SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND, 485BPOS, 1998-09-25

SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
485BPOS, 1998-09-25

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As filed with the Securities and Exchange Commission on September
25, 1998

Registration Nos. 33-47782
811-6663

SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

[ ] Pre-Effective Amendment No.

[X] Post-Effective Amendment No. 14

REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended

[X] Amendment No. 15

SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
(Exact name of Registrant as Specified in Charter)

388 Greenwich Street, 22nd Floor, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code
(212) 723-9218

Christina T. Sydor, Secretary
Smith Barney Adjustable Rate Government Income Fund
388 Greenwich Street, 22nd Floor
New York, New York 10013
(Name and Address of Agent for Service)

Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.

It is proposed that this filing will become effective:

[X] on September 25, 1998 pursuant to Rule 485(b)

SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND

CONTENTS OF REGISTRATION STATEMENT

This Registration Statement contains the following pages and
documents:

Front Cover

Contents Page

Cross-Reference Sheet

Part A -Prospectus

Part B - Statement of Additional Information

Part C - Other Information

Signature Page

Exhibits

SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND.

FORM N-1A
CROSS REFERENCE SHEET PURSUANT TO RULE 495(a)

Part A
Item No. Prospectus Caption

1. Cover Page Cover Page

2. Synopsis Prospectus Summary

3. Condensed Financial Financial Highlights;
Information Performance

4. General Description of Cover Page; Prospectus Summary;
Registrant Investment Objectives and
Management
Policies; Management of the Fund;
Distributor; Additional Information

5. Management of the Fund Prospectus Summary; Management
of
the Fund; Distributor; Additional
Information

6. Capital Stock and Other Purchase of Shares; Dividends
Securities Distributions and Taxes;
Additional
Information

7. Purchase of Securities Being Purchase of Shares;
Valuation of
Offered Shares; Redemption of Shares; Exchange
Privilege; Additional Information

8. Redemption or Repurchase Purchase of Shares;
Redemption of Shares

9. Legal Proceedings Not Applicable

Part B

Item No. Statement of Additional Information
Caption

10. Cover Page Cover page

11. Table of Contents Contents

12. General Information and Management of the Fund;
History Distributor; Organization of the
Fund

13. Investment Objectives and Investment Objective and
Policies Management Policies
14. Management of the Fund Management of the Fund;
Distributor; Custodian and
Transfer Agent

15. Control Persons and Principal Management of the Fund
Holders of Securities

16. Investment Advisory and Other Management of the Fund;
Services Distributor; Custodian and
Transfer Agent

17. Brokerage Allocation Investment Objective and
Management Policies

18. Capital Stock and Other Purchase of Shares; Taxes
Securities

19. Purchase, Redemption and Purchase of Shares;
Redemption
Pricing of Securities Being of Shares; Distributor;
Offered Valuation of Shares; Exchange
Privilege

20. Tax Status Taxes

21. Underwriters Distributor

22. Calculation of Performance Performance
Data

23. Financial Statements Financial Statements

PART A - PROSPECTUS

PROSPECTUS

SMITH BARNEY

Adjustable Rate
Government
Income Fund

SEPTEMBER 25, 1998

Prospectus begins on page one

[LOGO] Smith Barney Mutual Funds
Investing for your future.
Everyday.
<PAGE>

- --------------------------------------------------------------------------------
Prospectus September 25, 1998
- --------------------------------------------------------------------------------

Smith Barney Adjustable Rate
Government Income Fund
388 Greenwich Street
New York, New York 10013
1-800-451-2010

Smith Barney Adjustable Rate Government Income Fund (the "Fund") is a
mutual fund that seeks to provide high current income and to limit the degree of
fluctuation of its net asset value resulting from movements in interest rates by
investing primarily in a portfolio of adjustable rate securities ("Adjustable
Rate Securities") and securities issued or guaranteed by the United States
government, its agencies or instrumentalities ("U.S. government securities").

This Prospectus sets forth concisely certain information about the Fund,
including distribution and service fees and expenses, that prospective investors
will find helpful in making an investment decision. Investors are encouraged to
read this Prospectus carefully and retain it for future reference.

Additional information about the Fund is contained in a Statement of
Additional Information dated September 25, 1998 (the "SAI"), as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Fund at the telephone number or address set
forth above, or by contacting your Smith Barney Financial Consultant. The SAI
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.

SALOMON SMITH BARNEY INC.

Distributor

SMITH BARNEY STRATEGY ADVISERS INC.

Investment Adviser

BLACKROCK FINANCIAL MANAGEMENT, INC.

Sub-Investment Adviser

MUTUAL MANAGEMENT CORP.

Administrator

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE

1
<PAGE>

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Prospectus (continued)
- --------------------------------------------------------------------------------

(continued from page 1)

ALTHOUGH CERTAIN OF THE SECURITIES IN THE FUND'S PORTFOLIO ARE ISSUED OR
GUARANTEED BY THE UNITED STATES GOVERNMENT, AN INVESTMENT IN THE FUND IS NEITHER
INSURED NOR GUARANTEED BY THE UNITED STATES GOVERNMENT. IN ADDITION, ALTHOUGH
THE FUND'S PORTFOLIO MAY BE EXPECTED TO EXPERIENCE LOW VOLATILITY DUE TO THE
UNIQUE CHARACTERISTICS OF ADJUSTABLE RATE SECURITIES, THE FUND IS NOT A MONEY
MARKET FUND THAT ATTEMPTS TO MAINTAIN A CONSTANT NET ASSET VALUE AND THE FUND'S
INVESTMENT PORTFOLIO CAN BE EXPECTED TOEXPERIENCE GREATER VOLATILITY THAN THAT
OF A MONEY MARKET FUND.

2
<PAGE>

- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------

Prospectus Summary 4
- --------------------------------------------------------------------------------
Financial Highlights 10
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies 13
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Valuation of Shares 31
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 32
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Purchase of Shares 33
- --------------------------------------------------------------------------------
Exchange Privilege 36
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Redemption of Shares 39
- --------------------------------------------------------------------------------
Minimum Account Size 42
- --------------------------------------------------------------------------------
Performance 43
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Management of the Fund 43
- --------------------------------------------------------------------------------
Distributor 46
- --------------------------------------------------------------------------------
Additional Information 47
- --------------------------------------------------------------------------------

================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
================================================================================

3
<PAGE>

- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------

The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross-references in this summary are to headings in the Prospectus.
See "Table of Contents."

INVESTMENT OBJECTIVES The Fund is a diversified, open-end, management
investment company that seeks to provide high current income and to limit the
degree of fluctuation of its net asset value resulting from movements in
interest rates by investing primarily in a portfolio of Adjustable Rate
Securities and U.S. government securities. See "Investment Objectives and
Management Policies."

ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of
shares ("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The Fund offers three
classes of shares: Class A shares and Class B shares, which differ principally
in terms of sales charges and rate of expenses to which they are subject, and
Class I shares which are offered only to investors meeting an initial investment
minimum of $100,000. See "Purchase of Shares" and "Redemption of Shares."

Class A Shares. Class A shares are sold at net asset value and are subject
to annual distribution and service fees aggregating 0.75% of the average daily
net assets of the Class.

Class B Shares. Class B shares are offered through exchange purchases at
net asset value and are also subject to annual distribution and service fees
aggregating 0.75%. In addition, Class B shares are subject to a contingent
deferred sales charge ("CDSC)" based upon the CDSC of the fund from which an
exchange purchase transaction is made. This CDSC may be waived for certain
redemptions. Class B shares are no longer available to investors in the Smith
Barney 401(k) and ExecChoice(TM) Program.

Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."

Class I Shares. Class I shares are available only to investors meeting an
initial investment minimum of $100,000. Class I shares are sold at net asset
value with no initial sales charge or CDSC. They are subject to an annual
service fee of 0.25%.

Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B shares is the same as that of an initial
sales charge. See "Purchase of Shares" and "Management of the Fund" for a
complete description of the sales charges and service and distribution fees for
each class of shares and

4
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Prospectus Summary (continued)
- --------------------------------------------------------------------------------

"Valuation of Shares," "dividends, Distributions and Taxes" and "Exchange
Privilege" for other differences between the classes of shares.

SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible
to participate in the Smith Barney 401(k) Program, which is generally designed
to assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class B shares are available without a sales
charge as investment alternatives under both of these programs. See "Purchase of
Shares Smith Barney 401(k) and ExecChoice(TM) Programs."

PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Salomon Smith Barney Inc. ("Smith Barney"), a broker that clears securities
transactions through Smith Barney on a fully disclosed basis (an "Introducing
Broker") or an investment dealer in the selling group. In addition, certain
investors, including qualified retirement plans and certain other institutions,
may purchase shares directly from the Fund through the Fund's transfer agent,
First Data Investor Services Group, Inc. ("First Data"). See "Purchase of
Shares."

INVESTMENT MINIMUMS Investors in Class A and Class B shares (through
exchange purchases) may open an account by making an initial investment of at
least $1,000 and subsequent investments must be at least $50. Investors in Class
A shares through the Smith Barney 401(k) and ExecChoice(TM) Program may open an
account and make subsequent investments at a minimum of $25. Investors in Class
I shares may open an account for an initial investment of $100,000 and make
subsequent investments of at least $50. The minimum investment requirements for
purchases of Fund shares through the Systematic Investment Plan are described
below. See "Purchase of Shares."

SYSTEMATIC INVESTMENT PLAN The Fund offers Class A and Class I
shareholders a Systematic Investment Plan under which they may authorize the
automatic placement of a purchase order each month or quarter for Fund shares.
The minimum investment requirements for Class A and Class I shares and the
subsequent investment requirement for all classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."

REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."

MANAGEMENT OF THE FUND Smith Barney Strategy Advisers Inc. ("Strategy
Advisers") serves as the Fund's investment adviser. Strategy Advisers is a
wholly owned subsidiary of Mutual Management Corp. ("MMC"), an affiliate of

5
<PAGE>

- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------

Smith Barney. See "Management of the Fund."

BlackRock Financial Management Inc. ("BlackRock") serves as sub-investment
adviser. BlackRock is a wholly owned corporate subsidiary of BlackRock, Inc.,
the holding company for PNC Bank's asset management businesses. PNC Bank is a
commercial bank offering a wide range of domestic and international commercial
banking, retail banking and trust services to its customers. PNCBank also serves
as the Fund's custodian. See "Management of the Fund."

MMC serves as the Fund's Administrator. MMC provides investment advisory
and administrative services to investment companies affiliated with Smith Barney
and is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged through
its subsidiaries principally in four business segments: Investment Services
including Asset Management, Consumer Finance Services, Life Insurance Services
and Property & Casualty Insurance Services. See "Management of the Fund."

EXCHANGE PRIVILEGE Shares of Class A and B may be exchanged for shares of
the same Class of certain other Smith Barney Mutual Funds at the respective net
asset values next determined. Class I shares do not have Exchange Privileges.
See "Exchange Privilege."

VALUATION OF SHARES Net asset value of the Fund for the prior day
generally is quoted daily in the financial section of most newspapers and is
also available from a Smith Barney Financial Consultant. See "Valuation of
Shares."

DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are
generally paid monthly, on the last Friday of each month, to shareholders of
record as of three business days prior thereto. Distributions of net realized
long and short-term capital gains, if any, are paid at least annually. See
"Dividends, Distributions and Taxes."

REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of
any Class will be reinvested automatically in additional shares of the same
Class at net asset value unless otherwise specified by an investor. Shares
acquired through dividend and distribution reinvestments will not be subject to
any sales charge or CDSC. Class B shares acquired through dividend and
distribution reinvestments will become eligible for conversion to Class A shares
on a proportionate basis. See "Dividends, Distributions and Taxes."

RISK FACTORS AND SPECIAL CONSIDERATIONS No assurance can be given that the
Fund will achieve its investment objective. Although the Fund will invest
principally in securities issued or guaranteed by the United States government,
its agencies or instrumentalities, shares of the Fund, unlike certain bank
deposit accounts, are not insured or guaranteed by the United States government.

6
<PAGE>

- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------

Changes in interest rates generally will result in increases or decreases in the
market value of the obligations held by the Fund and, unlike that of a money
market fund, the Fund's net asset value per share will fluctuate. The Fund's net
asset value will be subject to greater fluctuation to the extent, if any, that
the Fund invests in zero coupon U.S. Treasury securities.

Certain of the instruments held by the Fund, and certain of the investment
techniques that the Fund may employ, might expose the Fund to special risks.
These instruments include mortgage backed securities ("MBSs") (which include
adjustable rate mortgage securities and collateralized mortgage obligations),
asset backed securities ("ABSs") and zero coupon securities. MBSs and ABSs are
subject to prepayment or early payout risks, which are affected by changes in
prevailing interest rates and numerous economic, geographic, social and other
factors. The investment techniques presenting special risks include futures
contracts, options on futures contracts, repurchase agreements, reverse
repurchase agreements and dollar rolls, engaging in short sales, lending
portfolio securities and entering into securities transactions on a when-issued
or delayed delivery basis. See "Investment Objectives and Management Policies."

THE FUND'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Fund, based on the maximum CDSC that may be incurred at the time of
redemption and the Fund's operating expenses for its most recent fiscal year:

Smith Barney Adjustable
Rate Government Income Fund Class A Class B Class I
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) None None None
Maximum CDSC
(as a percentage of redemption proceeds) None* 5.00** None
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 0.60% 0.60% 0.60%
12b-1 fees 0.75 0.75 0.25
Other expenses 0.22 0.28 0.22
- --------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.57% 1.63 1.07%
================================================================================

* Class A shares acquired as part of an exchange privilege transaction,
which were originally acquired in one of the other funds of the Smith
Barney Mutual Funds at net asset value subject to a CDSC, remain subject
to the original fund's CDSC while held in the Fund.

** Existing investors in the Smith Barney 401(k) Program may continue to
purchase Class B shares of the Fund; all other investors may acquire Class
B shares through exchanges only. Upon an exchange, the new Class B shares
will be subject to the same CDSC, and will be deemed to have been
purchased on the same date as the Class B shares of the fund that have
been exchanged. Class B shares acquired by participating plans will be
subject to an eight year 3% CDSC, payable upon a participating plan's
withdrawal from the Smith Barney 401(k) Program.

7
<PAGE>

- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------

Class A shares of the Fund purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.

The sales charge and CDSC set forth in the above table is the maximum CDSC
imposed by any of the funds participating in the Smith Barney Group of Funds
exchange program. Investors may pay actual charges of less than 5% depending on
the CDSC of the shares from which the exchange was made and the length of time
the shares are held and whether the shares are held through the Smith Barney
401(k) and ExecChoice(TM) Programs. See "Purchase of Shares," "Redemption of
Shares" and "Smith Barney 401(k) Program and ExecChoice(TM) Program." Management
fees payable by the Fund include investment advisory fees computed daily and
payable monthly to Strategy Advisers at the annual rate of 0.40% of the value of
the Fund's average daily net assets, and administration fees computed daily and
payable monthly to MMC in an amount equal to 0.20% of the value of the Fund's
average daily net assets. The Fund pays no direct fee to BlackRock. The nature
of the services for which the Fund pays management fees is described under
"Management of the Fund." Smith Barney also receives with respect to Class A and
B shares an annual 12b-1 distribution and shareholder servicing fee of 0.75% of
the value of average daily net assets of the respective Classes, of which 0.50%
is used by Smith Barney to cover expenses that are primarily intended to result
in, or that are primarily attributable to, the sale of shares, and of which
0.25% is used by Smith Barney to provide compensation for ongoing servicing
and/or maintenance of shareholder accounts. For Class I shares, Smith Barney
receives a shareholder servicing fee of 0.25% and no distribution fees. "Other
expenses" in the above table include fees for shareholder services, custodial
fees, legal and accounting fees, printing costs and registration fees.

EXAMPLE

The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Fund."

8
<PAGE>

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Prospectus Summary (continued)
- --------------------------------------------------------------------------------

Smith Barney Adjustable
Rate Government Income Fund 1 year 3 years 5 years 10 years*
- --------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and
(2) redemption at the end of each
time period:
Class A shares $16 $50 $86 $187
Class B shares $67 $81 $99 $192
Class I shares $11 $34 $59 $131
An investor would pay the following
expenses on the same investment,
assuming the same annual return and
no redemption:
Class A shares $16 $50 $86 $187
Class B shares $17 $51 $89 $192
Class I shares $11 $34 $59 $131

* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.

The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.

9
<PAGE>

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Financial Highlights
- --------------------------------------------------------------------------------

The following information for the three years ended May 31, 1998 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Fund's Annual Report dated May 31, 1998. The information for the
fiscal years ended May 31, 1993 through May 31, 1995 has been audited by other
auditors. The information set out below should be read in conjunction with the
financial statements and related notes that also appear in the Fund's Annual
Report to shareholders, which is incorporated by reference into the Statement of
Additional Information.

Smith Barney Adjustable Rate Government Income Fund

For a share of each class of beneficial interest outstanding throughout each
year.

<TABLE>
<CAPTION>
Class A Shares 1998 1997 1996 1995(1) 1994 1993(2)
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.84 $ 9.84 $ 9.88 $ 9.78 $ 9.96 $ 10.00
- ------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (3) 0.49 0.43 0.56 0.47 0.37 0.44
Net realized and unrealized gain (loss) 0.04 0.08 (0.04) 0.13 (0.17) (0.05)
- ------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.53 0.51 0.52 0.60 0.20 0.39
- ------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.50) (0.46) (0.56) (0.49) (0.38) (0.43)
Net realized gains -- -- -- (0.01) -- --
Capital (0.01) (0.05) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (0.51) (0.51) (0.56) (0.50) (0.38) (0.43)
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.86 $ 9.84 $ 9.84 $ 9.88 $ 9.78 $ 9.96
- ------------------------------------------------------------------------------------------------------------------
Total Return 5.57% 5.31% 5.48% 6.39% 2.05% 3.89%++
- ------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year
(in millions) $ 108 $ 124 $ 156 $ 174 $ 284 $ 313
- ------------------------------------------------------------------------------------------------------------------
Ratio to Average Net Assets:
Expenses (3)(4) 1.57% 1.69% 1.58% 1.60% 1.53% 1.50%+
Net investment income 4.94 4.42 5.66 4.94 3.72 4.36+
- ------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 242% 288% 273% 524% 525% 236%
==================================================================================================================
</TABLE>

(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from June 22, 1992 (inception date) to May 31, 1993.
(3) The Investment adviser waived a portion of its fees for the period ended
May 31, 1993. If such fees had not been waived, the per share decrease on
net investment income would have been $0.01 and the expense ratio would
have been 2.03% (annualized).

(4) For the years ended May 31, 1998, 1997, 1996,1995
and 1994 and the period ended May 31, 1993, the annualized expense
ratios were calculated excluding interest expense. The ratios including
interest expense were 3.34%, 3.09%, 3.10%, 2.47%, 2.31% and 1.92%
(annualized), respectively.

++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.

10
<PAGE>

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Financial Highlights (continued)
- --------------------------------------------------------------------------------

Smith Barney Adjustable Rate Government Income Fund

<TABLE>
<CAPTION>
Class B Shares 1998 1997 1996 1995(1) 1994 1993(2)
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.82 $ 9.84 $ 9.88 $ 9.78 $ 9.96 $ 9.96
- --------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (3) 0.49 0.39 0.56 0.47 0.37 0.25
Net realized and unrealized gain (loss) 0.04 0.10 (0.04) 0.13 (0.17) --
- --------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.53 0.49 0.52 0.60 0.20 0.25
- --------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.50 (0.46) (0.56) (0.49) (0.38) (0.25)
Net realized gains -- -- -- (0.01) -- --
Capital (0.01) (0.05) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.51) (0.51) (0.56) (0.50) (0.38) (0.25)
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.84 $ 9.82 $ 9.84 $ 9.88 $ 9.78 $ 9.96
- --------------------------------------------------------------------------------------------------------------------------
Total Return 5.56% 5.10% 5.48% 6.39% 2.05% 2.56%++
- --------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year
(in millions) $ 2 $ 3 $ 6 $ 5 $ 8 $ 4
- --------------------------------------------------------------------------------------------------------------------------
Ratio to Average Net Assets:
Expenses (3)(4) 1.63% 1.71% 1.60% 1.63% 1.57% 1.50%+
Net investment income 5.03% 4.32 5.64 4.92 3.68 4.36+
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 242% 288% 273% 524% 525% 236%
==========================================================================================================================
</TABLE>

(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from November 6, 1992 (inception date) to May 31, 1993.
(3) The investment adviser waived a portion of its fees for the period ended
May 31, 1993. If such fees had not been waived, the per share effect on
net investment income would have been a decrease of $0.01 and the expense
ratio would have been 2.03% (annualized).

