================================================================================
SEMI-ANNUAL REPORT
================================================================================
Smith Barney
Funds, Inc.
U.S. Government
Securities Portfolio
--------------------
June 30, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
====================================
U.S. Government Securities Portfolio
====================================
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Funds,
Inc. - U.S. Government Securities Portfolio ("Portfolio") for the period ended
June 30, 1997. In this report, we summarize the period's prevailing economic and
market conditions and outline our investment strategy. A more detailed summary
of performance can be found in the appropriate sections that follow.
Portfolio Performance Update
For the six months ended June 30, 1997, the Portfolio's Class A shares posted a
total return of 3.34% which compares favorably to its Lipper Analytical
Services, Inc. peer group average of 3.21%. (Lipper Analytical Services, Inc. is
an independent fund-tracking organization.) Moreover, over the past six months,
the Portfolio distributed dividends totaling $0.43 per Class A share.
Market Update and Outlook
After more than six years of uninterrupted growth, the U.S. economy continued
its vigorous expansion over the past six months. An annualized rate of increase
in Gross Domestic Product (GDP) of 5.6% was reported for the first quarter of
1997, coming on the heels of an already brisk 3.8% annualized GDP growth for the
fourth quarter of 1996, raised the concerns of many investors that the Federal
Reserve ("Fed") would be forced to raise short-term interest rates. The Fed has
stated that it considers an annual growth rate of approximately 2.0% to 2.5% to
be the limit the U.S. economy can absorb without increasing inflationary
pressures. As a result of the unexpected strength in the U.S. economy, the Fed
raised the federal funds rate by 25 basis points, or 0.25%, at its March 1997
meeting. (The federal funds rate is the interest rate banks charge each other
for overnight loans and a closely watched indicator of the direction of interest
rates.)
Despite robust growth and historically low unemployment, inflationary pressures
have been nearly absent in the U.S. economy. In fact, the cost of manufactured
goods has been declining and consumer prices have risen at less than a 2% annual
rate so far this year, as represented by the Producers Price Index and the
Consumers Price Index, respectively.
In our view, much of the performance of the financial markets in recent years
has been driven by demographic factors. As baby boomers reach their peak earning
years, they have tended to put those earnings to work in financial assets.
1
<PAGE>
This tendency, combined with their sheer size, has resulted in continued record
inflows into managed financial products, especially mutual funds.
We remain bullish on the bond market in the coming months. We expect that
interest rates should continue to go down for the remainder of the year with the
benchmark 30-year U.S. Treasury bond yield falling to around 6%. Moreover, we
believe that fixed-income investments should benefit from the continued steady
growth of the U.S. economy with little or no threat of higher inflationary
pressures.
Yields from U.S. Treasuries
<TABLE>
<CAPTION>
Low High
6/30/97 12/31/96 2/14/97 4/11/97
------- -------- ------- -------
<S> <C> <C> <C> <C>
3 Month Bill 5.172% 5.186% 5.079% 5.277%
6 Month Bill 5.251 5.297 5.155 5.636
1 Year Note 5.651 5.488 5.417 6.000
2 Year Note 6.059 5.868 5.761 6.489
3 Year Note 6.209 6.010 5.898 6.650
5 Year Note 6.372 6.206 6.053 6.839
10 Year Bond 6.491 6.418 6.265 6.968
30 Year Bond 6.780 6.641 6.528 7.166
</TABLE>
Portfolio's Investment Strategy
Given our expectations of lower interest rates, we reduced the Portfolio's
exposure to mortgage-backed securities during the reporting period from roughly
80% to approximately 61% of its holdings. We replaced those mortgage-backed
securities with U.S. Treasuries, increasing interest-bearing U.S. Treasuries to
about 14% and zero coupon U.S. Treasuries to around 21% of the Portfolio's
holdings. In addition, because of our positive outlook for the bond market, we
increased the Portfolio's duration from approximately 4 to 7 years.
In closing, we thank you for investing in the Smith Barney Funds, Inc. - U.S.
