When the funds purchases
Assignments from lenders, the funds will acquire direct
rights against the borrower on the loan. However, since
Assignments are arranged through private negotiations
between potential assignees and assignors, the rights and
obligations acquired by the funds as the purchaser of an
Assignment may differ from, and be more limited than, those
held by the assigned lender.

In addition, the funds may have difficulty disposing of its
investments in corporate loans. The liquidity of such
securities is limited and the funds anticipate that such
securities could be sold only to a limited number of
institutional investors. The lack of liquid secondary
market could have an adverse impact on the value of such
securities and on each fund's ability to dispose of
particular Assignments or Participations when necessary to
meet each fund's liquidity needs or in response to a
specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of liquid
secondary market for corporate loans also may make it more
difficult for the funds to assign a value to those
securities for purposes of valuing each fund's investments
and calculating its net asset value. Each fund's policy
limiting its illiquid securities will be applicable to
investments in corporate loans.

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 total assets. Included within that
amount, but not to exceed 5% of the value of the fund's
total 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 total 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.

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 17 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 total 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
total assets (for Convertible Fund, would exceed
10% of the value of the fund's total assets). At
no time may more than 2% of the fund's total assets
(for Convertible Fund, at no time may more than 5%
of the fund's total 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. Invest in other open-end investment companies
(except as part of a merger, consolidation,
reorganization or acquisition of assets). This
restriction does not apply to investments in
closed-end publicly traded investment companies.

17. 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 total 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, 1999 and 2000, the
portfolio turnover rates were as follows:

For the Fiscal Year Ended
July 31:

Fund
1999
2000

Convertible Fund

27 %
167%*

Diversified Strategic
Income Fund

150
110

High Income Fund

96
65

Municipal High Income
Fund

50
29

Total Return Bond Fund

32
8

Balanced Fund

60
43

* The Convertible Fund during the fiscal year ended July 31,
2000 experienced a larger portfolio turnover compared to
fiscal year ended July 31, 1999 because of the following
reasons: (a) the previous portfolio manager was replaced by
SaBAM which restructured the portfolio and (b) SaBAM's
investment philosophy entails greater turnover of portfolio
securities on account of convertible bonds possessing lower
call protection than other types of fixed income securities.

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

Convertib
le Fund
High
Income
Fund

Balanced
Fund
Diversified
Strategic
Income Fund
Total
Return
Bond
Fund
1998

23,753
$34,725
$2,187,8
05
$20,200
--
1999

13,850

3,634

592,637
$20,619
--
2000

150,697

786

472,222
--
--

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

13,080*
--
--
2000
--
--

16,889**
--
--
* Includes $2,520 for execution, research and statistical
services.
**Includes $15,125 for execution, research and statistical
services.

% of Total 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
1998
--
--

6.36%
--
--
1999
--
--

2.21%
--
--
2000
--
--

3.58%
--
--

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

Fiscal
Year

Convertib
le Fund
High
Income
Fund

Balanced
Fund
Diversified
Strategic
Income Fund
Total
Return
Bond
Fund
1998
--
--
6.54%
--
--
1999
--
--
1.95%
--
--
2000
--
--
2.27%
--
--

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%
4.05%
$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
4.25
4.44
3.83
50,000 -
99,999
3.75
3.63
3.38
100,000 -
249,999
3.25
3.09
2.48
250,000 -
499,999
2.75
2.04
1.80
500,000 -
999,000

1,000,000 or
more
2.00

0
2.04

0
1.80

up to 1.00*
* A distributor pays up to 1.00% to a Service Agent.

Purchases of Class A shares of $500,000 or more of the
Diversified Strategic Income, High Income, Municipal High
Income and Total Return Bond Funds 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 Salomon Smith Barney, which
compensates Salomon Smith Barney Financial Consultants, PFS
and other dealers whose clients make purchases of $500,000
or more.

Purchases of Class A shares of $1,000,000 or more of the
Convertible and Balanced Funds 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 Salomon Smith Barney, which
compensates Salomon Smith Barney Financial Consultants, PFS
and other dealers whose clients make purchases of
$1,000,000 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, PFSDI 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 PFPC Global 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 transfer agent. Share
certificates are issued only upon a shareholder's written
request to PFPC Global.

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 PFPC Global or PFS 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 PFPC Global
or PFS. 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 transfer agent 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 transfer agent
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 total 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 Retirement 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 transfer agent 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 and
the Diversified Strategic Income 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 PFS, 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 PFS. In processing applications and
investments, the transfer agent acts as agent for the
investor and for PFS 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 PFS. Share certificates are issued only upon a
shareholder's written request to PFS. 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 Citi Fidusciary or PFS 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 $50,000. Before
sending the wire, the PFS Investments Registered
Representative must contact PFS 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 PFS 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 PFS 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 $50,000. By
requesting a subsequent purchase by telephone, you
authorize PFS 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. 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. Subsequent
investments by telephone may not be available if the
shareholder cannot reach PFS 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.

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. Any signature written redemption request in
excess of $50,000 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
$50,000 or less do not require a signature guarantee unless
the shareholder has changed his/her address within 45 days
or less of the shareholder's redemption request.
Redemption proceeds will be mailed to an investor's address
of record. PFS 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 PFS
receives all required documents in proper form.

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.

PFS 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 PFS's services may be
obtained by contacting the Client Services Department at
(800) 544-5445.

Smith Barney Retirement Programs

You may be eligible to participate in a retirement program
sponsored by Salomon Smith Barney or one of its affiliates.
The fund offers Class A and Class L shares at net asset
value to participating plans under the programs. You can
meet minimum investment and exchange amounts, if any 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 and/or the date your account is
opened. Once a class of shares is chosen, all additional
purchases must by of the same class.

For plans opened on or after March 1, 2000 that are not
plans for which Paychex Inc. or an affiliate provides
administrative services (a "Paychex Plan") offering, Class
A shares may be purchased regardless of the amount
invested.

For plans opened prior to March 1, 2000 and for Paychex
plans, the class of shares you may purchase depends on the
amount of your initial investment:

Class A Shares. Class A shares may be purchased by plans
investing at least $1million.

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 not later than 8
years after the plan joined the program. They are eligible
for exchange in the following circumstances:

If the plan was opened on or after June 21, 1996 and a
total of $1 million 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 for 5 years.

If the plan 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.

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

Retirement Programs 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 ExecChoiceTM Program, a participating plan's
total Class L 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.

Retirement Programs 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 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
ExecChoiceTM Program, 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 or ExecChoiceTM 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, but instead may acquire Class A
shares of the same 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.

Retirement Programs Investing in Class B Shares: Class B
shares of a fund are not available for purchase by
participating plans opened on or after June 21, 1996, but
may continue to be purchased by any participating plan in
the Smith Barney 401 (k) Program opened prior to such date
and originally investing in such Class. Class B shares
acquired are subject to a deferred sales charge of 3.00% of
redemption proceeds if the participating plan terminates
within eight years of the date the participating plan first
enrolled in the Smith Barney 401 (k) Program.

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

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

The deferred sales charge will be waived on redemptions of
Class B shares in connection with lump-sum or other
distributions made by a participating plan; as a result of
(a) the retirement of an employee in the participating
plan; (b) the termination of employment of an employee in
the participating plan; (c) the death or disability or an
employee in the participating plan; (d) the attainment of
age 59 1/2 by an employee in the participating plan; (e)
hardship of an employee in the participating plan to the
extent permitted under Section 401(k) o the Code; or (f)
redemptions of shares in connection with a loan made by the
participating plan to an employee.