(4) For the years ended May 31, 1998, May 31, 1997, May 31, 1996, May 31, 1995
and May 31, 1994 and the period ended May 31, 1993, the annualized expense
ratios were calculated excluding interest expense. The ratios including
interest expense were 3.40%, 3.11%, 3.12%, 2.49%, 2.35% and 1.92%,
respectively.

++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.

11
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------

For a share of each class of beneficial interest outstanding throughout the
period.

Smith Barney Adjustable Rate Government Income Fund

Class I Shares 1998 1997(1)
================================================================================
Net Asset Value, Beginning of Period $ 9.85 $ 9.79
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.55 0.10
Net realized and unrealized gain 0.04 0.02
- --------------------------------------------------------------------------------
Total Income From Operations 0.59 0.12
- --------------------------------------------------------------------------------
Less Distributions:
Net investment income (0.56) (0.06)
Capital (0.01) (0.00)*
- --------------------------------------------------------------------------------
Total Distributions (0.57) (0.06)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.87 $ 9.85
- --------------------------------------------------------------------------------
Total Return 6.12% 1.20%++
- --------------------------------------------------------------------------------
Net Assets, End of Period (in millions) $ 3.0 $ 2.4
- --------------------------------------------------------------------------------
Ratio to Average Net Assets+:
Expenses (2) 1.07% 1.10%+
Net investment income 5.45 5.60+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 242% 288%
================================================================================

(1) For the period from April 18, 1997 (inception date) to May 31, 1997.

(2) For the year ended May 31, 1998 and the period ended May 31, 1997 the
annualized expense ratios were calculated excluding interest expense. The
ratios including interest expense were 2.84% and 2.50%, respectively.

* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.

12
<PAGE>

- --------------------------------------------------------------------------------
Investment Objectives and Management Policies
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVES

The investment objectives of the Fund are to seek to provide high current
income and to limit the degree of fluctuation of its net asset value resulting
from movements in interest rates. These investment objectives may not be changed
without the approval of the holders of a majority of the Fund's outstanding
shares. No assurance can be given that the Fund will be able to achieve its
investment objectives.

INVESTMENT POLICIES

In seeking to achieve its investment objectives, the Fund will invest
principally in Adjustable Rate Securities and U.S. government securities. Under
normal market conditions, the Fund will invest at least 65% of its net assets in
U.S. government securities, and will also invest at least 65% of its net assets
in Adjustable Rate Securities, many of which will also be U.S. government
securities. The Fund's assets not invested in U.S. government securities may be
invested in, among other instruments, fixed rate and adjustable rate MBSs, ABSs
and corporate debt securities rated within the two highest long-term debt
categories by a nationally recognized statistical rating organization (an
"NRSRO"), such as those rated Aa by Moody's Investors Service, Inc. ("Moody's")
or AA by Standard & Poor's Ratings Group ("S&P") and money market instruments
with a comparable short-term rating. Up to 20% of the Fund's total assets may be
invested in securities that are unrated but deemed to be of comparable credit
quality by BlackRock, and up to 10% of the Fund's total assets may be invested
in U.S. dollar-denominated foreign securities, including MBSs and ABSs issued by
foreign entities that are of comparable credit quality. The foregoing policies
as to ratings of portfolio securities will be applicable at the time securities
are purchased by the Fund; if portfolio securities of the Fund are subsequently
assigned lower ratings, if they cease to be rated or if they cease to be deemed
to be comparable, BlackRock will reassess whether the Fund should continue to
hold the securities.

The Fund may invest up to 5% of its total assets in municipal obligations
and in zero coupon securities, including zero coupon U.S. Treasury securities.
In addition, the Fund may engage in various hedging strategies to increase
investment return and/or protect against interest rate changes in an effort to
maintain the stability of its net asset value.

The Fund seeks to achieve low volatility of net asset value by investing
in a diversified portfolio of securities that BlackRock believes will, in the
aggregate, be resistant to significant fluctuations in market value. In
selecting securities for the Fund, BlackRock will take into account various
factors that will affect the volatility of the Fund's assets, such as the time
to the next coupon reset date for the securities, the payment characteristics of
the securities and the dollar weighted average life of the Fund's portfolio. The
Fund expects that under normal

13
<PAGE>

- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------

circumstances the dollar weighted average life (or period until the next reset
date) of its portfolio securities will be approximately two years.

ADJUSTABLE RATE SECURITIES

Adjustable Rate Securities are instruments that bear interest at rates
that adjust at periodic intervals at a fixed amount (typically referred to as a
"spread") over the market levels of interest rates as reflected in specified
indexes. The Adjustable Rate Securities in which the Fund will invest will
consist primarily of MBSs and ABSs. MBSs are securities that directly or
indirectly represent an interest in, or are backed by and are payable from,
mortgage loans secured by real property. ABSs are similar in structure to MBSs,
except that the underlying asset pools consist of credit card, automobile or
other types of receivables, or of commercial loans. MBSs and ABSs are issued in
structured financings through which a sponsor securitizes the underlying
mortgage loans or financial assets to provide the underlying assets with greater
liquidity or to achieve certain other financial goals.

The interest paid on Adjustable Rate Securities and, therefore, the
current income earned by the Fund by investing in them, will be a function
primarily of the indexes upon which adjustments are based and the applicable
spread relating to the securities. Examples of indexes that may be used are (a)
one-, three- and five-year U.S. Treasury securities adjusted to a constant
maturity index, (b) U.S. Treasury bills of three or six months, (c) the daily
Bank Prime Loan Rate made available by the Federal Reserve Board, (d) the cost
of funds for member institutions of the Federal Home Loan Bank of San Francisco
and (e) the offered quotations to leading banks in the London interbank market
for Eurodollar deposits of a specified duration ("LIBOR").

The interest rates paid on Adjustable Rate Securities are generally
readjusted periodically to an increment over the chosen interest rate index.
Such readjustments occur at intervals ranging from one to 36 months. The degree
of volatility in the market value of the Adjustable Rate Securities in the
Fund's portfolio will be a function of the frequency of the adjustment period,
the applicable index and the degree of volatility in the applicable index. It
will also be a function of the maximum increase or decrease of the interest rate
adjustment on any one adjustment date, in any one year and over the life of the
securities. These maximum increases and decreases are typically referred to as
"caps" and "floors," respectively. The Fund will not seek to maintain an overall
average cap or floor, although BlackRock will consider caps or floors in
selecting Adjustable Rate Securities for the Fund.

The adjustable interest rate feature underlying the Adjustable Rate
Securities in which the Fund invests generally will act as a buffer to reduce
sharp changes in the Fund's net asset value in response to normal interest rate
fluctuations. As the interest rates on the mortgages underlying the Fund's MBSs
are reset periodically,

14
<PAGE>

yields of portfolio securities will gradually align themselves to reflect
changes in market rates and should cause the net asset value of the Fund to
fluctuate less dramatically than it would if the Fund invested in more
traditional long-term, fixed rate debt securities. During periods of rapidly
rising interest rates, however, changes in the coupon rate may temporarily lag
behind changes in the market rate, possibly resulting in a lower net asset value
until the coupon resets to market rates. Thus, investors could suffer some
principal loss if they sell their shares of the Fund before the interest rates
on the underlying mortgages are adjusted to reflect current market rates.

Unlike fixed rate mortgages, which generally decline in value during
periods of rising interest rates, the Fund's MBSs will allow the Fund to
participate in increases in interest rates through periodic adjustments in the
coupons of the underlying mortgages, resulting in both higher current yields and
lower price fluctuations. In addition, if prepayments of principal are made on
the underlying mortgages during periods of rising interest rates, the Fund
generally will be able to reinvest those amounts in securities with a higher
current rate of return. The Fund will not benefit from increases in interest
rates to the extent that interest rates rise to the point at which they cause
the current coupon of Adjustable Rate Securities to exceed the maximum allowable
caps. The Fund's net asset value could vary to the extent that current yields on
Adjustable Rate Securities are different from market yields during interim
periods between the coupon reset dates.

MBSs. Three basic types of MBSs are currently available for investments:
(a) those issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, primarily consisting of securities either
guaranteed by the Government National Mortgage Association ("GNMA") or issued by
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"); (b) those issued by private issuers that
represent an interest in or are collateralized by MBSs issued or guaranteed by
the United States government or one of its agencies or instrumentalities; and
(c) those issued by private issuers that represent an interest in or are
collateralized by whole mortgage loans or MBSs without a United States
government guarantee but usually having some form of private credit enhancement.

GNMA, FNMA and FHLMC are agencies or instrumentalities of the United
States government, and MBSs issued or guaranteed by them are generally
considered to be of higher quality than those issued or guaranteed by
non-governmental entities. GNMA MBSs consist of pass-through interests in pools
of mortgage loans guaranteed or insured by agencies or instrumentalities of the
United States. FNMA and FHLMC MBSs most often represent pass-through interests
in pools of similarly insured or guaranteed mortgage loans or pools of
conventional mortgage loans or participations in the pools. GNMA, FNMA and FHLMC
"pass-through" MBSs are so named because they represent undivided interests in
the underlying mortgage

15
<PAGE>

pools, and a proportionate share of both regular interest and principal payments
(net of fees assessed by GNMA, FNMA and FHLMC and any applicable loan servicing
fees), as well as unscheduled early prepayments on the underlying mortgage pool,
are passed through monthly to the holders of the MBSs.

Timely payment of principal and interest on GNMA MBSs is guaranteed by
GNMA, a wholly owned corporate instrumentality of the United States government
within the Department of Housing and Urban Development, which guarantee is
backed by the full faith and credit of the United States government. FNMA, a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act, guarantees timely payment
of principal and interest on FNMA MBSs. FHLMC, a corporate instrumentality of
the United States, guarantees (a) the timely payment of interest on all FHLMC
MBSs, (b) the ultimate collection of principal with respect to some FHLMC MBSs
and (c) the timely payment of principal with respect to other FHLMC MBSs.
Neither the obligations of FNMA nor those of FHLMC are backed by the full faith
and credit of the United States. Nevertheless, because of the relationship of
each of these entities to the United States, MBSs issued by them are generally
considered to be high quality securities with minimal credit risk.

Certain of the MBSs, as well as certain of the ABSs, in which the Fund may
invest will be issued by private issuers. Such MBSs and ABSs may take a form
similar to the pass-through MBSs issued by agencies or instrumentalities of the
United States described above, or may be structured in a manner similar to the
other types of MBSs or ABSs described below. Private issuers include originators
of or investors in mortgage loans and receivables such as savings and loan
associations, savings banks, commercial banks, investment banks, finance
companies and special purpose finance subsidiaries of these types of
institutions.

Credit enhancements provided for certain MBSs and ABSs issued by
non-governmental entities typically take one of two forms, (a) liquidity
protection or (b) protection against losses resulting from ultimate default by
an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting from default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool. This
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third parties, through various
means of structuring the transaction or through a combination of these
approaches. The degree of credit support provided for each issue is generally
based on historical information with respect to the level of credit risk
associated with the underlying assets. Delinquencies or losses in excess of
those anticipated could adversely affect the return on an investment in a
security. The Fund will not pay any additional fees for credit support, although
the existence

16
<PAGE>

of credit support may increase the price of a security. BlackRock will monitor,
on an ongoing basis, the creditworthiness of the providers of credit enhancement
for such MBSs and ABSs held by the Fund.

Among the specific types of MBSs in which the Fund may invest are ARMs,
which are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first 3, 6, 12, 13, 36 or 60 scheduled monthly payments. Thereafter, the
interest rates are subject to periodic adjustment based on changes in a
designated benchmark index.

The Fund may invest in MBSs taking the form of collateralized mortgage
obligations ("CMOs"), which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are collateralized by
GNMA, FNMA or FHLMC certificates, but also may be collateralized by whole loans
or private mortgage pass-through securities (this collateral being referred to
collectively in this Prospectus as "Mortgage Assets"). Multi-class pass-through
securities are equity interests in a trust composed of Mortgage Assets. Payments
of principal of and interest on the Mortgage Assets, and any reinvestment income
on the Mortgage Assets, provide the funds to pay debt service on the CMOs or
make scheduled distributions on the multi-class pass-through securities. CMOs
may be issued by agencies or instrumentalities of the United States government,
or by private originators of, or investors in, mortgage loans, including
depository institutions, mortgage banks, investment banks and special purpose
subsidiaries of these types of institutions.

In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow is on a CMO tranche, the lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on MBSs.

The Fund may invest in, among other things, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, like other CMO structures,
must be

17
<PAGE>

retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds are parallel pay CMOs that generally require payments
of a specified amount of principal on each payment date; the required principal
payments on PAC Bonds have the highest priority after interest has been paid to
all classes.

ABSs. The Fund will invest in various types of Adjustable Rate Securities
in the form of ABSs. The securitization techniques for ABSs are similar to those
used for MBSs; through the use of trusts and special purpose corporations,
various types of receivables (such as home equity loans and automobile and
credit card receivables) are securitized in pass-through structures similar to
the mortgage pass-through structures described above or in a pay-through
structure similar to the CMO structure. ABSs are typically bought or sold from
or to the same entities that act as primary dealers in U.S. government
securities.

Certain of the ABSs in which the Fund will invest will be guaranteed by
the Small Business Administration ("SBA"). The SBA is an independent agency of
the United States, and ABSs guaranteed by the SBA carry a guarantee of both
principal and interest backed by the full faith and credit of the United States.
These ABSs may include pass-through securities collateralized by SBA guaranteed
loans whose interest rates adjust in much the same fashion as described above
with respect to ARMs. These loans generally include commercial loans such as
working capital loans and equipment loans. The underlying loans are originally
made by private lenders and are guaranteed in part by the SBA, the guaranteed
portion of the loans constituting the underlying financial assets in these ABSs.

In general, the collateral supporting ABSs is of shorter maturity than
mortgage loans and may be less likely to experience substantial prepayments.
Like MBSs, ABSs are often backed by a pool of assets representing the
obligations of a number of different parties. Currently, pass-through securities
collateralized by SBA guaranteed loans and home equity loans are the most
prevalent ABSs that are Adjustable Rate Securities.

ABSs are relatively new and untested instruments and may be subject to
greater risk of default during periods of economic downturn than other
securities, including MBSs, satisfying the quality standards of the Fund, which
characteristics of ABSs could result in possible losses to the Fund. In
addition, the secondary market for ABSs may not be as liquid as the market for
other securities, including MBSs, which may result in the Fund experiencing
difficulty in valuing ABSs.

U.S. GOVERNMENT SECURITIES

In addition to the U.S. government securities guaranteed by GNMA and
issued by FNMA and FHLMC described above, the Fund may invest in other U.S.
government securities such as bills, certificates of indebtedness and notes and
bonds issued by the United States Treasury. These instruments are direct

18
<PAGE>

obligations of the United States government and, as such, are backed by the full
faith and credit of the United States. They differ primarily in their interest
rates, the lengths of their maturities and the dates of their issuance.

OTHER INVESTMENTS OF THE FUND

Fixed Rate MBSs. Fixed rate MBSs in which the Fund may invest consist
primarily of fixed rate pass-through securities and fixed rate CMOs. Like
Adjustable Rate Securities, these fixed rate securities may be issued either by
agencies or instrumentalities of the United States government or by the types of
private issuers described above. The basic structures of fixed rate MBSs are the
same as those described above with respect to Adjustable Rate Securities. The
principal difference between fixed rate securities and Adjustable Rate
Securities is that the interest rate on the former type of securities is set at
a predetermined amount and does not vary according to changes in any index.

Stripped MBSs. The Fund may invest in stripped MBSs ("SMBSs"), which are
derivative multi-class mortgage-backed securities typically issued by the same
types of issuers that issue MBSs. Unlike MBSs, SMBSs commonly involve two
classes of securities that receive different proportions of the interest and
principal distributions on a pool of mortgage assets. A common variety of SMBSs
contemplates one class (the principal-only or "PO" class) receiving some of the
interest and most of the principal from the underlying assets, and the other
class (the interest-only or "IO" class) receiving most of the interest and the
remainder of the principal. In the most extreme case, the IO class receives all
of the interest, while the PO class receives all of the principal. Although the
Fund may purchase securities of a PO class, it is more likely to purchase the
securities of an IO class.

Although IO class SMBSs individually have greater market volatility than
Adjustable Rate Securities, the Fund will seek to combine investments in IOs
with other investments that have offsetting price patterns. The value of IOs
varies with a direct correlation to changes in interest rates, whereas the value
of fixed rate MBSs, like that of other fixed rate debt securities, varies
inversely with interest rate fluctuations. Therefore, active management of IOs
in combination with fixed rate MBSs is intended to add incremental yield from
changes in market rates while not materially increasing the volatility of the
Fund's net asset value.

The yield to maturity of an IO class is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying assets, and
a rapid rate of principal payments in excess of that considered in pricing the
securities will have a material adverse effect on an IO security's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
payments of principal, the Fund may fail to recoup fully its initial investment
in IOs. The sensitivity of an IO that represents the interest portion of a
particular class as opposed to the interest portion of an entire pool to
interest rate fluctuations may be

19
<PAGE>

increased because of the characteristics of the principal portion to which they
relate.

Corporate Debt Securities. The Fund may purchase corporate debt securities
rated within the two highest categories for long-term debt obligations by an
NRSRO, or, if unrated, deemed to be of comparable credit quality by BlackRock.
These debt securities may have adjustable or fixed rates of interest and in
certain instances may be secured by assets of the issuer. Adjustable rate
corporate debt securities may have features similar to those of adjustable rate
MBSs, but corporate debt securities, unlike MBSs, are not subject to prepayment
risk other than through contractual call provisions that generally impose a
penalty for prepayment. Fixed rate debt securities may also be subject to call
provisions.

Foreign Securities. The Fund may invest up to 10% of its total assets in
U.S. dollar-denominated foreign securities, including MBSs and ABSs issued by
foreign entities, although under current market conditions the Fund does not
expect to invest in foreign securities.

Investments in foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic issuers. These 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.

Municipal Obligations. The Fund may invest up to 5% of its total assets in
obligations issued by state and local governments, political subdivisions,
agencies and public authorities ("Municipal Obligations"). Any Municipal
Obligation that is backed directly or indirectly by U.S. Treasury securities or
the full faith and credit of the United States government will be considered by
BlackRock to have the highest rating.

Zero Coupon Securities. The Fund may purchase zero coupon securities when
yields on those securities are attractive, to enhance portfolio liquidity or for
a combination of both of these purposes. Zero coupon securities are debt
obligations that are issued or purchased at a significant discount from face
value, which do not require the periodic payment of interest. The discount
approximates the total amount of interest the security might accrue and compound
over the period until maturity or the particular interest payment date at a rate
reflecting the market rate of the securities at the time of issuance or
purchase. Zero coupon securities benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than fixed income securities that
make regular payments of interest. The Fund may invest in zero coupon securities
issued by the United States Treasury, or component parts of Treasury Bonds that
represent scheduled interest and principal payments on the bonds. The Fund will
accrue income on zero coupon securities it holds for tax and

20
<PAGE>

accounting purposes, which income is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the liquidation
of portfolio securities to satisfy the Fund's distribution obligations.

Money Market Instruments. Money market instruments in which the Fund may
invest are limited to: U.S. government securities; bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loan associations and other banking
institutions having total assets in excess of $500 million); commercial paper
rated no lower than Prime-1 by Moody's or A-1 by S&P or the equivalent from
another NRSRO, or, if unrated, of an issuer having an outstanding, unsecured
debt issue then rated within the highest rating category; and repurchase
agreements, as more fully described below. U.S. government securities in which
the Fund may invest include obligations issued or guaranteed by U.S. agencies
and instrumentalities that are supported solely by the credit of the agency or
instrumentality. At no time will the Fund's investments in bank obligations,
including time deposits, exceed 25% of its assets.

The Fund will invest in an obligation of a foreign bank or foreign branch
of a U.S. bank only if BlackRock determines that the obligation presents minimal
credit risks. The obligations of foreign banks or foreign branches of U.S. banks
in which the Fund will invest may be traded in or outside the United States, but
will be denominated in U.S. dollars. Obligations of a foreign bank or foreign
branch of a U.S. bank entail risks that include foreign economic and political
developments, foreign governmental restrictions that may adversely affect the
payment of principal and interest on the obligations, foreign exchange controls
and foreign withholding or other taxes on income. Foreign branches of domestic
banks are not necessarily subject to the same or similar regulatory requirements
that apply to domestic banks, such as mandatory reserve requirements, loan
limitations, and accounting, auditing and financial record keeping requirements.
In addition, less information may be publicly available about a foreign branch
of a domestic bank than about a domestic bank.

