HIGH INCOME OPPORTUNITY FUND INC, POS 8C, 1998-12-17

HIGH INCOME OPPORTUNITY FUND INC
POS 8C, 1998-12-17

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As filed with the Securities and Exchange Commission on December
17, 1998

Securities Act Registration No. 33-66770
Investment Company Act Registration No. 811-7920

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.___
Post-Effective Amendment No. 6

and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 8

High Income Opportunity Fund Inc.
(a Maryland Corporation)
(Exact Name of Registrant as Specified in Charter)

388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)

(800) 331-1710
(Registrant's Telephone Number, including Area Code)

Christina T. Sydor, Secretary
High Income Fund Opportunity Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)

Copies to:
John Baumgardner
Sullivan & Cromwell
125 Broad Street
30th Floor, Room 2704
New York, NY 10004

Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this
Registration Statement.

If any securities being registered on this form will be
offered on a delayed or continuous basis in reliance on Rule 415
under the Securities Act of 1933, other than securities offered in
connection with a dividend reinvestment plan, check the following
box. [ X ]

This Registration Statement relates to the registration of
an indeterminate number of shares solely for market-making
transactions. This Registration Statement relates to shares
previously registered on Form N-2. (Registration No. 33-66770).

It is proposed that this filing will become effective:
[X] when declared effective pursuant to section 8(c).

Registrant amends this Registration Statement under the
Securities Act of 1933, as amended, on such date as may be
necessary to delay its effective date until Registrant files a
further amendment that specifically states that this Registration
Statement will thereafter become effective in accordance with the
provisions of Section 8(a) of the Securities Act of 1933, as
amended, or until the Registration Statement becomes effective on
such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.

HIGH INCOME OPPORTUNITY FUND INC.

Form N-2
Cross Reference Sheet

Part A
Item No. Caption Prospectus Caption

1. Outside Front Cover Outside Front Cover of
Prospectus

2. Inside Front and Outside Inside Front and
Outside Back Cover Page
Back Cover Page of Prospectus

3. Fee Table and Synopsis Prospectus Summary; Fund
Expenses

4. Financial Highlights Financial Highlights

5. Plan of Distribution Prospectus Summary; The
Offering

6. Selling Shareholders Not Applicable

7. Use of Proceeds Use of Proceeds; Investment
Objective and Policies

8. General Description of the Registrant The Fund;
Investment Objective and
Policies; Risk Factors and
Special Considerations;
Investment Practices; Net
Asset Value; Market Discount

9. Management Management of the Fund;
Description of Shares;
Custodian and Transfer
Agent

10. Capital Stock, Long-Term Debt, Taxation; Dividend
and Other Securities Reinvestment Plan;
Description of Shares

11. Defaults and Arrears on Senior Not Applicable
Securities

12. Legal Proceedings Not Applicable

13. Table of Contents of the Statement Further Information
of Additional Information

Part B Statement of Additional
Item No. Information Caption

14. Cover Page Cover Page

15. Table of Contents Cover Page

16. General Information and History The Fund; Description
of Shares
(see Prospectus)

17. Investment Objective and Policies Investment
Objective and Policies;
Investment Restrictions

18. Management Management of the Fund;
Officers and Directors

19. Control Persons and Principal Holders Not Applicable
of Securities

20. Investment Advisory and Other Management of the Fund
Services

21. Brokerage Allocation and Other Portfolio Transactions
Practices

22. Tax Status Taxation

23. Financial Statements Financial Statements

PART A

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Prospectus January 29, 1999
- --------------------------------------------------------------------------------

High Income Opportunity Fund Inc.

Common Stock

Listed on the New York Stock Exchange
Trading symbol--HIO

High Income Opportunity Fund Inc. is a diversified, closed-end management
investment company. The fund's primary investment objective is to seek high
current income. Capital appreciation is a secondary objective. The fund invests
primarily in high-yielding bonds and other fixed income securities that are
below investment grade. These securities are also called junk bonds.

Shares of closed-end funds frequently have market prices that are less than the
net asset value per share. Investing in lower-rated securities involves a
greater risk that you may lose money than investing in investment grade
securities. For more information about these or other risks of investing in the
fund, see "Risk Factors and Special Considerations" on page 10.

The prospectus contains important information about the fund. For your benefit
and protection, please read it before you invest, and keep it on hand for future
referenc.

The statement of additional information (SAI) provides more detailed information
about the fund and is incorporated into this prospectus by reference. The SAI
and shareholder reports can be obtained without charge from your Salomon Smith
Barney Financial Consultant or from the fund by calling 1-800-331-1710 or
writing to the fund at 388 Greenwich Street, New York, New York 10013. You can
review the fund's SAI and shareholder reports at the Securities and Exchange
Commission's Public Reference Room in Washington, D.C. The Commission charges a
fee for this service. Information about the Public Reference Room may be
obtained by calling 1-800-SEC-0330. You can get the same information free from
the Commission's Internet web site at www.sec.com

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

SALOMON SMITH BARNEY INC.

1
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Table of Contents
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Prospectus Summary 3
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Fund Expenses 6
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Financial Highlights 7
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The Fund 8
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The Offering 8
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Use of Proceeds 8
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Investment Objectives and Policies 8
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Risk Factors and Special Considerations 10
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Investment Practices 13
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Share Price Data 18
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Taxation 19
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Management of the Fund 22
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Dividends and Distributions 23
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Dividend Reinvestment Plan 24
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Net Asset Value 25
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Market Discount 26
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Description of Shares 27
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Custodian and Transfer Agent 28
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Other Information 28
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NRSRO Ratings (Appendix A) A-1
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2
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Prospectus Summary
- --------------------------------------------------------------------------------

The following is a summary of more complete information appearing later in the
prospectus. You should read the entire prospectus because it contains details
that are not in the summary. Cross references in the summary to headings in the
prospectus will help you locate information.

THE FUND The fund is a diversified, closed-end management investment
company. See "The Fund."

INVESTMENT OBJECTIVES AND PRIMARY INVESTMENTS The fund's primary
investment objective is high current income. Capital appreciation is a secondary
objective. The fund invests primarily, but at least 65% of assets, in
high-yielding corporate debt securities and preferred stocks.

The fund may invest up to 35% of assets in common stock and equity-related
securities, such as options, warrants and rights. The fund invests primarily in
securities of U.S. and foreign companies and governments that are denominated or
quoted in U.S. dollars. The fund may, however, invest up to 20% of assets in
securities of foreign companies and governments that are denominated or quoted
in foreign currencies.

Credit quality Primarily below investment grade. This means that the fixed
income securities in which the fund invests are rated in the lower rating
categories by a rating agency or are of comparable quality. These securities are
also called junk bonds or high yield securities. The fund may not purchase
additional fixed income securities rated by more than one rating agency lower
than B if more than 10% of assets are invested in such securities.

Maturity Under current market conditions, the fund's average
dollar-weighted portfolio maturity is between 5 and 10 years. The fund may,
however, invest in individual fixed income securities of any maturity.

See "Investment Objectives and Policies."

THE OFFERING The fund's shares of common stock trade on the New York Stock
Exchange (NYSE). In addition, Salomon Smith Barney intends to buy and sell the
fund's shares and will make a market in the shares. Salomon Smith Barney is not
obligated to conduct market-making activities and may stop doing so at any time
without notice. See "The Offering" and "Use of Proceeds."

LISTING NYSE.

SYMBOL HIO.

INVESTMENT MANAGER Mutual Management Corp. (MMC) (formerly Smith Barney
Mutual Funds Management Inc.). The manager selects and manages the fund's
investments in accordance with the fund's investment objectives and policies.
The fund pays MMC a fee for its services equal on an annual basis to 1.15% of
the fund's average daily net assets.

3
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Prospectus Summary (continued)
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John C. Bianchi, a vice president of the fund, has been primarily
responsible for the day-to-day management of the fund since 1994, when the fund
commenced operations. Mr. Bianchi is a managing director of Salomon Smith
Barney.

See "Management of the Fund."

RISK FACTORS AND SPECIAL CONSIDERATIONS The value of the securities in the
fund's portfolio fluctuates and the value of your investment in the fund may go
up and down. This means that you could lose money on your investment in the fund
and the fund could perform less well than other similar investments. In
addition, the price of the shares is determined by market prices on the NYSE and
elsewhere, so you may receive a price that is less than net asset value when you
sell your shares. Specific risks associated with an investment in the fund are
described below.

Below investment grade securities. The fund invests primarily in
securities rated below investment grade by a rating agency or considered to be
of comparable quality. Investment in below investment grade securities involves
a substantial risk of loss. These securities are speculative with respect to the
issuer's ability to pay interest and principal.

Compared to investment grade securities, lower-rated securities are more
susceptible to default or decline in market value due to adverse economic and
business developments and their market value tends to be more volatile. Further,
the market for lower-rated securities tends to be less liquid than the market
for investment grade securities.

The fund may invest in securities issued by companies that are in default
on their obligations to pay interest and/or principal. The fund may lose all of
its investment in these securities.

Fixed income securities. In addition to the special risks associated with
investments in lower-rated securities, the fund's investments in fixed income
securities may be affected by any of the following:

o Interest rates rise, causing the value of the fund's investments
generally to decline.

o When interest rates are declining, the issuer of a security
exercises its right to prepay principal earlier than scheduled,
forcing the fund to reinvest in lower yielding securities. This is
known as call or prepayment risk.

o The issuer of a security owned by the fund has its credit rating
downgraded or defaults on its obligation to pay principal and/or
interest.

o The manager's judgment about the attractiveness, value or income
potential of a particular security proves to be incorrect.

o Lower-rated securities fall out of favor with investors, which will
adversely affect their market value and liquidity.

4
<PAGE>

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Prospectus Summary (continued)
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Equity securities. Equity securities have historically had higher returns
but have had significantly more volatile returns than fixed income securities.
The equity securities in the fund's portfolio may decline in value if there is a
general decline in the market of equity securities or an adverse event, such as
an unfavorable earnings report, depresses the market price of a portfolio
investment.

Foreign securities. The market value of foreign securities in the fund's
portfolio may go down because of unfavorable foreign government actions,
political, economic or market instability or the absence of accurate information
about foreign companies. Foreign securities are sometimes less liquid and harder
to value than securities of U.S. issuers. A decline in the value of foreign
currencies relative to the U.S. dollar will reduce the value of securities held
by the fund which are denominated or quoted in those currencies.

Derivatives. The fund may hold securities or use investment techniques
that provide for payments based on or "derived" from the performance of an
underlying asset, index or other economic benchmark.

Even a small investment in derivative contracts can have a big impact on
the fund's interest rate or foreign currency exchange rate exposure. Therefore,
using derivatives can disproportionately increase losses and reduce
opportunities for gains when interest rates and currency exchange rates are
changing. The fund may not fully benefit from or may lose money on derivatives
if changes in their value do not correspond accurately to changes in the value
of the fund's holdings. The other parties to certain derivative contracts
present the same types of default risk as issuers of fixed income securities.
Derivatives can also make the fund less liquid and harder to value, especially
in declining markets.

Closed-end investment company. The fund is a closed-end investment company
and its shares trade on the NYSE at a price that may be less than its net asset
value.

Certain provisions in the fund's governing documents may limit the ability
of other entities to acquire control of the fund. This could deprive
shareholders of the opportunity to sell their shares at a premium over
prevailing market prices.

See "Risk Factors and Special Considerations" and "Description of Shares."

DIVIDENDS AND DISTRIBUTIONS Any dividends from net investment income
(income other than net realized capital gains) are paid monthly and any
distributions of net realized capital gains are paid annually. Your dividends or
distributions are reinvested in additional fund shares through participation in
the dividend reinvestment plan, unless you elect to receive cash. The number of
shares

5
<PAGE>

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

issued to you by the plan depends on the price of the shares. The price
of the shares and the number of dividend shares received is determined by
the market price. For example:

Market Price of Fund Shares Price of Fund Shares Issued by Plan

Greater than or equal to Shares issued at net asset value or 95%
net asset value of market price, whichever is greater

Less than net asset value Market price

See "Dividends and Distributions" and "Dividend Reinvestment Plan."

CUSTODIAN PNC Bank, National Association (PNC Bank) is the fund's
custodian. See "Custodian and Transfer Agent."

TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT First Data
Investor Services Group, Inc. (First Data) is the fund's transfer agent,
dividend-paying agent and registrar. See "Custodian and Transfer Agent."

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Fund Expenses
- --------------------------------------------------------------------------------

The following table shows the costs the fund pays. As a shareholder, you
indirectly bear these expenses:

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Annual Expenses
(as a percentage of net assets)
Management fees 1.15%
Other expenses 0.03%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.18%
================================================================================

EXAMPLE The following example is intended to help you in understanding the
costs that you will bear directly or indirectly as a shareholder in the fund.
Your actual costs may be higher or lower.

The example assumes:

o you invest $1,000 in the fund for the time periods indicated;

o your investment has a 5% return each year; and

o the fund's operating expenses remain the same as shown in the table
above.

Year One Three Five Ten
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Operating Expenses $12 $37 $65 $143
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This example should not be considered a representation of past or future
expenses or performance. For a more complete description of these costs and
expenses, see "Management of the Fund."

6
<PAGE>

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

The following information for the four-year period ended September 30,
1998 and for the period from October 22, 1993 (commencement of operations) to
September 30, 1994 has been audited in conjunction with the annual audit of the
financial statements of the fund by KPMG LLP, independent auditors. The 1998
financial statements and the independent auditors' report thereon appear in the
September 30, 1998 Annual Report to Shareholders. The following information
should be read in conjunction with the financial statements and related notes
that also appear in the fund's Annual Report, which is incorporated by reference
in this prospectus.