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 the transfer agent 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 PFPC Global Fund Services
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 PFPC Global together with the
redemption request. Any signature appearing on a share
certificate, stock power or written redemption request in
excess of $50,000 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
$50,000 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. The transfer agent 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 the transfer agent 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 PFPC Global 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 PFPC Global may continue
to do so and applications for participation in the
Withdrawal Plan must be received by PFPC Global 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 the transfer agent 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 the transfer
agent 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 $50,000 of any
class or classes of a Fund's shares may be made by eligible
shareholders by calling transfer agent 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 transfer agent 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 total 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

Effective June 5, 2000, the trust has entered into an
agreement with Salomon Smith Barney located at 388 Greenwich
Street, New York, New York 10013 and PFSDI, located at 3100
Breckinridge Blvd., Duluth, Georgia 30099 to distribute the
trust's shares on a best efforts basis pursuant to
distribution agreements. Prior to June 5, 2000, CFBDS, Inc.
served as the trust's distributor.

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, 2000, Salomon Smith Barney
and/or PFSDI 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
PFSDI 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.
$5,348,090
$7,191,2
54
$ 630,860
$139,00
6
$137,14
4
N/A
Balanced
1,722,433

1,922,54
3

165,726

39,700

41,897
N/A
High
Income
4,832,202

4,120,09
0

415,262

50,645

167,730
N/A
Muni High

835,509
1,113,46
9

115,230

24,413

8,300
N/A
Convertibl
e

41,897

168,500

7,922

1,591

(665)
N/A
Ex.
Reserve

(469,551)

139,233

24,566

8,929

(27,757
)
N/A
Total
Return

201,380

460,966

43,305

7,659

(1,614)
N/A

Distribution Arrangements

Shares of the trust are sold on a best efforts basis by
Salomon Smith Barney and PFSDI 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 and
Diversified Strategic Income Fund pay PFSDI a distribution
fee with respect to its Class B shares. The distribution
fee is primarily intended to compensate Salomon Salomon
Smith Barney and/or PFSDI 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, 2000, Salomon Smith Barney
received $$29,447,079, 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
1998*
1999**
2000**
Convertible Fund
$
19,000
$
16,000
$ 19,000
Diversified Strategic
Income Fund

1,344,00
0

1,022,000
422,000
High Income Fund

1,571,00
0

1,302,000
583,000
Municipal High Income
Fund

70,000

101,000
68,000
Total Return Bond Fund

1,146,00
0

215,000
17,000
Balanced Fund

68,000

140,000
101,000

* Salomon Smith Barney received the total amount.
** Salomon Smith Barney and CFBDS, each, received the
following amounts:

Salomon Smith Barney

Fund
1999
2000
Convertible Fund
$14,400
$17,100
Diversified Strategic
Income Fund
919,800
$379,800
High Income Fund
1,171,800
$524,700
Municipal High Income
Fund
90,900
$61,200
Total Return Bond Fund
193,500
$15,300
Balanced Fund
126,000
$90,900

CFBDS

Fund
1999
2000
Convertible Fund
$1,600
$1,900
Diversified Strategic
Income Fund
102,200
42,200
High Income Fund
130,200
58,300
Municipal High Income
Fund
10,100
6,800
Total Return Bond Fund
21,500
1,700
Balanced Fund
14,000
10,100

Class L

For the Fiscal Year Ended July 31:

Fund
1998*
1999**
2000**
Convertible Fund
$2,000

$2,000
$
1,000
Diversified Strategic
Income Fund
78,000

977,000

376,000
High Income Fund
112,000

739,000

238,000
Municipal High Income
Fund
3,000

19,000

14,000
Total Return Bond Fund
21,000

110,000

20,000
Balanced Fund
4,000

59,000

75,000

* Salomon Smith Barney received the total amount.
** Salomon Smith Barney and CFBDS, each, received the
following amounts:

Salomon Smith Barney

Fund
1999
2000
Convertible Fund
$1,800
$900
Diversified Strategic
Income Fund
879,300
338,400
High Income Fund
665,100
214,200
Municipal High Income
Fund
17,100
12,600
Total Return Bond Fund
99,000
18,000
Balanced Fund
53,100
67,500

CFBDS

Fund
1999
2000
Convertible Fund
$200
$100
Diversified Strategic
Income Fund
97,700
37,600
High Income Fund
73,900
23,800
Municipal High Income
Fund
1,900
1,400
Total Return Bond Fund
11,000
2,000
Balanced Fund
5,900
7,500

Deferred Sales Charge (paid to Salomon Smith Barney)

Class A

For the Fiscal Year Ended
July 31:

Fund
1998
1999
2000
Convertible Fund
N/A
N/A
$ 0
Diversified Strategic Income Fund
$23,000
$12,000
16,000
Exchange Reserve Fund
N/A
N/A
N/A
High Income Fund
12,000
32,000
21,000
Municipal High Income Fund
N/A
3,000
2,000
Total Return Bond Fund
1,000
19,000
1,000
Balanced Fund
N/A
1,000
3,000

Class B

For the Fiscal Year Ended July 31:

Fund
1998
1999
2000
Convertible Fund
$
50,000
$35,000
$
23,000
Diversified Strategic
Income Fund
2,494,00
0
2,298,00
0

2,672,00
0
Exchange Reserve Fund
349,000
491,000

751,000
High Income Fund
936,000
1,545,00
0

1,728,00
0
Municipal High Income Fund
231,000
127,000

158,000
Total Return Bond Fund
34,000
348,000

271,000
Balanced Fund

829,000
255,000

162,000

Class L

For the Fiscal Year Ended
July 31:
Fund
1998
1999
2000
Convertible Fund
$0
$1,000
$
0
Diversified Strategic Income Fund
35,000
58,000
48,000
Exchange Reserve Fund
N/A
14,000
98,000
High Income Fund
20,000
60,000
49,000
Municipal High Income Fund
0
3,000

1,000
Total Return Bond Fund
20,000
17,000

5,000
Balanced Fund
0
0

2,000

Class O

For the Fiscal Year Ended
July 31:

Fund
1998
1999
2000
Balanced Fund
$1,000

$0
$0
Convertible Fund
0

0
0

Service Fees and Distribution Fees

For the Fiscal Year Ended July 31:

Fund
1998
1999
2000
Convertible Fund
$
400,232
$
295,113
$
187,786
Diversified Strategic
Income Fund
19,373,203
18,209,04
4
13,487,1
90
Exchange Reserve Fund

543,651

705,198

774,777
High Income Fund

7,255,916

8,242,837

7,427,96
4
Municipal High Income Fund

3,724,428

3,182,231

2,186,95
1
Total Return Bond Fund

329,050

1,034,865

807,065
Balanced Fund

7,016,893

5,578,812

4,575,34
6

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 PFSDI 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
PFSDI 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, 2000 the annualized
yield was 5.30% and 5.30% for Class B and Class L shares,
respectively. The compound effective yield was 5.44% and
5.44% for Class B and Class L shares, respectively. As of
July 31, 2000, the fund's average portfolio maturity was 14
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.