Illiquid Securities. The Fund may invest up to 15% of its net assets in
securities for which no readily available market exists or other illiquid
securities, including repurchase agreements having maturities of more than seven
days, interest rate swaps and ABSs that cannot be disposed of promptly within
seven days and in the usual course of business without the Fund's receiving a
reduced price. In the absence of a change in the position of the staff of the
SEC, the Fund will treat over-the-counter ("OTC") options as illiquid
securities. The Fund will also treat POs and IOs as illiquid securities except
for POs and IOs issued by U.S. government agencies and instrumentalities, whose
liquidity is monitored by BlackRock subject to the supervision of MMC and the
Fund's Board of Trustees.

21
<PAGE>

INVESTMENT TECHNIQUES AND STRATEGIES

The Fund may use at any time any of the techniques and strategies
described below. The Fund is under no obligation to use any of the listed
practices at any given time or under any particular economic condition. In
addition, no assurance can be given that the use of any practice will have its
intended result.

Repurchase Agreements. The Fund may enter into repurchase agreement
transactions with member banks of the Federal Reserve System or with certain
dealers on the Federal Reserve Bank of New York's list of reporting dealers. A
repurchase agreement is a contract under which the buyer of a security
simultaneously commits to resell the security to the seller at an agreed-upon
price on an agreed-upon date. Under the terms of a typical repurchase agreement,
the Fund would acquire an underlying debt obligation for a relatively short
period 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. Under each repurchase agreement, the selling institution will be
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price.

The value of the securities underlying a repurchase agreement of the Fund
will be monitored on an ongoing basis by BlackRock or MMC to ensure that the
value is at least equal at all times to the total amount of the repurchase
obligation, including interest. BlackRock or MMC will also monitor, on an
ongoing basis to evaluate potential risks, the creditworthiness of the banks and
dealers with which the Fund enters into repurchase agreements.

Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreement transactions with member banks on 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. The Fund will enter into a reverse repurchase agreement
for these 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 may also 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.

The Fund will establish a segregated account with its custodian, PNC Bank,
in which the Fund will maintain cash, U.S. government securities or other liquid
high

22
<PAGE>

grade debt obligations equal in value to its obligations with respect to reverse
repurchase agreements.

Dollar Roll Transactions. To take advantage of attractive financing
opportunities in the mortgage market and to enhance current income, the Fund may
enter into dollar roll transactions. A dollar roll transaction, which is
considered a borrowing by the Fund, involves a sale by the Fund of a security to
a financial institution, such as a bank or broker-dealer, concurrently with an
agreement by the Fund to repurchase a similar security from the institution at a
later date at an agreed-upon price. The 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 additional instruments for the Fund,
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. Dollar 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 that the Fund enters into a dollar roll
transaction, it will place in a segregated account maintained with its
custodian, PNC Bank, cash, U.S. government securities or other liquid high grade
debt obligatsions having a value equal to the repurchase price and will
subsequently monitor the account to ensure that its value is maintained.

When-Issued and Delayed Delivery Securities. The Fund may purchase or sell
securities on a when-issued or delayed delivery basis. When-issued or delayed
delivery transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. PNC Bank will maintain, in a segregated account
of the Fund, cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Fund's purchase commitments, provided such
securities have been determined to be liquid and unencumbered, and are marked to
market daily, pursuant to guidelines established by the Trustees. PNC Bank will
also segregate securities sold on a delayed basis. The payment obligations and
the interest rates that will be received are each fixed at the time the Fund
enters into the commitment and no interest accrues to the Fund until settlement.
Thus, it is possible that the market value at the time of settlement could be
higher or lower than the purchase price if the general level of interest rates
has changed.

Short Sales. The Fund may make short sales of securities. A short sale is
a transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The Fund may make short
sales both as a form of hedging to offset potential declines in securities
positions it holds in similar securities and in order to maintain portfolio
flexibility.

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<PAGE>

The Fund may make short sales "against the box" without complying with the
limitations described above. In a short sale against the box transaction, the
Fund, at the time of the sale, owns or has the immediate and unconditional right
to acquire at no additional cost the identical security sold. This is
distinguished from a "naked short," in which the Fund does not own or have the
right to acquire the security sold.

Lending of Portfolio Securities. To generate income, the Fund may lend
portfolio securities to brokers, dealers and other financial organizations.
These loans, if and when made, may not exceed 30% of the Fund's assets taken at
value. The Fund's loans of securities will be collateralized by cash, letters of
credit or U.S. government securities. The cash or instruments collateralizing
the Fund's loans of securities will be maintained at all times in a segregated
account with PNC Bank in an amount at least equal to the current market value of
the loaned securities.

Options Transactions. The Fund is authorized to engage in transactions
involving put and call options. The Fund may purchase a put option, for example,
in an effort to protect the value of a security that it owns against a
substantial decline in market value, if BlackRock believes that a defensive
posture is warranted for a portion of the Fund's portfolio. In addition, in
seeking to protect certain portfolio securities against a decline in market
value at a time when put options on those particular securities are not
available for purchase, the Fund may purchase a put option on securities it does
not hold. Although changes in the value of the put option should generally
offset changes in the value of the securities being hedged, the correlation
between the two values may not be as close in the latter type of transaction as
in a transaction in which the Fund purchases a put option on an underlying
security it owns.

The Fund may purchase call options on securities it intends to acquire to
hedge against an anticipated market appreciation in the price of the underlying
securities. If the market price does rise as anticipated in such a situation,
the Fund will benefit from that rise only to the extent that the rise exceeds
the premiums paid. If the anticipated rise does not occur or if it does not
exceed the premium, the Fund will bear the expense of the option premiums and
transaction costs without gaining an offsetting benefit.

The Fund is authorized to engage in transactions involving
over-the-counter options ("OTC options") and options traded on a U.S. securities
exchange. Whereas exchange-traded options are in effect guaranteed by The
Options Clearing Corporation, the Fund relies on the dealer from which it
purchases an OTC option to perform if the option is exercised. BlackRock will
monitor the creditworthiness of dealers with which the Fund enters into OTC
option transactions under the general supervision of MMC and the Fund's Board of
Trustees.

Futures Contracts and Options on Futures Contracts. The Fund may enter into
interest rate futures contracts on U.S. government securities and MBSs. A

24
<PAGE>

futures contract on securities, other than GNMAs which are cash settled, is an
agreement to purchase or sell an agreed amount of securities at a set price for
delivery on an agreed future date. The Fund may purchase a futures contract as a
hedge against an anticipated decline in interest rates, and resulting increase
in market price, of securities the Fund intends to acquire. The Fund may sell a
futures contract as a hedge against an anticipated increase in interest rates,
and resulting decline in market price, of securities the Fund owns.

The Fund may purchase call and put options on futures contracts on U.S.
government securities and MBSs that are traded on U.S. commodity exchanges. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon the exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account that
represents the amount by which the market price of the futures contract at
exercise 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 Fund will not purchase an option if, as a result of the purchase, more
than 20% of its total assets would be invested in premiums for options and
options on futures. In addition, the Fund may not sell futures contracts or
purchase related options if immediately after the sale the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and for premiums paid for the related options would exceed 5% of the market
value of the Fund's total assets, after taking into account unrealized profits
and unrealized losses on any such contracts the Fund has entered into, except
that, in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing the 5% limitation. The Fund is
subject to no overall limitation on the percentage of its assets that may be
subject to a hedge position.

The Fund will purchase put options on futures contracts primarily to hedge
its portfolio of U.S. government securities and MBSs against the risk of rising
interest rates, and the consequential decline in the prices of U.S. government
securities and MBSs it owns. The Fund will purchase call options on futures
contracts to hedge the Fund's portfolio against a possible market advance at a
time when the Fund is not fully invested in U.S. government securities and MBSs
(other than U.S. Treasury Bills).

Interest Rate Transactions. The Fund may enter into interest rate swaps,
which are "derivative" transactions involving the exchange by the Fund with
another party

25
<PAGE>

of their respective commitments to pay or receive interest, such as, for
example, an exchange of floating rate payments for fixed rate payments. The Fund
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or a portion of its portfolio or to protect
against any increase in the price of securities that the Fund anticipates
purchasing at a later date. The Fund intends to use these transactions as a
hedge and not as a speculative investment.

The Fund will enter into interest rate swap transactions on a net basis;
that is, the two payment streams are netted out, with the Fund receiving or
paying only the net amount of the two payments. The net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each
interest rate swap will be accrued daily, and an amount of cash, U.S. government
securities or other liquid high grade debt obligations having an aggregate net
asset value at least equal to the accrued excess will be maintained by the Fund
in a segregated account with PNC Bank.

Transactions Involving Eurodollar Instruments. The Fund may from time to
time purchase Eurodollar instruments traded on the Chicago Mercantile Exchange.
These instruments are in essence U.S. dollar-denominated futures contracts or
options on futures contracts that are linked to LIBOR. Eurodollar futures
contracts enable purchasers to obtain a fixed rate for the lending of funds and
sellers to obtain a fixed rate for borrowings. The Fund intends to use
Eurodollar futures contracts and options on futures contracts to hedge against
changes in LIBOR, to which many interest rate swaps are linked. The use of these
instruments is subject to the same limitations and risks as those applicable to
the use of the interest rate futures contracts and options on futures contracts
described under "Futures Contracts and Options on Futures Contracts" above.

Borrowing. The Fund may borrow from banks for temporary or emergency (not
leveraging) purposes and enter into reverse repurchase agreements or dollar
rolls in an aggregate amount equal to up to 33 1/3% of the value of its total
assets (computed at the time the loan is made). The Fund may pledge up to
33 1/3% of its total assets to secure these borrowings. Under normal market
conditions, the Fund expects to engage in borrowing with respect to
approximately 10% of its total assets. If the Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings.

Year 2000. The investment management and administration services provided
to the Fund by Strategy Advisers and MMC (collectively, the "Managers") and the
services provided to shareholders by Smith Barney depend on the smooth
functioning of their computer systems. Many computer software systems in use
today cannot recognize the year 2000, but revert to 1900 or some other date, due
to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. The Managers and Smith Barney
have advised

26
<PAGE>

the Fund that they have been reviewing all of their computer systems and
actively working on necessary changes to their systems to prepare for the year
2000 and expect that their systems will be compliant before that date. In
addition, the Managers have been advised by the Fund's custodian, transfer agent
and accounting service agent that they are also in the process of modifying
their systems with the same goal. There can, however, be no assurance that the
Managers, Smith Barney or any other service provider will be successful, or that
interaction with other non-complying computer systems will not impair Fund
services at that time.

In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.

RISK FACTORS AND SPECIAL CONSIDERATIONS

Interest Rate Risk. The Fund's portfolio will be affected by general
changes in interest rates that will result in increases or decreases in the
market value of the obligations held by the Fund. The market value of the
obligations in the Fund's portfolio can be expected to vary inversely to changes
in prevailing interest rates. Investors should also recognize that, in periods
of declining interest rates, the 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, money received by the Fund from the continuous sale of its shares
will likely be invested in portfolio instruments producing lower yields than the
balance of its portfolio, thereby reducing the Fund's current yield. In periods
of rising interest rates, the opposite result can be expected to occur.

Adjustable Rate Securities. The types of securities in which the Fund will
invest have certain unique attributes that warrant special consideration or that
present risks that may not exist in other types of mutual fund investments. Some
of these risks and special considerations are peculiar to Adjustable Rate
Securities whereas others, most notably the risk of prepayments, pertain to the
characteristics of MBSs or ABSs generally.

27
<PAGE>

MBS or ABS originally held. To the extent that MBSs or ABSs are purchased by the
Fund at a premium, mortgage foreclosures and principal prepayments may result in
loss to the extent of the premium paid. If MBSs or ABSs are bought at a
discount, however, both scheduled payments of principal and unscheduled
prepayments will increase current and total returns and will accelerate the
recognition of income which, when distributed to shareholders, will be taxable
as ordinary income. BlackRock will consider remaining maturities or estimated
average lives of MBSs and ABSs in selecting them for the Fund.

ABSs may present certain risks not relevant to MBSs. Although ABSs are a
growing sector of the financial markets, they are relatively new instruments and
may be subject to a greater risk of default during periods of economic downturn
than MBSs. In addition, assets underlying ABSs such as credit card receivables
are generally unsecured, and debtors are entitled to the protection of various
state and federal consumer protection laws, some of which provide a right of
set-off that may reduce the balance owed. Finally, the market for ABS may not be
as liquid as that for MBSs.

The interest rate reset features of Adjustable Rate Securities held by the
Fund will reduce the effect on the net asset value of Fund shares caused by
changes in market interest rates. The market value of Adjustable Rate Securities
and, therefore, the Fund's net asset value, however, may vary to the extent that
the current interest rate on the securities differs from market interest rates
during periods between interest reset dates. The longer the adjustment intervals
on Adjustable Rate Securities held by the Fund, the greater the potential for
fluctuations in the Fund's net asset value.

Investors in the Fund will receive increased income as a result of upward
adjustments of the interest rates on Adjustable Rate Securities held by the Fund
in response to market interest rates. The Fund and its shareholders will not
benefit, however, from increases in market interest rates once those rates rise
to the point at which they cause the rates on the Adjustable Rate Securities to
reach their maximum adjustment rate, annual or lifetime caps. Because of their
interest rate adjustment feature, Adjustable Rate Securities are not an
effective means of "locking-in" attractive rates for periods in excess of the
adjustment period. In addition, mortgagors on loans underlying MBSs with respect
to which the underlying mortgage assets carry no agency or instrumentality
guarantee are often qualified for the loans on the basis of the original payment
amounts; the mortgagor's income may not be sufficient to enable it to continue
making its loan payments as the payments increase, resulting in a greater
likelihood of default.

Any benefits to the Fund and its shareholders from an increase in the
Fund's net asset value caused by declining market interest rates is reduced by
the potential for increased prepayments and a decline in the interest rates paid
on Adjustable Rate Securities held by the Fund. When market rates decline
significantly, the prepayment rate on Adjustable

28
<PAGE>

Rate Securities is likely to increase as borrowers refinance with fixed rate
mortgage loans, thereby decreasing the capital appreciation potential of
Adjustable Rate Securities. As a result, the Fund should not be viewed as
consistent with an objective of seeking capital appreciation.

Options and Futures Markets. Participation in the options or futures
markets involves investment risks and transaction costs to which the Fund would
not be subject absent the use of these strategies. If BlackRock's predictions of
movements in the direction of the securities and interest rate markets are not
accurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if options or futures strategies were not used. Risks inherent in
the use of options, futures contracts and options on futures contracts include:
(a) dependence on BlackRock's ability to predict correctly movements in the
direction of interest rates and securities prices; (b) imperfect correlation
between the price of options and futures contracts and options on futures
contracts and movements in the prices of the securities being hedged; and (c)
the skills needed to use these strategies being different from those needed to
select portfolio securities. In addition, positions in futures contracts and
options on futures contracts may be closed out only on the exchange or board of
trade on which they were entered into, and no assurance can be given that an
active market will exist for a particular contract or option at a particular
time.

Lending Portfolio Securities. In lending securities to brokers, dealers
and other financial organizations, the Fund will be subject to risks, which,
like those associated with other extensions of credit, include the possible
delays in realizing on, or loss of, collateral should the borrower fail
financially.

Repurchase and Reverse Repurchase Agreements. In entering into a
repurchase agreement, the Fund bears a risk of loss in the event that the other
party to the transaction 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.

A reverse repurchase agreement involves the risk that the market value of
the securities retained by the Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase under the agreement.
In the event the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
agreement may be restricted pending a determination by the party, or its trustee
or receiver, whether to enforce the Fund's obligation to repurchase the
securities.

29
<PAGE>

When-Issued and Delayed Delivery Transactions. Securities purchased on a
when-issued or delayed delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their delivery.
Purchasing when-issued or delayed delivery securities can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.

Short Sales. If the price of the security sold short increases between the
time of the short sale and the time the Fund replaces the borrowed security, the
Fund will incur a loss; conversely, if the price declines, the Fund will realize
a capital gain. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited in
respect to a "naked" short.

Borrowing. If the Fund borrows to invest in securities, any investment
gains made on the securities in excess of interest paid on the borrowing will
cause the net asset value of the Fund's shares to rise faster than would
otherwise be the case. On the other hand, if the investment performance of the
additional securities purchased fails to cover their costs (including any
interest paid on the money borrowed) to the Fund, the net asset value of the
Fund's shares will decrease faster than would otherwise be the case. This is the
speculative characteristic known as "leverage."

PORTFOLIO TRANSACTIONS AND TURNOVER

Newly issued securities ordinarily are purchased directly from the issuer
or from an underwriter; other purchases and sales usually are placed with those
dealers from which it appears that the best price or execution will be obtained.
Usually no brokerage commissions, as such, are paid by the Fund for purchases
and sales undertaken through principal transactions, although the price paid
usually includes an undisclosed compensation to the dealer acting as agent. The
prices paid to underwriters of newly issued securities usually include a
concession paid by the issuer to the underwriter, and purchases of after-market
securities from dealers ordinarily are executed at a price between the bid and
asked price.

Transactions on behalf of the Fund are allocated to various dealers by
BlackRock in its best judgment. The primary consideration is prompt and
effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected for research, statistical or
other services to enable BlackRock to supplement its own research and analysis
with the views and information of other securities firms.

Although investment decisions for the Fund will be made independently from
those of the other accounts managed by BlackRock, investments of the type the
Fund may make may also be made by those other accounts. When the Fund and one or
more other accounts managed by BlackRock are prepared to invest in, or desire to
dispose of, the same security or other investment instrument, available
invest-

30
<PAGE>

ments or opportunities for sales will be allocated in a manner believed by
BlackRock to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or disposed of by the Fund.

The Fund has no fixed policy with respect to portfolio turnover, but does
not expect to trade in securities for short-term gain. The Fund's annual
portfolio turnover rate will not be a factor preventing a sale or purchase when
BlackRock believes investment considerations warrant such sale or purchase.
Since the Fund's inception, the Fund's annual portfolio turnover rate has
exceeded 200% in each fiscal year. Annual turnover at this rate means that the
Fund's portfolio securities are replaced more than twice during a period of one
year. Portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the Fund's
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less. High portfolio turnover may involve corresponding
greater transaction costs that will be borne directly by the Fund. See
"Financial Highlights" for the Fund's annual Portfolio Turnover Rate.

- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------

The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
net asset value attributable to each Class by the total number of shares of the
Class outstanding.

Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any security, at fair value as
determined by or under the direction of the Fund's Board of Trustees. Short-term
investments that have a maturity of more than 60 days are valued at prices based
on market quotations for securities of similar type, yield and maturity.
Short-term investments with a remaining maturity of 60 days or less are valued
at amortized cost where the Board has determined that amortized cost
approximates fair value. Corporate debt securities, MBSs and ABSs held by the
Fund are valued on the basis of valuations provided by dealers in those
instruments or by an independent pricing service approved by the Board of
Trustees; any such pricing service, in determining value, will use information
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analysis and evaluations
of various relationships between securities and yield to maturity information.

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<PAGE>

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Dividends, Distributions And Taxes
- --------------------------------------------------------------------------------

DIVIDENDS AND DISTRIBUTIONS

The Fund's policy is to declare and pay monthly dividends from its net
investment income. Dividends from net realized capital gains, if any, will be
distributed annually. The Fund may also pay additional dividends shortly before
December 31 from certain amounts of undistributed ordinary income and capital
gains realized, in order to avoid a Federal excise tax liability. If a
shareholder does not otherwise instruct, dividends and capital gain
distributions will be automatically reinvested in additional same Class shares
at the appropriate net asset value, with no additional sales charge or CDSC.

The per share amounts of dividends from net investment income on Class A
shares may be lower than that of Classes B and I, mainly as a result of the
distribution and service fees applicable to the Class A shares. Capital gain
distributions, if any, will be the same across all Classes of Fund shares (A, B
and I).

TAXES

The following is a summary of the material federal tax considerations
affecting the Fund and Fund shareholders, please refer to the SAl for further
discussion. In addition to the considerations described below and in the SAI,
there may be other federal, state, local, and/or foreign tax applications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of any investment.

The Fund intends to qualify, as it has in prior years, under Subchapter M
of the Internal Revenue Code (the "Code") for tax treatment as a regulated
investment company. In each taxable year that the Fund qualifies, so long as
such qualification is in the best interests of its shareholders, the Fund will
pay no federal income tax on its net investment company taxable income and
long-term capital gain that is distributed to shareholders.