For a share of capital stock outstanding throughout each year:

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994(1)(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.43 $ 11.72 $ 11.48 $ 11.20 $ 12.50
- ---------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 1.08 1.15 1.14 1.14 1.01*
Net realized and unrealized gain (loss) (1.14) 0.68 0.22 0.28 (1.30)
- ---------------------------------------------------------------------------------------------------
Total Income (Loss) from Operations (0.06) 1.83 1.36 1.42 (0.29)
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (1.13) (1.12) (1.12) (1.12) (1.01)
Capital -- -- -- (0.02) --
- ---------------------------------------------------------------------------------------------------
Total Distributions (1.13) (1.12) (1.12) (1.14) (1.01)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 11.24 $ 12.43 $ 11.72 $ 11.48 $ 11.20
- ---------------------------------------------------------------------------------------------------
Total Return Based on Market Value** (1.65)% 18.18% 21.07% 9.90% (7.33)%++
- ---------------------------------------------------------------------------------------------------
Total Return Based on Net Asset Value** (0.58)% 16.48% 12.86% 13.99% (2.31)%++
- ---------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 810 $ 883 $ 819 $ 802 $ 783
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.18% 1.21% 1.21% 1.20% 1.15%+*
Net investment income 8.81% 9.63% 9.85 10.02 9.09%+
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Portfolio Turnover Rate 98% 87% 73% 59% 69%
- ---------------------------------------------------------------------------------------------------
Market Value, End of Year $11.125 $12.438 $11.500 $10.500 $10.625
===================================================================================================
</TABLE>

(1) For the period from October 22, 1993 (commencement of operations) to
September 30, 1994.
(2) Based on weighted average shares outstanding for period.
* The manager waived a part of its fee for the period ended September 30,
1994. If such fees were not waived, the per share decrease in net
investment income would have been $0.01 and the ratio of expenses to
average net assets would have been 1.21% (annualized).
** The total return calculation assumes that dividends are reinvested in
accordance with the fund's dividend reinvestment plan.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.

7
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The Fund
- --------------------------------------------------------------------------------

The fund is a diversified, closed-end management investment company. The
fund was incorporated under the laws of the State of Maryland on July 30, 1993
and is registered under the Investment Company Act of 1940, as amended (the 1940
Act). The fund's principal office is located at 388 Greenwich Street, New York,
New York 10013 and its telephone number is (800) 331-1710.

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The Offering
- --------------------------------------------------------------------------------

The fund's common stock, which is the only class of shares that the fund
has issued, is listed for trading on the NYSE. In addition, Salomon Smith Barney
currently intends to make a market in the shares. This prospectus is to be used
by Salomon Smith Barney in connection with offers and sales of the shares in
market-making transactions in the over-the-counter market at negotiated prices
related to prevailing market prices at the time of the sale. Salomon Smith
Barney is not required to make a market in the common stock and may stop doing
so at any time. You should not rely on Salomon Smith Barney's market making
activities to provide an active or liquid trading market for the shares.

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Use of Proceeds
- --------------------------------------------------------------------------------

The fund will not receive any proceeds from the sale of any common stock
offered pursuant to this prospectus. Proceeds received by Salomon Smith Barney
as a result of its market-making will be used by Salomon Smith Barney in
connection with its secondary market operations and for general corporate
purposes.

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

Set out below is a general description of the investment objectives and
principal investment policies of the fund. The fund may not be able to achieve
its investment objectives. See "Investment Objectives and Policies" and
"Investment Restrictions" in the SAI.

GENERAL

The fund's primary investment objective is high current income, with
capital appreciation as a secondary objective. The fund seeks to achieve its
investment objectives by investing, under normal circumstances, at least 65% of
assets in high-yielding corporate debt obligations and preferred stock. Under
current market conditions, the fund's average dollar weighted portfolio maturity
is between 5 and

8
<PAGE>

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

10 years. The fund may, however, invest in individual fixed income securities of
any maturity. The manager may adjust the fund's average maturity when, based on
interest rate trends and other market conditions, it deems it appropriate to do
so. The fund may invest up to 35% of assets in common stocks and common stock
equivalents, including options, warrants and rights. Equity investments may be
made in securities of companies of any size depending on the relative
attractiveness of the company and the economic sector in which it operates.

The fixed income securities purchased by the fund are generally below
investment grade. This means they are rated lower than in the four highest
rating categories (BB or below) by a nationally recognized statistical ratings
organization (NRSRO), or are of comparable quality in the manager's opinion. The
fund's securities may be rated as low as C by Moody's Investors Service, Inc.
(Moody's) or D by Standard & Poor's Ratings Group (S&P). The fund may not
purchase additional fixed income securities rated lower than B by more than one
NRSRO if more than 10% of assets are invested in such securities. Please see
Appendix A for further information about NRSRO ratings.

Notwithstanding the foregoing, the fund may invest any amount of assets in
investment grade securities when the difference in yields between those
securities and lower-rated securities is relatively narrow. In addition, the
fund may invest in investment grade securities for temporary defensive purposes.
Investments in investment grade securities may serve to lessen a decline in net
asset value but may also affect the amount of current income produced by the
fund, since the yields from such securities are usually lower than those from
lower-rated securities. The fund may also invest without limitation in money
market instruments, including commercial paper of domestic and foreign
corporations, certificates of deposit, bankers' acceptances and other
obligations of banks, repurchase agreements and short-term obligations issued or
guaranteed by the United States government or its agencies. The yield on these
securities will generally be lower than the yield on other securities purchased
by the fund.

The fund invests primarily in securities of U.S. and foreign companies and
governments that are denominated in U.S. dollars. The fund may, however, invest
up to 20% of assets in the securities of foreign companies and governments that
are denominated in foreign currencies. In order to mitigate the effects of
uncertainty in currency exchange rates affecting the fund's non-U.S. dollar
investments, the fund may engage in various currency-related hedging
transactions, such as currency exchange transactions and currency futures
contracts and related options and purchase options on foreign currencies.

The fund may lend its portfolio securities and purchase or sell securities
on a when-issued or delayed-delivery basis. The fund does not intend to leverage
its investments although it reserves the right to do so. The fund may hedge
against

9
<PAGE>

possible declines in the value of its investments by entering into interest rate
futures contracts and related options, swaps and other financial instruments.

A more detailed description of the fund's investment practices is set
forth below under "Investment Practices," and more detail about the fund's
investment policies, restrictions and techniques is included in the SAI.

Year 2000. The investment management and administrative services provided
to the fund by MMC depend on the smooth functioning of its 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. MMC has advised the fund that it has been reviewing all of its
computer systems and actively working on necessary changes to its systems to
prepare for the year 2000 and expect that its systems will be compliant before
that date. In addition, MMC has 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 MMC 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
- --------------------------------------------------------------------------------

There are various risks associated with an investment in the fund. You
should consider whether the fund is an appropriate investment for you. The fund
invests primarily in lower-rated securities. An investment in these securities
has speculative characteristics and involves a substantial risk of loss.
Circumstances or events that affect the value of fixed income securities in
general and lower-rated securities in particular will affect the fund's net
asset value. While certain risks are discussed elsewhere in this prospectus, the
following is intended to provide a summary of the principal risks involved in an
investment in the fund:

<PAGE>

- --------------------------------------------------------------------------------
Risk Factors and Special Considerations (continued)
- --------------------------------------------------------------------------------

The issuer of a lower-rated security may default on its obligation to pay

o At the time of the fund's investment, the issuer of a lower-rated
security may be in default on its obligations to pay interest and principal or
it may subsequently default on its payment obligations. If an issuer does not
make timely payments, the fund would not receive the anticipated income from the
investment and the fund's investment would decline in value. This would decrease
the fund's net asset value.

o The risk of default is greater for lower-rated securities than for
investment grade securities. Issuers of lower-rated securities are often highly
leveraged and may not have more traditional methods of financing available.
These issuers may be unable to make principal and interest payment obligations
during an economic downturn or during sustained periods of rising interest
rates. The issuer's payment obligations on these lower-rated securities may also
rank lower than its payment obligations on other debt obligations.

o Even if the issuer does not actually default, adverse changes in the
issuer's financial condition may negatively affect its credit rating or presumed
creditworthiness. The market value of lower-rated securities is more sensitive
to changes in the issuer's financial condition and changes in economic
conditions than is the market value of investment grade securities.

o The fund may invest up to 10% of assets in securities rated lower than B
by more than one NRSRO. These securities generally lack characteristics of
desirable investments, they may already be in default, and the chance that the
fund would collect principal and interest payments on these securities is
speculative. See Appendix A for a description of certain NRSRO ratings.

The issuer of a lower-rated security declares bankruptcy

o The issuer of a lower-rated security might declare or be in bankruptcy
and the fund could experience loss or delays collecting interest and principal.
To enforce its rights to collect principal and interest payments, the fund might
be required to incur additional expenses which would reduce its net asset value.
The fund may lose some or all of its investment in lower-rated securities upon
default or bankruptcy because these securities are generally not secured by
collateral.

Less liquid markets for lower-rated securities

o The market for lower-rated securities may be less liquid than for
investment grade securities. There may be no established trading markets for
certain lower-rated securities. If markets are less liquid, the fund may have
difficulty buying and selling these securities when the manager desires to do so
or to sell securities at a fair price. Further, the ability of the manager to
value lower-rated securities may be more difficult and the manager's judgment
may play a greater role in their valuation.

11
<PAGE>

o Less liquid markets tend to be more volatile and react more negatively
to adverse publicity and investor perception than more liquid markets.

Interest rate sensitivity

o Fixed-income securities, including lower-rated securities, are sensitive
to changes in interest rates. Generally, when interest rates are rising, the
value of the fund's fixed-income securities can be expected to decrease. When
interest rates are declining, the value of the fund's fixed-income securities
can be expected to increase.

Call or prepayment risk

o Fixed-income securities, including lower-rated securities, frequently
permit their issuers to prepay, call or repurchase the securities from their
holders, such as the fund. As a result of declining interest rates, the issuer
of a fixed income security may exercise its prepayment, call or repurchase right
on the security, forcing the fund to replace the security with a lower yielding
security. This would decrease the return to the fund.

o If the fund purchased a fixed-income security at a premium, it would
experience a loss of that premium in the event that the issuer of that security
exercises its prepayment, call or repurchase right.

Foreign securities

o There are additional risks associated with investing in securities of
foreign companies and governments compared to investing in U.S. issuers. These
risks include:

o Less information may be available about foreign companies and
markets due to relaxed disclosure or accounting standards or
regulatory practices.

o Many foreign markets are smaller, less liquid and more
volatile than U.S. markets. As a result, the manager may not
be able to sell the fund's securities in amounts and at prices
it considers reasonable.

o The U.S. dollar appreciates against foreign currencies causing
the value of the fund's foreign securities to be worth less.

o Economic, political or social instability in foreign countries
disrupts the markets where the fund's foreign securities are
traded.

o These risks are greater to the extent that the fund invests in
securities of issuers located in emerging market countries.

12
<PAGE>

Equity securities

o The equity securities in the fund's portfolio may decline in value if:

o The stock market goes down.

o Companies in which the fund invests suffer unexpected losses
or lower than expected earnings.

o The manager's judgments about the attractiveness, value or
potential appreciation of a particular company's stock
selected for the fund's portfolio prove to be wrong.

Financial Futures and Options

The fund may use financial futures contracts and options on these
contracts to protect the fund from a decline in the price of securities it owns
or an increase in the price of a security it plans to buy. There are risks
associated with futures and options transactions.

o Because there is imperfect correlation between the fund's securities
that are hedged and the futures or options contract, the hedge may not be fully
effective. Losses on the fund's security may be greater than gains on the
futures or options contract, or losses on the futures or options contract may be
greater than gains on the securities subject to the hedge.

o To compensate for imperfect correlation, the fund may over-hedge or
under-hedge by entering into a futures contract or an option on a futures
contract in dollar amounts greater or lesser than the dollar amounts of the
securities being hedged. If market movements are not as anticipated, the fund
could lose money from these positions.

o If the fund hedges against an increase in interest rates, and rates
decline instead, the fund will lose all or part of the benefit of the increase
in value of the securities it hedged because it will have offsetting losses in
its futures or options positions. Also, in order to meet margin requirements,
the fund may have to sell securities at a time it would not normally choose.

- --------------------------------------------------------------------------------
Investment Practices
- --------------------------------------------------------------------------------

In connection with the investment objectives and policies described above,
the fund may, but is not required to, utilize various investment techniques in
an attempt to earn income, facilitate portfolio management and mitigate risk.
These investment techniques include convertible securities, interest rate and
currency futures contracts, put and call options on such futures contracts,
currency exchange transactions, illiquid securities, securities of unseasoned
issuers and securities of foreign governments and corporations including those
of developing countries.

13
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Investment Practices (continued)
- --------------------------------------------------------------------------------

Such techniques are generally accepted by modern portfolio managers and are
regularly utilized by many investment companies and other institutional
investors. These investment practices entail risks. Although the manager
believes that these investment techniques may assist the fund in achieving its
investment objectives, in any instance it is possible that the fund would
perform better if the technique were not used. Any or all of the investment
techniques available to the manager described below may be used at any time and
there is no particular strategy that dictates the use of one technique rather
than another, since the use of any investment technique is a function of
numerous variables including market conditions. See the fund's SAI for more
information regarding the fund's investment practices.

Convertible Securities and Synthetic Convertible Securities. The fund may
invest in convertible securities, which are fixed-income securities that may be
converted at either a stated price or stated rate into shares of common stock,
and "synthetic" convertible securities which are comprised of separate
components which together are designed to have similar attributes. Convertible
securities have characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities, the
market value of convertible securities is sensitive to interest rates as
described above under "Risk Factors and Special Considerations." In addition,
because of the conversion feature, the market value of convertible securities
tends to vary with fluctuations in the market value of the underlying common
stocks and, therefore, also will react to variations in the general market for
equity securities.

Futures Contracts and Options on Futures Contracts. The fund may enter
into interest rate and currency futures contracts and may purchase and sell put
and call options on such futures contracts. The fund will enter into such
transactions for hedging purposes or for other appropriate risk-management
purposes permitted under the rules and regulations of the Commodity Futures
Trading Commission and the SEC.

While the fund may enter into futures contracts and options on futures
contracts for bona fide hedging and other appropriate risk management purposes,
the use of futures contracts and options on futures contracts might result in a
poorer overall performance for the fund than if it had not engaged in these
particular types of transactions. If, for example, the fund had insufficient
cash, it may have to sell a portion of its underlying portfolio of securities in
order to meet daily variation margin requirements on its futures contracts or
options on futures contracts at a time when it may be disadvantageous to do so.
There may be an imperfect correlation between the fund's portfolio holdings and
futures contracts or options on futures contracts entered into by the fund,
which may prevent the fund from achieving the intended hedge or expose the fund
to risk of loss. Further, the fund's use of futures contracts and options on
futures contracts to reduce risk involves cost

14
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Investment Practices (continued)
- --------------------------------------------------------------------------------

and will be subject to the manager's ability to predict correctly changes in
interest rate relationships, currency exchange rates or other factors. No
assurance can be given that the manager's judgment in this respect will be
correct.

Currency Exchange Transactions. The fund may engage in currency exchange
transactions and purchase exchange-traded put and call options on foreign
currencies. A forward currency contract involves an obligation to purchase or
sell a specific currency for an agreed-upon price at an agreed-upon date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties. Although these contracts are intended to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might result should the value of the currency
increase.

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

The cost to the Fund of engaging in currency transactions varies with the
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing.