The yields for the thirty-day period ended July 31, 2000 for
the following funds were:

Fund
Class
A
Class
B
Class
L
Class
O
Class
Y
Class Z

Convertible Fund

3.54%

3.18%

3.22%
2.69%

4.24%
N/A
Diversified Strategic
Income Fund
7.16
7.02
6.99
N/A
7.84
7.84
High Income Fund
10.75
10.73
10.66
N/A
11.56
26.78%
Municipal High Income Fund
6.10
5.86

5.68
N/A
N/A
N/A
Total Return Bond Fund
7.16
6.98

6.96
N/A
N/A
N/A

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 ended
July 31, 2000:

Fund*

One-Year
Period

Five-Year
Period
Since Inception
Convertible Fund
0.84%
6.32%
7.28%
Diversified Strategic
Income Fund
(1.28)
5.15
5.99
High Income Fund
(3.65)
5.44
7.27
Municipal High Income Fund
(4.97)
3.92
4.81
Total Return Bond Fund
(1.22)
N/A
(0.18)
Balanced Fund
5.08
11.66
10.01

*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 ended July 31, 2000 without including the deduction
of the maximum applicable sales charge is as follows:

Fund*
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund
6.13%
7.41%
8.00%
Diversified Strategic
Income Fund
3.35
6.13
6.63
High Income Fund
0.93
6.41
7.91
Municipal High Income Fund
(1.00)
4.78
5.36
Total Return Bond Fund
3.40
N/A
1.73
Balanced Fund
10.62
12.82
10.75
*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 ended July 31, 2000:

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

Since
Inception
Convertible Fund (1)
0.59%
6.73%
8.36%
7.59%
Diversified Strategic Income
Fund (2)(6)
(1.37
)
5.49
7.29
7.45
High Income Fund(3)(6)
(3.72
)
5.74
9.02
7.63
Municipal High Income
Fund(4)(6)
(5.70
)
4.09
5.64
7.03
Total Return Bond Fund(7)
(1.53
)
N/A
N/A
0.11
Balanced Fund(5)
5.09
12.18
10.75
10.80

(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 ended July 31, 2000 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)
5.59%
6.88%
8.36%
7.59%
Diversified Strategic Income
Fund (2)(6)
2.98
5.64
7.29
7.45
High Income Fund(3)(6)
0.40
5.88
9.02
7.63
Municipal High Income
Fund(4)(6)
(1.52
)
4.24
5.64
7.03
Total Return Bond Fund(7)
2.83
N/A
N/A
1.21
Balanced Fund(5)
10.09
12.30
10.75
10.80

The average annual total returns with sales charges (with
fees waived) of the fund's Class L shares were as follows for
the periods ended July 31, 2000:

Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(3)
3.04%
N/A
(0.44)%
Diversified Strategic Income
Fund(5)
0.80
5.48%
5.58
High Income Fund(4)
(1.31)
5.77
6.77
Municipal High Income
Fund(2)
(3.51)
3.96
5.77
Total Return Bond Fund(1)
0.88
N/A
0.83
Balanced Fund(6)
7.77
N/A
8.28

(1) The fund commenced selling Class L shares (previously
designated as Class C shares) on February 27,1998.
(2) The fund commenced selling Class L shares (previously
designated as Class C shares) on November 17, 1994.
(3) The fund commenced selling Class L shares on June 15,
1998.
(4) The fund commenced selling Class L shares (previously
designated as Class C shares) on August 24, 1994.
(5) The fund commenced selling Class L shares (previously
designated as Class C shares) on March 19, 1993.
(6) The fund commenced selling Class L shares on June 15,
1998.

The average annual total return for each portfolio's Class L
shares of the periods ended July 31, 2000 without including
the deduction of the maximum applicable initial sales charge
or deferred sales charge is as follows:

Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(3)
5.07%
N/A
0.02%
Diversified Strategic Income
Fund(5)
2.84
5.69%
5.71
High Income Fund(4)
0.57
5.98
6.95
Municipal High Income
Fund(2)
(1.61)
4.16
5.95
Total Return Bond Fund(1)
2.89
N/A
1.26
Balanced Fund(6)
9.87
N/A
8.79

(1) The fund commenced selling Class L shares (previously
designated as Class C shares) on February 27, 1998.
(2) The fund commenced selling Class L shares (previously
designated as Class C shares) on November 17, 1994.
(3) The fund commenced selling Class L shares on June 15,
1998.
(4) The fund commenced selling Class L shares (previously
designated as Class C shares) on August 24, 1994.
(5) The fund commenced selling Class L shares (previously
designated as Class C shares) on March 19, 1993.
(6) The fund commenced selling Class L shares on June 15,
1998.

The average annual total returns with sales charges (with
fees waived) of the fund's Class O shares were as follows for
the periods ended July 31, 2000:

Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(1)
4.57%
6.87%
8.11%
Balanced Fund(2)
9.13
12.35
9.48

(1) The fund commenced selling Class O shares (previously
designated as Class C shares) on November 7, 1994.
(2) The fund commenced selling Class O shares (previously
designated as Class C shares) on February 4, 1993.

The average annual total return for each portfolio's Class O
Shares of the periods ended July 31, 2000 without including
the deduction of the maximum applicable initial sales charge
or deferred sales charge is as follows:
Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(1)
5.57%
6.87%
8.11%
Balanced Fund(2)
10.13
12.35
9.48
(1) The fund commenced selling Class O shares (previously
designated as Class C shares) on November 7, 1994.
(2) The fund commenced selling Class O shares (previously
designated as Class C shares) on February 4, 1993.
The average annual total returns (with fees waived) of the
fund's Class Y shares were as follows for the periods ended
July 31, 2000:

Fund
One-Year
Period
Five-Year
Period
Since Inception
Convertible Fund(1)
6.62%
N/A
6.87%
Diversified Strategic Income
Fund(2)
3.83
N/A
6.34
High Income Fund(3)
1.29
N/A
5.75
Balanced Fund(4)
N/A
N/A
N/A

(1) The fund commenced selling Class Y shares on February 7,
1996.
(2) The fund commenced selling Class Y shares on October 10,
1995.
(3) The fund commenced selling Class Y shares on April 28,
1995.
(4) The fund commenced selling Class Y shares on October 9,
1995. There were no Class Y shares outstanding as of
July 31, 2000.

The average annual total returns (with fees waived) of the
fund's Class Z shares were as follows for the periods ended
July 31, 2000:

Fund
One-Year
Period
Five-Year
Period
Since Inception
Diversified Strategic Income
Fund(1)
3.83%

6.50%
7.00%
High Income Fund(2)
(3.88)

5.59
7.46

(1) The fund commenced selling Class Z shares on November 6,
1992.
(2) The fund commenced selling Class Z shares on November 6,
1992.
Neither Class Y nor Class Z shares impose an initial sales
charge or deferred sales charge.

A Class' total return figures calculated in accordance with
the above formula assume that the maximum sales charge or
maximum applicable Deferred Sales Charge, as the case may be,
has been deducted for the hypothetical $1,000 initial
investment at the time of purchase.

It is important to note that the yield and total return
figures set forth above are based on historical earnings and
are not intended to indicate future performance.