Dividends paid from net investment income and net realized short-term
securities gain, are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains, derived
from the sale of securities held by the Fund for more than one year, are taxable
as long-term capital gains, regardless of the length of time a shareholder has
owned Fund shares.

Shareholders are required to pay tax on all taxable distributions, even if
those distributions are automatically reinvested in additional Fund shares. None
of the dividends paid by the Fund will qualify for the corporate dividends
received deduction. Dividends consisting of interest from U.S. government
securities may be exempt from state and local income taxes. The Fund will inform
shareholders of the source and tax status of all distributions promptly after
the close of each calendar year.

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<PAGE>

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Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------

A shareholder's gain or loss on the disposition of Fund shares (whether by
redemption, sale or exchange), generally will be a long-term or short-term gain
or loss depending on the length of time the shares had been owned at
disposition. Losses realized by a shareholder on the disposition of Fund shares
owned for six months or less will be treated as a long-term capital loss to the
extent a capital gain dividend had been distributed on such shares.

The Fund is required to withhold ("backup withholding") 31 % of all
taxable dividends, capital gain distributions, and the proceeds of any
redemption, regardless of whether gain or loss is realized upon the redemption,
for shareholders who do not provide the Fund with a correct taxpayer
identification number (social security or employer identification number).
Withholding from taxable dividends and capital gain distributions also is
required for shareholders who otherwise are subject to backup withholding. Any
tax withheld as a result of backup withholding does not constitute an additional
tax, and may be claimed as a credit on the shareholders' federal income tax
return.

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Purchase of Shares
- --------------------------------------------------------------------------------

GENERAL

The Fund offers three classes of shares. Class A shares are sold to
investors with no initial sales charge and are subject to ongoing distribution
and service fees. Class B shares are available through exchange purchases and/or
the Smith Barney 401(k) and ExecChoice(TM) Programs and are subject to a CDSC
payable upon certain redemptions. Class I shares are sold without an initial
sales charge or CDSC and are available only to investors investing a minimum of
$100,000. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which class of shares to
purchase.

Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, with an Introducing Broker or with an investment
dealer in the selling group. In addition, certain investors may purchase shares
directly from the Fund through First Data. When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A, Class B or Class I
shares. Smith Barney and other broker/dealers may charge their customers an
annual account maintenance fee in connection with a brokerage account through
which an investor purchases or holds shares. Accounts held directly at First
Data are not subject to a maintenance fee.

Investors in Class A and Class B (through Exchange Purchases) 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 I shares may open an account by making an initial
investment

33
<PAGE>

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Purchase of Shares (continued)
- --------------------------------------------------------------------------------

of $100,000. 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(a) of the Code, the minimum initial investment requirement for Class
A and Class B 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, the minimum initial investment requirement is $25
for monthly purchases and $50 for quarterly purchases. There are no minimum
investment requirements for Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, and Directors or Trustees of any
Travelers-affiliated funds, including 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 the Fund's transfer agent, First Data. Share certificates are issued
only upon a shareholder's written request to First Data.

The minimum initial and subsequent investment requirements in the Fund for
an account established under the Uniform Gift to Minors Act is $250 and the
subsequent investment requirement is $50.

The minimum initial and subsequent investment requirements in the Fund for
an account established under the Simple IRA and the Easy Simple IRA Programs is
$1. Exchange investments will have a $1 minimum.

Purchase orders received by the Fund or Smith Barney 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 (the "trade
date"). Orders received by dealers or Introducing Brokers 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 Smith Barney prior to Smith Barney's close of
business (the "trade date"). For shares purchased through Smith Barney or
Introducing Brokers purchasing through Smith Barney, payment for Fund shares is
due on the third business day after the trade date (the "settlement date"). In
all other cases, payment must be made with the purchase order.

SYSTEMATIC INVESTMENT PLAN

Class A and Class I 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, Smith Barney or First
Data is authorized through preauthorized transfers of at least $25 on a monthly
basis or at least $50 on a quarterly basis to charge an account 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. For share-

34
<PAGE>

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Purchase of Shares (continued)
- --------------------------------------------------------------------------------

holders purchasing Class A and Class I shares of the Fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
and the minimum subsequent investment requirement is $25. For shareholders
purchasing Class A and Class I shares of the Fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment requirement
and the minimum subsequent investment requirement is $50. A shareholder who has
insufficient funds to complete the transfer will be charged a fee of up to $25
by Smith Barney or First Data. The Systematic Investment Plan also authorizes
Smith Barney to apply cash held in the shareholder's 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 Smith Barney Financial Consultant.

CLASS B CONVERSION FEATURE

Class B shares will convert automatically to Class A shares eight years
after the date on which they were originally purchased. There will also be
converted at that time such proportion of Class B Dividend Shares 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 Class B shares (other than Class B Dividend
Shares) owned by the shareholder. See "Prospectus Summary -- Alternative
Purchase Arrangements -- Class B Shares Conversion Feature."

The length of time that CDSC 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 any CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Smith Barney.

WAIVERS OF CDSC

The CDSC 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) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the Fund with

35
<PAGE>

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Purchase of Shares (continued)
- --------------------------------------------------------------------------------

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 CDSC imposed on the
prior redemption.

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

SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS

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

The Fund offers to Participating Plans Class A shares as an investment
choice under the Smith Barney 401(k) and ExecChoice(TM) Programs, provided the
Participating Plan makes an initial investment of $1,000,000 or more of Class A
shares of one or more funds of the Smith Barney Mutual Funds. Class A shares
acquired through the Participating Plans are subject to the same service and/or
distribution fees as the Class A shares acquired by other investors.

Participating Plans wishing to acquire shares of the Fund through the
Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must
purchase such shares directly from First Data. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.

- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------

Except as otherwise noted below, shares of Class A or Class B may be
exchanged at the net asset value next determined for shares of the same Class in
the following funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class A
and Class B shares are subject to minimum investment requirements and all shares
are subject to the other requirements of the fund into which exchanges are made.
Class I shares do not have exchange privileges.

Fund Name
- --------------------------------------------------------------------------------
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund

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Exchange Privilege (continued)
- --------------------------------------------------------------------------------

Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund

Taxable Fixed-Income Funds
Smith Barney Diversified Strategic Income Fund

* Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund

Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.

Smith Barney Total Return Bond Fund

Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund

Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio

37
<PAGE>

- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------

Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio

Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio

Smith Barney Concert Allocation Series Inc. -- Global Portfolio

Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio

Money Market Funds
+ Smith Barney Exchange Reserve Fund

* Smith Barney Money Funds, Inc. -- Cash Portfolio
* Smith Barney Money Funds, Inc. -- Government Portfolio
* Smith Barney Money Funds, Inc. -- Retirement Portfolio
* Smith Barney Municipal Money Market Fund, Inc.
* Smith Barney Muni Funds -- California Money Market Portfolio
* Smith Barney Muni Funds -- New York Money Market Portfolio

- ----------
* Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B shares of the Fund.

Class A Exchanges. Class A shares of the Fund are subject to the
appropriate initial sales charge upon the exchange of such shares for Class A
shares of a fund sold with a sales charge, including any shares obtained through
automatic reinvestment. This does not apply to the Smith Barney 401(k) Program
and ExecChoice(TM) Programs.

Class B Exchanges. In the event a Class B shareholder (unless such
shareholder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her shares in any
of the funds imposing a CDSC, the exchanged Class B shares will be subject to
that CDSC. Upon the exchange, the newly acquired Class B shares will be deemed
to have been purchased on the date the Class B shares of the Fund that have been
exchanged were acquired.

Additional Information Regarding the Exchange Privilege. Excessive
exchange transactions can be detrimental to the Fund's performance and its
shareholders. MMC 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, MMC may, at its discretion, decide to limit additional purchases
and/or exchanges by the shareholder. Upon such a determination, the Fund will
provide notice in writing or by telephone to the shareholder at least 15 days
prior to suspending the exchange privilege and

38
<PAGE>

- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------

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 other Smith Barney Mutual Funds then available, 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 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 Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.

- --------------------------------------------------------------------------------
Redemption of Shares
- --------------------------------------------------------------------------------

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

If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until First Data receives
further instructions from Smith Barney, or if the shareholder's account is not
with 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 any 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 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 ten
days or more.

Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those

39
<PAGE>

- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------

held by 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 Adjustable Rate Government Income Fund
Class A, B or I (please specify)
c/o First Data Investor Services Group
P.O. Box 5128
Boston, Massachusetts 01581-5128

A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) 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 by First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 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 $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.

TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

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

Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 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. Redemption of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.

40
<PAGE>

- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------

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. The 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 from the Fund being acquired is identical to the
registration of the shares of the Fund exchanged. Such exchange request may be
made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(New York 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 the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The 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). The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or impose a charge for this service at
any time following at least seven (7) days' prior notice to shareholders.

AUTOMATIC CASH WITHDRAWAL PLAN

The Fund offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. The
withdrawal plan will be carried over on exchanges between funds or classes of
the Fund. Any applicable CDSC will be waived on amounts withdrawn by a
shareholder that do not exceed 1% per month of the value of the shareholder's
shares subject to the CDSC at the time the withdrawal plan commences. With
respect to withdrawal plans in effect prior to November 7, 1994, any applicable
CDSC will be waived on amounts withdrawn that do not exceed 2.00% per month of
the shareholder shares subject to the CDSC. For further information regarding
the automatic cash withdrawal plan, shareholders should contact their Smith
Barney Financial Consultant.

41
<PAGE>

- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------

CONTINGENT DEFERRED SALES CHARGE, CLASS B SHARES

Class B shares, which may be acquired only upon an exchange with another
fund in the Smith Barney Group of Funds, are subject upon redemption to the
highest CDSC (if any) of the shares from which the exchange or any preceding
exchange was made. A CDSC payable to Smith Barney is imposed on any redemption
of Class B shares that causes the value of a shareholder's account to fall below
the dollar amount of all payments by the shareholder for the Class B shares (or
any predessor of those shares) that were exchanged for Class B shares of the
Fund ("purchase payments") during the preceding five years. No charge is imposed
to the extent that the net asset value of the Class B shares redeemed does not
exceed (a) the current net asset value of Class B shares purchased through
reinvestment of dividends or capital gains distributions, plus (b) the current
net asset value of Class B shares acquired in an exchange that were originally
purchased more than five years prior to the redemption, plus (c) increases in
the net asset value of the shareholder's Class B shares above the purchase
payments made during the preceding five years.

In circumstances in which the CDSC is imposed, the amount of the charge
will depend on (a) the CDSC schedule applicable to shares of the fund that were
exchanged for the shares being redeemed; and (b) the number of years since the
shareholder made the purchase payment from which the amount is being redeemed. A
redemption of shares acquired in exchange for shares that had been the subject
of two or more exchanges among funds with differing CDSC schedules will be
subject to the highest applicable CDSC schedule. See "Exchange Privilege."
Solely for purposes of determining the number of years since a purchase payment,
all purchase payments during a month will be aggregated and deemed to have been
made on the last day of the preceding Smith Barney statement month. The purchase
payment from which a redemption is made is assumed to be the earliest purchase
payment from which a full redemption has not already been effected.

Class B shares will automatically convert to Class A shares eight years
after the date they were purchased. For this purpose, the date of purchase of
Class B shares of the Fund refers to the purchase date of the shares given in
exchange for the Class B shares of the Fund.

- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------

The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate net asset value of the shares held in the Fund is less
than $500. (If a shareholder has more than one account in the Fund, each account
must satisfy the minimum account size.) The Fund, however, will not redeem
shares based solely upon market reductions in net asset value. Before the Fund
exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring accounts up to minimum to avoid involuntary
liquidation.

42
<PAGE>

- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------

From time to time the Fund may advertise its total return, average annual
total return and yield in advertisements. In addition, in other types of sales
literature the Fund may include its current dividend return. These figures are
computed separately for the respective Classes of shares of the Fund. These
figures are based on historical earnings and are not intended to indicate future
performance. Total return is computed for a specified period of time assuming
reinvestment of all income dividends and capital gain distributions on the
reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calculated by
the initial amount invested and subtracting 100%. The standard average annual
total return, as prescribed by the SEC, is derived from this total return, which
provides the ending redeemable value. Such standard total return information may
also be accompanied with nonstandard total return information for differing
periods computed in the same manner but without annualizing the total return.
The yield of the Fund refers to the net investment income earned by investments
in the Fund over a thirty-day period. This net investment income is then
annualized, i.e., the amount of income earned by the investment during that
thirty-day period is assumed to be earned each 30-day period for twelve periods
and is expressed as a percentage of the investments. The yield quotation is
calculated according to a formula prescribed by the SEC to facilitate comparison
with yields quoted by other investment companies. The Fund calculates current
dividend return for each Class by annualizing the most recent distribution and
dividing by the net asset value on the last day of the period for which current
dividend return is presented. The current dividend return for each Class may
vary from time to time depending on market conditions, the composition of its
investment portfolio and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return should be
considered when comparing a Class's current return to yields published for other
investment companies and other investment vehicles. The Fund may also include
comparative performance information in advertising or marketing its shares. Such
performance information may include data from Lipper Analytical Services, Inc.
and other financial publications.

- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------

BOARD OF TRUSTEES

Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Trustees. The Board of Trustees approves all
significant agreements between the Fund and the companies that furnish services
to the Fund, including agreements with the Fund's distributor, investment
adviser, sub-investment adviser, administrator, custodian and transfer agent.
The day-to-day

43
<PAGE>

- --------------------------------------------------------------------------------
Management of the Fund (continuend
- --------------------------------------------------------------------------------

investment activities of the Fund have been delegated to Strategy Advisers and
BlackRock. The SAI contains background information regarding each Trustee and
executive officer of the Fund.

INVESTMENT ADVISER AND ADMINISTRATOR

Strategy Advisers, located at 388 Greenwich Street, New York, New York
10013, serves as the Fund's investment adviser. In this capacity, Strategy
Advisers, subject to the supervision and direction of the Fund's Board of
Trustees, is generally responsible for furnishing, or causing to be furnished to
the Fund, investment management services. Included among the specific services
provided by Strategy Advisers as investment adviser are: the selection and
compensation of a sub-investment adviser to the Fund; the review of all
purchases and sales of portfolio instruments made by the Fund to assess
compliance with its stated investment objectives and policies; the monitoring of
the selection of brokers and dealers effecting investment transactions on behalf
of the Fund, and the payment of reasonable salaries and expenses of those of the
Fund's officers and employees, and the fees and expenses of those members of the
Fund's Board of Trustees, who are directors, officers or employees of Strategy
Advisers. Strategy Advisers provides investment management, investment advisory
and/or administrative services to individual, institutional and investment
company clients that had aggregate assets under management, as of August 31,
1998, in excess of $4.1 billion. For the fiscal year ended May 31, 1998,
Strategy Advisers received fees in an amount equal to 0.40% of the Fund's
average daily net assets.

SUB-INVESTMENT ADVISER -- BLACKROCK

Under the terms of the sub-investment advisory agreement among Strategy
Advisers, the Fund and BlackRock, Strategy Advisers employs BlackRock as the
Fund's sub-investment adviser. BlackRock is an indirect subsidiary of PNC Bank
Corp. In December 1997, PNC Bank announced the strategic consolidation of its
various asset management firms under BlackRock, Inc., which maintains its
principal offices at 345 Park Avenue, New York, New York 10154. BlackRock has
served as investment adviser to fixed income investors in the United States and
overseas, and had assets under management in excess of $119 billion as of June
30, 1998. Some of the other asset management firms, which historically have
provided liquidity management and domestic and international equity management
services, merged with and into BlackRock in March, 1998 as part of the firm's
expansion from a fixed income investment manager to a multi-product investment
adviser.

As the Fund's sub-investment adviser, BlackRock, subject to the
supervision and direction of the Fund's Board of Trustees, and subject to review
by Strategy Advisers, manages the Fund's portfolio in accordance with the
investment objectives and stated policies of the Fund, makes investment
decisions for the Fund, selects the brokers and dealers through which the Fund's
investment transactions are effected and places

44
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- --------------------------------------------------------------------------------
Management of the Fund (continue)
- --------------------------------------------------------------------------------

purchase and sale orders for the Fund's portfolio transactions. BlackRock also
pays the salaries of all officers and employees of the Fund who are employed by
both it and the Fund, provides the Fund with investment officers who are
authorized by the Board of Trustees to execute purchases and sales of securities
and other financial instruments on behalf of the Fund and employs a professional
staff of portfolio managers who draw upon a variety of sources for research
information for the Fund. Strategy Advisers pays BlackRock a fee for services
provided by BlackRock to the Fund that is accrued daily and paid monthly at the
annual rate of 0.20% of the value of the Fund's average daily net assets. The
Fund pays no direct fee to BlackRock.

PORTFOLIO MANAGEMENT

Since the Fund's commencement of operations, June 22, 1992, Keith T.
Anderson, Scott M. Amero and Robert S. Kapito, each a senior officer at
BlackRock, have been responsible for managing the day-to-day investment
activities of the Fund.

Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended May 31, 1998, is
included in the Annual Report for that period. A copy of the Annual Report may
be obtained upon request and without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.

ADMINISTRATOR -- MMC

MMC, located at 388 Greenwich Street, New York, New York 10013 serves as
the Fund's administrator. As the Fund's administrator, MMC calculates the net
asset value of the Fund's shares and generally assists in all aspects of the
Fund's administration and operation. MMC provides investment management,
investment advisory and/or administrative services to investment companies that
had aggregate assets under management in excess of $100 billion as of August 31,
1998. MMC receives a fee for services provided to the Fund that is accrued daily
and paid monthly at the annual rate of 0.20% of the value of the Fund's average
daily net assets.

On April 6, 1998, Travelers announced that it had entered
into a Merger Agreement with Citicorp. The transaction was approved by the
stockholders of both Travelers and Citicorp on June 22, 1998 and by the
Federal Reserve Board on September 23, 1998. The companies expect the
merger to close on or about October 8, 1998, creating a new entity to be
called Citigroup. By approving the merger, the Federal Reserve Board
approved Travelers, as the surviving entity, becoming a bank holding
company subject to regulation under the Bank Holding Company Act of 1956
(the "BHCA"), the requirements of the Glass-Steagall Act and certain other laws
regulations. MMC does not believe that its compliance with the applicable law
will have a material adverse effect on its ability to continue to provide the
Fund with the same level of investment advisory services that it
currently receives.

45
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- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------

The Managers do not believe that compliance with applicable law following
the merger of Travelers and Citicorp will have a material adverse effect on
their ability to continue to provide the Fund with the same level of investment
advisory and administration services that it currently receives. Smith Barney
and the Managers believe that the Managers' services and the shareholder service
activities performed by Smith Barney are not underwriting and would be
consistent with the Glass-Steagall Act and other relevant federal and state
laws. However, there is little controlling precedent regarding the performance
of the combination of investment advisory, shareholder servicing and
administrative activities by subsidiaries of bank holding companies. If Smith
Barney and the Managers, or their affiliates, were to be prevented from acting
as the manager or a shareholder service agent, the Fund would seek alternative
means for obtaining these services. The Fund does not expect that shareholders
would suffer any adverse financial consequences as a result of any such
occurrence.

- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------

Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A, Class B and Class I shares of the Fund at the annual rate of
0.25% of the average daily net asset value of the respective Class. Smith Barney
is also paid a distribution fee with respect to Class A and Class B shares at
the rate of 0.50% of the average daily net assets attributable to those Classes.
The service fees are used by Smith Barney primarily to pay its Financial
Consultants for servicing shareholder accounts, and the distribution fees are
used to cover expenses primarily intended to result in the sale of shares. These
expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney in connection with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses.Smith Barney Financial Consultants may receive different levels of
compensation for selling different Classes of shares.

Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Fund's Board of Trustees
will evaluate the appropriateness of the Plan and its payment terms on a
continuing

46
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- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------

basis and in so doing will consider all relevant factors, including expenses
borne by Smith Barney, amounts received under the Plan and proceeds of the CDSC.

The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the merger of Travelers and Citicorp
and as a consequence of the applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the Fund's
shares.

- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------

The Fund was organized as an unincorporated business trust under the laws
of the Commonwealth of Massachusetts pursuant to a Master Trust Agreement dated
May 7, 1992. On November 5, 1992 the Fund filed an Amended and Restated Master
Trust Agreement (as amended from time to time, the "Trust Agreement"). The Fund
commenced operations on June 22, 1992, and on July 30, 1993 the Fund changed its
name to Smith Barney Shearson Adjustable Rate Government Income Fund. On
November 7, 1994 the Fund changed its name to Smith Barney Adjustable Rate
Government Income Fund.