Options on Foreign Currencies. The fund may purchase options on a foreign
currency in which securities held by the fund are denominated to protect against
a decline in the value of the currency in relation to the currency in which the
exercise price is denominated. The benefit to the fund derived from purchasing
foreign currency options, like the benefit derived from other types of options,
will be reduced by the amount of the premium and related transaction costs. In
addition, if currency rates do not move in the direction or to the extent
anticipated, the fund could sustain losses on transactions in foreign currency
options that would require it to forego a portion or all of the benefits of
advantageous changes in the rates. Options on foreign currencies purchased by
the fund may be traded on domestic and foreign exchanges or traded
over-the-counter.

15
<PAGE>

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Investment Practices (continued)
- --------------------------------------------------------------------------------

When-Issued and Delayed-Delivery Securities. The fund may purchase
securities on a when-issued basis, or may purchase or sell securities for
delayed delivery. In when-issued or delayed-delivery transactions, delivery of
the securities occurs beyond normal settlement periods, but no payment or
delivery will be made by the fund prior to the actual delivery or payment by the
other party to the transaction. The value of securities purchased on a
when-issued or delayed-delivery basis may decrease prior to their delivery to
the fund. Purchasing securities on a when-issued or delayed-delivery basis 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.

Lending Securities. The fund is authorized to lend securities it holds to
brokers, dealers and other financial organizations, but it will not lend
securities to any affiliate of the manager, including Salomon Smith Barney,
unless the fund applies for and receives specific authority to do so from the
SEC.

Short Sales Against the Box. The fund may make short sales of securities
in order to reduce market exposure and/or to increase its income. At all times
when a short position is open, the fund will own an equal or greater amount of
such securities or own preferred stock, debt or warrants convertible or
exchangeable into an equal or greater number of the shares of the securities
sold short. Short sales of this kind are referred to as short sales "against the
box."

Non-Publicly Traded and Illiquid Securities. The fund may purchase
illiquid and restricted securities, but the fund will not invest more than 15%
of the Fund's net assets in illiquid securities. A sale of such securities by
the fund may force the fund to receive less than the amount at which the fund
has valued them, or the fund may not be able to liquidate them at the time the
manager believes it desirable to do so. Certain securities that are restricted
as to resale but which may otherwise be determined to be liquid (such as those
that are eligible for sale only to qualified institutional buyers) are not
covered by the 15% limitation. Determinations of which securities are illiquid
are made by, or under the oversight of, the fund's Board of Directors (Board).

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

Securities of Developing Countries. A developing country is generally
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems that can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries

16
<PAGE>

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Investment Practices (continued)
- --------------------------------------------------------------------------------

have been more volatile and have provided higher returns than the markets of the
more mature economies of developed countries.

Corporate Loans, Loan Participations and Assignments. The Portfolio may
invest up to 15% of assets in corporate loans, loan participations
("Participations") and assignments ("Assignments"). Corporate loans are
negotiated and underwritten by a bank or syndicate of banks and other
institutional investors. These loans may be collateralized or uncollateralized.
The loans tend to have a senior position in the borrower's capital structure,
and tend to have variable or adjustable interest rates.

By purchasing a Participation, the fund acquires some or all of the
interest of a bank or other institution in a loan. The Participations typically
will result in the fund having a contractual relationship only with the lender,
and not the borrower. The fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the lender
selling the Participation and only upon receipt by the lender of payments from
the borrower. In connection with purchasing Participations, the fund generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement, nor any rights of set-off against the borrower, and the fund may
not directly benefit from any collateral supporting the loan in which it has
purchased the Participation. As a result, the fund will assume the credit risk
of both the borrower and the lender that is selling the Participation. In the
event of the insolvency of the lender selling a Participation, the fund may be
treated as a general creditor of the lender and may not benefit from any set-off
between the lender and the borrower. The fund will acquire Participations only
if the lender inter-positioned between the fund and the borrower is determined
by management to be creditworthy.

The fund may also invest in assignments of portions of loans from third
parties ("Assignments"). When it purchases Assignments from lenders, the fund
will acquire direct rights against the borrower on the loan. However, since
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigned lender.

The fund may have difficulty disposing of Assignments and Participations.
The liquidity of such securities is limited and the fund anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Portfolio's liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the borrower. The fund's policy limiting its illiquid
investments will be applicable to corporate loans, Participations and
Assignments that are illiquid.

17
<PAGE>

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Investment Practices (continued)
- --------------------------------------------------------------------------------

Mortgage-Backed Securities. The fund may invest in mortgage-backed
securities. These are securities that represent interests in pools of mortgage
loans assembled for sale to investors by various governmental agencies and
government-related organizations, as well as by private issuers such as
commercial banks, savings and loan institutions, mortgage bankers and private
mortgage insurance companies. Generally, mortgage-backed securities provide a
monthly payment consisting of interest and principal payments. Additional
payments may be made out of unscheduled repayments of principal resulting from
the sale of the underlying residential property, refinancing or foreclosure, net
of fees or costs that may be incurred. Mortgage-backed securities vary from
traditional fixed-income securities because of the potential for prepayment on
the underlying mortgages, which results in a return of principal to the fund at
a time when interest rates are declining. The fund may invest in collateralized
mortgage obligations, which are a type of bond secured by an underlying pool of
mortgages, or mortgage pass-through certificates that are structured to direct
payments on underlying collateral to different series of classes of the
obligations. To the extent that the Fund purchases mortgage-related securities
at a premium, mortgage foreclosures and prepayments of principal may result in
some loss of the Fund's principal investment to the extent of the premium paid.

Other Asset-Backed Securities. The fund may invest in asset-backed
securities arising through the grouping by governmental, government-related and
private organizations of loans, receivables and other assets originated by
various lenders. Interests in pools of these assets differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal paid at maturity or specified call dates. Instead,
asset-backed securities provide periodic payments which generally consist of
both interest and principal payments. As is the case with mortgage-backed
securities, falling interest rates generally result in an increase in the rate
of prepayments on the underlying instruments.

- --------------------------------------------------------------------------------
Share Price Data
- --------------------------------------------------------------------------------

The fund's common stock is listed on the NYSE under the symbol "HIO." In
addition, Salomon Smith Barney intends to buy and sell the fund's shares in
order to make a market in the shares.

The following table sets forth for the fund's common stock information for
each quarterly period during the last two fiscal years: high and low sales
prices and net asset values; sales price and net asset value at quarter-end; and
the premium (discount) of the sales price to net asset value at quarter-end.

18
<PAGE>

- --------------------------------------------------------------------------------
Share Price Data (continued)
- --------------------------------------------------------------------------------

NYSE
NYSE NAV Price at NAV at
Price Price Quarter- Quarter- Premium
Three Months Ended Range Range End End (Discount)
================================================================================
12/31/98 $ $ $ $ %
9/30/98 12.00-10.13 12.28-11.13 11.13 11.24 (.98)
6/30/98 12.31-11.50 12.39-12.16 11.94 12.18 (1.97)
3/31/98 12.75-11.75 12.41-12.24 11.88 12.32 (3.57)
12/31/97 12.63-11.44 12.57-12.24 12.50 12.24 2.12
9/30/97 12.50-12.06 12.43-12.01 12.44 12.43 (.08)
6/30/97 12.25-11.50 12.20-11.61 12.06 12.10 (.33)
3/31/97 12.00-11.38 12.12-11.74 11.75 11.74 .09
12/31/96 11.63-11.13 11.92-11.49 11.50 11.92 (3.52)
================================================================================

As of January 6,1999, the price per share of common stock as quoted on the
NYSE was $_____, representing a ____% premium from the common stock's net asset
value calculated on that day.

- --------------------------------------------------------------------------------
Taxation
- --------------------------------------------------------------------------------

The following is a summary of the material federal tax considerations
affecting the fund and its shareholders; see the SAI for a further discussion.
In addition to the considerations described below and in the SAI, which are
applicable to any investment in the fund, there may be other federal, state,
local or foreign tax considerations applicable to particular investors. You are
therefore urged to consult your tax adviser about your particular circumstances
and the tax consequences to them of an investment in the Fund.

TAXATION OF THE FUND

The fund intends to qualify and be treated each year as a regulated
investment company for federal income tax purposes. In order to so qualify, the
fund must satisfy certain tests regarding the nature and distribution of its
income and the diversification of assets. If the fund qualifies as a related
investment company and distributes to its shareholders at least 90% of the sum
of its net investment income and any excess of its net short-term capital gain
over its net long-term capital loss, then the fund will not be subject to
federal income tax on the income and gain so distributed. However, the fund
would be subject to corporate income tax on any undistributed income and net
short-term and long-term capital gains. In addition, the fund will be subject to
a nondeductible 4% federal excise tax on the amount by which the net income and
capital gains it distributes in any calendar year is less than a required
amount.

The fund may acquire securities which do not pay interest currently, such
as zero coupon, pay-in-kind, or delayed interest securities. As the holder of
such a

19
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Taxation (continued)
- --------------------------------------------------------------------------------

security, the fund is required to include in taxable income an amount of deemed
interest known as original issue discount that accrues on the security for the
taxable year under federal tax law, even if the fund receives no payment on the
security during the year. Because the fund must distribute annually
substantially all of its investment company taxable income, including any
original issue discount, in order to qualify as a regulated investment company
and to avoid imposition of income tax and the 4% excise tax, the fund may be
required in a particular year to distribute dividends in an amount that is
greater than the total amount the fund actually receives in interest or other
distributions on the securities it owns. Those distributions will be made from
the fund's cash assets or from the proceeds of sales of portfolio securities, if
necessary. The fund may realize capital gains or losses from those sales, which
would increase or decrease the fund's investment company taxable income or net
capital gain.

The fund may also acquire securities at a market discount. Market discount
is generally equal to (other than in the case of an obligation issued with
original issue discount) the excess of the stated redemption price of the
obligation over the purchase price at which it is acquired. Market discount is
treated as ordinary income, rather than as capital gain, when ultimately
recognized by the purchaser. The market discount rules may cause the fund to
recognize more ordinary income, and less capital gain, than would be the case if
the fund had acquired securities at a price equal to that at which the
securities had originally been issued.

Foreign Taxes. Dividends and interest and, in some cases, capital gains on
foreign securities held by the fund may be subject to income, withholding or
other taxes imposed by foreign countries and U.S. possessions that would reduce
the yield on the fund's securities. Tax conventions between certain countries
and the United States may reduce or eliminate these taxes in some cases. The
fund does not expect to be eligible to pass through any such taxes to the fund's
shareholders. As a result, any such taxes imposed on the fund would not be
deductible or creditable by the fund's shareholders.

TAXATION OF SHAREHOLDERS

Distributions. In general, all distributions to shareholders attributable
to the fund's net investment income and any excess of net short-term capital
gain over net short-term capital loss will be taxable as ordinary income whether
paid in cash or reinvested in additional shares of common stock pursuant to the
fund's dividend reinvestment plan.

Although the fund does not expect to realize significant net capital gain
(the excess of net long-term capital gain over net short-term capital loss), to
the extent the fund does realize net capital gain, it intends to distribute such
gain at least annually and designate such a distribution as a capital gain
dividend. Capital gain dividends are taxable to the shareholder as long-term
capital gains, whether paid in

20
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Taxation (continued)
- --------------------------------------------------------------------------------

cash or reinvested in additional shares of common stock, regardless of how long
the shareholder's shares have been held. The fund may elect to retain its net
capital gain and pay corporate income tax thereon. In such event, the fund would
most likely make an election which would require each shareholder of record on
the last day of the fund's taxable year to include in income for tax purposes as
long-term capital gains his proportionate share of the fund's undistributed net
capital gain. If such an election is made, each shareholder would be entitled to
credit his proportionate share of the tax paid by the fund against his federal
income tax liabilities and to claim refunds to the extent that the credit
exceeds such liabilities. In addition, the shareholder would be entitled to
increase the basis of his shares for federal income tax purposes by an amount
equal to 65% of his proportionate share of the undistributed net capital gain.

Shareholders receiving distributions in the form of additional shares
purchased by First Data as purchasing agent pursuant to the fund's dividend
reinvestment plan will be treated for federal income tax purposes as receiving
the amount of cash received by First Data on their behalf. In general, the basis
of such shares will equal the price paid by First Data for such shares,
including brokerage commissions. With respect to distributions issued in shares
of the fund, the amount of the distribution for tax purposes is the fair market
value of the issued shares on the payment date, and the difference between such
fair market value and the amount of cash the shareholder would otherwise have
received may be treated as a return of capital. In the case of shares issued by
the fund, the shareholder's tax basis in each share received is its fair market
value on the payment date, adjusted by any amount treated as a return of capital
to the shareholder.

Sales of Shares. In general, if a share of common stock is sold, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale and the seller's adjusted basis in the share. However, any
loss recognized by a shareholder on the sale of shares not held for more than
six months will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder and the shareholder's share
of undistributed net capital gain, in each case with respect to the shares sold.
In addition, any loss realized on a sale of shares of common stock generally
will be disallowed to the extent the shares disposed of are replaced with other
shares of the fund within a 61-day period beginning 30 days before and ending 30
days after the disposition of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any gain or
loss realized upon a sale of shares (other than to the fund in connection with a
tender offer or otherwise) by a shareholder who is not a dealer in securities
will be treated as capital gain or loss.

Backup Withholding. The fund may be required to withhold federal income
tax at the rate of 31% of any payments made to a stockholder if the stockholder
has not provided a correct taxpayer identification number and certain required

21
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Taxation (continued)
- --------------------------------------------------------------------------------

certifications to the fund, or if the Secretary of the U.S. Treasury or a broker
notifies the fund that the number provided by a stockholder is not correct or
that the stockholder has not reported all interest and dividend income required
to be shown on the stockholder's federal income tax return or if a stockholder
is otherwise subject to backup withholding.

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

BOARD OF DIRECTORS

The business and affairs of the fund, including the general supervision of
the duties performed by the manager under the investment management agreement,
are the responsibility of the Board.

INVESTMENT MANAGER

MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the fund's investment manager. MMC was incorporated in 1968 and manages
investment companies with total assets in excess of $105 billion as of October
31, 1998. MMC is a subsidiary of Citigroup Inc. Citigroup businesses produce a
broad range of financial services--asset management, banking and consumer
finance, credit and charge cards, insurance, investments, investment banking and
trading--and use diverse channels to make them available to consumer and
corporate customers around the world. Among these businesses are Citibank,
Commercial Credit, Primerica Financial Services, Salomon Smith Barney, SSBC
Asset Management, Travelers Life & Annuity, and Travelers Property Casualty.