A Class' performance will vary from time to time depending
upon market conditions, the composition of the relevant
fund's portfolio and operating expenses and the expenses
exclusively attributable to that Class. Consequently, any
given performance quotation should not be considered
representative of the Class' performance for any specified
period in the future. Because performance will vary, it may
not provide a basis for comparing an investment in the Class
with certain bank deposits or other investments that pay a
fixed yield for a stated period of time. Investors comparing
a Class' performance with that of other mutual funds should
give consideration to the quality and maturity of the
respective investment company's portfolio securities.

TAXES

The following is a summary of certain Federal income tax
considerations that may affect the trust and its
shareholders. This summary is not intended as a substitute
for individual tax advice and investors are urged to consult
their own tax advisors as to the tax consequences of an
investment in any fund of the trust.

Tax Status of the Funds

Each fund will be treated as a separate taxable entity for
federal income tax purposes.

Each fund has qualified and the trust intends that each fund
continue to qualify separately each year as a "regulated
investment company" under the Code. A qualified fund will not
be liable for federal income taxes to the extent its taxable
net investment income and net realized capital gains are
distributed to its shareholders, provided that such fund
distributes at least 90% of its net investment income. One of
the several requirements for qualification is that a fund
receive at least 90% of its gross income each year from
dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of equity
or debt securities or foreign currencies, or other income
(including but not limited to gains from options, futures, or
forward contracts) derived with respect to the fund's
investment in such stock, securities, or currencies. The
trust does not expect any fund to have difficulty meeting
this test.

If for any taxable year a fund does not qualify as regulated
investment company, all of its taxable income will be subject
to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such
event, dividend distributions, including amounts derived from
long-term capital gains and to the extent of the fund's
current and accumulated earnings and profits, and would be
eligible for the dividends received deduction for
corporations in the case of corporate shareholders.

On July 31, 2000, the unused capital loss carryovers, by
fund, were approximately as follows: Diversified Strategic
Income Fund, $104,877,000; Total Return Bond Fund,
$2,424,000; and High Income Fund, $159,625,000. For federal
income tax purposes, these amounts are available to be
applied against future capital gains of the fund that has
the carryovers, if any, that are realized prior to the
expiration of the applicable carryover. The carryovers
expire as follows:

FUND
July 31,

(in thousands)
2001
2002
2003
2004
2005
2006
2007
2008
Diversified
Strategic
Income
--
--
--
--
--
--
--
$104,87
7
Total Return
Bond
--
--
--
--
--
--
$
1,372

1,052
High Income
--
--
$13,40
4
$23,36
0
--
--

25,768

97,093

Taxation of Investment by the Funds

Gains or losses on sales of securities by a fund generally
will be long-term capital gains or losses if the fund has
held the securities for more than one year. Gains or losses
on sales of securities held for not more than one year
generally will be short-term. If a fund acquires a debt
security at a substantial discount, a portion of any gain
upon sale or redemption will be taxed as ordinary income,
rather than capital gain, to the extent that it reflects
accrued market discount.

Options and Futures Transactions. The tax consequences of
options transactions entered into by a fund will vary
depending on the nature of the underlying security, whether
the option is written or purchased, and whether the
"straddle" rules, discussed separately below, apply to the
transaction. When a fund writes a call or put option on an
equity or convertible debt security, it will receive a
premium that will, subject to the straddle rules, be treated
as follows for tax purposes. If the option expires
unexercised, or if the fund enters into a closing purchase
transaction, the fund will realize a gain (or loss if the
cost of the closing purchase transaction exceeds the amount
of the premium) without regard to any unrealized gain or loss
on the underlying security. Any such gain or loss will be a
short-term capital gain or loss, except that any loss on a
"qualified" covered call stock option that is not treated as
a part of a straddle may be treated as long-term capital
loss. If a call option written by a fund is exercised, the
fund will recognize a capital gain or loss from the sale of
the underlying security, and will treat the premium as
additional sales proceeds. Whether the gain or loss will be
long-term or short-term will depend upon the holding period
of the underlying security. If a put option written by a fund
is exercised, the amount of the premium will reduce the tax
basis of the security that the fund then purchases.

If a put or call option that a fund has purchased on an
equity or convertible debt security expires unexercised, the
fund will realize capital loss equal to the cost of the
option. If the fund enters into a closing sale transaction
with respect to the option, it will realize a capital gain or
loss (depending on whether the proceeds from the closing
transaction are greater or less than the cost of the option).
The gain or loss will be short-term or long-term, depending
on the fund's holding period in the option. If the fund
exercises such a put option, it will realize a short-term
capital gain or loss (long-term if the fund holds the
underlying security for more than one year before it
purchases the put) from the sale of the underlying security
measured by the sales proceeds decreased by the premium paid.
If the fund exercises such a call option, the premium paid
for the option will be added to the tax basis of the security
purchased.

One or more funds may invest in section 1256 contracts, and
the Code imposes a special "mark-to-market" system for taxing
these contracts. These contracts generally include options on
non-convertible debt securities (including United States
government securities), options on stock indexes, futures
contracts, options on futures contracts and certain foreign
currency contracts. Options on foreign currency, futures
contracts on foreign currency and options on foreign currency
futures will qualify as "section 1256" contracts if the
options or futures are traded on or subject to the rules of a
qualified board or exchange. Generally, most of the foreign
currency options and foreign currency futures and related
options in which certain funds may invest will qualify as
section 1256 contracts. In general, gain or loss on section
1256 contracts will be taken into account for tax purposes
when actually realized (by a closing transaction, by
exercise, by taking delivery or by other termination). In
addition, any section 1256 contracts held at the end of a
taxable year will be treated as sold at their year-end fair
market value (that is, marked to the market), and the
resulting gain or loss will be recognized for tax purposes.
Provided that section 1256 contracts are held as capital
assets and are not part of a straddle, both the realized and
the unrealized year-end gain or loss from these investment
positions (including premiums on options that expire
unexercised) will be treated as 60% long-term and 40% short-
term capital gain or loss, regardless of the period of time
particular positions actually are held by a fund.

Straddles. While the mark-to-market system is limited to
section 1256 contracts, the Code contains other rules
applicable to transactions which create positions that offset
positions in section 1256 contracts or other investment
contracts. Those rules, applicable to "straddle"
transactions, are intended to eliminate any special tax
advantages for such transactions. "Straddles" are defined to
include "offsetting positions" in actively-traded personal
property. Under current law, it is not clear under what
circumstances one investment made by a fund, such as an
option or futures contract, would be treated as "offsetting"
another investment also held by the fund, such as the
underlying security (or vice versa) and, therefore, whether
the fund would be treated as having entered into a straddle.
In general, investment positions may be "offsetting" if there
is a substantial diminution in the risk of loss from holding
one position by reason of holding one or more other positions
(although certain "qualified" covered call stock options
written by a fund may be treated as not creating a straddle).
Also, the forward currency contracts entered into by a fund
may result in the creation of "straddles" for federal income
tax purposes.

If two or more positions constitute a straddle, a realized
loss from one position (including a mark-to-market loss) must
be deferred to the extent of unrecognized gain in an
offsetting position. Also, the holding period rules described
above may be modified to re-characterize long-term gain as
short-term gain, or to re-characterize short-term loss as
long-term loss, in connection with certain straddle
transactions. Furthermore, interest and other carrying
charges allocable to personal property that is part of a
straddle must be capitalized. In addition, "wash sale" rules
apply to straddle transactions to prevent the recognition of
loss from the sale of a position at a loss where a new
offsetting position is or has been acquired within a
prescribed period. To the extent that the straddle rules
apply to positions established by a fund, losses realized by
the fund may be either deferred or re-characterized as long-
term losses, and long-term gains realized by the fund may be
converted to short-term gains.