Each Class of shares represents an identical interest in the Fund's
investment portfolio. As a result, the Classes have the same rights, privileges
and preferences, except with respect to: (a) the designation of each Class; (b)
the effect of the respective sales charges, if any, for each Class; (c) the
expenses allocable exclusively to each Class; (d) voting rights on matters
exclusively affecting a single Class; (e) the exchange privileges of each Class;
and (f) the conversion feature of the Class B shares. The Fund's Board of
Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes of shares of the Fund. The
Board of Trustees, on an ongoing basis, will consider whether any such conflict
exists and, if so, take appropriate action.

When matters are submitted for shareholder vote, shareholders of each
Class will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Generally, shares
of the Fund will be voted on a Fund-wide basis except for matters affecting only
the interests of one Class. The Fund does not hold annual shareholder meetings.
There normally will be no meeting of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders. The Trustees will call a
meeting for any purpose upon written request of shareholders holding at least
10% of the Fund's outstanding shares. Shareholders of record owning no less than
two-thirds of the outstanding shares of the Fund may remove a Trustee through a
declaration in writing or by vote cast in person or by

47
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- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------

proxy at a meeting called for that purpose. Shareholders who satisfy certain
criteria will be assisted by the Fund in communicating with other shareholders
in seeking the holding of the meeting.

PNC Bank, located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania, 19103, serves as custodian of the Fund's investments.

First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.

The Fund sends to each of its shareholders a semi-annual report and an
audited annual report, each of which includes a list of the investment
securities held by the Fund at the end of the period covered. In an effort to
reduce the Fund's printing and mailing costs, the Fund plans to consolidate the
mailing of its semi-annual and annual reports by household. This consolidation
means that a household having multiple accounts with the identical address of
record will receive a single copy of each report. In addition, the Fund also
plans to consolidate the mailing of its Prospectus so that a shareholder having
multiple accounts (that is, individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. When the Fund's annual
report is combined with the Prospectus into a single document, the Fund will
mail the combined document to each shareholder to comply with legal
requirements. Any shareholder who does not want this consolidation to apply to
his or her account should contact his or her Smith Barney Financial Consultant
or the Fund's transfer agent.

48
<PAGE>

SMITH BARNEY

A Member of TravelersGroup[LOGO]

Smith Barney
Adjustable Rate
Government
Income Fund

388 Greenwich Street
New York, New York 10013
(212) 723-9218

FD0249 9/98

PART B - STATEMENT OF ADDITIONAL INFORMATION

Smith Barney

Adjustable Rate Government Income Fund

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

Statement of Additional
Information
September 25, 1998

This Statement of Additional Information expands upon and supplements
the information contained in the current Prospectus of Smith Barney
Adjustable Rate Government Income Fund (the "Fund"), dated September 25,
1998, as amended or supplemented from time to time, and should be read
in conjunction with the Prospectus. The Prospectus may be obtained from
your Smith Barney Financial Consultant or by writing or calling the Fund
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 Prospectus in its entirety.

TABLE OF CONTENTS

For ease of reference, the same section headings are used in both the
Prospectus and the Statement of Additional Information, except where
shown below

Management of the
Fund.................................................................2
Investment Objectives and Management
Policies.............................................................5
Purchase of
Shares..............................................................17
IRA and Other Prototype Retirement Plans............................18
Redemption of
Shares..............................................................18
Distributor.........................................................
19
Valuation of
Shares...................................................................
.....................................................
20
Exchange
Privilege................................................................
.........................................................
20
Performance Data (See in the Prospectus
"Performance").......................................................
21
Taxes (See in the Prospectus "Dividends, Distributions and
Taxes").......................................
23
Custodian and Transfer Agent (See in the Prospectus
"Additional Information").................................................

24
Organization of the Fund (See in the Prospectus
"Additional Information")..................................................

24
Financial
Statements.................................................................
.....................................................
25

MANAGEMENT OF THE FUND

The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations
are as follows:

Name
Service
Salomon Smith Barney Inc.
("Smith
Barney")..................................................
.........................

Distributor
Smith Barney Strategy Advisers Inc.
("Strategy
Advisers")..........................................
.............................

Investment Adviser
Black Rock Financial Management, Inc.
("Black
Rock")..............................................
....................................

Sub-Investment
Adviser
Mutual Management Corp.

("MMC").............................................
............................................

Administrator
PNC Bank, National Association ("PNC
Bank")..............................
Custodian
First Data Investor Services Group, Inc. ("First
Data").................
Transfer Agent

These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional
Information.

MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS OF THE FUND

The Trustees and executive officers of the Fund, together with
information as to their principal business occupations during the past
five years, are set forth below. Each Trustee who is an "interested
person" of the Fund, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"), is indicated by an asterisk.

Allan J. Bloostein, Trustee (Age 68). President, Allan J. Bloostein
Associates, a consulting firm. Retired Vice Chairman and Director of
Mays Department Stores, Director of Taubman Centers Inc. and CVS
Corporation. His address is c/o Allan J. Bloostein Associates, 717
Fifth Avenue, 21st Floor, New York, NY 10022.

Martin Brody, Trustee (Age 77). Retired Vice Chairman of the Board of
Restaurant Associates Corporation. His address is c/o HMK Associates,
30 Columbia Turnpike, Florham Park, New Jersey 07932.

Dwight B. Crane, Trustee (Age 60). Professor, Harvard Business School.
His address is c/o Harvard Business School, Soldiers Field Road, Boston,
Massachusetts 02163.

Robert A. Frankel, Trustee (Age 71). Managing Partner of Robert A.
Frankel Management Consultants. Former Corporate Vice President of The
Reader's Digest Association, Inc. His address is 102 Grand Street,
Croton-on-Hudson, New York 10520

William R. Hutchinson, Director (Age 55). Vice President, Financial
Operations of Amoco Corporation; Director of Associated Bank and
Associated Banc Corporation. His address is c/o Amoco Corporation, 200
E. Randolph Drive, Chicago, Illinois 60601.

*Heath B. McLendon, (Age 65). President, Chairman of the Board and
Chief Executive Officer. Managing Director of Smith Barney, Chairman of
the Board of Strategy Advisers and President of MMC and Travelers
Investment Adviser, Inc. ("TIA"); Chairman of the Board and Director or
Trustee of 58 investment companies associated with Smith Barney. His
address is 388 Greenwich Street, New York, New York 10013.

Scott M. Amero, (Age 35) Portfolio Manager. Managing Director of
BlackRock Financial Management. His address is 345 Park Avenue, New
York, New York 10154.

Keith T. Anderson, (Age 39) Portfolio Manager. Managing Director of
BlackRock Financial Management. His address is 345 Park Avenue, New
York, New York 10154.

Robert S. Kapito, (Age 41) Portfolio Manager. Vice Chairman of
BlackRock Financial Management. His address is 345 Park Avenue, New
York, New York 10154.

Lewis E. Daidone, Senior Vice President and Treasurer (Age 41).
Managing Director of Smith Barney; Director and Senior Vice President of
MMC and TIA; Senior Vice President and Treasurer of 42 investment
companies associated with Smith Barney. His address is 388 Greenwich
Street, New York New York 10013.

Christina T. Sydor, (Age 47) Secretary. Managing Director of Smith
Barney; General Counsel and Secretary of MMC and TIA; Secretary of 42
investment companies associated with Smith Barney. Her address is 388
Greenwich Street, New York, New York 10013.

Thomas M. Reynolds, (Age 38) Controller. Director of Smith Barney;
Controller of 37 investment companies associated with Smith Barney. His
address is 388 Greenwich Street, New York, New York 10013.

As of September 23, 1998, the Trustees and officers of the Fund as a
group beneficially owned less than 1% of the outstanding shares of the
Fund. As of September 23, 1998, to the knowledge of the Fund and the
Board, the following shareholders or "group" (as that term is used in
Section 13(d) of the Securities Act of 1934) beneficially owned more
than 5% of the outstanding shares of the Fund:

Class I Shares

Daughters of Israel Geriatric Center
Restricted Funds
1155 Pleasant Valley Way
West Orange, NJ 07052
Owned 27,848.222 (11.72%)

Buckeye Corn Syrup Corp
88 Market Street
Saddle Brook, NJ 07663
Owned 26,963.187 (11.35%)

Hikari Sales U.S.A., Inc.
2804 McCone Avenue
Hayward, CA 94545
Owned 20,525.605 (8.64%)

William S. Ross
Smith Barney Inc IRA Custodian
428 W.4th Street, #6
Medford, OR 97501
Owned 19,404.83 (8.17%)

Lobart Company
11239 Ilex Avenue
Pacdina, CA 91331
Owned 15,883.123 (6.69%)

The 1991 Adam Targan Family
Trust u/a/d 4/11/91
Ronald G. Targan-TTEE
88 Market Street
Saddle Brook, NJ 07663
Owned 13,058.357 (5.50%)

George B. Cox TTEE
FBO Marian W. Brown
U/a/d 12/21/88
P.O. Box 1140
Suquamish, WA 98392
Owned 12,881.116 (5.42%)

Class B Shares

Dr. Wyman Andrus
Smith Barney Inc Rollover cust
18155 Marine View Drive SW
Seattle, WA 98166
Owned 20,283.976 (8.62%)

Kathryne M. Cherry
2353 Old Port Isabel Rd
Brownsville, TX 78521
Owned 15,254.408 (6.48%)

D. R. Voelkel
Smith Barney Inc Sep Custodian
105 Royal Oaks
Kerrville, TX 78028
Owned 12,366.319 (5.25%)

REMUNERATION

No director, officer or employee of Smith Barney, Strategy Advisers,
BlackRock or MMC or any of their affiliates receives any compensation
from the Fund for serving as an officer or Trustee of the Fund. The
Fund pays each Trustee who is not a director, officer or employee of
Smith Barney, Strategy Advisers, BlackRock, MMC, or any of their
affiliates, a fee of $2,500 per annum plus $250 per meeting attended,
and reimburses them for travel and out-of-pocket expenses. For the
fiscal year ended May 31, 1998 such travel expenses totaled $3,678.

The following table sets forth the compensation paid by the Fund to each
person who was a Trustee during the Fund's last fiscal year:

TRUSTEE

AGGREGATE
COMPENSATION
FROM THE FUND
PENSION OR
RETIREMENT
BENEFITS
ACCRUED AS PART
OF
FUND EXPENSES

TOTAL
COMPENSATION
FROM FUND AND
FUND COMPLEX
TOTAL NUMBER OF
FUNDS FOR WHICH
DIRECTOR/TRUSTEESH
IP SERVES WITHIN
FUND COMPLEX

Allan J.
Bloostein
$3,350
$0
$85,850
8
Martin Brody
$2,850
0
$119,814
19
Dwight Crane
$3,100
0
$133,850
22
Robert A.
Frankel
$3,250
0
$65,900
8
William R.
Hutchinson
$3,100
0
$35,750
6
Heath B.
McLendon*
- --
0
- --
58

* Designates an "interested person" of the Fund.

Upon attainment of age 80, Fund Trustees are required to change to
emeritus status. 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
Fund Trustees, together with reasonable out-of-pocket expenses for
each meeting attended. During the last fiscal year, aggregate
compensation paid to Charles Barber, a Trustee Emeritus, totaled
$3,678, who elected to defer the payment of all the compensation due
to him from the Fund.

INVESTMENT ADVISER, SUB-INVESTMENT ADVISER AND ADMINISTRATOR

Certain of the services provided to, and the fees paid by, the Fund
under its agreements with Strategy Advisers, BlackRock and MMC are
described in the Prospectus. For the fiscal years ended May 31, 1996,
1997 and 1998, such fees (for investment advisory and administration
services) amounted to $1,054,644, $869,373, and $708,254, respectively.
In addition to providing the services described in the Prospectus, MMC
furnishes the Fund with statistical and research data, clerical
assistance and accounting, data processing, bookkeeping, internal
auditing and legal services and certain other services required by the
Fund; prepares reports to the Fund's shareholders; and prepares tax
returns, reports to and filings with, the Securities and Exchange
Commission (the "SEC") and state regulatory authorities. Strategy
Advisers is a wholly owned subsidiary of MMC, and a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"). Holdings
is a wholly owned subsidiary of Travelers Group, Inc. ("Travelers").
Strategy Advisers pays BlackRock a fee for services provided by
BlackRock to the Fund, which is accrued daily and paid monthly, at the
annual rate of 0.20% of the value of the Fund's average daily net
assets. The Fund pays no direct fee to BlackRock. Strategy Advisers,
BlackRock and MMC each pays the salaries of all officers and employees
it employs who provide services to the Fund, and Strategy Advisers and
MMC maintain office facilities for the Fund. Strategy Advisers,
BlackRock and MMC bear all expenses in connection with the performance
of their respective services under their agreements with the Fund.

COUNSEL AND AUDITORS

Willkie Farr & Gallagher serves as counsel for the Fund. The Trustees
who are not "interested persons" of the Fund have selected Stroock &
Stroock & Lavan LLP, as their counsel

KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has
been selected as the Fund's independent auditors to examine and report
the Fund's financial statements and financial highlights for the fiscal
year ending May 31, 1999.

INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES

The Prospectus discusses the investment objectives of the Fund and the
principal policies to be employed to achieve those objectives.
Supplemental information is set out below concerning the types of
securities and other instruments in which the Fund may invest, the
investment policies and strategies that the Fund may utilize, and
certain risks attendant to those investments, policies and strategies.

Adjustable Rate Securities

The Fund will invest at least 65% of its net assets in adjustable rate
securities ("Adjustable Rate Securities"), consisting principally of
mortgage-backed and asset-backed securities. The collateral backing
mortgage-backed securities ("MBSs") and asset-backed securities ("ABSs")
is usually held by an independent bailee, custodian or trustee on behalf
of the holders of the related MBSs or ABSs. The holder of the related
MBSs or ABSs (such as the Fund) will have either an ownership interest
or security interest in the underlying collateral and can exercise its
rights to it through the bailee, custodian or trustee.

Payments of principal of and interest on MBSs and ABSs are made more
frequently than are payments on conventional debt securities. In
addition, holders of MBSs and of certain ABSs (such as ABSs backed by
home equity loans) may receive unscheduled payments of principal at any
time representing prepayments on the underlying mortgage loans or
financial assets. These prepayments may usually be made by the related
obligor without penalty. Prepayment rates are affected by changes in
prevailing interest rates and numerous economic, geographic, social and
other factors. (ABSs backed by other than home equity loans do not
generally prepay in response to changes in interest rates, but may be
subject to prepayments in response to other factors.) Changes in the
rates of prepayments will generally affect the yield to maturity of the
security.

Indices. The key determinant of the interest rates paid on Adjustable
Rate Securities is the interest rate index chosen (and the spread, above
or below the interest rate of the index, required to be paid on the
security). Certain indices are tied to the interest rate paid on
specified securities, such as one-, three-or five-year U.S. Treasury
securities, whereas other indices are more general. A prominent example
of a general type of index is the cost of funds for member institutions
(that is, savings and loan associations and savings banks) of the
Federal Home Loan Bank (the "FHLB") of San Francisco (The 11th District
Cost of Funds Index, "COFI"). A number of factors may affect the COFI
and cause it to behave differently from indices tied to specific types
of securities. The COFI is dependent upon, among other things, the
origination dates and maturities of the member institutions'
liabilities. Consequently, the COFI may not reflect the average
prevailing market interest rates on new liabilities of similar
maturities, and may not move in the same direction as prevailing
interest rates since, as longer term deposits or borrowings mature and
are renewed at market interest rates, the COFI will rise or fall
depending upon the differential between the prior and the new rates on
the deposits and borrowings. In addition, associations in the thrift
industry in recent years have caused and may continue to cause the cost
of funds of thrift institutions to change for reasons unrelated to
changes in general interest rate levels. Any movement in the COFI as
compared to other indices based upon specific interest rates may be
affected by changes instituted by the FHLB of San Francisco in the
method used to calculate the COFI. To the extent that the COFI may
reflect interest changes on a more delayed basis than other indices, in
a period of rising interest rates any increase may produce a higher
yield later than would be produced by the other indices. In a period of
declining interest rates, the COFI may remain higher than other market
interest rates, which may result in a higher level of principal
prepayments on mortgage loans that adjust in accordance with the COFI
than mortgage or other loans that adjust in accordance with other
indices. In addition, to the extent that the COFI may lag behind other
indices in a period of rising interest rates, securities based on the
COFI may have a lower market value than would result from use of other
indices. In a period of declining interest rates, securities based on
the COFI may reflect a higher market value than would securities based
on other indices.

MBSs And ABSs issued by Nongovernmental Entities -- Credit Enhancements.
Credit enhancements for certain MBSs and ABSs issued by nongovernmental
entities typically are provided by external entities such as banks or
financial institutions or by the structure of a transaction itself.
Examples of such credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
securities with one or more classes being senior to other subordinated
classes as to the payment of principal and interest, with the result
that defaults on the underlying assets are borne first by the holders of
the subordinated class), creation of "reserve funds" (in which case cash
or investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and
"overcollateralization" (in which case the scheduled payments on, or the
principal amount of, the underlying assets exceeds that required to make
payment of the securities and pay any servicing or other fees). The
Fund may purchase subordinated securities that, as noted above, may
serve as a form of credit support for senior securities purchased by
other investors.

U.S. Government Agencies or Instrumentalities

Government National Mortgage Association. The Government National
Mortgage Association ("GNMA") is a wholly owned corporate
instrumentality of the United States government within the Department of
Housing and Urban Development. The National Housing Act of 1934, as
amended (the "Housing Act"), authorizes GNMA to guarantee the timely
payment of the principal of and interest on securities that are based on
and backed by a pool of specified mortgage loans. For these types of
securities to qualify for a GNMA guarantee, the underlying mortgages
must be insured by the Federal Housing Administration (the "FHA") under
the Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or
be guaranteed by the Veterans' Administration under the Servicemen's
Readjustment Act of 1944, as amended ("VA Loans"), or be pools of other
eligible mortgage loans. The Housing Act provides that the full faith
and credit of the United States government is pledged to the payment of
all amounts that may be required to be paid under any guarantee.

GNMA pass-through MBSs may represent a proportionate interest in one or
more pools of the following types of mortgage loans: (a) fixed rate
level payment mortgage loans; (b) fixed rate graduated payment mortgage
loans; (c) fixed rate growing equity mortgage loans; (d) fixed rate
mortgage loans secured by manufactured (mobile) homes; (e) mortgage
loans on multifamily residential properties under construction; (f)
mortgage loans on completed multifamily projects; (g) fixed rate
mortgage loans as to which escrowed funds are used to reduce the
borrower's monthly payments during the early years of the mortgage loans
("buydown" mortgage loans); (h) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or
in other payment terms of the mortgage loans; and (i) mortgage-backed
serial notes.

Federal National Mortgage Association. The Federal National Mortgage
Association ("FNMA") is a Federally chartered and privately owned
corporation established under the Federal National Mortgage Association
Charter Act. FNMA was originally organized in 1938 as a United States
government agency to add greater liquidity to the mortgage market, and
was transformed into a private sector corporation by legislation enacted
in 1968. FNMA provides funds to the mortgage market primarily by
purchasing home mortgage loans from local lenders, thereby providing
them with funds for additional lending. FNMA acquires funds to purchase
loans from investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for
housing.

Each FNMA pass-through MBS represents a proportionate interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (that
is, mortgage loans that are not insured or guaranteed by any government
agency). The loans contained in those pools consist of: (a) fixed rate
level payment mortgage loans; (b) fixed rate growing equity mortgage
loans; (c) fixed rate graduated payment mortgage loans; (d) variable
rate mortgage loans; (e) other adjustable rate mortgage loans; and (f)
fixed rate mortgage loans secured by multifamily projects.

Federal Home Loan Mortgage Corporation. The Federal Home Loan Mortgage
Corporation ("FHLMC") is a corporate instrumentality of the United
States established by the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC was organized primarily for the purpose of
increasing the availability of mortgage credit to finance needed
housing. The operations of FHLMC currently consist primarily of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in mortgage loans and the sale of the mortgage
loans in the form of mortgage-backed securities.

The mortgage loans underlying FHLMC MBSs typically consist of fixed rate
or adjustable rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first
liens on one-to four-family residential properties or multifamily
projects. Each mortgage loan must meet the applicable standards set out
in the FHLMC Act. Mortgage loans underlying FHLMC MBSs may include
whole loans, participation interests in whole loans and undivided
interests in whole loans and participations in another FHLMC MBS.