Subject to the supervision and direction of the Board, MMC manages the
securities held by the fund in accordance with the fund's stated investment
objectives and policies, makes investment decisions for the fund, places orders
to purchase and sell securities on behalf of the fund and employs managers and
securities analysts who provide research services to the fund. MMC also serves
as the fund's administrator and as such manages all aspects of the
administration and operations of the fund. The fund pays the manager a fee for
the services provided to the fund that is computed daily and paid monthly at the
annual rate of 1.15% of the value of the fund's average daily net assets.

Mr. John C. Bianchi, a managing director of Salomon Smith Barney, has been
responsible for the day-to-day management of the fund's portfolio within the
investment framework described above since the fund's inception and has more
than 15 years of investment advisory experience. He joined MMC in 1985.

Transactions in fixed income securities on behalf of the fund are
allocated to various dealers by the manager in its best judgment. The primary
consideration is prompt and effective execution of orders at the most favorable
price. Subject to that

22
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Management of the Fund (continued)
- --------------------------------------------------------------------------------

primary consideration, dealers may be selected for their research, statistical
or other services to enable the manager to supplement its own research and
analysis with the views and information of other securities firms. The fund may
use Salomon Smith Barney in connection with the purchase or sale of securities
when the manager believes that the broker's charge for the transaction does not
exceed usual and customary levels. The same standard applies to the use of
Salomon Smith Barney as a broker in connection with entering into options and
futures contracts. The fund made no investments in equity securities apart from
its investments in fixed income securities in its last fiscal year, and
therefore paid no brokerage commissions in the last fiscal year.

Citigroup is 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 and regulations.

Salomon Smith Barney and the manager believe that the manager's investment
management and administration services and the market-making activities
performed by Salomon Smith Barney are not underwriting and are consistent with
the BHCA, the Glass-Steagall Act and other federal and state laws applicable to
Citigroup. However, there is a little controlling precedent regarding the
performance of the combination of investment advisory and administrative
activities by subsidiaries of bank holding companies. If Salomon Smith Barney
and MMC, or their affiliates, were to be prevented from acting as the manager or
administrator, 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.

- --------------------------------------------------------------------------------
Dividends and Distributions
- --------------------------------------------------------------------------------

The fund expects to pay monthly dividends of net investment income (income
other than net realized gains) to the holders of the common stock. Under the
fund's current policy, which may be changed at any time by the Board, the fund's
monthly dividends will be paid at a level that reflects the past and projected
performance of the fund, which policy over time will result in the distribution
of all net investment income of the fund. Net income of the fund consists of all
interest income accrued on the fund's assets less all expenses of the fund.
Expenses of the fund are accrued each day. Net realized capital gains, if any,
will be distributed to the stockholders at least once per year.

23
<PAGE>

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Dividends Reinvestment Plan
- --------------------------------------------------------------------------------

All dividends or distributions with respect to shares of common stock are
reinvested automatically in additional shares through participation in the
fund's Dividend Reinvestment Plan (plan), unless a shareholder elects to receive
cash.

Under the plan, a shareholder whose shares of common stock are registered
in his own name will have all distributions from the fund reinvested
automatically by First Data as purchasing agent under the plan, unless the
shareholder elects to receive cash. Distributions with respect to shares
registered in the name of a broker-dealer or other nominee (that is, in street
name) will be reinvested by the broker or nominee in additional shares under the
plan, unless the service is not provided by the broker or nominee or the
shareholder elects to receive distributions in cash. Investors who own common
stock registered in street name should consult their broker-dealers for details
regarding reinvestment. All distributions to fund shareholders who do not
participate in the plan will be paid by check mailed directly to the record
holder by or under the direction of First Data as dividend paying agent.

The number of shares of common stock distributed to participants in the
plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the common stock is equal to or exceeds the net asset value
per share on the determination date (generally, the record date for the
distribution), plan participants will be issued shares of common stock by the
fund at a price equal to the greater of net asset value determined as described
below under "Net Asset Value" or 95% of the market price of the common stock.

If the market price of the common stock is less than the net asset value
of the common stock at the time of valuation (which is the close of business on
the determination date), or if the fund declares a dividend or capital gains
distribution payable only in cash, First Data will buy common stock in the open
market, on the NYSE or elsewhere, for the participants' accounts. If, following
the commencement of the purchases and before First Data has completed its
purchases, the market price exceeds the net asset value of the common stock as
of the valuation time, First Data will attempt to terminate purchases in the
open market and cause the fund to issue the remaining portion of the dividend or
distribution by issuing shares at a price equal to the greater of (a) net asset
value as of the valuation time or (b) 95% of the then current market price. In
this case, the number of shares received by a plan participant will be based on
the weighted average of prices paid for shares purchased in the open market and
the price at which the fund issues the remaining shares. To the extent First
Data is unable to stop open market purchases and cause the fund to issue the
remaining shares, the average per share purchase price paid by First Data may
exceed the net asset value of the common stock as of the valuation time,
resulting in the acquisition of fewer shares than if the dividend or capital
gains distribution had been paid in common stock issued by the fund at such net
asset value. First Data will begin to purchase common stock on the open market
as soon as practicable

24
<PAGE>

- --------------------------------------------------------------------------------
Dividends Reinvestment Plan (continued)
- --------------------------------------------------------------------------------

after the determination date for the dividend or capital gains distribution, but
in no event shall such purchases continue later than 30 days after the payment
date for such dividend or distribution, or the record date for a succeeding
dividend or distribution, except when necessary to comply with applicable
provisions of the federal securities laws.

First Data maintains all shareholder accounts in the plan and furnishes
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. The automatic reinvestment
of dividends and capital gains distributions will not relieve plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Common stock in the account of each plan participant will be held
by First Data in uncertificated form in the name of each plan participant.

Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the plan. First Data's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
fund. No brokerage charges apply with respect to shares of common stock issued
directly by the fund under the plan. Each plan participant will, however, bear a
proportionate share of any brokerage commissions actually incurred with respect
to any open market purchases made under the plan.

Experience under the plan may indicate that changes to it are desirable.
The fund reserves the right to amend or terminate the plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The plan also may be amended or
terminated by First Data, with the fund's prior written consent, on at least 30
days' written notice to plan participants. All correspondence concerning the
plan should be directed by mail to First Data Investor Services Group, P.O. Box
8030, Boston, Massachusetts 02266-8030 or by telephone at 1-800-331-1710.

- --------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------

The net asset value of shares of the fund is calculated as of the close of
regular trading on the NYSE, currently 4:00 p.m., Eastern time, on the last day
of each week and month on which the NYSE is open for trading. The fund reserves
the right to cause its net asset value to be calculated on a less frequent basis
as determined by the fund's Board. For purposes of determining net asset value,
futures contracts and options on futures contracts will be valued 15 minutes
after the close of regular trading on the NYSE.

Net asset value per share is calculated by dividing the value of the
fund's total assets less liabilities and then dividing by the number of shares
outstanding. In general, the fund's investments will be valued at market

25
<PAGE>

- --------------------------------------------------------------------------------
Net Asset Value (continued)
- --------------------------------------------------------------------------------

value, or in the absence of market value, at fair value as determined by or
under the direction of the Board. Securities traded primarily on foreign
exchanges are generally valued at the preceding closing values on the exchanges,
except that when an occurence subsequent to the time a value was so established
is likely to have changed such value, then the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Board. A security that is traded primarily on an exchange is
valued at the last sale price on that exchange or, if there were no sales during
the day, at the current quoted bid price. Over-the-counter securities are valued
on the basis of the bid price at the close of business on each day. Investments
in U.S. government securities (other than short-term securities) are valued at
the average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued on the basis of
amortized cost (which involves valuing an investment at its cost and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the effect of fluctuating interest rates on the market
value of the investment) when the Board has determined that amortized cost is
fair value.

- --------------------------------------------------------------------------------
Market Discount
- --------------------------------------------------------------------------------

Shares of of closed-end investment companies frequently trade at a
discount from net asset value, or in some cases trade at a premium. Shares of
closed-end investment companies investing primarily in fixed-income securities
tend to trade on the basis of income yield on the market price of the shares and
the market price may also be affected by trading volume, general market
conditions and economic conditions and other factors beyond the control of the
fund. As a result, the market price of the fund's shares may be greater or less
than the net asset value. Since the commencement of the fund's operations, the
fund's shares have traded in the market at prices that were at times equal to,
but generally were below, net asset value.

Some closed-end investment companies have taken certain actions, including
the repurchase of common stock in the market at market prices and the making of
one or more tender offers for common stock at net asset value, in an effort to
reduce or mitigate the discount, and others have converted to an open-end
investment company, the shares of which are redeemable at net asset value.

The fund's Board has seen no reason to adopt any of the steps specified
above, which some other closed-end funds have used to address the discount. The
experience of many closed-end funds suggests that the effect of many of these
steps (other than open-ending) on the discount may be temporary or
insignificant. Accordingly, there can be no assurance that any of these actions
will be taken or, if undertaken, will cause the fund's shares to trade at a
price equal to their net asset

26
<PAGE>

- --------------------------------------------------------------------------------
Market Discount (contnued)
- --------------------------------------------------------------------------------

value. The manager may voluntarily waive its fees from time to time in order to
increase the fund's dividend yield in an effort to reduce the discount. Any such
waiver may be terminated at any time, and there can be no assurance that such
actions would be successful at reducing the discount.

- --------------------------------------------------------------------------------
Description of Shares
- --------------------------------------------------------------------------------

The fund was incorporated under the laws of the State of Maryland on July
30, 1993 by the Articles of Incorporation (Articles of Incorporation). The
Articles of Incorporation authorize issuance of the fund's shares of common
stock.

COMMON STOCK

Amount
Outstanding
Exclusive of Shares
Held by Fund for Its
Amount Held Own Account as of
Amount by Fund for Its January __,
Title of Class Authorized Own Account 1999
================================================================================
Common 500,000,000
Stock Shares 0 ____________
================================================================================

No shares, other than those currently outstanding, are offered for sale
pursuant to this Prospectus. All shares of common stock have equal
non-cumulative voting rights and equal rights with respect to dividends, assets
and liquidation. Shares of common stock will be fully paid and non-assessable
when issued and have no preemptive, conversion or exchange rights.

ANTI-TAKEOVER PROVISIONS IN THE ARTICLES OF INCORPORATION

The Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board, and could have the effect
of depriving shareholders of an opportunity to sell their shares of common stock
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the fund. The Board is divided into three classes.
At the annual meeting of shareholders in each year, the term of one class
expires and each director elected to the class holds office for a term of three
years. The classification of the Board in this manner could delay for an
additional year the replacement of a majority of the directors. A director may
be removed from office only by vote of the holders of at least 75% of the shares
of common stock entitled to be voted on the matter. In addition, the Articles of
Incorporation require the affirmative vote of at least 75% of the Board and
shareholders to authorize certain fund transactions not in the ordinary course
of business (including a merger) unless certain conditions are met which would
have the result of reducing the number of directors and shareholders

27
<PAGE>

- --------------------------------------------------------------------------------
Description of Shares (continued)
- --------------------------------------------------------------------------------

necessary to approve such a transaction. See "Repurchase of Shares and
Conversion to Open-End Fund" in the SAI.

The Board has determined that the 75% voting requirements described above,
which are greater than the minimum requirements under Maryland law or the 1940
Act, are in the best interests of shareholders generally. Reference should be
made to the Articles of Incorporation, which are on file with the SEC, for the
full text of these provisions.

CONVERSION TO OPEN-END FUND

The Articles of Incorporation require the favorable vote of the holders of
at least two-thirds of the shares of common stock then entitled to be voted on
the matter to authorize the conversion of the fund from a closed-end to an
open-end investment management company as defined in the 1940 Act, unless
two-thirds of certain members of the Board approve such a conversion. In the
latter case, the affirmative vote of a majority of the shares outstanding and
entitled to vote on the matter will be required to approve an amendment to the
Articles of Incorporation providing for the conversion of the fund to an
open-end investment company. Further detail about the fund's ability to convert
to open-end status is contained in the SAI.

- --------------------------------------------------------------------------------
Custodian and Transfer Agent
- --------------------------------------------------------------------------------

PNC Bank, 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103,
acts as custodian of the Fund's investments. First Data, located at Exchange
Place, Boston, Massachusetts 02109, serves as agent in connection with the Plan
and serves as the fund's transfer agent, dividend-paying agent and registrar.

- --------------------------------------------------------------------------------
Other Information
- --------------------------------------------------------------------------------

The audited financial statements have been incorporated by reference in
the SAI in reliance upon the report of KPMG LLP (KPMG), independent auditors.
KPMG has been selected as the fund's independent auditors to examine and report
on the fund's financial statements and highlights for the fiscal year ending
September 30, 1999.

The prospectus and the SAI do not contain all of the information set forth
in the registration statement that the fund has filed with the SEC. The complete
registration statement may be obtained from the SEC upon payment of the fee
prescribed by its rules and regulations.

28
<PAGE>

- --------------------------------------------------------------------------------
Other Information (continued)
- --------------------------------------------------------------------------------

The table of contents of the SAI is as follows:

Page
----
Investment Objectives and Policies .............................. 2
Investment Restrictions ......................................... 10
Net Asset Value ................................................. 11
Taxation ........................................................ 12
Officers and Directors .......................................... 15
Portfolio Transactions .......................................... 17
Management of the Fund .......................................... 19
Repurchase of Shares, Conversion to Open-End Fund
and Anti-Takeover Provisions .................................. 19
Financial Statements ............................................ 21

29
<PAGE>

- --------------------------------------------------------------------------------
Appendix A
- --------------------------------------------------------------------------------

NRSRO RATINGS

The ratings of securities by NRSROs (such as Moody's and S&P) represent
the opinions of these organizations as to the quality of the securities. An
NRSRO rating is assigned at a given point in time, and it is possible that the
rating will not be changed in a timely manner to reflect changes affecting the
security. Ratings are relative and subjective, and are not absolute standards of
quality. Ratings evaluate only the default risk of a security and not the market
value risk of the security.

The following description of Moody's and S&P ratings is provided as an
example of ratings categories for those NRSROs, for informational purposes only.

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:

Aaa -- Bonds that are rated Aaa are judged to be of the best
quality, carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments with respect to these bonds are protected
by a large or by an exceptionally stable margin, and principal is secure.
Although the various protective elements applicable to these bonds are likely to
change, those changes are most unlikely to impair the fundamentally strong
position of these bonds.

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

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

Baa -- Bonds rated Baa are considered to be medium grade
obligations; that is, they are neither highly protected nor poorly secured.
Interest payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. These bonds lack outstanding
investment characteristics and may have speculative characteristics as well.