If a fund chooses to identify particular offsetting positions
as being components of a straddle, a realized loss will be
recognized, but only upon the liquidation of all of the
components of the identified straddle. Special rules apply to
the treatment of "mixed" straddles (that is, straddles
consisting of a section 1256 contract and an offsetting
position that is not a section 1256 contract). If a fund
makes certain elections, the section 1256 contract components
of such straddles will not be subject to the "60%/40%" mark-
to-market rules. If any such election is made, the amount,
the nature (as long-or short-term) and the timing of the
recognition of the fund's gains or losses from the affected
straddle positions will be determined under rules that will
vary according to the type of election made.

Constructive Sales. If a fund effects a short sale of
securities at a time when it has an unrealized gain on the
securities, it may be required to recognize that gain as if
it had actually sold the securities (as a "constructive
sale") at the time it effects the short sale. However, such
constructive sale treatment may not apply if the fund closes
out the short sale with securities other than the appreciated
securities held at the time of the short sale and if certain
other conditions are satisfied. Uncertainty regarding the
tax consequences of effecting short sales may limit the
extent to which a fund may effect short sales.

Section 988. Foreign currency gain or loss from transactions
in (a) bank forward contracts not traded in the interbank
market and (b) futures contracts traded on a foreign exchange
may be treated as ordinary income or loss under Section 988
of the Code. A fund may elect to have section 988 apply to
section 1256 contracts. Pursuant to that election, foreign
currency gain or loss from these transactions would be
treated entirely as ordinary income or loss when realized. A
fund will make the election necessary to gain such treatment
if the election is otherwise in the best interests of the
fund.

Taxation of the Trust's Shareholders

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

Dividends of investment income (but not capital gains) from
any fund generally will qualify for the federal dividends-
received deduction for domestic corporate shareholders to the
extent that such dividends do not exceed the aggregate amount
of dividends received by the fund from domestic corporations.
If securities held by a fund are considered to be "debt-
financed" (generally, acquired with borrowed funds), are held
by the fund for less than 46 days (91 days in the case of
certain preferred stock), or are subject to certain forms of
hedges or short sales, the portion of the dividends paid by
the fund which corresponds to the dividends paid with respect
to such securities will not be eligible for the corporate
dividends-received deduction.

If a shareholder (a) incurs a sales charge in acquiring fund
shares and (b) disposes of those shares and acquires within
90 days after the original acquisition, shares in a mutual
fund for which the otherwise applicable sales charge is
reduced by reason of a reinvestment right (i.e., an exchange
privilege), the original sales charge increases the
shareholder's tax basis in the original shares only to the
extent the otherwise applicable sales charge for the second
acquisition is not reduced. The portion of the original sales
charge that does not increase the shareholder's tax basis in
the original shares would be treated as incurred with respect
to the second acquisition and, as a general rule, would
increase the shareholder's tax basis in the newly acquired
shares. Furthermore, the same rule also applies to a
disposition of the newly acquired shares made within 90 days
of the second acquisition. This provision prevents a
shareholder from immediately deducting the sales charge by
shifting his or her investment in a family of mutual funds.

Capital Gains Distribution. As a general rule, a shareholder
who redeems or exchanges his or her shares will recognize
long-term capital gain or loss if the shares have been held
for more than one year, and will recognize short-term capital
gain or loss if the shares have been held for one year or
less. However, if a shareholder receives a distribution
taxable as long-term capital gain with respect to shares of a
fund and redeems or exchanges the shares before he or she has
held them for more than six months, any loss on such
redemption or exchange that is less than or equal to the
amount of the distribution will be treated as a long-term
capital loss.

Backup Withholding. If a shareholder fails to furnish a
correct taxpayer identification number, fails to fully report
dividend or interest income, or fails to certify that he or
she has provided a correct taxpayer identification number and
that he or she is not subject to such withholding, then the
shareholder may be subject to a 31% "backup withholding tax"
with respect to (a) any taxable dividends and distributions
and (b) any proceeds of any redemption of trust shares. An
individual's taxpayer identification number is his or her
social security number. The backup withholding tax is not an
additional tax and may be credited against a shareholder's
regular Federal income tax liability.

Municipal High Income Fund. Because the Municipal High Income
Fund will distribute exempt-interest dividends, interest on
indebtedness incurred by shareholders, directly or
indirectly, to purchase or carry shares of the fund will not
be deductible for federal income tax purposes. If a
shareholder redeems or exchanges shares of the fund with
respect to which he receives an exempt-interest dividend
before holding the shares for more than six months, no loss
will be allowed on the redemption or exchange to the extent
of the dividend received. Also, that portion of any dividend
from the fund which represents income from private activity
bonds (other than those issued for charitable, educational
and certain other purposes) held by the fund may not retain
its tax-exempt status in the hands of a shareholder who is a
"substantial user" of a facility financed by such bonds or a
person "related" to such substantial user. Investors should
consult their own tax advisors to see whether they may be
substantial users or related persons with respect to a
facility financed by bonds in which the fund may invest.
Moreover, exempt-interest dividends derived from interest on
private activity bonds of this type will be subject to the
federal alternataive minimum tax that is imposed on
individuals and corporations. In addition, investors
receiving social security or certain other retirement
benefits should be aware that exempt-interest dividends
received from the fund may under certain circumstances cause
up to one-half of such retirement benefits to be subject to
tax. If the fund receives taxable investment income, it will
designate as taxable the same percentage of each dividend as
the fund's actual taxable income bears to the total
investment income earned during the period for which the
dividend is paid. The percentage of each dividend designated
as taxable, if any, may, therefore, vary. Dividends derived
from interest from Municipal Securities which are exempt from
federal tax also may be exempt from personal income taxes in
the state where the issuer is located, but in most cases will
not be exempt under the tax laws of other states or local
taxing authorities. Annual statements will set forth the
amount of interest from Municipal Securities earned by the
fund in each state or possession in which issuers of
portfolio securities are located.

ADDITIONAL INFORMATION

The trust was organized as an unincorporated business trust
under the laws of the Commonwealth of Massachusetts pursuant
to a Master trust agreement dated March 12, 1985, as amended
from time to time, and on November 5, 1992 the trust filed an
Amended and Restated Master Trust Agreement (the "trust
agreement"). The trust commenced business as an investment
company on September 16, 1985, under the name Shearson Lehman
Special Portfolios. On February 21, 1986, December 6, 1988,
August 27, 1990, November 5, 1992, July 30, 1993 and October
14, 1994, the trust changed its name to Shearson Lehman
Special Income Portfolios, SLH Income Portfolios, Shearson
Lehman Brothers Income Portfolios, Shearson Lehman Brothers
Income Funds, Smith Barney Shearson Income Funds and Smith
Barney Income Funds, respectively.