Government Securities Portfolio. We look forward to continuing to help you
pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
- --------------------- -------------------
Heath B. McLendon James E. Conroy
Chairman Vice President
July 18, 1997
2
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Historical Performance -- Class A Shares
==============================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.24 $13.24 $ 0.43 $0.00 3.34%+
- ----------------------------------------------------------------------------------------------
12/31/96 13.59 13.24 0.86 0.00 3.97
- ----------------------------------------------------------------------------------------------
12/31/95 12.50 13.59 0.92 0.00 16.52
- ----------------------------------------------------------------------------------------------
12/31/94 13.66 12.50 0.91 0.05 (1.48)
- ----------------------------------------------------------------------------------------------
12/31/93 13.87 13.66 0.98 0.11 6.40
- ----------------------------------------------------------------------------------------------
12/31/92 14.10 13.87 1.08 0.08 6.85
- ----------------------------------------------------------------------------------------------
12/31/91 13.22 14.10 1.13 0.05 16.29
- ----------------------------------------------------------------------------------------------
12/31/90 13.17 13.22 1.18 0.00 9.95
- ----------------------------------------------------------------------------------------------
12/31/89 12.56 13.17 1.21 0.00 15.11
- ----------------------------------------------------------------------------------------------
12/31/88 12.68 12.56 1.20 0.00 8.72
- ----------------------------------------------------------------------------------------------
12/31/87 13.89 12.68 1.31 0.24 2.67
==============================================================================================
Total $11.21 $0.53
==============================================================================================
<CAPTION>
==============================================================================================
Historical Performance -- Class B Shares
==============================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.26 $13.26 $0.40 $0.00 3.06%+
- ----------------------------------------------------------------------------------------------
12/31/96 13.61 13.26 0.79 0.00 3.44
- ----------------------------------------------------------------------------------------------
12/31/95 12.51 13.61 0.86 0.00 16.03
- ----------------------------------------------------------------------------------------------
Inception*-12/31/94 12.47 12.51 0.21 0.00 2.04+
==============================================================================================
Total $2.26 $0.00
==============================================================================================
<CAPTION>
==============================================================================================
Historical Performance -- Class C Shares
==============================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.23 $13.23 $0.40 $0.00 3.10%+
- ----------------------------------------------------------------------------------------------
12/31/96 13.58 13.23 0.80 0.00 3.49
- ----------------------------------------------------------------------------------------------
12/31/95 12.50 13.58 0.87 0.00 15.93
- ----------------------------------------------------------------------------------------------
12/31/94 13.66 12.50 0.83 0.04 (2.11)
- ----------------------------------------------------------------------------------------------
12/31/93 13.86 13.66 0.88 0.11 5.74
- ----------------------------------------------------------------------------------------------
Inception*-12/31/92 14.01 13.86 0.30 0.00 1.07+
==============================================================================================
Total $4.08 $0.15
==============================================================================================
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Historical Performance -- Class Y Shares
==============================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.27 $13.27 $0.45 $0.00 3.46%+
- ----------------------------------------------------------------------------------------------
12/31/96 13.61 13.27 0.89 0.00 4.30
- ----------------------------------------------------------------------------------------------
12/31/95 12.51 13.61 0.96 0.00 16.88
- ----------------------------------------------------------------------------------------------
12/31/94 13.67 12.51 0.91 0.04 (1.53)
- ----------------------------------------------------------------------------------------------
Inception*-12/31/93 13.97 13.67 0.95 0.11 5.55+
==============================================================================================
Total $4.16 $0.15
==============================================================================================
<CAPTION>
==============================================================================================
Historical Performance -- Class Z Shares
==============================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.26 $13.26 $0.45 $0.00 3.47%+
- ----------------------------------------------------------------------------------------------
12/31/96 13.60 13.26 0.89 0.00 4.31
- ----------------------------------------------------------------------------------------------
12/31/95 12.50 13.60 0.95 0.00 16.89
- ----------------------------------------------------------------------------------------------
Inception*-12/31/94 12.47 12.50 0.24 0.00 2.15+
==============================================================================================
Total $2.53 $0.00
==============================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
<TABLE>
<CAPTION>
==============================================================================================
Average Annual Total Return
==============================================================================================
Without Sales Charge(1)
----------------------------------------------------------
Class A Class B Class C Class Y Class Z
==============================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/97+ 3.34% 3.06% 3.10% 3.46% 3.47%
- ----------------------------------------------------------------------------------------------
Year Ended 6/30/97 8.59 8.10 8.09 8.93 9.03
- ----------------------------------------------------------------------------------------------
Five Years Ended 6/30/97 6.42 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------
Ten Years Ended 6/30/97 8.76 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------
Inception* through 6/30/97 9.47 9.20 5.79 6.25 11.09
==============================================================================================
<CAPTION>
With Sales Charge(2)
----------------------------------------------------------
Class A Class B Class C Class Y Class Z
==============================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/97+ (1.29)% (1.44)% 2.10% 3.46% 3.47%
- ----------------------------------------------------------------------------------------------
Year Ended 6/30/97 3.73 3.60 7.09 8.93 9.03
- ----------------------------------------------------------------------------------------------
Five Years Ended 6/30/97 5.45 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------
Ten Years Ended 6/30/97 8.26 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------
Inception* through 6/30/97 9.07 8.21 5.79 6.25 11.09
==============================================================================================
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Cumulative Total Return
==============================================================================================
Without Sales Charge(1)
==============================================================================================
<S> <C>
Class A (6/30/87 through 6/30/97) 131.53%
- ----------------------------------------------------------------------------------------------
Class B (Inception* through 6/30/97) 26.22
- ----------------------------------------------------------------------------------------------
Class C (Inception* through 6/30/97) 29.41
- ----------------------------------------------------------------------------------------------
Class Y (Inception* through 6/30/97) 31.10
- ----------------------------------------------------------------------------------------------
Class Z (Inception* through 6/30/97) 33.29
==============================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 4.50%; Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from initial purchase. This CDSC declines by 0.50% the first year
after purchase and thereafter by 1.00% per year until no CDSC is incurred.