Ba -- Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safe-guarded

A-1
<PAGE>

- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------

during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

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

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

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

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

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

DESCRIPTION OF S&P CORPORATE BOND RATINGS:

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

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

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

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

A-2
<PAGE>

- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------

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

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

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

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

A-3
<PAGE>

SALOMON SMITH BARNEY
--------------------
A member of citigroup [LOGO]

High
Income
Opportunity
Fund Inc.

388 Greenwich Street
New York, New York 10013

Common Stock

All dealers effecting transactions in the fund's securities, whether or not
participating in this distribution, may be required to give investors a
prospectus.

If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. This prospectus does not offer any
security other than the fund's shares of common stock. Neither the fund nor
Salomon Smith Barney is offering to sell shares of the fund to any person to
whom the fund may not lawfully sell its shares.

There may be changes in the fund's affairs that occur after the date of the
prospectus. The fund will publish a supplement to the prospectus if there are
any material changes in its business.

PART B

HIGH INCOME OPPORTUNITY FUND INC.
388 Greenwich Street
New York, New York 10013

STATEMENT OF ADDITIONAL INFORMATION

High Income Opportunity Fund Inc. (fund) is a diversified,
closed-end management investment company whose investment
objective is to provide shareholders with high current income with
capital appreciation. This Statement of Additional Information
(SAI) is not a prospectus, but should be read in conjunction with
the Prospectus for the fund dated January 29, 1999 (Prospectus).
This SAI does not include all information that a prospective
investor should consider before purchasing the fund's shares of
common stock (common stock), and investors should obtain and read
the Prospectus prior to purchasing shares. A copy of the
Prospectus may be obtained without charge by calling (800) 331-
1710. This SAI incorporates by reference the entire Prospectus.

TABLE OF CONTENTS

Page
Investment Objectives and Policies
2
Investment Restrictions
10
Net Asset Value
11
Taxation
12
Officers and Directors
15
Portfolio Transactions
17
Management of the Fund
19
Repurchase of Shares, Conversion to Open-End Fund and Anti-Takeover
Provisions
19
Financial Statements
21

The Prospectus and this SAI omit certain of the information
contained in the registration statement filed with the Securities
and Exchange Commission, Washington, D.C. (SEC). These items may
be obtained from the SEC upon payment of the fee prescribed, or
inspected at the SEC's office at no charge.

This Statement of Additional Information is dated January 29, 1999

INVESTMENT OBJECTIVES AND POLICIES

Corporate Securities. The fund may invest in corporate
fixed-income securities of both domestic and foreign issuers, such
as bonds, debentures, notes, equipment lease certificates,
equipment trust certificates and preferred stock. Certain of the
corporate fixed-income securities in which the fund may invest may
involve equity characteristics. The fund may, for example, invest
in warrants for the acquisition of stock of the same or of a
different issuer, or in corporate fixed-income securities that
have conversion or exchange rights permitting the holder to
convert or exchange the securities at a stated price within a
specified period of time into a specified number of shares of
common stock. In addition, the fund may invest in participations
that are based on revenues, sales or profits of an issuer, or in
common stock offered as a unit with corporate fixed-income
securities.

Money Market Instruments. When Mutual Management Corp.,
formerly known as Smith Barney Mutual Funds Management Inc. (MMC
or the Investment Manager) believes that economic circumstances
warrant a temporary defensive posture, the fund may invest without
limitation in short-term money market instruments. The fund may
also invest in money market instruments to help defray operating
expenses, to serve as collateral in connection with certain
investment techniques (see "Investment Practices" below) and to
hold as a reserve pending the payment of dividends to investors.
To the extent that the fund invests in short-term money market
instruments it may not be pursuing its investment objectives.

Money market instruments that the fund may acquire will be
securities rated in the two highest short-term rating categories
by Moody's Investors Service or Standard & Poor's Ratings Group or
the equivalent from another major rating service or comparable
unrated securities. Money market instruments in which the fund
typically expects to invest include: U.S. government securities,
bank obligations (including certificates of deposit, time deposits
and bankers' acceptances of U.S. or foreign banks), commercial
paper and repurchase agreements.

The fund may enter into repurchase agreement transactions
with certain member banks of the Federal Reserve System or with
certain dealers listed 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 obligation for a
relatively short period (usually not more than seven days) 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.
Repurchase agreements could involve certain risks in the event of
default or insolvency of the seller, including possible delays or
restrictions on the fund's ability to dispose of the underlying
securities. In evaluating these potential risks, the Investment
Manager, acting under the supervision of the fund's Board of
Directors and on an ongoing basis, monitors (1) the value of the
collateral underlying each repurchase agreement of the fund to
ensure that the value is at least equal to the total amount of the
repurchase obligation, including interest, and (2) the
creditworthiness of the banks and dealers with which the fund
enters into repurchase agreements.

U.S. Government Securities. The fund may invest in direct
obligations of the United States and obligations issued by U.S.
government agencies and instrumentalities (U.S. government
securities). Included among direct obligations of the United
States are Treasury bills, Treasury notes and Treasury bonds,
which differ principally in terms of their maturities. Included
among the securities issued by U.S. government agencies and
instrumentalities are: securities that are supported by the full
faith and credit of the United States (such as Government National
Mortgage Association certificates); securities that are supported
by the right of the issuer to borrow from the U.S. Treasury (such
as securities of Federal Home Loan Banks); and securities that are
supported by the credit of the instrumentality (such as Federal
National Mortgage Association and Federal Home Loan Mortgage
Corporation bonds). See "Mortgage-Baked Securities" under
"Investment Practices," below.

Zero Coupon, Pay-In-Kind and Delayed Interest Securities.
The fund may invest in zero coupon, pay-in-kind and delayed
interest securities, as well as custodial receipts or certificates
underwritten by securities dealers or banks that evidence
ownership of future interest payments, principal payments or both
on certain U.S. government securities. Zero coupon securities pay
no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held
to maturity, their entire return comes from the difference between
their purchase price and their maturity value. Pay-in-kind
securities pay interest through the issuance to the holders of
additional securities, and delayed interest securities are
securities which do not pay interest for a specified period.
Because interest on zero coupon, pay-in-kind and delayed interest
securities is not paid on a current basis, the values of
securities of this type are subject to greater fluctuations than
are the values of securities that distribute income regularly and
may be more speculative than such securities. Accordingly, the
values of these securities may be highly volatile as interest
rates rise or fall. In addition, the fund's investments in zero
coupon, pay-in-kind and delayed interest securities will result in
special tax consequences. Although zero coupon securities do not
make interest payments, for tax purposes a portion of the
difference between a zero coupon security's maturity value and its
purchase price is taxable income of the fund each year.

Custodial receipts evidencing specific coupon or principal
payments have the same general attributes as zero coupon U.S.
government securities but are not considered to be U.S. government
securities. Although under the terms of a custodial receipt the
fund is typically authorized to assert its rights directly against
the issuer of the underlying obligation, the fund may be required
to assert through the custodian bank such rights as may exist
against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal and/or interest when due, the fund
may be subject to delays, expenses and risks that are greater than
those that would have been involved if the fund had purchased a
direct obligation of the issuer. In addition, in the event that
the trust or custodial account in which the underlying security
has been deposited is determined to be an association taxable as a
corporation instead of a non-taxable entity, the yield on the
underlying security would be reduced in respect of any taxes paid.

Investment Practices

The fund may employ, among others, the investment techniques
described below:

Convertible Securities and Synthetic Convertible Securities.
Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality because
of the potential for capital appreciation. A convertible
security, in addition to providing fixed income, offers the
potential for capital appreciation through the conversion feature,
which enables the holder to benefit from increases in the market
price of the underlying common stock. However, there can be no
assurance of capital appreciation because securities prices
fluctuate.

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

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

Futures Contracts and Options on Futures Contracts. An
interest rate futures contract is a standardized contract for the
future delivery of a specified security (such as a Treasury bond
or Treasury note) or its equivalent at a future date at a price
set at the time of the contract. A currency futures contract is a
standardized contract for the future delivery of a specified
amount of currency at a future date at a price set at the time of
the contract. The fund may only enter into futures contracts
traded on regulated commodity exchanges.

The fund may either accept or make delivery of cash or the
underlying instrument specified at the expiration of a futures
contract or, prior to expiration, enter into a closing transaction
involving the purchase or sale of an offsetting contract. Closing
transactions with respect to futures contracts are effected on the
exchange on which the contract was entered into or on a linked
exchange.

The fund may purchase and write put and call options on
futures contracts in order to hedge all or a portion of its
investments and may enter into closing purchase transactions with
respect to options written by the fund in order to terminate
existing positions. There is no guarantee that such closing
transactions can be effected at any particular time or at all. In
addition, daily limits on price fluctuations on exchanges on which
the fund conducts its futures and options transactions may prevent
the prompt liquidation of positions at the optimal time, thus
subjecting the fund to the potential of greater losses.

An option on a futures contract, as contrasted with the
direct investment in such a contract, gives the purchaser of the
option the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at
any time on or before the expiration date of the option. Upon
exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be
accomplished by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the
case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The
potential loss related to the purchase of an option on a futures
contract is limited to the premium paid for the option, plus
transaction costs. With respect to options purchased by the fund,
there are no daily cash payments made by the fund to reflect
changes in the value of the underlying contract; however, the
value of the option does change daily and that change would be
reflected in the net asset value of the fund.

While the fund may enter into futures contracts and options
on futures contracts for bona fide hedging and other appropriate
risk management purposes, the use of futures contracts and options
on futures contracts might result in a poorer overall performance
for the fund than if it had not engaged in any such transactions.
If, for example, the fund had insufficient cash, it may have to
sell a portion of its underlying portfolio of securities in order
to meet daily variation margin requirements on its futures
contracts or options on futures contracts at a time when it may be
disadvantageous to do so. There may be an imperfect correlation
between the fund's portfolio holdings and futures contracts or
options on futures contracts entered into by the fund, which may
prevent the fund from achieving the intended hedge or expose the
fund to risk of loss. Further, the fund's use of futures
contracts and options on futures contracts to reduce risk involves
cost and will be subject to the Investment Manager's ability to
predict correctly changes in interest rate relationships or other
factors. No assurance can be given that the Investment Manager's
judgment in this respect will be correct.

Foreign Securities. There are certain risks involved in
investing in securities of companies and governments of foreign
nations which are in addition to the usual risk inherent in
domestic investments. Securities of many foreign issuers and their
markets may be less liquid, and their prices more volatile, than
those of securities of comparable domestic issuers. In addition,
with respect to certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory
taxation and limitations on the use or removal of funds or other
assets of the fund, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that
could reduce the yield on such securities. Because the fund will
invest in securities denominated or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates
may adversely affect the value of portfolio securities and the
appreciation or depreciation of investments. Investments in
foreign securities also may result in higher expenses due to the
cost of converting foreign currency to U.S. dollars, the payment
of fixed brokerage commissions on foreign exchanges, the expense
of maintaining securities with foreign custodians and the
imposition of transfer taxes or transaction charges associated
with foreign exchanges.

Additional risks include those resulting from devaluation of
currencies, future adverse political and economic developments and
the relative lack of public information concerning issuers and the
lack of uniform accounting, auditing and financial reporting
standards or other regulatory practices and requirements
comparable to those applicable to domestic companies.

Currency Exchange Transactions. In order to protect against
uncertainty in the level of future exchange rates, the fund may
engage in currency exchange transactions and purchase exchange-
traded put and call options on foreign currencies. The fund will
conduct its currency exchange transactions either on a spot (i.e.,
cash) basis at the rate prevailing in the currency exchange market
or through entering into forward contracts to purchase or sell
currencies.

A forward currency contract involves an obligation to
purchase or sell a specific currency for an agreed-upon price at
an agreed-upon date, which may be any fixed number of days from
the date of the contract agreed upon by the parties. These
contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks)
and their customers. Although these contracts are intended to
minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential
gain that might result should the value of the currency increase.

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

Although the foreign currency market may not necessarily be
more volatile than the market in other commodities, the foreign
currency market offers less protection against defaults in the
forward trading of currencies than is available when trading in
currencies occurs on an exchange. Because a forward currency
contract is not guaranteed by an exchange or clearing-house,
default on the contract would deprive the fund of unrealized
profits or force the fund to cover its commitments for the
purchase or resale, if any, at the current market price. In
addition, if a devaluation is generally anticipated, the fund may
not be able to contract to sell the currency at a price above the
anticipated devaluation level.

Because transactions in currency exchange are usually
conducted on a principal basis, no fees or commissions are
involved. The use of forward currency contracts does not
eliminate fluctuations in the underlying prices of the securities,
but it does establish a rate of exchange that can be achieved in
the future. In addition, although forward currency contracts
limit the risk of loss due to a decline in the value of the hedged
currency, at the same time they limit any potential gain that
might result should the value of the currency increase.

Options on Foreign Currencies. The fund may purchase put
options on a foreign currency in which securities held by the fund
are denominated to protect against a decline in the value of the
currency in relation to the currency in which the exercise price
is denominated. The fund may purchase a call option on a foreign
currency to hedge against an adverse exchange rate of the currency
in which a security that it anticipates purchasing is denominated
in relation to the currency in which the exercise price is
denominated. Put options convey the right to sell the underlying
currency at a price which is anticipated to be higher than the
spot price of the currency at the time the option expires. Call
options convey the right to buy the underlying currency at a price
which is expected to be lower than the spot price of the currency
at the time that the option expires.

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

When-Issued and Delayed-delivery Securities. The fund will
not accrue income with respect to a when-issued or delayed-
delivery security prior to its stated delivery date. The fund
will establish with the PNC Bank, N.A. (PNC Bank), the fund's
Custodian, a segregated account consisting of cash, U.S.
government securities, equity securities or debt securities of any
grade, in an amount equal to the amount of the fund's when-issued
and delayed-delivery purchase commitments, provided such
securities are liquid and unencumbered and are marked to market
daily pursuant to guidelines established by the Board of
Directors. Placing securities rather than cash in the segregated
account may have a leveraging effect on the fund's net asset value
per share; that is, to the extent that the fund remains
substantially fully invested in securities at the same time that
it has committed to purchase securities on a when-issued or
delayed-delivery basis, greater fluctuations in its net asset
value per share may occur than if it had set aside cash to satisfy
its purchase commitments. 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.

Lending Securities. Loans of the fund's securities, if and
when made, may not exceed 20% 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 that will be
maintained at all times in a segregated account with PNC Bank in
an amount 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 that is acting as a "finder."