PFPC Trust Company is located at 8800 Tinicum Blvd.,
Philadelphia, Pennsylvania 19153, and serves as the custodian
for each of the funds, except Diversified Strategic Income
Fund. Chase, located at Chase MetroTech Center, Brooklyn, NY
11245, serves as the custodian for Diversified Strategic
Income Fund. Under their respective custodian agreements with
the respective funds, each custodian is authorized to
establish separate accounts for foreign securities owned by
the appropriate fund to be held with foreign branches of
other U.S. banks as well as with certain foreign banks and
securities depositories. For its custody services to the
trust, each custodian receives monthly fees based upon the
month-end aggregate net asset value of the appropriate fund,
plus certain charges for securities transactions including
out-of-pocket expenses, and costs of any foreign and domestic
sub-custodians. The assets of the trust are held under bank
custodianship in compliance with the 1940 Act.

Citi Fiduciary Trust Company, located at 125 Broad Street,
New York, New York 10004, serves as the trust's transfer
agent. Under the transfer agency agreement, the transfer
agent maintains the shareholder account records for each
fund, handles certain communications between shareholders and
each fund, and distributes dividends and distributions
payable by each fund. For these services, the transfer agent
receives a monthly fee computed on the basis of the number of
shareholder accounts it maintains for each fund during the
month, and is reimbursed for out-of-pocket expenses.

PFPC Global Fund Services, located at P.O. Box 9699
Providence, R.I. 02940-9699 serves as certain fund's sub-
transfer agent to render certain shareholder record keeping
and accounting services functions. Under the transfer
agency agreement, PFPC Global maintains the shareholder
account records for a fund, handles certain communications
between shareholders and a fund, and distributes dividends
and distributions payable by a fund. For these services,
PFPC Global receives a monthly fee computed on the basis of
the number of shareholder accounts it maintains for the
fund during the month, and is reimbursed for out-of-pocket
expenses.

PFS Shareholder Services, located at 3100 Breckinridge
Blvd., Bldg 200, Duluth, Georgia 30099-0062, serves as the
sub-transfer agent for PFS Accounts of Smith Barney
Exchange Reserve Fund and Smith Barney Diversified
Strategic Income Fund.

VOTING RIGHTS

In the interest of economy and convenience, certificates
representing shares in the trust are not physically issued
except upon specific request made by a shareholder to
transfer agent. Transfer agent maintains a record of each
shareholder's ownership of trust shares. Shares do not have
cumulative voting rights, which means that holders of more
than 50% of the shares voting for the election of trustees
can elect all of the trustees. Shares are transferable but
have no preemptive or subscription rights. Shareholders
generally vote by fund, except with respect to the election
of trustees and the selection of independent public
accountants.

Massachusetts law provides that, under certain circumstances,
shareholders could be held personally liable for the
obligations of the trust. However, the trust agreement
disclaims shareholder liability for acts or obligations of
the trust and requires that notice of such disclaimer be
given in each agreement, obligation or instrument entered
into or executed by the trust or a trustee. The trust
agreement provides for indemnification from the trust's
property for all losses and expenses of any shareholder held
personally liable for the obligations of the trust. Thus, the
risk of a shareholder's incurring financial loss on account
of shareholder liability is limited to circumstances in which
the trust would be unable to meet its obligations, a
possibility that the trust's management believes is remote.
Upon payment of any liability incurred by the trust, the
shareholder paying the liability will be entitled to
reimbursement from the general assets of the trust. The
trustees intend to conduct the operations of the trust in
such a way so as to avoid, as far as possible, ultimate
liability of the shareholders for liabilities of the trust.

The trustees themselves have the power to alter the number
and the terms of office of the trustees, and they may at
any time lengthen their own terms or make their terms of
unlimited duration (subject to certain removal procedures)
and appoint their own successors, provided that in
accordance with the 1940 Act at any time at least a
majority, but in most instances at least two-thirds, of the
trustees have been elected by the shareholders of the fund.
Shares do not have cumulative voting rights and therefore
the holders of more than 50% of the outstanding shares of
the fund may elect all of the trustees irrespective of the
votes of other shareholders. Class A, Class B, Class O,
Class L and Class Y shares of a fund, if any, represent
interests in the assets of that fund and have identical
voting, dividend, liquidation and other rights on the same
terms and conditions, except that each Class of shares has
exclusive voting rights with respect to provisions of the
fund's Rule 12b-1 distribution plan which pertain to a
particular class. For example, a change in investment
policy for a fund would be voted upon only by shareholders
of the fund involved. Additionally, approval of each
fund's Investment advisory agreement is a matter to be
determined separately by that fund. Approval of a proposal
by the shareholders of one fund is effective as to that
fund whether or not enough votes are received from the
shareholders of the other funds to approve the proposal as
to those funds.

As of November 17, 2000, the following shareholders
beneficially owned and as record holder, 5% or more of a
class of shares of a fund:

High Income Fund - Class Y

Smith Barney Concert Series, Inc.
Growth Portfolio
PNC Bank, NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 9,286,858.313 (34.87%) shares*

Smith Barney Concert Series, Inc.
High Growth Portfolio
PNC Bank, NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 8,947,646.432 (33.60%) shares*

Smith Barney Concert Series, Inc.
Select Growth Portfolio
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 2,832,419.389 (10.64%) shares*

Smith Barney Concert Series, Inc.
Select High Growth Portfolio
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 1,955,712.937 (10.64%) shares*

* The Fund believes that these entities are not the
beneficial owners of shares held of record by them

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank, NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 1,342,203.749 (5.04%) shares*

High Income Fund - Class Y

Ennis D. Robertson
SSB IRA Custodian
Carefree Country Club
9705 Lake Bess Road #253
Winter Haven, FL 33884
Owned 4,920.879 (53.83%) shares

Ennis D. Robertson
Carefree Country Club
9705 Lake Bess Road #253
Winter Haven, FL 33884
Owned 4,219.858 (46.17%) shares

Balanced Fund - Class A

FISERV Securities Inc.
Attn: Mutual Fund Dept.
One Commerce Sqare
2005 Market Street
Philadelphia, PA 19103
Owned 18,633,044.168 (35.61%) shares

Balanced Fund - Class O

ABC Appliance Utica Inc.
EMP Profit Sharing Plan
DTD 12/1/75
D.Todd, D. Dion,M.Celusnak, TTEES
48825 Van Dyke
Utica, MI 48317
Owned 20,247.704 (5.27%) shares

* The Fund believes that these entities are not the
beneficial owners of shares held of record by them

Convertible Fund - Class L

Alfred L Curry
SSB IRA Rollover Custodian
6832 Trapper Way
Midland, GA 31820-3813
owned 3,418.088 (14.68%) shares

Raymond Trudeau
Smith Barney Inc. IRA Custodian
99 Plummer Hill Road
Belmont, NH 03220-5811
owned 3,220.438(13.83%) shares

FISERV Securities Inc.
FAO 74061939
Attn: Mutual Fund Dept.
One Commerce Sqare
2005 Market Street
Philadelphia, PA 19103
Owned 3,168.568 (13.61%) shares

Jay G. Burgess TRS
FBO Jay G Burgess
U/A/D 7/23/85
3061 N. Southern Hills Ave.
Wadsworth, IL 60083-9288
owned 1,275.880 (5.48%) shares

Marjorie C. Gilmore
SSB IRA custodian
725 Renaissance Drive
Apartment 216
Williamsville, NY 14221
owned 1236.491(5.31%) shares

Convertible Fund - Class O

John J. Madden and Deborah A. Madden JTWROS
4107 Golden Grove Road
Greenwood, IN 46143
owned 3,847.155 (19.90%) shares