U.S. Small Business Administration. The U.S. Small Business
Administration (the "SBA") is an independent agency of the United States
established by the Small Business Act of 1953. The SBA was organized
primarily to assist independently owned and operated businesses that are
not dominant in their respective markets. The SBA provides financial
assistance, management counseling and training for small businesses, as
well as acting generally as an advocate of small businesses. The SBA
guarantees the payment of principal and interest on portions of loans
made by private lenders to certain small businesses. The loans are
generally commercial loans such as working capital loans and equipment
loans. The SBA is authorized to issue from time to time, through its
fiscal and transfer agent, SBA-guaranteed participation certificates
evidencing fractional undivided interests in pools of these SBA-
guaranteed portions of loans made by private lenders. The SBA's
guarantee of the certificates, and its guarantee of a portion of the
underlying loan, are backed by the full faith and credit of the United
States.

U.S. Government Securities

Securities issued or guaranteed by the United States government or one
of its agencies, authorities or instrumentalities ("U.S. government
securities") in which the Fund may invest include debt obligations of
varying maturities issued by the United States Treasury or issued or
guaranteed by an agency or instrumentality of the United States
government, including the FHA, Farmers Home Administration, Export-
Import Bank of the United States, SBA, GNMA, General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit
Banks, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit
Banks, Federal Land Banks, FNMA, Maritime Administration, Tennessee
Valley Authority, District of Columbia Armory Board, Student Loan
Marketing Association and Resolution Trust Company. Direct obligations
of the United States Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance.
Because the United States government is not obligated by law to provide
support to an instrumentality that it sponsors, the Fund will not invest
in obligations issued by an instrumentality of the United States
government unless BlackRock determines that the instrumentality's credit
risk does not make its securities unsuitable for investment by the Fund.

Zero Coupon Treasury Securities

The Fund may purchase "zero coupon" U.S. Treasury securities, which are
U.S. Treasury bills, notes and bonds that have been stripped of their
interest coupons or that are certificates representing interests in the
stripped debt obligations and coupons. A zero coupon security is
purchased at a discount from its face amount, and pays no interest to
its holder during its life. 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).

The interest rate on zero coupon securities is automatically compounded
and paid out at maturity. Although compounding at a constant rate
eliminates the risk of receiving lower yields upon reinvestment of
interest if prevailing interest rates decline, the owner of a zero
coupon security does not obtain the higher yields upon reinvestment of
interest received if prevailing interest rates rise. For this reason,
zero coupon securities are subject to substantially greater market price
fluctuations during periods of changing prevailing interest rates than
are comparable debt securities that make current distributions of
interest. Current Federal tax law requires that a holder (such as the
Fund) of a zero coupon security accrue a portion of the discount at
which the security was purchased as income each year even although the
holder receives no interest payments in cash on the security during the
year.

Currently, the only U.S. Treasury security issued without coupons is the
U.S. Treasury bill. A number of banks and brokerage firms, however,
have separated (stripped) the principal portions from the coupon
portions of U.S. Treasury bonds and notes and have sold them separately
in the form of receipts or certificates representing undivided interests
in these instruments. These instruments are generally held by a bank in
a custodial or trust account.

Illiquid Securities

The Fund may not invest more than 15% of its net assets in repurchase
agreements that have a maturity of longer than seven days or in other
illiquid securities, including securities that are illiquid by virtue
of the absence of a readily available market. Illiquid securities have
historically included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "1933 Act"). Limitations on
resale may have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of restricted or
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register restricted securities in order
to dispose of them, resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.

Restricted securities issued pursuant to Rule 144A under the 1933 Act
are not deemed to be illiquid. BlackRock will monitor the liquidity of
these restricted securities subject to the supervision of Strategy
Advisers and the Board of Trustees. In assessing the liquidity of a
security, BlackRock will consider, among other things, the following
factors: (a) the frequency of trades and quotes for the security; (b)
the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (c) dealer undertakings to make
a market in the security and (d) the nature of the security and the
nature of the marketplace trades (for example, the time needed to
dispose of the security, the method of soliciting offers and the
mechanics of the transfer). Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.

Repurchase Agreements

The Fund may engage in repurchase agreement transactions with member
banks of the Federal Reserve System and with certain dealers on the
Federal Reserve Bank of New York's list of reporting dealers. A
repurchase agreement is a contract under which the buyer of a security
simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under each repurchase agreement, the
selling institution will be required to maintain the value of the
securities subject to the repurchase agreement at not less than their
repurchase price. 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.

When-Issued and Delayed Delivery Transactions

When the Fund engages in when-issued or delayed delivery securities
transactions, it will rely on the other party to consummate the trade.
Failure of the seller to do so may result in the Fund's incurring a
loss or missing an opportunity to obtain a price considered to be
advantageous.

Lending Portfolio Securities

The Fund may lend portfolio securities to brokers, dealers and other
financial organizations. These loans, if and when made, are currently
subject to a limitation whereby they may not exceed 33 1/3% of the value
of the Fund's total assets. The Fund will not lend securities to Smith
Barney unless the Fund has applied for and received specific authority
to do so from the SEC. The Fund's loans of securities will be
collateralized by cash, letters of credit or U.S. government securities.
The cash or instruments collateralizing the Fund's loans of securities
will be maintained at all times in a segregated account with PNC, the
Fund's custodian, in an amount at least equal to the current market
value of the loaned securities. From time to time, the 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 that is
unaffiliated with the Fund and is acting as a "finder."

By lending its portfolio securities, the 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. The Fund will comply with
the following conditions whenever it loans securities: (a) the Fund must
receive at least 100% cash collateral or equivalent securities from the
borrower; (b) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level of the
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 except that, if a material
event adversely affecting the investment in the loaned securities
occurs, the Fund's Board of Trustees must terminate the loan and regain
the right to vote the securities.

Short Sales

To complete a short sale, the Fund must arrange through a broker to
borrow the securities to be delivered to the buyer. The proceeds
received by the Fund from the short sale are retained by the broker
until the Fund replaces the borrowed securities. In borrowing the
securities to be delivered to the buyer, 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, which collateral consists of cash or U.S. government securities.
In addition, the Fund will place in a segregated account with PNC Bank
an amount of cash, U.S. government securities or other liquid high grade
debt obligations equal to the difference, if any, between (a) the market
value of the securities sold at the time they were sold short and (b)
any cash or U.S. government securities 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 at a level 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.

The Fund will not enter into a short sale of securities if, as a result
of the sale, the total market value of all securities sold short by the
Fund would exceed 25% of the value of the Fund's assets. In addition,
the Fund may not (a) sell short the securities of any single issuer
listed on a national securities exchange to the extent of more than 2%
of the value of the Fund's net assets or (b) sell short the securities
of any class of an issuer to the extent of more than 2% of the
outstanding securities of the class at the time of the transaction.

Portfolio Strategies Involving Interest Rate Transactions, Options and
Futures

The Fund may seek to increase its return through the use of covered
options on portfolio securities and to hedge its portfolio against
movements in interest rates by means of other portfolio strategies. The
Fund has authority to write (that is, sell) covered call and put options
on its portfolio securities, purchase and sell call and put options on
securities and engage in transactions in interest rate swaps, caps and
floors, financial futures contracts, and related options on those
contracts. Each of these portfolio strategies is described in the
Prospectus. Although these strategies entail risks (as discussed in the
Prospectus and below), BlackRock believes that, because the Fund will
(a) write only covered options and (b) engage in other transactions only
for hedging purposes, the strategies should not subject the Fund to the
risks frequently associated with the speculative use of the strategies.
While the Fund's use of hedging strategies is intended to reduce the
volatility of the net asset value of Fund shares, the Fund's net asset
value will fluctuate. The Fund is not obligated to use any of the
listed strategies at any particular time or under any particular
economic condition, and there is no assurance that these strategies will
be effective. The following is further information relating to certain
portfolio strategies the Fund may utilize.

Interest Rate Hedging Transactions and Associated Risk Factors. The
Fund may hedge all or a portion of its portfolio against fluctuations in
interest rates by entering into interest rate transactions. The Fund
bears the risk of an imperfect correlation between the index used in the
hedging transaction and that pertaining to the securities that are the
subject of the hedging transaction.

The Fund expects to enter into interest rate transactions primarily to
hedge its portfolio of Adjustable Rate Securities against fluctuations
in interest rates. Typically, the parties with which the Fund will
enter into interest rate transactions will be brokers, dealers or other
financial institutions typically called "counterparties." Certain
Federal income tax requirements may, however, limit the Fund's ability
to engage in certain interest rate transactions. Gains from transactions
in interest rate swaps distributed to shareholders of the Fund will be
taxable as ordinary income or, in certain circumstances, as long-term
capital gains to the shareholders.

The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined rate, to receive
payments of interest on a notional principal amount from the party
selling the cap. The purchase of an interest rate cap therefore hedges
against an increase in interest rates above the cap on an Adjustable
Rate Security held by the Fund. Thus, for example, in the case of an
Adjustable Rate Security indexed to the COFI, if the COFI increases
above the rate paid on the security, the counter-party will pay the
differential to the Fund. The opposite is true in the case of an
interest rate floor; it hedges against a decrease in the index rate
below any floor on the Adjustable Rate Security Interest rate. Swap
transactions involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest, such as an
exchange of fixed rate payments for floating rate payments. If the Fund
were to hold an MBS with an interest rate that is reset only once each
year, for example, it could swap the right to receive interest at the
fixed rate for the right to receive interest at a rate that is reset
every week. This swap would enable the Fund to offset a decline in the
value of the MBS due to rising interest rates, but would also limit its
ability to benefit from falling interest rates. Conversely, if the Fund
were to hold an MBS with an interest rate that is reset every week and
it desired to lock in what it believed to be a high interest rate for
one year, it could swap the right to receive interest at this variable
weekly rate for the right to receive interest at a rate that is fixed
for one year. This type of a swap would protect the Fund from a
reduction in yield due to falling interest rates, but would preclude it
from taking full advantage of rising interest rates.

The Fund will enter into interest rate swap transactions on a net basis;
that is, the two payment streams are netted out, with the Fund receiving
or paying only the net amount of the two payments. Inasmuch as these
transactions will be entered into for good faith hedging purposes,
BlackRock believes that the obligations should not be deemed to
constitute senior securities and, thus, the Fund will not treat them as
being subject to its borrowing restrictions. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap will be accrued daily, and an amount
of cash, U.S. government securities or other liquid high grade debt
obligations having an aggregate net asset value at least equal to the
accrued excess will be maintained by the Fund in a segregated account
with PNC Bank. The Fund will not enter into any interest rate swap
transaction unless the credit quality of the unsecured senior debt or
the claims-paying ability of the other party to the transaction is rated
in one of the highest two rating categories by at least one nationally
recognized statistical rating organization ("NRSRO") or is believed by
BlackRock to be equivalent to that rating. If the other party to the
transaction defaults, the Fund will have contractual remedies pursuant
to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid in comparison with other similar
instruments traded in the interbank market.

The use of interest rate swaps is a highly specialized activity that
involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If BlackRock is
incorrect in its forecasts of market values, interest rates and other
applicable factors, the investment performance of the Fund would be
lower than it would have been if interest rate swaps were not used.

Interest rate swap transactions do not involve the delivery of
securities or other underlying assets or principal. As a result, the
risk of loss with respect to interest rate swaps is limited to the net
amount of interest payments that the Fund would be contractually
obligated to make. If the MBS or other security underlying an interest
rate swap were prepaid and the Fund continued to be obligated to make
payments to the other party to the swap, the Fund would have to make the
payments from another source. If the other party to an interest rate
swap were to default, the Fund's risk of loss would consist of the net
amount of interest payments that the Fund contractually was entitled to
receive. Since interest rate transactions are individually negotiated,
BlackRock expects to achieve an acceptable degree of correlation between
the Fund's rights to receive interest on MBSs and its rights and
obligations to receive and pay interest pursuant to interest rate swaps.

Writing Covered Options. The Fund is authorized to write (that is,
sell) covered call options on the securities in which it may invest and
to enter into closing purchase transactions with respect to certain of
these options. A covered call option is an option pursuant to which the
Fund, in return for a premium, gives another party a right to buy
specified securities owned by the Fund at a specified future date and
price set at the time of the contract. The principal reason for writing
call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By
writing covered call options, the Fund gives up the opportunity to
profit from any potential price increase in the underlying security
above the option exercise price. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in
effect unless the Fund effects a closing purchase transaction. A
closing purchase transaction cancels out the Fund's position as the
writer of an option by means of an offsetting purchase of an identical
option prior to the expiration of the option it has written. Covered
call options serve as a partial hedge against the price of the
underlying security declining.

The writer of a covered call option has no control over when it may be
required to sell its securities since it may be assigned an exercise
notice at any time prior to the termination of its obligation as a
writer. If an option expires unexercised, the writer realizes a gain in
the amount of the premium. Such a gain may be offset by a decline in
the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from
the sale of the underlying security.

The Fund may write put options that give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise
price. The Fund will receive a premium for writing a put option, which
increases the Fund's return. The Fund will write only covered put
options, which means that so long as the Fund is obligated as the writer
of the option it will have placed and maintained cash, U.S. government
securities or other high grade liquid debt obligations with PNC Bank
with a value equal to or greater than the exercise price of the
underlying securities. By writing a put, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the
market value of that security at the time of exercise for as long as the
option is outstanding. The Fund may engage in closing transactions to
terminate put options that it has written.

Options purchased or sold by the Fund may include options issued by The
Options Clearing Corporation (the "Clearing Corporation"), which options
are currently traded on the Chicago Board Options Exchange, American
Stock Exchange, New York Stock Exchange, Inc. ("NYSE") and various
regional stock exchanges. An option position may be closed out only on
an exchange that provides a secondary market for an option of the same
series. If a secondary market does not exist, it might not be possible
to effect closing transactions in particular options, with the result,
in the case of a covered call option, that the Fund would not be able to
sell the underlying security until the option expires or the Fund
delivered the underlying security upon exercise. Reasons for the
absence of a liquid secondary market on an exchange include the
following: (a) insufficient trading interest in certain options may
exist; (b) restrictions may be imposed by the exchange on opening
transactions or closing transactions or both; (c) trading halts,
suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (d)
unusual or unforeseen circumstances may interrupt normal operations on
the exchange; (e) the facilities of the exchange or the Clearing
Corporation may not at all times be adequate to handle current trading
volume; or (f) the exchange could, for economic or other reasons, decide
to or be compelled at some future date to discontinue the trading of
options (or a particular class or series of options), in which event the
secondary market on the exchange (or in that class or series of options)
would cease to exist, although outstanding options on the exchange that
had been issued by the Clearing Corporation as a result of trades on the
exchange would continue to be exercisable in accordance with their
terms.

The Fund may enter into over-the-counter option transactions ("OTC
options"), which are two-party contracts with prices and terms
negotiated between the buyer and seller. In the absence of a change of
position of the staff of the SEC, the Fund will treat OTC options and
the assets used as cover for written OTC options as illiquid securities.
If an OTC option is sold by the Fund to a primary U.S. government
securities dealer recognized by the Federal Reserve Bank of New York and
the Fund has the conditional contractual right to repurchase the OTC
option from the dealer at the predetermined price, then the Fund will
treat as illiquid the amount of the underlying securities as is equal to
the repurchase price less the amount by which the option is "in-the-
money" (that is, the current market value of the underlying security
minus the option's strike price). The repurchase price with the primary
dealers is typically a formula price that is generally based on a
multiple of the premium received for the option, plus the amount by
which the option is "in-the-money."

Purchasing Options. The Fund may purchase put options to hedge against
a decline in the market value of its holdings. By buying a put, the
Fund has a right to sell the underlying security at the exercise price,
thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be offset
partially by the amount of the premium paid for the put option and any
related transaction costs. Prior to its expiration, a put option may be
sold in a closing sale transaction and profit or loss from the sale will
depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing
sale transaction cancels out the Fund's expiration of the option it has
purchased. In certain circumstances, the Fund may purchase call options
on securities held in its portfolio on which it has written call options
or that it intends to purchase. The Fund may purchase either exchange-
traded or OTC options.

Futures and Financial Futures. As described in the Prospectus, the Fund
is authorized to engage in transactions in financial futures contracts
and related options on these futures contracts. A futures contract is
an agreement between two parties to buy and sell a security or, in the
case of an index-based futures contract, to make and accept a cash
settlement for a set price on a future date. The Fund may assume both
"long" and "short" positions with respect to futures contracts. A long
position involves entering into a futures contract to buy a security,
whereas a short position involves entering into a futures contract to
sell a security. A majority of transactions in futures contracts,
however, do not result in the actual delivery of the underlying
instrument or cash settlement, but are settled through liquidation, that
is, by entering into an offsetting transaction. Futures contracts are
traded on boards of trade that have been designated "contracts markets"
by the Commodity Futures Trading Commission.

The purchase or sale of a futures contract, unlike the purchase or sale
of a security, contemplates no price or premium being paid or received.
Instead, an amount of cash or securities acceptable to the broker and
the relevant contract market, which varies, but is generally about 5% of
the contract amount, must be deposited with the broker. This amount is
known as "initial margin" and represents a "good faith" deposit assuring
the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the borrower, called
"variation margin," are required to be made daily as the price of the
futures contract fluctuates making the long and short positions in the
futures contracts more or less valuable, a process known as "marking to
the market." At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position
that will operate to terminate the position in the futures contract. A
final determination of variation margin is then made, additional cash is
required to be paid or released by the broker and the purchaser realizes
a loss or gain. In addition, a nominal commission is paid on each
completed sale transaction.

Additional Risk Factors in Options and Futures Transactions.
Utilization of futures transactions to hedge the Fund's portfolio will
involve the risk of imperfect correlation in movements in the prices of
futures contracts and movements in the price of the security that is the
subject of the hedge. If the price of the futures contract moves more
or less than the price of the security, the Fund will experience a gain
or loss that would not be completely offset by movements in the price of
the security that is the subject of the hedge.

Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale
transaction. Such a transaction requires a secondary market on an
exchange for call or put options of the same series. The Fund will
enter into an option or futures transaction on an exchange only if a
liquid secondary market appears to exist for the options or futures. No
assurance can be given that a liquid secondary market will exist for any
particular call or put option or futures contract at any specific time.
Thus, it may not be possible to close an option or futures position. In
the case of a futures position or an option on a futures position
written by the Fund, in the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may
have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In
addition, the Fund may be required to take or make delivery of the
currency underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse effect on the
Fund's ability to hedge effectively its portfolio. The risk also exists
of a loss by the Fund of margin deposits in the event of bankruptcy of a
broker with which the Fund has an open position in a futures contract or
related option.

The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of
call or put options on the same underlying currency (whether or not
covered) that may be written by a single investor, whether acting alone
or in concert with others (regardless of whether the options are written
on the same or different exchanges or are held or written on one or more
accounts or through one or more brokers). "Trading limits" are imposed
on the maximum number of contracts that any person may trade on a
particular trading day. An exchange may order the liquidation of
positions found to be in violation of these limits and it may impose
other sanctions or restrictions. BlackRock does not believe that these
trading and position limits will have any adverse effect on the
portfolio strategies for hedging the Fund's portfolio.

Ratings as Investment Criteria

In general, the ratings of NRSROs such as Moody's Investors Service,
Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") represent
the opinions of those agencies as to the quality of debt obligations
that they rate. These ratings, however, are relative and subjective,
are not absolute standards of quality and do not evaluate the market
risk of securities. An issue of debt obligations may, subsequent to its
purchase by the Fund, cease to be rated or its ratings may be reduced
below the minimum required for purchase by the Fund. Neither event will
require the sale of the debt obligation by the Fund, but BlackRock will
consider the event in its determination of whether the Fund should
continue to hold the obligation.

INVESTMENT RESTRICTIONS

The Fund is subject to certain restrictions and policies that are
"fundamental," which means that they may not be changed without a "vote
of a majority of the outstanding voting securities" of the Fund, as
defined under the 1940 Act. The Fund is subject to other restrictions
and policies that are "non-fundamental" and which may be changed by the
Fund's Board of Trustees without shareholder approval, subject to any
applicable disclosure requirements.

Fundamental Policies. Without the approval of a majority of its
outstanding voting securities, the Fund may not:

1. issue "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.
2. invest 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.
3. borrow 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 transactions.
4. make loans. This restriction does not apply to: (a) the purchase
of debt obligations in which the Fund may invest consistent with
its investment objectives and policies; (b) repurchase agreements;
and (c) loans of its portfolio securities, to the fullest extent
permitted under the 1940 Act.
5. engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be
deemed to be an underwriter under the 1933 Act in disposing of
portfolio securities.
6. purchase or sell 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); and (d) investing in real
estate investment trust securities.
7. invest in a manner that would cause the Fund to fail to be a
"diversified company" under the Act and the rules, regulations and
orders thereunder.
8. purchase securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and
sales of securities and except that the Fund may pay initial or
variation margin in connection with options or futures contracts.
9. make short sales of securities, or maintain a short position if,
when added together, more than 25% of the value of the Fund's net
assets would be (a) deposited as collateral for the obligation to
replace securities borrowed to effect the short sales and (b)
allocated to segregated accounts in connection with the short
sales. Short sales "against-the-box" are not subject to this
restriction.