By lending its securities, the fund can increase its income
by continuing to receive interest on the loaned securities, by
investing the cash collateral in short-term instruments or by
obtaining yield in the form of interest paid by the borrower when
U.S. government securities are used as collateral. The portfolio
will adhere to the following conditions whenever it lends its
securities: (1) the fund must receive at least 100% cash
collateral or equivalent securities from the borrower, which
amount of collateral will be maintained by daily marking to
market; (2) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level of the
collateral; (3) the fund must be able to terminate the loan at any
time; (4) 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; (5) the fund
may pay only reasonable custodian fees in connection with the
loan; and (6) 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 Directors must terminate the loan and regain the fund's right
to vote the securities.

Short Sales Against the Box. The broker-dealer that
executes a short sale generally invests the cash proceeds of the
sale until they are paid to the fund. Arrangements may be made
with the broker-dealer to obtain a portion of the interest earned
by the broker on the investment of short sale proceeds. The fund
will segregate the securities against which short sales against
the box have been made in a special account with PNC Bank. Not
more than 10% of the fund's net assets (taken at current value)
may be held as collateral for such sales at any one time.

Mortgage-Backed Securities. The fund may invest in mortgage-
backed securities, which are securities representing interests in
"pools" of mortgage loans assembled for sale to investors by
various governmental agencies and government-related organizations,
such as Government National Mortgage Association (GNMA), Federal
National Mortgage Association (FNMA) and Federal Home Loan Mortgage
Corporation (FHLMC). Monthly payments of interest and principal by
the individual borrowers on mortgages are "passed through" to the
holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. The average lives of mortgage pass-
throughs are variable when issued because their average lives
depend on prepayment rates. The average life of these securities is
likely to be substantially shorter than their stated final maturity
as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and
all or part of a premium if any has been paid, and the actual yield
(or total return) to the fund may be different than the quoted
yield on the securities. Mortgage prepayments generally increase
with falling interest rates and decrease with rising interest
rates. Like other fixed-income securities, when interest rates rise
the value of mortgage pass-through securities generally will
decline; however, when interest rates are declining, the value of
mortgage pass-through securities with prepayment features may not
increase as much as that of other fixed-income securities.

Interests in pools of mortgage-related securities differ from
other forms of debt securities, which normally provide for periodic
payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide
a monthly payment which consists of both interest and principal
payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by prepayments of
principal resulting from the sale, refinancing or foreclosure of
the underlying property, net of fees or costs which may be
incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association (GNMA) are
described as "modified pass-through." These securities entitle the
holder to receive all interests and principal payments owed on the
mortgages in the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether the mortgagor
actually makes the payment.

The principal governmental guarantor of mortgage pass-through
securities is the GNMA. GNMA is a wholly owned U.S. government
corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of
the U.S. government, the timely payment of principal and interest
on securities issued by institutions approved by GNMA (such as
savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of FHA-insured or VA-guaranteed
mortgages. These guarantees, however, do not apply to the market
value or yield of mortgage pass-through securities. GNMA securities
are often purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be
lost if prepayment occurs.

Government-related guarantors (i.e., whose guarantees are not
backed by the full faith and credit of the U.S. government) include
the Federal National Mortgage Association (FNMA) and the Federal
Home Loan Mortgage Corporation (FHLMC). FNMA is a government-
sponsored corporation owned entirely by private shareholders. It is
subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases conventional residential mortgages
(i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include
state and federally-chartered savings and loan associations, mutual
savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA.

FHLMC is also a government-sponsored corporation owned by
private shareholders. FHLMC issues Participation Certificates (PCs)
which represent interests in conventional mortgages (i.e., not
federally insured or guaranteed) from FHLMC's national portfolio.
FHLMC guarantees timely payment of interest and ultimate collection
of principal regardless of the status of the underlying mortgage
loans. Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary
market issuers also create pass-through pools of mortgage loans.
Such issuers may also be the originators and/or servicers of the
underlying mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct
or indirect government or agency guarantees of payments in the
former pools. However, timely payment of interest and principal of
mortgage loans in these pools may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and
hazard insurance, and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers
and the mortgage poolers. There can be no assurance that the
private insurers or guarantors can meet their obligations under the
insurance policies or guarantee arrangements. The fund may also buy
mortgage-related securities without insurance or guarantees.

Prompt payment of principal and interest on GNMA mortgage
pass-through certificates is backed by the full faith and credit of
the United States. FNMA-guaranteed mortgage pass-through
certificates are solely the obligations of those entities but are
supported by the discretionary authority of the U.S. government to
purchase the agencies' obligations. Mortgage pools created by
private organizations generally offer a higher rate of interest
than governmental and government-related pools because there are no
direct or indirect guarantees of payments in the former pools.
Timely payment of interest and principal in these pools, however,
may be supported by various forms of private insurance or
guarantees, including individual loan, title, pool and hazard
insurance. There can be no assurance that the private insurers
will meet their obligations.

Mortgage-backed securities vary from traditional fixed-income
securities because of the potential for prepayment. These
instruments are backed by a real estate mortgage, and the mortgage
loan may be repaid at any time without penalty. While mortgage-
backed securities tend to rise in value when interest rates fall,
faster than expected prepayments of the mortgage loans will reduce
both the market value and yield to maturity of the mortgage-backed
securities. Thus, changes in interest rates may have a greater
effect on mortgage-backed securities that on traditional fixed
income securities. In a period of declining interests rates,
prepayments rise because mortgage holders are in a disadvantageous
economic position. Therefore, the amounts available for
reinvestment in new mortgages increase, but are likely to be
reinvested at lower interests rates. As a result, mortgage-backed
securities may benefit less from declining interests rated than
other fixed-income securities because of the risk of increased
prepayment.

Other Asset-Backed Securities. Corporate asset-backed
securities present certain risks. For instance, in the case of
credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of
the holders of the related automobile receivables. In addition,
because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee
for the holders of the automobile receivables may not have a proper
security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to
support payments on these securities.

Corporate asset-backed securities are often backed by pools
of assets representing the obligations of a number of different
parties. To lessen the effect of failures by obligors to make
payments on underlying assets, the securities may contain elements
of credit support which fall into two categories: (i) liquidity
protection and (ii) 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 ultimate default ensures
payment through insurance policies or letters of credit obtained by
the issuer or sponsor from third parties. The fund will not pay any
additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on
historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss in
excess of that anticipated, or failure of the credit support, could
adversely affect the return on an instrument in such a security.

The estimated life of an asset-backed security varies with
the prepayment experience with respect to the underlying debt
instruments. The rate of such prepayments, and hence the life of
an asset-backed security, will primarily be a function of current
market interest rates, although other economic and demographic
factors may be involved. While rising interest rates generally
decrease the rate of prepayments, an acceleration in prepayments
in response to sharply falling interests rates will shorten the
security's average maturity and limit the potential appreciation
in the security's value relative to a conventional debt security.
Consequently, asset-backed securities are not as affective in
locking in high long-term yields.

INVESTMENT RESTRICTIONS

The investment restrictions numbered 1 through 12 below have
been adopted by the fund as fundamental policies. Under the
Investment Company Act of 1940, as amended (1940 Act), a
fundamental policy may not be changed without the vote of a
majority of the outstanding voting securities of the fund, as
defined in the 1940 Act. This is defined in the 1940 Act as the
lesser of (a) 67% or more of the shares present at a meeting, if
the holders of more than 50% of the outstanding shares of the fund
are present or represented by proxy, or (b) more than 50% of the
outstanding shares.

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

1. Purchasing the securities of any issuer (other than
U.S. government securities) if, as a result, more than
5% of the value of the fund's total assets would be
invested in the securities of the issuer, except that
up to 25% of the value of the fund's total assets may
be invested without regard to this 5% limitation.

2. Purchasing more than 10% of the voting securities of
any one issuer (other than U.S. government
securities), except that up to 25% of the value of the
fund's total assets may be invested without regard to
this 10% limitation.

3. Purchasing securities on margin, except that the fund
may obtain any short-term credits necessary for the
clearance of purchases and sales of securities. For
purposes of this restriction, the deposit or payment
of initial or variation margin in connection with
futures contracts or related options will not be
deemed to be a purchase of securities on margin.

4. Making short sales of securities, except that the fund
may engage in short sales "against the box."

5. Borrowing money, except that (a) the fund may borrow
from banks for temporary or emergency (not leveraging)
purposes in an amount not exceeding 10% of the value
of the fund's total assets (including the amount
borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the
borrowing is made and (b) the fund may enter into
futures contracts. Whenever borrowings described in
(a) exceed 5% of the value of the fund's total assets,
the fund will not make any additional investments.

6. Pledging, hypothecating, mortgaging or otherwise
encumbering the fund's assets except to secure
borrowings and as margin for commodities transactions.

7. Underwriting the securities of other issuers, except
insofar as the fund may be deemed an underwriter in
the course of disposing of portfolio securities.

8. Purchasing or selling real estate or interests in real
estate, except that the fund may purchase and sell
securities that are secured by real estate or
interests in real estate and may purchase securities
issued by companies that invest in or deal in real
estate.

9. Investing in commodities, except that the fund may
invest in futures contracts, options on futures
contracts and options on currencies.

10. Making loans to others, except through the purchase of
qualified debt obligations, the entry into repurchase
agreements and loans of portfolio securities
consistent with the fund's investment objectives and
policies.

11. Investing in securities of other investment companies
registered or required to be registered under the 1940
Act, except as they may be acquired as part of a
merger, consolidation, reorganization, acquisition of
assets or an offer of exchange, or to the extent
permitted by the 1940 Act.

12. Purchasing any securities which would cause more than
25% of the value of the fund's total assets at the
time of purchase to be invested in the securities of
issuers conducting their principal business activities
in the same industry; provided that there shall be no
limit on the purchase of U.S. government securities.

NET ASSET VALUE

The valuation of the fund's assets is made by the Investment
Manager after consultation with an independent pricing service
(Service) approved by the fund's Board of Directors. When, in the
judgment of the Service, quoted bid prices for investments are
readily available and are representative of the bid side of the
market, these investments are priced by the Service at the mean
between the quoted bid prices and asked prices. Investments for
which, in the judgment of the Service, no readily obtainable
market quotation is available are priced by the Service at its
determination at fair value, based on methods that include
consideration of: yields or prices of securities of comparable
quality, coupon, maturity and type; indication as to values from
dealers; and general market conditions. The Service may use
electronic data processing techniques and/or matrix system to
determine valuations. The Investment Manager reviews the
Service's price information and, unless the Investment Manager has
information which leads it to use a different valuation, it will
generally use the Service's prices in establishing net asset
value. The procedures of the Service are reviewed periodically by
the officers of the fund under the general supervision and
responsibility of the Board of Directors, which may replace the
Service at any time if it determines it to be in the best
interests of the fund to do so.

TAXATION

Taxation of the Fund

The fund intends to qualify each year and elect to be
treated as a regulated investment company for federal income tax
purposes. In order to so qualify, the fund must, among other
things: (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of securities
and gains from the sale or other disposition of securities or
certain other related income; and (b) diversify its holdings so
that at the end of each fiscal quarter (i) at least 50% of the
value of the fund's assets is represented by cash or cash items,
U.S. government securities, securities of other regulated
investment companies, and other securities which, with respect to
any one issuer, do not represent more than 5% of the value of the
fund's assets nor more than 10% of the voting securities of such
issuer, and (ii) not more than 25% of the value of the fund's
assets is invested in the securities of any one issuer (other than
U.S. government securities or the securities of other regulated
investment companies), or two or more issuers which the taxpayer
(the fund) controls and which are determined to be engaged in the
same or similar trades or businesses or related trades or
businesses.

If the fund qualifies as a regulated investment company and
distributes to its shareholders at least 90% of its net investment
income, then the fund will not be subject to federal income tax on
the income so distributed. However, the fund would be subject to
corporate income tax on any undistributed income. In addition,
the fund will be subject to a nondeductible 4% excise tax on the
amount by which the income it distributes in any calendar year is
less than a required amount. For purposes of the excise tax, the
required distribution for any calendar year equals the sum of: (a)
98% of the fund's ordinary income for such calendar year; (b) 98%
of the excess of capital gains over capital losses for the one-
year period ending on October 31 (or another date if elected by
the fund) of that year; and (c) 100% of the undistributed ordinary
income and gains from prior years. For purposes of the excise
tax, any ordinary income or capital gains retained by, and taxed
in the hands of, the fund will be treated as having been
distributed.

The fund may elect to retain all or a portion of its net
capital gain, as described under "Taxation of Shareholders--
Distributions" below.

Any capital losses resulting from the disposition of
securities can only be used to offset capital gains and cannot be
used to reduce the fund's ordinary income. Such capital losses
may be carried forward by the fund for eight years.

If the fund owns shares in a foreign corporation that
constitutes a "passive foreign investment company" for federal
income tax purposes, and the fund does not elect to treat the
foreign corporation as a "qualified electing fund" within the
meaning of the Internal Revenue Code of 1986 (Code), the fund may
be subject to United States federal income taxation on a portion
of any "excess distribution" it receives from the foreign
corporation or any gain it derives from the disposition of such
shares, even if such income is distributed as a taxable dividend
by the fund to its shareholders. The fund may also be subject to
additional tax in the nature of an interest charge with respect to
deferred taxes arising from such distributions or gains. Any tax
paid by the fund as a result of its ownership of shares in a
"passive foreign investment company" will not give rise to any
deduction or credit to the fund or any shareholders. A "passive
foreign investment company" means any foreign corporation if, for
any taxable year during which its stock was held by the fund,
either (i) it derives at least 75% of its gross income from
"passive income" (including, but not limited to, interest,
dividends, royalties, rents and annuities), or (ii) at least 50%
of the value (or adjusted tax basis, if elected) of its assets
produce "passive income" or are held for the production of
"passive income." If the fund owns shares in a "passive foreign
investment company" and the fund does elect to treat the foreign
corporation as a "qualified electing fund" under the Code, the
fund may be required to include in its income each year a portion
of the ordinary income and net capital gain of the foreign
corporation, even if this income is not distributed to the fund.
Any such income would be subject to the 90% excise tax
distribution requirements described above.

Under Regulations proposed by the Treasury Department, a
regulated investment company may be entitled to make an
irrevocable election to mark to market (i.e., treat as disposed
of) as of the end of each taxable year for which such election to
treat such stock as a "qualified electing fund" was made. Any
gain recognized as the result of such an election would be treated
as gain derived from the sale of securities held for not less than
three months. No loss would be recognizable, however, as a result
of the mark to market election. In the event these proposed
Regulations are adopted, the fund will determine whether such an
election will be in the best interests of the fund and its
shareholders.