Class C shares reflect the deduction of a 1.00% CDSC, which applies if
shares are redeemed within the first year of purchase.
* Inception dates for Class A, B, C, Y and Z shares are October 9, 1984,
November 7, 1994, December 2, 1992, January 12, 1993 and November 7, 1994,
respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
5
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of the
U.S. Government Securities Portfolio vs.
Lehman Brothers GNMA Index+
- --------------------------------------------------------------------------------
June 1987 -- June 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
U.S. Government Lehman Brothers
Securities Portfolio GNMA Index
-------------------- ----------
<S> <C> <C>
6/87 $ 9,598 $ 10,000
12/87 9,886 10,337
12/88 10,708 11,246
12/89 12,281 13,010
12/90 13,454 14,387
12/91 15,592 16,694
12/92 16,606 17,931
12/93 17,614 19,110
12/94 17,315 18,822
12/95 20,176 22,031
12/96 20,976 23,252
6/97 21,676 24,191
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on June 30,
1987, assuming deduction of the maximum 4.50% sales charge in effect at the
time of investment and reinvestment of dividends (after deduction of
applicable sales charge through November 7, 1994, and thereafter at net
asset value) and capital gains, if any, at net asset value through June 30,
1997. The Lehman Brothers GNMA Index is composed of 15-year and 30-year
fixed-rate securities backed by mortgage pools of the Government National
Mortgage Association. The index is unmanaged and is not subject to the
management and trading expenses of a mutual fund. The performance of the
Portfolio's other classes may be greater or less than the Class A shares'
performance indicated on this chart, depending on whether greater or lesser
sales charges and fees were incurred by shareholders investing in other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
6
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Schedule of Investments (unaudited) June 30, 1997
==============================================================================================
FACE
AMOUNT SECURITY VALUE
==============================================================================================
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 34.7%
$ 13,000,000 U.S. Treasury Note, 5.875% due 2/15/04 $ 12,607,790
36,900,000 U.S. Treasury Note, 6.500% due 10/15/06* 36,742,437
125,000,000 U.S. Treasury Strips, zero coupon due 2/15/15 37,755,000
30,000,000 U.S. Treasury Strips, zero coupon due 8/15/17 7,513,500
135,000,000 U.S. Treasury Strips, zero coupon due 2/15/19 30,430,350
- ----------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost-- $123,180,741) 125,049,077
==============================================================================================
U.S. GOVERNMENT AGENCIES -- 61.1%
6,500,000 Federal National Mortgage Association Certificates, 8.000%@ 6,638,125
1,267,785 Government National Mortgage Association Certificates,
10.000% due 7/15/20+ 1,390,595
70,958,593 Government National Mortgage Association Certificates,
8.000% due 7/15/26+ 72,621,154
9,491,458 Government National Mortgage Association Certificates,
9.000% due 7/15/26+ 10,037,218
29,665,627 Government National Mortgage Association Certificates Platinum,
9.000% due 11/15/17 31,973,909
89,769,780 Government National Mortgage Association Certificates Platinum,
9.000% due 12/15/17++ 96,754,766
916,482 Government National Mortgage Association II Certificates,
10.000% due 1/20/18+ 996,096
- ----------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost-- $217,665,670) 220,411,863
==============================================================================================
REPURCHASE AGREEMENT -- 4.2%
15,212,500 Morgan Stanley Group, Inc., 5.470% due 7/1/97;
Proceeds at maturity -- $15,226,369;
(Fully collateralized by the following:
Federal Home Loan Mortgage Corp. Certificates,
7.867% due 4/1/24; Market value -- $8,186,584;
Federal National Mortgage Association Certificates,
6.032% due 12/1/33; Market value -- $7,336,208;
Total Market value-- $15,522,792) (Cost-- $15,212,500) 15,212,500
==============================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $356,058,911**) $ 360,673,440
==============================================================================================
</TABLE>
* Security serves as collateral for reverse repurchase agreement.