Nonfundamental Policies. As a nonfundamental policy, the Fund may not:

1. purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that
are illiquid.
2. write or purchase puts, calls, straddles, spreads or combinations
of those transactions, except as consistent with the Fund's
investment objectives and policies.
3. purchase securities, other than MBSs, ABSs or U.S. government
securities, of any issuer having a record, together with
predecessors, of less than three years of continuous operations
if, immediately after the purchase, more than 5% of the Fund's
total assets would be invested in such securities.
4. invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may may invest in the
securities of companies that invest in or sponsor those programs.
5. make investments for the purpose of exercising control or
management.
6. invest in securities of another investment company except as
permitted by Section 12(d)(1) of the 1940 Act or as part of a
merger, consolidation, or acquisition of substantially all of the
assets.
7. purchase or retain securities of any issuer if, to the knowledge
of the Fund, any of the Fund's officers or Trustees or any officer
or director of Strategy Advisers, BlackRock or MMC individually
owns more than 1/2 of 1% of the outstanding securities of the
issuer and together they own beneficially more than 5% of the
securities.

All of the foregoing restrictions stated in terms of percentages will
apply at the time an investment is made; a subsequent increase or
decrease in the percentage that may result from changes in values or net
assets will not result in a violation of the restriction.

PORTFOLIO TRANSACTIONS

Decisions to buy and sell securities for the Fund will be made by
BlackRock, subject to the overall review of the Fund's Board of
Trustees. Allocation of transactions on behalf of the Fund, including
their frequency, to various dealers will be determined by BlackRock in
its best judgment and in a manner deemed fair and reasonable to the
Fund's shareholders. The primary considerations of BlackRock in
allocating transactions will be availability of the desired security and
the prompt execution of orders in an effective manner at the most
favorable prices. Subject to these considerations, dealers that provide
supplemental investment research and statistical or other services to
BlackRock may receive orders for portfolio transactions by the Fund.
Information so received is in addition to, and not in lieu of, services
required to be performed by Strategy Advisers or BlackRock, and the fees
of Strategy Advisers and BlackRock are not reduced as a consequence of
their receipt of the supplemental information. The information may be
useful to Strategy Advisers and BlackRock in serving both the Fund and
other clients, and conversely, supplemental information obtained by the
placement of business of other clients may be useful to Strategy
Advisers and BlackRock in carrying out their obligations to the Fund.

For the fiscal year ended May 31, 1998, the Fund incurred no brokerage
commissions.

The Fund will not purchase securities, including U.S. government
securities, during the existence of any underwriting or selling group
relating to the offering of the securities, of which Smith Barney is a
member, except to the extent permitted by rules or exemptions adopted by
the SEC or interpretations of the staff of the SEC. Under certain
circumstances, the Fund may be at a disadvantage because of this
limitation in comparison to other funds that have similar investment
objectives but that are not subject to a similar limitation.

PORTFOLIO TURNOVER

Under certain market conditions, if the Fund is engaged in options
transactions it may experience increased portfolio turnover as a result
of its investment strategies. For instance, the exercise of a
substantial number of options written by the 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 high turnover rate (i.e., in excess of
100%). The Fund's portfolio turnover rate is calculated by dividing the
lesser of purchases or sales of its portfolio securities for one 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.

For the fiscal years ended May 31, 1996, 1997 and 1998, the Fund's
portfolio turnover rate was 273%, 288% and 242%, respectively.

PURCHASE OF SHARES

Determination of Public Offering Price. Shares of the Fund are offered
to the public on a continuous basis. The public offering price per
Class A share of the Fund is equal to the net asset value per share next
determined. Class B shares are offered for exchange with Class B shares
of other funds in the Smith Barney Group of Mutual Funds. Class B
shares are subject to the contingent deferred sales charge ("CDSC"), if
any, of the shares with which the exchange is made. Class I shares are
available only to investors meeting an initial investment minimum of
$100,000 and are sold at net asset value with no initial sales charge or
CDSC. See the Prospectus for detailed information under the caption
"Purchase of Shares."

IRA AND OTHER PROTOTYPE RETIREMENT PLANS

Copies of the following plans with custody or trust agreements have been
approved by the Internal Revenue Service and are available from the Fund
or Smith Barney; investors should consult with their own tax or
retirement planning advisors prior to the establishment of a plan.

IRA, Rollover IRA and Simplified Employee Pension - IRA. The Small
Business Job Protection Act of 1996 changed the eligibility requirements
for participants in Individual Retirement Accounts ("IRAs"). If you or
your spouse have earned income, each of you may establish an IRA and make
maximum annual contributions equal to the lesser of earned income or
$2,000. As a result of this legislation, married couples where one
spouse is non-working may contribute a total of $4,000 annually to their
IRAs.

The Taxpayer Relief Act of 1997 changed the requirements for determining
whether or not you are eligible to make a deductible IRA contribution.
Under the new rules effective January 1, 1998, if you are considered an
active participant in an employer-sponsored retirement plan, you may
still be eligible for a full or partial deduction depending upon your
combined adjusted gross income ("AGI"). For married couples filing
jointly, a full deduction is permitted if your combined AGI is $50,000 or
less ($30,000 for unmarried individuals); a partial deduction will be
allowed when AGI is between $50,000-$60,000 ($30,000-$40,000 for an
unmarried individual); and no deduction when AGI is $60,000 ($40,000 for
an unmarried individual). However, if you are married and your spouse is
covered by an employer-sponsored retirement plan, but you are not, you
will be eligible for a full deduction if your combined AGI is $150,000 or
less. A partial deduction is permitted if your combined AGI is between
$150,000-$160,000 and no deduction is permitted after $160,000.

A Rollover IRA is available to defer taxes on lump sum payments and other
qualifying rollover amounts (no maximum) received from another retirement
plan.

An employer who has established a Simplified Employee Pension - IRA
("SEP-IRA") on behalf of eligible employees may make a maximum annual
contribution to each participant's account of 15% (up to $24,000) of each
participant's compensation. Compensation is capped at $160,000 for 1998.

Paired Defined Contribution Prototype. Corporations (including
Subchapter S corporations) and non-corporate entities may purchase
shares of the Fund through the Smith Barney Prototype Paired Defined
Contribution Plan. The prototype permits adoption of profit-sharing
provisions, money purchase pension provisions, or both, to provide
benefits for eligible employees and their beneficiaries. The prototype
provides for a maximum annual tax deductible contribution on behalf of
each Participant of up to 25% of compensation, but not to exceed $30,000
(provided that a money purchase pension plan or both a profit-sharing
plan and a money purchase pension plan are adopted thereunder).

REDEMPTION OF SHARES

Detailed information on how to redeem shares of the Fund is included in
the Prospectus. The right of redemption of shares of the Fund may be
suspended, or the date of payment postponed (a) for any periods during
which the NYSE is closed (other than for customary weekend and holiday
closings), (b) when trading in the markets the Fund normally utilizes is
restricted, or an emergency, as defined by the rules and regulations of
the SEC, exists making disposal of the Fund's investments or
determination of net asset value not reasonably practicable or (c) for
any other periods as the SEC by order may permit for the protection of
the Fund's shareholders.

Distributions In Kind. If the Board of Trustees determines that it
could be detrimental to the best interests of the remaining shareholders
of the Fund to make a redemption payment wholly in cash, the Fund may
pay, in accordance with rules adopted by the SEC, any portion of a
redemption in excess of the lesser of $250,000 or 1% of the Fund's net
assets by a distribution in kind of portfolio securities in lieu of
cash. Portfolio securities issued in a distribution in kind will be
readily marketable, although shareholders receiving distributions in
kind may incur brokerage commissions when subsequently disposing of
these securities.

Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan (the
"Withdrawal Plan") is available to a shareholder of any Fund who owns
shares of the Fund with a value of at least $10,000 and who wishes 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 the Fund as may be necessary to cover the stipulated
withdrawal payment. Any applicable CDSC 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. (With
respect to Withdrawal Plans in effect prior to November 7, 1994, any
applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month of the value of a shareholder's shares at the time the
Withdrawal Plan commences.) To the extent that withdrawals exceed
dividends, distributions and appreciation of a shareholder's investment
in the Fund, continued withdrawal payments will reduce the shareholder's
investment, and may 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 he or she is
participating in the Withdrawal Plan, purchases by such shareholders in
amounts of less than $5,000 ordinarily will not be permitted.

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

DISTRIBUTOR

Smith Barney currently serves as the Fund's distributor on a best
efforts basis pursuant to a written agreement (the "Distribution
Agreement") dated July 30, 1993. For the fiscal years ending May 31,
1997 and 1998, Smith Barney received $20,000 and approximately $7,000,
respectively, in CDSCs on the redemption of the Fund's Class B (and
previous Class C shares).

Smith Barney forwards investors' funds for the purchase of shares three
business days after the placement of purchase orders (the "settlement
date"). When payment is made by the investor before 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 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 Smith Barney money market fund. If the investor
instructs Smith Barney to invest the funds in a Smith Barney money
market fund, the amount of the investment will be included as part of
the average daily net assets of both the Fund and the money market fund,
and affiliates of Smith Barney which serve the funds in an investment
advisory capacity will benefit from the fact that they are receiving
investment management fees from both such investment companies, computed
on the basis of their average daily net assets. The Fund's Board of
Trustees has been advised of the benefits to Smith Barney resulting from
three-day settlement procedures and will take such benefits into
consideration when reviewing the Advisory and Distribution Agreements
for continuance.

Distribution Arrangements. Shares of the Fund are distributed on a best
efforts basis by the Distributor pursuant to the Distribution Agreement.
To compensate Smith Barney for the services it provides and for the
expense it bears under the Distribution Agreement, the Fund has adopted
a services and distribution plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, the Fund pays Smith Barney a
service fee, accrued daily and paid monthly, calculated at the annual
rate of 0.25% of the value of the Fund's average daily net assets
attributable to Class A, Class B and Class I shares. In addition, Smith
Barney is also paid an annual distribution fee with respect to Class A
and Class B shares at the rate of 0.50% of the value of the average
daily net assets attributable to each respective class of shares. For
the fiscal years ended May 31, 1996, 1997 and 1998, the Fund incurred
service fees of $440,521, $362,239, and $289,980 respectively. For the
fiscal years ended May 31, 1996, 1997 and 1998, the Fund incurred
distribution fees of $881,043, $739,312 and $579,959, respectively,
before the deduction of the maximum contingent deferred sales charge.

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 Trustees who are not interested persons of
the Fund and who have no direct or indirect financial interest in the
operation of the Plan or in the Distribution Agreement (the "Independent
Trustees"). The Plan may not be amended to increase the amount of the
fees without shareholder approval, and all material amendments of the
Plan also must be approved by the Trustees and the Independent Trustees
in the manner described above. The Plan may be terminated at any time
with respect to a Class, without penalty, by vote of a majority of the
Independent Trustees or by a vote of a majority of the outstanding
voting securities of such Class of the Fund (as defined in the 1940
Act). Pursuant to the Plan, Smith Barney 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

As noted in the Prospectus, the net asset value of shares of each Class
will not be calculated on certain holidays. In carrying out valuation
policies adopted by the Fund's Board of Trustees, MMC, as administrator,
may consult with an independent pricing service (the "Pricing Service")
retained by the Fund. The procedures of the Pricing Service are
reviewed periodically by the officers of the Fund under the general
supervision and responsibility of the Board of Trustees.

EXCHANGE PRIVILEGE

Class A and Class B shares of the Fund may be exchanged for shares of
the respective Class of many of the funds of the Smith Barney Mutual
Funds, as indicated in the Prospectus, to the extent such shares are
offered for sale in the shareholder's state of residence. Class I
shares do not have exchange privileges.

Except as noted below, shareholders of any of the Smith Barney Mutual
Funds may exchange all or part of their shares for shares of the same
class of other Smith Barney Mutual Funds, as listed in the Prospectus,
on the basis of relative net asset value per share at the time of
exchange, as follows:

A. Class A shares of any fund purchased with a sales charge may be
exchanged for Class A shares of any of the other funds. Class A shares
of any fund sold without a sales charge may be exchanged for Class A
shares of any of the other funds, but any applicable sales charge will
apply.

B. Class B shares of any fund may be exchanged without a sales charge.
Class B shares of the Fund exchanged for Class B shares of another fund
will be subject to the higher applicable CDSC of the two funds and, for
purposes of calculating CDSC rates and conversion periods, will be
deemed to have been held since the date the shares being exchanged were
purchased.

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 resident 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 any Smith Barney
Financial Consultant.

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

PERFORMANCE DATA

From time to time, the Fund may quote the yield or total return of a
Class in advertisements or in reports and other communications to
shareholders. To the extent any advertisement or sales literature of
the Fund describes the expenses or performance of a Class, it will also
disclose such information for the other Classes.

Yield. The 30-day yield figure of each Class described in the
Prospectus is calculated according to a formula prescribed by the SEC,
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
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 the 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 Fund's yield for the 30-day period ended May 31, 1998 was 5.03%,
4.89% and 5.53% with respect to its Class A, Class B and Class I shares,
respectively.

Investors should recognize that in periods of declining interest rates,
yield will tend to be somewhat higher than prevailing market rates and,
in periods of rising interest rates, will tend to be somewhat lower. In
addition, when interest rates are falling, monies received by the Fund
from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of its portfolio of
securities, thereby reducing the current yield of the Classes. In
periods of rising interest rates the opposite result can be expected to
occur.

Average Annual Total Return. The "average annual total return" of a
Class described in the Prospectus is computed according to a formula
prescribed by the SEC, 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 a 1-, 5-or 10-year
period at the end of a 1-, 5-or 10-year period (or
fractional portion thereof), assuming reinvestment of all
dividends and distributions.

The ERV assumes complete redemption of the hypothetical investment at
the end of the measuring period.

Over the life of the Fund, the average annual returns for Class A, Class
B and Class I shares were 4.82%, 4.87% and 6.52% respectively, without
deduction of any CDSC.

Aggregate Total Return. The "aggregate total return" of a Class
described in the Prospectus represents the cumulative change in the
value of an investment in a Class for the specified period and is
computed by the following formula:

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

The ERV assumes complete redemption of the hypothetical investment at
the end of the measuring period.

Net investment income changes in response to fluctuations in interest
rates and the expenses of a Class. Consequently, the given performance
quotations should not be considered as representative of the Class'
performance for any specified period in the future.

For the fiscal year ended May 31, 1998, the Fund's total returns for
Class A, Class B and Class I shares were 5.57%, 5.56% and 6.12%
respectively, without deduction of any CDSC. Over the life of the Fund,
the aggregate total returns for Class A, Class B and Class I shares were
32.28%, 30.30% and 7.39%, respectively, without deduction of any CDSC.

A Class' performance will vary from time to time depending upon market
conditions, the composition of the Fund's portfolio and its operating
expenses and the expenses attributable to a particular Class.
Consequently, any given performance quotation should not be considered
representative of a Class' performance for any specified period in the
future. In addition, because performance will fluctuate, 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 the performance of a Class with
that of other mutual funds or classes of other mutual funds should give
consideration to the quality and maturity of the portfolio securities of
the funds or classes.

TAXES

The following is a summary of selected Federal income tax considerations
that may affect the Fund and its shareholders. The 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 the Fund.

The Fund has qualified and will seek to qualify each year as a
"regulated investment company" under the Internal Revenue Code of 1986,
as amended. Provided the Fund (a) is a regulated investment company and
(b) distributes to its shareholders at least 90% of its taxable net
investment income (including, for this purpose, its net realized short-
term capital gains), it will not be liable for Federal income taxes to
the extent that its taxable net investment income and its net realized
long-term and short-term capital gains, if any, are distributed to its
shareholders. As a general rule, the Fund's gain or loss on a sale or
exchange of an investment will be a long-term capital gain or loss if it
has held the investment for more than one year and will be a short-term
capital gain or loss if the Fund has held the investment for one year or
less. In addition, as a general rule, a shareholder's gain or loss on a
sale or redemption of shares of the Fund will be a long-term capital
gain or loss if the shareholder has held his or her Fund shares for more
than one year and will be a short-term capital gain or loss if he or she
has held his or her Fund shares for one year or less. If a shareholder
receives a long-term capital gain distribution and sells his stock when
it has been held for six months or less, a loss on the sale will be
long-term. Shareholders of the Fund will receive, as more fully
described in the Prospectus, an annual statement as to the income tax
status of his or her dividends and distributions for the prior calendar
year, including any eligibility of long-term capital gains dividends for
a reduced tax rate. Each shareholder will also receive, if appropriate,
various written notices after the close of the Fund's prior taxable year
as to the Federal income tax status of the Fund during the Fund's prior
taxable year. Investors considering buying shares of the Fund on or
just prior to the record date for a taxable dividend or capital gain
distribution should be aware that the amount of the forthcoming dividend
or distribution payment will be a taxable dividend or distribution
payment.

If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to
certify that he or she has provided a correct taxpayer identification
number and that the shareholder is not subject to "backup withholding,"
then the shareholder may be subject to a 31% "backup withholding" tax
with respect to (a) taxable dividends and distributions and (b) the
proceeds of any redemptions of shares of the Fund. 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 taxpayer's regular Federal income tax liability. The
discussion above is only a summary of certain tax considerations
generally affecting the Fund and its shareholders, and is not intended
to be a substitute for careful tax planning. Shareholders are urged to
consult their tax advisors with specific reference to their own tax
situations, including their state and local tax liabilities.

CUSTODIAN AND TRANSFER AGENT

PNC Bank, located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania, serves as the custodian of the Fund. The assets of the
Fund are held under bank custodianship in accordance with the 1940 Act.
Under its custody agreement with the Fund, PNC Bank is authorized to
establish separate accounts and appoint securities depositories as sub-
custodians of assets owned by the Fund. For its custody services, PNC
Bank receives monthly fees charged to the Fund based upon the month-end,
aggregate net asset value of the Fund plus certain charges for
securities transactions. PNC Bank is also reimbursed by the Fund for
out-of-pocket expenses, including the costs of any sub-custodians.

First Data, located at Exchange Place, Boston, Massachusetts 02109,
serves as the Fund's transfer agent. For its services as transfer
agent, First Data receives fees charged to the Fund based upon the net
asset value of the Fund during the year. First Data is also reimbursed
by the Fund for out-of-pocket expenses.

ORGANIZATION OF THE FUND

The Fund was organized as an unincorporated business trust under the
laws of the Commonwealth of Massachusetts and pursuant to an Amended and
Restated Master Trust Agreement dated November 5, 1992, as amended from
time to time (the "Trust Agreement"). The Fund commenced operations on
June 22, 1992, and on July 30, 1993 the Fund changed its name to Smith
Barney Shearson Adjustable Rate Government Income Fund. On November 7,
1994 the Fund changed its name to its current name.

In the interest of economy and convenience, certificates representing
shares in the Fund are not physically issued except upon specific
request made by a shareholder to First Data, the Fund's transfer agent.
First Data maintains a record of each shareholder's ownership of Fund
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 Trustees. Shares are transferable but have no
preemptive, conversion or subscription rights.

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

FINANCIAL STATEMENTS

The Fund's Annual Report for the fiscal year ended May 31, 1998 is
incorporated herein by reference in its entirety.

Smith Barney
Adjustable Rate
Government Income
Fund

Statement of
Additional Information
September 25, 1998

Smith Barney
Adjustable Rate Government Income Fund
388 Greenwich Street
New York, NY 10013
...................................Fund ........................
Salomon SMITH BARNEY
A Member of Travelers
Group

u:\legal\funds\arms\1998\secdocs\sai.998 12

PART C - FORM N-1A

Item 24. Financial Statements and Exhibits

(a) Financial Statements Location
In:
Part A
Annual
Report

Investment Portfolios -- *

Statement of Assets and Liabilities -- *

Statements of Operations -- *

Statements of Changes in Net Assets -- *

Notes to Financial Statements -- *

Supplementary Information -- *

* The Registrant's Annual Report for the fiscal year ended May 31,
1998 is incorporated by reference to the N-30D filed on August 27,
1998 as Accession # 91155-98-000521.

All other statements and schedules are omitted because they are not
applicable or the required information will be shown in the
financial statements or notes thereto.

(b) Exhibits

(1)(a) First Amended and Restated Master Trust Agreement dated
November 5, 1992 is incorporated by reference to Post-Effective
Amendment No. 5 to the Registration Statement filed September 28,
1993
("Post Effective Amendment No. 5").