Hedging and Option Income Strategies and Foreign Currencies.
The use of hedging and option income strategies, such as writing
(selling) and purchasing options and futures contracts and
entering into forward contracts, involves complex rules that will
determine for income tax purposes the character and timing of
recognition of the income received in connection therewith by the
fund.

Gains or losses attributable to fluctuations in exchange
rates that occur between the time the fund accrues receivables or
liabilities denominated in a foreign currency and the time the
fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of foreign currency or debt securities
denominated in foreign currency and on disposition of certain
futures, forward contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency
between the date of acquisition of the currency, security, or
contract and the date of disposition also are treated as ordinary
income or loss. Such income or losses may increase or decrease
the amount of the fund's investment company taxable income to be
distributed to its shareholders as ordinary income, rather than
the amount distributed as capital gain.

The hedging transactions undertaken by the fund may result
in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by
the fund. In addition, losses or deductions realized by the fund
on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such
losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the tax consequences of
hedging transactions to the fund are not entirely clear. The fund
may make one or more of the elections available under the Code
which are applicable to straddles. If the fund makes any of the
elections, the amount, character and timing of the recognition of
gains, losses or deductions from the affected straddle positions
will be determined under rules that vary according to the
election(s) made. The rules applicable under certain elections
operate to accelerate the recognition of gains, losses or
deductions from the affected straddle positions. Because
application of the straddle rules may affect the character and
timing of gains, losses or deductions from the affected straddle
positions, the amount which must be distributed to shareholders,
and taxed to shareholders as ordinary income or long-term capital
gain, may be increased or decreased substantially as compared to a
fund that did not engage in such hedging transactions.

The fund's taxable income will in most cases be determined
on the basis of reports made to the fund by the issuers of the
securities in which the fund invests. The tax treatment of
certain securities in which the fund may invest is not free from
doubt and it is possible that an Internal Revenue Service
examination of the issuers of such securities or of the fund could
result in adjustments to the income of the fund.

Taxation of Shareholders

Distributions. In general, all distributions to
shareholders attributable to the fund's net investment income will
be taxable as ordinary income whether paid in cash or reinvested
in additional shares of common stock pursuant to the fund's
dividend reinvestment plan.

Dividends distributed by the fund will not generally be
eligible for the dividends received deduction in the hands of
corporate shareholders, except to the extent that the fund's
taxable income consists of dividends received from domestic
corporations.

Dividends and other distributions by the fund are generally
taxable to the shareholders at the time the dividend or
distribution is made. Any dividends declared by the fund in
October, November or December and made payable to shareholders of
record in such a month would be taxable to shareholders as of
December 31, provided that the dividend is paid in the following
January.

If a shareholder purchases shares of common stock at a cost
that reflects an anticipated dividend, such dividend will be
taxable even though it represents economically in whole or in part
a return of the purchase price. Investors should consider the tax
implications of buying shares shortly prior to a dividend
distribution.

The fund will, within 60 days after the close of its taxable
year, send written notices to shareholders regarding the tax
status of all distributions made during the year.

Sales of Shares. In general, if a share of common stock is
sold, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale and the
seller's adjusted basis in the share. However, any loss
recognized by a shareholder within six months of purchasing the
shares will be treated as a long-term capital loss to the extent
of any capital gain dividends received by the shareholder and the
shareholder's share of undistributed net capital gain. In
addition, any loss realized on a sale of shares of common stock
will be disallowed to the extent the shares disposed of are
replaced within a 61-day period beginning 30 days before and
ending 30 days after the disposition of the shares. In such a
case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss. Any gain or loss realized upon a sale of
shares by a shareholder who is not a dealer in securities will be
treated as capital gain or loss.

Backup Withholding. The fund may be required to withhold
federal income tax at the rate of 31% of any payments made to a
shareholder if the shareholder has not provided a correct taxpayer
identification number and certain required certifications to the
fund, or if the Secretary of the Treasury notifies the fund that
the number provided by a shareholder is not correct or that the
shareholder has not reported all interest and dividend income
required to be shown on the shareholder's federal income tax
return.

The foregoing discussion is a summary of certain of the
current federal income tax laws regarding the fund and investors
in the shares of common stock, and does not deal with all of the
federal income tax consequences applicable to the fund, or to all
categories of investors, some of which may be subject to special
rules. Prospective investors should consult their own tax
advisers regarding the federal, state, local, foreign and other
tax consequences to them of investments in the fund.

OFFICERS AND DIRECTORS

The Officers and Directors of the fund and their principal
occupations for at least the last five years are set forth below.
Those Directors who are "interested persons" of the fund, as
defined in the 1940 Act, are indicated by asterisk. Each person
indicated below as a Director of the fund is also a director,
trustee and/or general partner of other investment companies
registered under the 1940 Act with which Salomon Smith Barney Inc.
(Salomon Smith Barney) or one or more of its affiliates is an
affiliated person.

Name, Address and Age

Positions Held with
the Fund

Principal Occupations During
Past Five Years

*Heath B. McLendon
388 Greenwich Street
New York, NY 10013
Age 65

Chairman of the
Board, President
and Chief Executive
Officer

Managing Director Salomon Smith
Barney; Director of 59
investment companies associated
with Salomon Smith Barney;
Chairman of the Board of Smith
Barney Strategy Advisers Inc and
Director and President of MMC
and Travelers Investment
Adviser, Inc. (TIA)

Donald R. Foley
3668 Freshwater Drive
Jupiter, FL 33477
Age 76

Director

Retired; Director of 10
investment companies associated
with Salomon Smith Barney.
Formerly, Vice President of
Edwin Bird Wilson, Incorporated
(advertising).

Paul Hardin
60134 Davie Street
Chapel Hill, NC 27599
Age 67

Director

Professor of Law at the
University of North Carolina at
Chapel Hill, Director of 12
investment companies associated
with Salomon Smith Barney.
Formerly, Chancellor of the
University of North Carolina at
Chapel Hill.

Name, Address and Age

Positions Held with
the Fund

Principal Occupations During
Past Five Years

Roderick C. Rasmussen
9 Cadence Court
Morristown, NJ 07960
Age 72

Director

Investment Counselor; Director
of 10 investment companies
associated with Salomon Smith
Barney. Formerly, Vice President
of Dresdner and Company Inc.
(investment counselors).

John P. Toolan
13 Chadwell Place
Morristown, NJ 07960
Age 68

Director

Retired; Director of 10
investment companies associated
with Salomon Smith Barney;
Director of John Hancock Funds.
Formerly, Director and Chairman
of Salomon Smith Barney Trust
Company, Director of Smith
Barney and MMC.

*Lewis E. Daidone
388 Greenwich Street
New York, NY 10013
Age 41

Senior Vice
President and
Treasurer

Managing Director of Salomon
Smith Barney; Senior Vice
President and Treasurer of other
investment companies associated
with Salomon Smith Barney;
Director and Senior Vice
President of MMC and TIA, and
Senior Vice President of Smith
Barney Strategy Advisers, Inc.

*Christina T. Sydor
388 Greenwich Street
New York, NY 10013
Age 47

Secretary

Managing Director of Salomon
Smith Barney and Secretary of
other investment companies
associated with Salomon Smith
Barney; Secretary and General
Counsel of MMC and TIA.

*John C. Bianchi
388 Greenwich Street
New York, NY 10013
Age 42

Vice President and
Investment Officer

Managing Director of Salomon
Smith Barney and investment
officer of certain other
investment companies associated
with Salomon Smith Barney.

*Paul Brook
388 Greenwich Street
New York, NY 10013
Age

Controller

Director of Salomon Smith Barney
and Controller and Assistant
Secretary of certain other
investment companies associated
with Salomon Smith Barney.

Fees for directors who are not "interested persons" of the
fund, all of whom are board members of a group of funds sponsored
by Salomon Smith Barney, are set at $42,000 per annum and are
allocated based on relative net assets of each fund in the group.
In addition, these directors receive $100 per fund for each board
meeting attended ($100 per underlying portfolio of each
registrant, in the case of in-person meetings), plus reimbursement
for travel and out-of-pocket expenses incurred in connection with
board meetings. For the fiscal year ended September 30, 1998,
such expenses totaled $14,080.60.

The following table shows the compensation paid by the fund
to each person who was a director during the fund's fiscal year
ended September 30, 1998.

Compensation Table

Name

Aggregate
Compensation
from Fund

Pension or
Retirement
Benefits Accrued
as part of Fund
Expenses

Compensation
from Fund
and Fund
Complex

Total Number
of Funds for
Which Director
Serves Within
Fund Complex

Joseph H. Fleiss+@
$875
$0
$54,900
10

Donald R. Foley+
1,053
0
55,400
10

Paul Hardin
1,207
0
73,000
12

Heath B. McLendon*
0
0
0
59

Roderick C.
Rasmussen
1,407
0
55,400
10

John P. Toolan+
1,307
0
55,400
10

Francis Martin
4,448
0
53,000
10

* Designates a director who is an "interested person" of the fund
as defined under the 1940 Act.

+ Pursuant to the fund's deferred compensation plan, the
indicated persons have elected to defer the payment of the
following amounts of their compensation from the fund: Joseph
H. Fleiss: $96, Donald R. Foley: $353, John P. Toolan: $1,307
and Francis Martin: $191, and the following amounts of their
total compensation from the fund complex: Joseph H. Fleiss:
$21,000, Donald R. Foley: $21,000, and John P. Toolan: $55,400
and Francis Martin: $53,000.

@ Effective January 1, 1998, Mr. Fleiss became director emeritus.
Upon attainment of age 72 the fund's current directors may elect to
change to emeritus status. Any directors elected or appointed to the board
of directors in the future will be required to change to emeritus status
upon attainment of age 80. Directors emeritus are entitled to serve in
emeritus status for a maximum of 10 years during which time they are
paid 50% of the annual retainer fee and meeting fees otherwise
applicable to the fund's directors, together with reasonable
out-of-pocket expenses for each meeting attended. During the
fund's last fiscal year, total compensation paid by the fund to
directors emeritus (other than Mr. Fleiss, who is covered in
the table above) totaled $453.

At the close of business on December 10, 1998,
70,930,989.881 shares of common stock, equal to 98.2% of the
fund's total shares outstanding on that date, were held of record
but not beneficially owned by, CEDE & Co., c/o Depository Trust
Company, Box 20, Bowling Green Station, NY, NY 10004-9998. As of
that date, the officers and Directors of the fund beneficially
owned less than 1% of the outstanding shares of the fund.

PORTFOLIO TRANSACTIONS

General

The fund's securities ordinarily are purchased from and sold
to parties acting as either principal or agent. 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 the Investment Manager determines
that the best execution will be obtained. Usually no brokerage
commissions, as such, are paid by the fund for purchases and sales
of fixed-income securities, which are typically undertaken through
principal transactions, although the price paid usually includes
compensation to the dealer acting in the form of a spread or mark-
up. The prices paid to underwriters of newly issued securities
typically include a concession paid by the issuer to the
underwriter, and purchasers of after-market fixed-income
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
broker-dealers by the Investment Manager in its best judgment.
The primary consideration is prompt and effective execution of
orders at the most favorable price. Subject to that primary
consideration, broker-dealers may be selected for research,
statistical or other services to enable the Investment Manager to
supplement its own research and analysis with the views and
information of other securities firms. The fund may utilize
Salomon Smith Barney or a Salomon Smith Barney-affiliated broker
in connection with a purchase or sale of securities when the
Investment Manager believes that the broker's charge for the
transactions does not exceed usual and customary levels. The same
standard applies to the use of Smith Barney as a commodities
broker in connection with entering into options and futures
contracts.

Research services furnished by broker-dealers through which
the fund effects securities transactions may be used by the
Investment Manager in managing other investment funds and,
conversely, research services furnished to the Investment Manager
by broker-dealers in connection with other funds the Investment
Manager advises may be used by the Investment Manager in advising
the fund. Although it is not possible to place a dollar value on
these services, the Investment Manager is of the view that the
receipt of the services should not reduce the overall costs of its
research services.

Investment decisions for the fund are made independently
from those of other investment companies managed by the Investment
Manager. If those investment companies are prepared to invest in,
or desire to dispose of, investments at the same time as the fund,
however, available investments or opportunities for sales will be
allocated equitably to each client of the Investment Manager. In
some cases, this procedure may adversely affect the size of the
position obtained for or disposed of by the fund or the price paid
or received by the fund.

The fund's Board of Directors will review periodically the
commissions paid by the fund to determine if the commissions paid
over representative periods of time were reasonable in relation to
the benefits inuring to the fund.

Turnover

The fund cannot accurately predict its turnover rate, but
anticipates that its annual turnover rate will not exceed 150%.
The fund's turnover rate is calculated by dividing the lesser of
the fund's sales or purchases of securities during a year
(excluding any security the maturity of which at the time of
acquisition is one year or less) by the average monthly value of
the fund's securities for the year. Higher turnover rates can
result in transaction costs, and corresponding increases in the
fund's expense ratio. The fund will not consider turnover rate a
limiting factor in making investment decisions consistent with its
investment objectives and policies. For the fiscal years ended
September 30, 1996, 1997 and 1998 the portfolio turnover rate was
73%, 87% and 98%, respectively.

MANAGEMENT OF THE FUND

Investment Manager

MMC, 388 Greenwich Street, New York, New York 10013, is
controlled by Salomon Smith Barney Holdings Inc., the parent
company of Salomon Smith Barney. Salomon Smith Barney Holdings
Inc. is a direct wholly owned subsidiary of Citigroup Inc.

Subject to the supervision and direction of the fund's Board
of Directors, MMC manages the securities held by the fund in
accordance with the fund's stated investment objectives and
policies, makes investment decisions for the fund, places orders
to purchase and sell securities on behalf of the fund and employs
managers and securities analysts who provide research services to
the fund. The fund pays MMC a fee for services provided to the
fund that is computed daily and paid monthly at the annual rate of
1.15% of the value of the fund's average daily net assets. This
fee is higher than the rates for similar services paid by other
publicly offered, closed-end management investment companies that
have investment objectives and policies similar to the fund. For
the years ended September 30, 1996, 1997 and 1998, the fund paid
$9,318,853, $9,638,822 and $10,065,212, respectively, in
management fees to MMC.

Custodian and Transfer Agent

PNC Bank, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, acts as custodian of the fund's
investments. First Data Investor Services Group, Inc. (First
Data), 53 State Street, Boston, Massachusetts, 02109, serves as
the fund's transfer agent, dividend-paying agent and registrar.

Independent Auditors

KPMG LLP, 345 Park Avenue, New York, New York 10154, has
been selected as independent auditors for the fund for its fiscal
year ending September 30, 1999 to examine and report on the
financial statements of the fund.