Joseph H. Siemer
Smith Barney Inc. IRA Custodian
8752 Carousel Park Circle B105
Cincinnati, OH 45251
owned 2,555.610 (13.22%) shares

John R. Payzant & Carolyn R. Payzant Trustees
FBO John R. Payzant & Carolyn R. Payzant
U/A/D 7/19/88
P.O.Box 277
Hampton, NH 03843
owned 1,919.005 (9.93%) shares

Michigan Floral Assoc.
Attn: Rodney Crittenden
5815 Executive Drive
Suite B P.O. Box 24065
Lansing, MI 48909
owned 1,888.562 (9.77%) shares

Keith M. Lehrer
SSB IRA Custodian
20801 Nordhoff Street
Chatsworth, CA 91311
owned 1,885.342 (9.75%) shares

Nancy E. Kittle
SSB IRA Custodian
918 Shabona Lane
Wilmette, IL 60091
owned 1,231.527 (6.37%) shares

Joseph O. Bouchard
SSB IRA Rollover Custodian
11 Calle Del Norte
Rancho Santa Margarita, CA 92688
owned 1,082.087 (6.37%) shares

George Pality Jr.
Cynthia D. Pality JTWROS
9207 Landsdowne Drive
Houston, TX 77096
Owned 1,079.354 (5.58%) shares

William S.Silva
SB IRA Rollover Custodian
3656 Newgate Lane
Indianapolis, IN 46235-2380
Owned 1,054.927 (5.46%) shares

Convertible Fund - Class Y

Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 3,042,936.167 (52.60%) shares*

Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 1,399,210.874 (24.19%) shares*

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 769,997.797 (13.31%) shares*

Smith Barney Concert Series, Inc.
Select Conservative Portfolio
PNC Bank NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 335,196.840 (5.79%) shares*
_________________________________________
* The Fund believes that these entities are not the
beneficial owners of shares held of record by them

Diversified Strategic Income Fund Class Y

Smith Barney Concert Series, Inc.
PNC Bank NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
Balanced Portfolio
owned 10,090,720.530(46.30%) shares*

Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 4,642,897.898 (21.30%) shares*

Smith Barney Concert Series, Inc.
Conservative Portfolio
PNC Bank NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 3,460,365.131 (15.88%) shares*

Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 1,507,547.723 (6.92%) shares*

Smith Barney Concert Series, Inc.
Select Conservative Portfolio
PNC Bank NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Floor, Ste. 200
Philadelphia, PA 19153
owned 1,489,080.140 (6.83%) shares*

_________________________________________
* The Fund believes that these entities are not the
beneficial owners of shares held of record by them

Diversified Strategic Income Fund Class Z

State Street Bank & Trust, Custodian
The Travelers Group 401(k)
Savings Plan
Attn: Rick Vest
225 Franklin Street
Boston, MA 02101
owned 3,463,979.590 (99.55%) shares*

_________________________________________
* The Fund believes that these entities are not the
beneficial owners of shares held of record by them

Total Return Bond Fund - Class A

The Globe Newspaper
Teamsters Local 259
H and W Benefit Fund
Attn: Marilyn Kelly
PO Box 1914
Boston, MA 02205
owned 236,392.681 (7.59%) shares

Municipal High Income Fund - Class L

Ida Belle D Perry
3668 Castlegate Drive NW
Atlanta, GA 30327
owned 27,017.304 (7.59%) shares

FINANCIAL STATEMENTS

The funds' Annual Reports for the fiscal year ended July 31,
2000 are incorporated herein by reference in their entirety.
The annual reports were filed on October 6, 2000, Accession
Number 950130-00-5346.

OTHER INFORMATION

Styles of Fund Management: In an industry where the average
portfolio manager has seven years of experience (source: ICI,
1998), the portfolio managers of Smith Barney mutual funds
average 21 years in the industry and 15 years with the firm.

Smith Barney mutual funds offers more than 60 mutual funds.
We understand that many investors prefer an active role in
allocating the mix of funds in their portfolio, while
others want the asset allocation decisions to be made by
experienced managers.

That's why we offer four "styles" of fund management that
can be tailored to suit each investor's unique financial
goals.

Classic Series - our portfolio manager driven funds
Our Classic Series lets investors participate in
mutual funds whose investment decisions are
determined by experienced portfolio managers, based
on each fund's investment objectives and guidelines.
Classic Series funds invest across asset classes and
sectors, utilizing a range of strategies in order to
achieve their objectives.

Index Series - funds that track the market
Our Index funds are designed to provide investment
results that track, as closely as possible, the
performance of a stock or bond market index. This
strategy distinguishes an index fund from an
"actively managed" mutual fund. Instead of trying to
outperform a market or segment, a portfolio manager
looks to an index to determine which securities the
fund should own.

Premier Selections Series - our best ideas,
concentrated funds
We offer a series of Premier Selections funds managed
by several of our most experienced and proven
managers. This series of funds is built on a unique
strategy of combining complementary investment
management styles to create broader, multiclass and
multicap products that are distinguished by a highly
concentrated focus.

Research Series - driven by exhaustive fundamental
securities analysis
Built on a foundation of substantial buy-side research
under the direction of our Citibank Global Asset
Management (CGAM) colleagues, our Research funds focus
on well-defined industries, sectors and trends.
Style Pure Series - our solution to funds that stray
Our Style Pure Series funds are the building blocks
of asset allocation. The funds stay fully invested
within their asset class and investment style,
enabling you to make asset allocation decisions in
conjunction with your financial professional.

APPENDIX

Description of Ratings

Description of S&P Corporate Bond Ratings

AAA

Bonds rated AAA have the highest rating assigned by S&P to a
debt obligation. Capacity to pay interest and repay principal
is extremely strong.

Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues
only in small degree.

Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible
to the adverse effects of changes in circumstances and
economic conditions than bonds in higher rated categories.

BBB

Bonds rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated
categories.

BB, B and CCC

Bonds rated BB and B are regarded, on balance, as
predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of
the obligation. BB represents a lower degree of speculation
than B and CCC, the highest degrees of speculation. While
such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.

Description of Moody's Corporate Bond Ratings

Aaa

Bonds which are rated Aaa are judged to be the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt-edge." Interest payments are
protected by a large or exceptionally stable margin and
principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.

Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities, or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.

Bonds which are rated A possess favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the
future.

Baa

Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.

Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may
be very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal
payments or of maintenance of other terms of the contract
over any long period of time may be small.

Caa

Bonds that are rated Caa are of poor standing. These issues
may be in default or present elements of danger may exist
with respect to principal or interest.

Moody's applies the numerical modifier 1, 2 and 3 to each
generic rating classification from Aa through B. The modifier
1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in
the lower end of its generic rating category.

Description of S&P Municipal Bond Ratings

AAA

Prime -- These are obligations of the highest quality. They
have the strongest capacity for timely payment of debt
service.

General Obligation Bonds -- In a period of economic stress,
the issuers will suffer the smallest declines in income and
will be least susceptible to autonomous decline. Debt burden
is moderate. A strong revenue structure appears more than
adequate to meet future expenditure requirements. Quality of
management appears superior.

Revenue Bonds -- Debt service coverage has been, and is
expected to remain, substantial. Stability of the pledged
revenues is also exceptionally strong due to the competitive
position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant,
earnings test for issuance of additional bonds, debt service
reserve requirements) are rigorous. There is evidence of
superior management.