(b) Amendment No. 1 to First Amended and Restated Master Trust
Agreement is incorporated by reference to Post-Effective Amendment
No. 5.

(c) Amendment No. 2 to First Amended and Restated Master Trust
Agreement is incorporated by reference to Post-Effective Amendment
No. 9 to the Registration Statement filed October 1, 1995.

(d) Amendment No. 3 to First Amended and Restated Master
Trust Agreement is incorporated by reference to Post-Effective
Amendment No. 12 to the Registration Statement filed on March 14,
1997 ("Post-Effective Amendment No. 12")

(e) Amendment No. 4 to First Amended and Restated Master
Trust Agreement is incorporated by reference to Post-Effective
Amendment No. 12

(2) Registrant's By-Laws are incorporated by reference to Pre-
Effective Amendment No. 1 to the Registration Statement filed June
6, 1992 ("Pre-Effective Amendment No. 1").

(3) Not Applicable.

(4) Registrant's form of share certificate for Class A, B, and I
shares is incorporated by reference to Post-Effective Amendment No.
2 to the Registration Statement filed August 14, 1992 ("Post-
Effective Amendment No. 2").

(5)(a) Advisory Agreement between the Registrant and Smith Barney
Strategy Advisers Inc. (formerly, Smith Barney Shearson Strategy
Advisers Inc.) is incorporated by reference to Post-Effective
Amendment
No. 5.

(b) Form of Sub-Advisory Agreement with
BlackRock Financial Management Inc. is incorporated by reference to
definitive Proxy Materials filed by Registrant on January 12, 1995.

(c) Administration Agreement dated June 1, 1994 between the
Registrant and Mutual Mangement Corp. (formerly Smith Barney Mutual Funds
Management Inc. and also formerly
Smith, Barney Advisers, Inc.) is incorporated by reference to Post-
Effective Amendment No. 6 to the Registration Statement as filed
July 29, 1994 ("Post-Effective Amendment No. 6")

(6) Distribution Agreement between the Registrant and Smith Barney
Inc. (formerly, Smith Barney Shearson Inc.) dated July 30, 1993 is
incorporated by reference to Post-Effective Amendment No. 5.

(7) Not Applicable.

(8) Custody Agreement between the Registrant and PNC Bank, National
Association is incorporated by reference to Post-Effective Amendment
No. 9.

(9) Transfer Agency Agreement between the Registrant and First Data
Investor Services Group, Inc. (formerly The Shareholder Services
Group, Inc.) is incorporated by reference to Pre-Effective Amendment
No. 1.

(10) Opinion of Counsel is incorporated by reference to Pre-
Effective Amendment No. 1.

(11)(a) Not Applicable.
(b) Consent of Independent Accountants is filed herewith.

(12) Not Applicable.

(13) Purchase Agreement between the Registrant and Shearson Lehman
Brothers Inc. is incorporated by reference to Pre-Effective
Amendment No. 1.

(14) Not Applicable.

(15) Amended Services and Distribution Plan pursuant to Rule 12b-1
dated February 25, 1997 is incorporated by reference to Post-
Effective Amendment No. 12

(16) Not Applicable.

(17) Financial Data Statement is filed herewith.

(18) Amended Plan pursuant to Rule 18f-3 under the Investment
Company Act of 1940 is filed herewith.

Item 25. Persons Controlled by or Under Common Control with
Registrant

None.

Item 26. Number of Holders of Securities

(1) (2)
Number of Record
Title of Class Holders by Class as of
[September 23, 1998]

Shares representing Class A- 3509
beneficial interests,
par value $.001 per Class B - 126
share

Class I - 25

Item 27. Indemnification

The response to this item is incorporated by reference to Pre-
Effective Amendment No. 1.

Item 28(a). Business and Other Connections of Investment Adviser

See the material under the caption "Management of the Fund"
included in Part A (Prospectus) of this Registration Statement and
the material appearing under the caption "Management of the Fund"
included in Part B (Statement of Additional Information) of this
Registration Statement.

Investment Adviser - Smith Barney Strategy Advisers Inc.

Smith Barney Strategy Advisers Inc. ("SBSA") was incorporated on
October 22, 1986 under the laws of the State of Delaware. SBSA is a
wholly owned subsidiary of Mutual Management Corp.
("MMC"),which was incorporated under the laws of the State of
Delaware in 1968. MMC is a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc., which in turn is a wholly owned subsidiary of
Travelers Group Inc. ("Travelers"). MMC is registered as an
investment adviser under the Investment
Advisers Act of 1940 (the "Advisers Act").

The list required by this Item 28 of officers and Trustees of MMC,
together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such
officers and trustees during the past two years, is incorporated by
reference to Schedules A and D of FORM ADV
filed by MMC pursuant to the Advisers Act (SEC File No. 801-8314).

Item 28 (b). Business and Other Connections of Investment Adviser.

Sub-Investment Adviser -- BlackRock Financial Management L.P.

BlackRock Financial Management Inc. ("BlackRock") is a Delaware
corporation and is a registered investment adviser engaged in the
investment advisory business. Information as to BlackRock's officers
and
directors is incorporated by reference to the Form ADV filed by
BlackRock pursuant to the Advisers Act (SEC file No. 801-32183).

Item 29. Principal Underwriters

(a) Salomon Smith Barney Inc. ("Salomon Smith Barney") currently
acts as distributor for
Concert Investment Series
Consulting Group Capital Markets Funds
Global Horizons Investment Series (Cayman Islands)
Global Horizons Investment Series (Ireland)
Greenwich Street California Municipal Fund Inc.
Greenwich Street Municipal Fund Inc.
Greenwich Street Series Fund
High Income Opportunity Fund Inc.
The Italy Fund Inc.
Managed High Income Portfolio Inc.
Managed Municipals Portfolio II Inc.
Managed Municipals Portfolio Inc.
Municipal High Income Fund Inc.
Puerto Rico Daily Liquidity Fund Inc.
Puerto Rico Equity Index & Income Fund, Inc.
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Concert Allocation Series Inc.
Smith Barney Equity Funds
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.
Smith Barney Global Enhanced Income Fund
Smith Barney Income Funds
Smith Barney Institutional Cash Management Fund, Inc.
Smith Barney Intermediate Municipal Fund, Inc.
Smith Barney Investment Funds Inc.
Smith Barney Investment Trust
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc.
Smith Barney Muni Funds
Smith Barney Municipal Fund, Inc.
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund Inc.
Smith Barney Principal Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust
Smith Barney Variable Account Funds
Smith Barney World Funds, Inc.
Smith Barney Worldwide Special Fund N.V. (Netherlands Antilles)
Travelers Series Fund Inc.
The USA High Yield Fund N.V. (Netherlands Antilles)
Worldwide Securities Limited (Bermuda)
Zenix Income Fund Inc.
and various series of unit investment trusts.

Salomon Smith Barney is a wholly owned subsidiary of Holdings, which
in turn is a wholly owned subsidiary of Travelers. The information
required by this Item 29 with respect to each officer, director and
partner of Salomon Smith Barney is incorporated by reference to
Schedule A of Form BD filed by Salomon Smith Barney pursuant to the
Securities Exchange Act of 1934 (SEC File No. 812-8510).

Item 30. Location of Accounts and Records

(1) Smith Barney Adjustable Rate Government Income Fund
Smith Barney Strategy Advisers Inc.
Mutual Management Corp.
388 Greenwich Street, 22nd Floor
New York, New York 10013
.
(2) BlackRock Financial Management Inc.
345 Park Avenue, 31st Floor
New York, New York 10154

(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania

(4) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109

Item 31. Management Services

Not Applicable.

Item 32. Undertakings

(a) Registrant undertakes to call a meeting of shareholders for
the purpose of voting upon the question of removal of a trustee or
trustees of Registrant when requested in writing to do so by the
holders of at least 10% of Registrant's outstanding shares and, in
connection with the meeting, to comply with the provisions of
Section 16(c) of the 1940 Act relating to communications with the
shareholders of certain
common-law trusts.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the
Registrant, SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND, has
duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized,
all in the City of New York, State of New York on the 25th day of
September, 1998. Further, the Registrant certifies that this
Amendment No. 14 is being filed solely for the purposes specified in
Rule 485(b) and no material event has occurred since
September 25, 1997 which would render the Registrant ineligible to
file under such Rule.

SMITH BARNEY ADJUSTABLE RATE
GOVERNMENT INCOME FUND

By: /s/ Heath B. McLendon
Heath B. McLendon, Chief Executive Officer

WITNESS our hands on the date set forth below.

Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment to the Registration Statement and the above
Power of Attorney has been signed below by the following persons in
the capacities and on the dates indicated.

Signature Title Date

/s/ Heath B. McLendon
Heath B. McLendon Chairman of the Board
09/25/98
Chief Executive Officer
and Trustee

/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer 09/25/98
Chief Financial Officer
/s/ Allan J. Bloostein*
Allan J. Bloostein Trustee
09/25/98

/s/ Martin Brody*
Martin Brody Trustee
09/25/98

/s/ Dwight B. Crane*
Dwight B. Crane Trustee
09/25/98

/s/ Robert A. Frankel*
Robert A. Frankel Trustee
09/25/98

/s/ William R. Hutchinson *
William R. Hutchinson Trustee
09/25/98

* Signed by Heath McLendon, their duly authorized attorney-in-fact,
pursuant to power of attorney filed with Post Effective No 12.

Exhibit Index

11(b) Consent of Independent Accountants

(17) Financial Data Statement

(18) Amended Plan pursuant to Rule 18f-3 under the Investment
Company Act of 1940

Independent Auditors' Consent

To the Shareholders and Board of Directors of
Adjustable Rate Government Income Fund:

We consent to the use of our report dated June 12, 1998 for Adjustable
Rate Government Income Fund, incorporated herein by reference and to
the references to our Firm under the headings "Financial Highlights"
in the Prospectus and "Counsel and Auditors" in the Statement of
Additional Information.

KPMG Peat Marwick LLP

New York, New York
September 21, 1998

Rule 18f-3 (d) Multiple Class Plan for Smith Barney Mutual Funds

Introduction

This plan (the "Plan") is adopted pursuant to Rule 18f-3 (d) of
the Investment Company Act of 1940, as amended (the "1940 Act").
The purpose of the Plan is to restate the existing arrangements
previously approved by the Boards of Directors and Trustees of
certain of the open-end investment companies set forth on Schedule
A (the "Funds" and each a "Fund") distributed by Smith Barney Inc.
("Smith Barney") under the Funds' existing order of exemption
(Investment Company Act Release Nos. 20042 (January 28,
1994) (notice) and 20090 (February 23, 1994)). Shares of the
Funds are distributed pursuant to a system (the "Multiple Class
System") in which each class of shares (a "Class") of a Fund
represents a pro rata interest in the same portfolio of
investments of the Fund and differs only to the extent outlined
below.

I. Distribution Arrangements and Service Fees

One or more Classes of shares of the Funds are offered for
purchase by investors with the following sales load structure. In
addition, pursuant to Rule 12b-1 under the 1940 Act (the "Rule"),
the Funds have each adopted a plan (the "Services and Distribution
Plan") under which shares of the Classes are subject to the
services and distribution fees described below.

1. Class A Shares

Class A shares are offered with a front-end sales load and under
the Services and Distribution Plan are subject to a service fee of
up to 0.25% of average daily net assets. In addition, the Funds
are permitted to assess a contingent deferred sales charge
("CDSC") on certain redemptions of Class A shares sold pursuant to
a complete waiver of front-end sales loads applicable to large
purchases, if the shares are redeemed within one year of the date
of purchase. This waiver applies to sales of Class A shares where
the amount of purchase is equal to or exceeds $500,000 although
this amount may be changed in the future.

2. Class B Shares

Class B shares are offered without a front-end sales load, but are
subject to a five-year declining CDSC and under the Services and
Distribution Plan are subject to a service fee at an annual rate
of up to 0.25% of average daily net assets and a distribution fee
at an annual rate of up to 0.75% of average daily net assets.

3. Class D Shares

Class D shares are offered without a front-end sales load, CDSC,
service fee or distribution fee.

4. Class L Shares

Class L shares are offered with a front-end load, are subject to a
one-year CDSC and under the Services and Distribution Plan are
subject to a service fee at an annual rate of up to 0.25% of
average daily net assets and a distribution fee at an annual rate
of up to 0.75% of average daily net assets. Unlike Class B
shares, Class L shares do not have the conversion feature as
discussed below and accordingly, these shares are subject to a
distribution fee for an indefinite period of time. The Funds
reserve the right to impose these fees at such higher rates as may
be determined.

5. Class I Shares

Class I shares are offered without a front-end sales load, but are
subject under the Services and Distribution Plan to a service fee
at an annual rate of up to 0.25% of average daily net assets.

6. Class O Shares

Class O shares are offered without a front-end load, but are
subject to a one-year CDSC and under the Services and Distribution
Plan are subject to a service fee at an annual rate of up to 0.25%
of average daily net assets and a distribution fee at an annual
rate of up to 0.50% of average daily net assets. Unlike Class B
shares, Class O shares do not have the conversion feature as
discussed below and accordingly, these shares are subject to a
distribution fee for an indefinite period of time. The Funds
reserve the right to impose these fees at such higher rates as may
be determined.

Effective June 28, 1999, Class O shares will be offered with a
front-end load and will continue to be subject to a one year CDSC,
a service fee at an annual rate of up to 0.25% of average daily
net assets and a distribution fee at an annual rate of up to 0.50%
of average daily net assets.

7. Class Y Shares

Class Y shares are offered without imposition of either a sales
charge or a service or distribution fee for investments where the
amount of purchase is equal to or exceeds a specific amount as
specified in each Fund's prospectus.

8. Class Z Shares

Class Z shares are offered without imposition of either a sales
charge or a service or distribution fee for purchase (i) by
employee benefit and retirement plans of Smith Barney and its
affiliates, (ii) by certain unit investment trusts sponsored by
Smith Barney and its affiliates, and (iii) although not currently
authorized by the governing boards of the Funds, when and if
authorized, (x) by employees of Smith Barney and its affiliates
and (y) by directors, general partners or trustees of any
investment company for which Smith Barney serves as a distributor
and, for each of (x) and (y), their spouses and minor children.

9. Additional Classes of Shares

The Boards of Directors and Trustees of the Funds have the
authority to create additional classes, or change existing
Classes, from time to time, in accordance with Rule 18f-3 of the
1940 Act.

II. Expense Allocations

Under the Multiple Class System, all expenses incurred by a Fund
are allocated among the various Classes of shares based on the net
assets of the Fund attributable to each Class, except that each
Class's net asset value and expenses reflect the expenses
associated with that Class under the Fund's Services and
Distribution Plan, including any costs associated with obtaining
shareholder approval of the Services and Distribution Plan (or an
amendment thereto) and any expenses specific to that Class. Such
expenses are limited to the following:

(i) transfer agency fees as identified by the transfer
agent as being attributable to a specific Class;

(ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses
and proxies to current shareholders;

(iii) Blue Sky registration fees incurred by a Class of
shares;

(iv) Securities and Exchange Commission registration fees
incurred by a Class of shares;

(v) the expense of administrative personnel and services
as required to support the shareholders of a specific Class;

(vi) litigation or other legal expenses relating solely to
one Class of shares; and

(vii) fees of members of the governing boards of the funds
incurred as a result of issues relating to one Class of shares.

Pursuant to the Multiple Class System, expenses of a Fund
allocated to a particular Class of shares of that Fund are borne
on a pro rata basis by each outstanding share of that Class.

III. Conversion Rights of Class B Shares

All Class B shares of each Fund will automatically convert to
Class A shares after a certain holding period, expected to be, in
most cases, approximately eight years but may be shorter. Upon
the expiration of the holding period, Class B shares (except those
purchases through the reinvestment of dividends and other
distributions paid in respect of Class B shares) will
automatically convert to Class A shares of the Fund at the
relative net asset value of each of the Classes, and will, as a
result, thereafter be subject to the lower fee under the Services
and Distribution Plan. For purposes of calculating the holding
period required for conversion, newly created Class B shares
issued after the date of implementation of the Multiple Class
System are deemed to have been issued on (i) the date on which the
issuance of the Class B shares occurred or (ii) for Class B shares
obtained through an exchange, or a series of exchanges, the date
on which the issuance of the original Class B shares occurred.

Shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares are also Class B
shares. However, for purposes of conversion to Class A, all Class
B shares in a shareholder's Fund account that were purchased
through the reinvestment of dividends and other distributions paid
in respect of Class B shares (and that have not converted to Class
A shares as provided in the following sentence) are considered to
be held in a separate sub-account. Each time any Class B shares
in the shareholder's Fund account (other than those in the sub-
account referred to in the preceding
sentence) convert to Class A, a pro rata portion of the Class B
shares then in the sub-account also converts to Class A. The
portion is determined by the ratio that the shareholder's Class B
shares converting to Class A bears to the shareholder's total
Class B shares not acquired through dividends and distributions.

The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling of the Internal Revenue
Service that payment of different dividends on Class A and Class B
shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Internal Revenue
Code of 1986, as amended (the "Code"), and the continuing
availability of an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event under the
Code. The conversion of Class B shares to Class A shares may be
suspended if this opinion is no longer available, In the event
that conversion of Class B shares does not occur, Class B shares
would continue to be subject to the distribution fee and any
incrementally higher transfer agency costs attending the Class B
shares for an indefinite period.

IV. Exchange Privileges

Shareholders of a Fund may exchange their shares at net asset
value for shares of the same Class in certain other of the Smith
Barney Mutual Funds as set forth in the prospectus for such Fund.
Funds only permit exchanges into shares of money market funds
having a plan under the Rule if, as permitted by paragraph (b) (5)
of Rule 11a-3 under the 1940 Act, either (i) the time period
during which the shares of the money market funds are held is
included in the calculations of the CDSC or (ii) the time period
is not included but the amount of the CDSC is reduced by the
amount of any payments made under a plan adopted pursuant to the
Rule by the money market funds with respects to those shares.
Currently, the Funds include the time period during which shares
of the money market fund are held in the CDSC period. The
exchange privileges applicable to all Classes of shares must
comply with Rule 11a-3 under the 1940 Act.

Smith Barney Sponsored Investment Companies
Operating under Rule 18f-3 - Schedule A
(as of June 30, 1998)

Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund
Smith Barney Concert Allocation Series Inc.
Conservative Portfolio
Balanced Portfolio
Global Portfolio
Growth Portfolio
Income Portfolio
High Growth Portfolio
Smith Barney Equity Funds -
Concert Social Awareness Fund
Smith Barney Large Cap Blend Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -
Large Cap Value Fund
Short-Term High Grade Bond Fund
U.S. Government Securities Fund
Smith Barney Income Funds -
Smith Barney Balanced Fund
Smith Barney Convertible Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Exchange Reserve Fund
Smith Barney High Income Fund
Smith Barney Municipal High Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Total Return Bond Fund
Smith Barney Investment Trust -
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney S&P 500 Index Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Investment Funds Inc. -
Concert Peachtree Growth Fund
Smith Barney Contrarian Fund
Smith Barney Government Securities Fund
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Special Equities Fund

Smith Barney Institutional Cash Management Fund, Inc.
Cash Portfolio
Government Portfolio
Municipal Portfolio
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc. -
Cash Portfolio
Government Portfolio
Retirement Portfolio
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Muni Funds -
California Money Market Portfolio
Florida Portfolio
Georgia Portfolio
Limited Term Portfolio
National Portfolio
New York Portfolio
New York Money Market
Pennsylvania Portfolio
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust -
Smith Barney Telecommunications Income Fund
Smith Barney World Funds, Inc. -
International Equity Portfolio
International Balanced Portfolio
European Portfolio
Pacific Portfolio
Global Government Bond Portfolio
Emerging Markets Portfolio

U:\legal\funds\azmu\1998\secdocs\pea2218f

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<EXPENSES-NET> 1,841,428
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<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 17,994,228
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<INTEREST-EXPENSE> 2,085,603
<GROSS-EXPENSE> 1,841,428
<AVERAGE-NET-ASSETS> 111,993,141
<PER-SHARE-NAV-BEGIN> 9.84
<PER-SHARE-NII> 0.49
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<NET-INVESTMENT-INCOME> 5,848,012
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<NET-CHANGE-FROM-OPS> 6,420,181
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<DISTRIBUTIONS-OF-INCOME> 146,591
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 2,811
<NUMBER-OF-SHARES-SOLD> 1,510,009
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<PER-SHARE-NAV-BEGIN> 9.82
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<DISTRIBUTIONS-OF-GAINS> 0
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