REPURCHASE OF SHARES, CONVERSION TO OPEN-END FUND AND
ANTI-TAKEOVER PROVISIONS

Repurchase Of Common Shares

The fund may repurchase shares of its common stock in the
open market or in privately negotiated transactions when the fund
can do so at prices below their then-current net asset value per
share on terms that the Board of Directors believes represent a
favorable investment opportunity, but has no obligation to do so.

No assurance can be given that repurchases and/or tenders
will result in the common stock's trading at a price that is close
or equal to net asset value. The market price of the common stock
will, among other things, be determined by the relative demand
for, and supply of, the common stock in the market, the fund's
investment performance, the fund's dividends and investor
perception of the fund's overall attractiveness as an investment
as compared with other investment alternatives. Any such
acquisition of common stock will decrease the total assets of the
fund and therefore have the effect of increasing the fund's
expense ratio. The fund may borrow money to finance the
repurchase of shares subject to certain limitations. See
"Investment Restrictions." Any interest on the borrowings will
reduce the fund's net income.

If the fund liquidates securities in order to repurchase
shares of common stock, the fund may realize gains and losses. The
fund's turnover rate may or may not be affected by the fund's
repurchases of shares of common stock pursuant to a tender offer.

Conversion To Open-End Fund

The fund's Articles of Incorporation require the favorable
vote of the holders of at least two-thirds of the shares of common
stock then entitled to be voted to authorize the conversion of the
fund from a closed-end to an open-end investment company as
defined in the 1940 Act, unless two-thirds of the Continuing
Directors (as defined below) approve such a conversion. In the
latter case, the affirmative vote of a majority of the shares
outstanding will be required to approve the amendment to the
fund's Articles of Incorporation providing for the conversion of
the fund.

Anti-Takeover Provisions

The fund's Articles of Incorporation include provisions that
could have the effect of limiting the ability of other entities or
persons to acquire control of the fund or to change the
composition of its Board of Directors and could have the effect of
depriving shareholders of an opportunity to sell their shares of
common stock at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the
fund. Commencing with the first annual meeting of shareholders,
the Board of Directors will be divided into three classes. At the
annual meeting of shareholders in each year thereafter, the term
of one class will expire and each Director elected to the class
will hold office for a term of three years. The classification of
the Board of Directors in this manner could delay for an
additional year the replacement of a majority of the Board. The
Articles of Incorporation provide that the maximum number of
Directors that may constitute the fund's entire board is 12. A
Director may be removed from office, or the maximum number of
Directors increased, only by vote of the holders of at least 75%
of the shares of common stock entitled to be voted on the matter.

The affirmative votes of at least 75% of the Directors and
the holders of at least 75% of the shares of the fund are required
to authorize any of the following transactions (referred to
individually as a "Business Combination"): (1) a merger,
consolidation or share exchange of the fund with or into any other
person (referred to individually as a "Reorganization
Transaction"); (2) the issuance or transfer by the fund (in one or
a series of transactions in any 12-month period) of any securities
of the fund to any other person or entity for cash, securities or
other property (or combination thereof) having an aggregate fair
market value of $1,000,000 or more, excluding sales of securities
of the fund in connection with a public offering, issuances of
securities of the fund pursuant to a dividend reinvestment plan
adopted by the fund and issuances of securities of the fund upon
the exercise of any stock subscription rights distributed by the
fund; (3) a sale, lease, exchange, mortgage, pledge, transfer or
other disposition by the fund (in one or a series of transactions
in any 12-month period) to or with any person of any assets of the
fund having an aggregate fair market value of $1,000,000 or more,
except for transactions in securities effected by the fund in the
ordinary course of its business (each such sale, lease, exchange,
mortgage, pledge, transfer or other disposition being referred to
individually as a "Transfer Transaction"). The same affirmative
votes are required with respect to: any proposal as to the
voluntary liquidation or dissolution of the fund or any amendment
to the fund's Articles of Incorporation to terminate its existence
(referred to individually as a "Termination Transaction"), and any
shareholder proposal as to specific investment decisions made or
to be made with respect to the fund's assets.

A 75% shareholder vote will not be required with respect to
a Business Combination if the transaction is approved by a vote of
at least 75% of the Continuing Directors (as defined below) or if
certain conditions regarding the consideration paid by the person
entering into, or proposing to enter into, a Business Combination
with the fund and various other requirements are satisfied. In
such case, a majority of the votes entitled to be cast by
shareholders of the fund will be required to approve the
transaction if it is a Reorganization Transaction or a Transfer
Transaction that involves substantially all of the fund's assets
and no shareholder vote will be required to approve the
transaction if it is any other Business Combination. In addition,
a 75% shareholder vote will not be required with respect to a
Termination Transaction if it is approved by a vote of at least
75% of the Continuing Directors, in which case a majority of the
votes entitled to be cast by shareholders of the fund will be
required to approve the transaction.

The voting provisions described above could have the effect
of depriving shareholders of the fund of an opportunity to sell
their common stock at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the
fund in a tender offer or similar transaction. In the view of the
fund's Board of Directors, however, these provisions offer several
possible advantages, including: (1) requiring persons seeking
control of the fund to negotiate with its management regarding the
price to be paid for the amount of common stock required to obtain
control; (2) promoting continuity and stability; and (3) enhancing
the fund's ability to pursue long-term strategies that are
consistent with its investment objective and the management
policies. The Board of Directors has determined that the voting
requirements described above, which are generally greater than the
minimum requirements under Maryland law and the 1940 Act, are in
the best interests of shareholders generally.

A "Continuing Director," as used in the discussion above, is
any member of the fund's Board of Directors (1) who is not a
person or affiliate of a person who enters or proposes to enter
into a Business Combination with the fund (such a person or
affiliate being referred to individually as an "Interested Party")
and (2) who has been a member of the Board of Directors for a
period of at least 12 months (or since the commencement of the
fund's operations, if less than 12 months), or is a successor of a
Continuing Director who is unaffiliated with an Interested Party
and is recommended to succeed a Continuing Director by a majority
of the Continuing Directors then members of the Board of
Directors.

FINANCIAL STATEMENTS

The financial information contained under the following
headings is hereby incorporated by reference from the fund's
September 30, 1998 Annual Report to Shareholders, copies of which
are furnished with this SAI: Statement of Assets and Liabilities;
Statement of Changes in Net Assets; Statement of Operations; Notes
to Financial Statements; Financial Highlights and Independent
Auditors' Report.

u:\legal\funds\#hio\1999\secdocs\sai99 3

Part C
Item No.

Information required to be included in Part C is set forth,
under the appropriate item so numbered, in Part C of this
Registration Statement.

PART C OTHER INFORMATION

Item 24. Financial Statements and Exhibits.

(a) Financial Statements

Included in Part A:

Financial Highlights

Included in Part B:

The Registrant's Annual Report for the fiscal year ended
September 30, 1998 and the Independent Auditors' Report
dated November 16, 1998 are incorporated by reference into
the Statement of Additional Information and by reference to
the Definitive N-30D filed on December 9, 1998, Accession #
91155-98-000717.

(b) Exhibits:

Exhibit
Number Description

(1)(a) Articles of Incorporation*
(b) Amendment to Articles of Incorporation**

(2) By-Laws*

(3) Not Applicable

(4) Specimen Certificate of Common Stock***

(5) Form of Dividend Reinvestment Plan++

(6) Not Applicable

(7)(a) Form of Investment Management Agreement between the
Fund and Mutual Management Corp.***
(b) Form of Transfer and Assumption of Investment
Management Agreement between the Registrant, Mutual
Management Corp. and Smith Barney Mutual Funds
Management Inc. +

(8)(a) Form of Underwriting Agreement**
(b) Form of Smith Barney Shearson Master Agreement among
Underwriters**

(9) Not applicable.

(10) Form of Custodian Agreement between the Fund and PNC
Bank***

(11) Form of Transfer Agency and Service Agreement between
the Fund and TSSG (to be filed by amendment)

(12) Opinion and consent of Miles & Stockbridge***

(13) Not Applicable

(14) Consent of KPMG Peat Marwick LLP, independent auditors
for the Fund (filed herewith)

(15) Not Applicable

(16) Form of Subscription Agreement***

(17) Not Applicable

(18) Financial Data Schedule

_____________

* Previously filed by Registrant with its initial Registration
Statement (No. 33-66770) on July 30, 1993.
** Previously filed by the Registrant with Pre-Effective
Amendment No. 1 to its Registration Statement (No. 33-66770)
on September 10, 1993.
*** Previously filed by the Registrant with Pre-Effective
Amendment No. 2 to its Registration Statement (No. 33-66770)
on October 21, 1993.
+ Previously filed by the Registrant with Post-Effective
Amendment No. 1 to its Registration Statement (No. 33-66770)
on December 30, 1994.

++ Incorporated by reference to Exhibit 2 (e) of Post-Effective
Amendment No. 6 of Managed Municipals Portfolio II Inc.
(File No. 33-49982) filed on November 18, 1998, accession
number 91155-98-000680.

Item 25. Marketing Arrangements.

Reference is made to the Underwriting Agreement filed as
Exhibit 8(a) by Registrant with Pre-effective Amendment No. 2
to its Registration Statement.

Item 26. Other Expenses of Issuance and Distribution.

The following table sets forth the estimated expenses to be
incurred in connection with the offering described in this
Registration Statement:

Securities and Exchange Commission registration fees $0
Printing (other than stock certificates)
5,000.00
Legal fees and expenses 0
Accounting fees and expenses 0
Miscellaneous 0
Total $5,000.00

Item 27. Persons Controlled by or Under Common Control with
Registrant.

None.

Item 28. Number of Holders of Securities.

(1) (2)
Title of Class Number of Record Holders
at December 10, 1998

Shares of Common Stock, 1,427
$.001 Par Value

Item 29. Indemnification.

Section 2-418 of the General Corporation Law of the State of
Maryland, Article VI of the Fund's By-Laws and the Investment
Management Agreement filed as Exhibit 7(a) to Pre-Effective
Amendment No. 2 to its Registration Statement provide for
indemnification.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be provided to directors, officers
and controlling persons of the Fund, pursuant to the foregoing
provisions or otherwise, the Fund has been advised that in the
opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than
the payment by the Fund of expenses incurred or paid by a
director, officer or controlling person of the Fund in
connection with any successful defense of any action, suit or
proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the Fund will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.

Reference is made to Section 8 of the Underwriting Agreement, a
form of which is filed as Exhibit 8(a) with Pre-Effective
Amendment No. 1 to its Registration Statement for provisions
relating to the indemnification of the agent.

Item 30. Business and Other Connections of Investment Manager.

Mutual Management Corp. ("MMC"), formerly known as Smith Barney
Mutual Funds Management Inc., was incorporated in December 1968
under the laws of the State of Delaware. MMC is a registered
investment adviser and is a wholly owned subsidiary of Salomon
Smith Barney Holdings Inc., which in turn is a wholly owned
subsidiary of Citigroup Inc. MMC is primarily engaged in the
investment advisory business. Information as to executive
officers and directors of MMC is included in its Form ADV filed
with the SEC (Registration number 801-8314) and is incorporated
herein by reference.

Item 31. Location of Accounts and Records.

All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of
1940, as amended and the rules promulgated thereunder are
maintained at the office of Investment Manager at 388 Greenwich
Street, New York, New York 10013.

Item 32. Management Services.

Not applicable.

Item 33. Undertakings.

(1) Not applicable.

(2) Not applicable.

(3) Not applicable.

(4)(a) Registrant undertakes to file, during any period in
which offers or sales are being made, a post-effective
amendment to this Registration Statement:

(1) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;

(2) to reflect in the prospectus any facts or events
after the effective date of this Registration
Statement (or the most recent post-effective
amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in this Registration
Statement; and

(3) to include any material information with respect
to the plan of distribution not previously
disclosed in this Registration Statement or any
material change to such information in this
Registration Statement.

(4)(b) Registrant undertakes that, for the
purpose of determining any liability under the
Securities Act of 1933, each subsequent post-
effective amendment shall be deemed to be a new
registration statement relating to the
securities offered therein, and the offering of
those securities at that time shall be deemed to
be the initial bona fide offering thereof.

(4)(c) Not applicable.

(5) Not applicable.

(6) Registrant undertakes to send by first class
mail or other means designed to ensure equally
prompt delivery, within two business days of
receipt of a written or oral request, any
Statement of Additional Information.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused
this Amendment to the Registration Statement on Form N-2 to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York, on the
17th day of December, 1998.
.

HIGH INCOME OPPORTUNITY FUND INC.

By: /s/Heath B. McLendon
Heath B. McLendon, Chairman of the
Board, President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by
the following in the capacities and on the date indicated.

Signatures Title Date

/s/Heath B, McLendon * Chairman of the Board,
December 17, 1998
Heath B. McLendon Chief Executive Officer
and President

/s/Donald R. Foley* Director
December 17, 1998
Donald R. Foley

/s/ Paul Hardin* Director
December 17, 1998
Paul Hardin

/s/Roderick C. Rasmussen* Director
December 17, 1998
Roderick C. Rasmussen

/s/John P. Toolan* Director
December 17, 1998
John P. Toolan

/s/Lewis E. Daidone* Treasurer December 17,
1998
Lewis E. Daidone Principal Financial
and Accounting Officer

*By /s/Lewis E. Daidone
Lewis E. Daidone
Pursuant to Power of Attorney

HIGH INCOME OPPORTUNITY FUND INC.

EXHIBIT INDEX

Exhibit No. Description of Exhibit

(14) Consent of KPMG Peat Marwick LLP,
Independent Auditors for the Fund

(18) Financial Data Schedule

Independent Auditors' Consent

To the Shareholders and Board of Directors of
High Income Opportunity Fund Inc.:

We consent to the use of our reports dated November 16, 1998 for
High Income Opportunity Fund Inc. herein by reference and to the
references to our Firm under the headings "Financial Highlights"
and "Other Information" in the Prospectus and "Independent
Auditors" in the Statement of Additional Information.

KPMG Peat Marwick LLP

New York, New York
December 16, 1998

<ARTICLE> 6
<CIK> 0000910068
<NAME> HIGH INCOME OPPORTUNITY FUND INC.

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 828,353,698
<INVESTMENTS-AT-VALUE> 800,692,061
<RECEIVABLES> 20,113,978
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 820,806,039
<PAYABLE-FOR-SECURITIES> 6,635,390
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<OTHER-ITEMS-LIABILITIES> 4,543,791
<TOTAL-LIABILITIES> 11,179,181
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<PER-SHARE-GAIN-APPREC> (1.14)
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