High Grade -- The investment characteristics of bonds in this
group are only slightly less marked than those of the prime
quality issues. Bonds rated AA have the second strongest
capacity for payment of debt service.

Good Grade -- Principal and interest payments on bonds in
this category are regarded as safe although the bonds are
somewhat more susceptible to the adverse affects of changes
in circumstances and economic conditions than bonds in higher
rated categories. This rating describes the third strongest
capacity for payment of debt service. Regarding municipal
bonds, the ratings differ from the two higher ratings
because:

General Obligation Bonds -- There is some weakness, either in
the local economic base, in debt burden, in the balance
between revenues and expenditures, or in quality of
management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt
obligations at some future date.

Revenue Bonds -- Debt service coverage is good, but not
exceptional. Stability of the pledged revenues could show
some variations because of increased competition or economic
influences on revenues. Basic security provisions, while
satisfactory, are less stringent. Management performance
appears adequate.

BBB

Medium Grade -- Of the investment grade ratings, this is the
lowest. Bonds in this group are regarded as having an
adequate capacity to pay interest and repay principal.
Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest
and repay principal for bonds in this category than for bonds
in higher rated categories.

General Obligation Bonds -- Under certain adverse conditions,
several of the above factors could contribute to a lesser
capacity for payment of debt service. The difference between
A and BBB ratings is that the latter shows more than one
fundamental weakness, or one very substantial fundamental
weakness, whereas the former shows only one deficiency among
the factors considered.

Revenue Bonds -- Debt coverage is only fair. Stability of the
pledged revenues could show substantial variations, with the
revenue flow possibly being subject to erosion over time.
Basic security provisions are no more than adequate.
Management performance could be stronger.

BB, B, CCC and CC

Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of
the obligation. BB includes the lowest degree of speculation
and CC the highest degree of speculation. While such bonds
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

The rating C is reserved for income bonds on which no
interest is being paid.

Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.

S&P's letter ratings may be modified by the addition of a
plus or a minus sign, which is used to show relative standing
within the major rating categories, except in the AAA-Prime
Grade category.

Description of S&P Municipal Note Ratings

Municipal notes with maturities of three years or less are
usually given note ratings (designated SP-1, -2 or -3) to
distinguish more clearly the credit quality of notes as
compared to bonds. Notes rated SP-1 have a very strong or
strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are
given the designation of SP-1+. Notes rated SP-2 have
satisfactory capacity to pay principal and interest.

Description of Moody's Municipal Bond Ratings

Aaa

Bonds which are rated Aaa are judged to be the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.

Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities, or fluctuation of protective
elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.

Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the
future.

Baa

Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract
over any long period of time may be small.

Caa

Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.

Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.

Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.

Moody's applies the numerical modifiers 1, 2 and 3 in each
generic rating classification from Aa through B. The modifier
1 indicates that the security ranks in the higher end of its
generic ratings category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic ratings category.

Description of Moody's Municipal Note Ratings

Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade
(MIG) and for variable rate demand obligations are designated
Variable Moody's Investment Grade (VMIG). This distinction
recognizes the differences between short- and long-term
credit risk. Loans bearing the designation MIG 1/VMIG 1 are
the best quality, enjoying strong protection from established
cash flows of funds for their servicing or from established
and broad-based access to the market for refinancing, or
both. Loans bearing the designation MIG 2/VMIG 2 are of high
quality, with margins of protection ample, although not as
large as the preceding group. Loans bearing the designation
MIG 3/VMIG 3 are of favorable quality, with all security
elements accounted for but lacking the undeniable strength of
the preceding grades. Market access for refinancing, in
particular, is likely to be less well established. Loans
bearing the designation MIG 4/VMIG 4 are of adequate quality.
Protection commonly regarded as required of an investment
security is present and although not distinctly or
predominantly speculative, there is specific risk.

Description of Commercial Paper Ratings

The rating A-1+ is the highest, and A-1 the second highest,
commercial paper rating assigned by S&P. Paper rated A-1+
must have either the direct credit support of an issuer or
guarantor that possesses excellent long-term operating and
financial strength combined with strong liquidity
characteristics (typically, such issuers or guarantors would
display credit quality characteristics which would warrant a
senior bond rating of A- or higher) or the direct credit
support of an issuer or guarantor that possesses above
average long-term fundamental operating and financing
capabilities combined with ongoing excellent liquidity
characteristics. Paper rated A-1 must have the following
characteristics: liquidity ratios are adequate to meet cash
requirements; long-term senior debt is rated A or better; the
issuer has access to at least two additional channels of
borrowing; basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances; typically, the
issuer's industry is well established and the issuer has a
strong position within the industry; and the reliability and
quality of management are unquestioned.

The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's
in assigning ratings are the following: (a) evaluation of the
management of the issuer; (b) economic evaluation of the
issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain
areas; (c) evaluation of the issuer's products in relation to
competition and customer acceptance; (d) liquidity; (e)
amount and quality of long-term debt; (f) trend of earnings
over a period of ten years; (g) financial strength of parent
company and the relationships which exist with the issuer;
and (h) recognition by the management of obligations which
may be present or may arise as a result of public interest
questions and preparations to meet such obligations.

Short-term obligations, including commercial paper, rated A-
1+ by IBCA Limited or its affiliate IBCA Inc. are obligations
supported by the highest capacity for timely repayment.
Obligations rated A-1 have a very strong capacity for timely
repayment. Obligations rated A-2 have a strong capacity for
timely repayment, although such capacity may be susceptible
to adverse changes in business, economic and financial
conditions.

Thomson BankWatch employs the rating "TBW-1" as its highest
category, which indicates that the degree of safety regarding
timely repayment of principal and interest is very strong.
"TBW-2" is its second highest rating category. While the
degree of safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is not as
high as for issues rated "TBW-1."

Fitch IBCA Inc. employs the rating F-1+ to indicate issues
regarded as having the strongest degree of assurance of
timely payment. The rating F-1 reflects an assurance of
timely payment only slightly less in degree than issues rated
F-1+, while the rating F-2 indicates a satisfactory degree of
assurance of timely payment although the margin of safety is
not as great as indicated by the F-1+ and F-1 categories.

Duff & Phelps Inc. employs the designation of Duff 1 with
respect to top grade commercial paper and bank money
instruments. Duff 1+ indicates the highest certainty of
timely payment: short-term liquidity is clearly outstanding
and safety is just below risk-free U.S. Treasury short-term
obligations. Duff 1- indicates high certainty of timely
payment. Duff 2 indicates good certainty of timely payment:
liquidity factors and company fundamentals are sound.

Various NRSROs utilize rankings within ratings categories
indicated by a + or -. The funds, in accordance with industry
practice, recognize such ratings within categories as
gradations, viewing for example S&P's rating of A-1+ and A-1
as being in S&P's highest rating category.

Smith Barney
INCOME FUNDS

Statement of
Additional Information
November 28, 2000

Convertible Fund

Diversified Strategic Income Fund

Exchange Reserve Fund

High Income Fund

Municipal High Income Fund

Total Return Bond Fund

Balanced Fund

Smith Barney
Income Funds
7 World Trade Center
New York, New York 10048

SALOMON
SMITH BARNEY

A Member of
CitiGroup

FD 01217 11/00