@ Security is traded on a "to-be-announced" basis (See Note 6).
+ Maturity date shown represents the last in the range of maturity dates of
mortgage certificates owned.
++ Security has been segregated by Custodian.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements
7
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Statement of Assets and Liabilities (unaudited) June 30, 1997
==============================================================================================
<S> <C>
ASSETS:
Investments, at value (Cost-- $356,058,911) $360,673,440
Receivable for Fund shares sold 69,094
Receivable from broker-- variation margin 281,250
Interest receivable 2,282,393
- ----------------------------------------------------------------------------------------------
Total Assets 363,306,177
- ----------------------------------------------------------------------------------------------
LIABILITIES:
Reverse repurchase agreement (Note 5) 17,212,500
Payable for securities purchased 6,646,747
Payable to bank 606,311
Management fees payable 174,293
Distribution fees payable 34,494
Interest payable 13,627
Accrued expenses 54,893
- ----------------------------------------------------------------------------------------------
Total Liabilities 24,742,865
- ----------------------------------------------------------------------------------------------
Total Net Assets $338,563,312
==============================================================================================
NET ASSETS:
Par value of capital shares $ 255,627
Capital paid in excess of par value 341,921,871
Undistributed net investment income 154,089
Accumulated net realized loss on security transactions and futures contracts (8,434,494)
Net unrealized appreciation of investments and futures contracts 4,666,219
==============================================================================================
Total Net Assets $338,563,312
==============================================================================================
Shares Outstanding:
Class A 21,665,949
- ----------------------------------------------------------------------------------------------
Class B 892,514
- ----------------------------------------------------------------------------------------------
Class C 1,120,534
- ----------------------------------------------------------------------------------------------
Class Y 400,121
- ----------------------------------------------------------------------------------------------
Class Z 1,483,610
- ----------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.24
- ----------------------------------------------------------------------------------------------
Class B* $13.26
- ----------------------------------------------------------------------------------------------
Class C** $13.23
- ----------------------------------------------------------------------------------------------
Class Y (and redemption price) $13.27
- ----------------------------------------------------------------------------------------------
Class Z (and redemption price) $13.26
- ----------------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $13.86
==============================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within the first year of purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
8
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Statement of Operations (unaudited)
==============================================================================================
For the Six Months Ended June 30, 1997
<S> <C>
INVESTMENT INCOME:
Interest $13,308,075
Less: Interest expense (Note 5) (351,593)
- ----------------------------------------------------------------------------------------------
Total Investment Income 12,956,482
- ----------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 801,941
Distribution fees (Note 2) 466,935
Shareholder and system servicing fees 71,972
Registration fees 34,712
Shareholder communications 25,741
Audit and legal 8,331
Custody 7,935
Directors' fees 2,480
Other 4,960
- ----------------------------------------------------------------------------------------------
Total Expenses 1,425,007
- ----------------------------------------------------------------------------------------------
Net Investment Income 11,531,475
- ----------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FUTURES CONTRACTS
(NOTES 3 AND 8):
Realized Loss From:
Security transactions (excluding short-term securities) (3,309,080)
Futures contracts (1,498,468)
- ----------------------------------------------------------------------------------------------
Net Realized Loss (4,807,548)
- ----------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Futures Contracts:
Beginning of period 159,993
End of period 4,666,219
- ----------------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 4,506,226
- ----------------------------------------------------------------------------------------------
Net Loss on Investments and Futures Contracts (301,322)
- ----------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $11,230,153
==============================================================================================
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Statements of Changes in Net Assets
==============================================================================================
For the Six Months Ended June 30, 1997 (unaudited)
and the Year Ended December 31, 1996
1997 1996
==============================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 11,531,475 $ 25,143,062
Net realized gain (loss) (4,807,548) 957,180
Increase (decrease) in net unrealized appreciation 4,506,226 (12,000,502)
- ----------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 11,230,153 14,099,740
- ----------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (11,375,758) (25,585,330)
- ----------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (11,375,758) (25,585,330)
- ----------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 7,642,648 12,294,423
Net asset value of shares issued for
reinvestment of dividends 6,596,780 14,678,816
Cost of shares reacquired (40,966,400) (95,176,025)
- ----------------------------------------------------------------------------------------------
Decrease in Net Assets
From Fund Share Transactions (26,726,972) (68,202,786)
- ----------------------------------------------------------------------------------------------
Decrease in Net Assets (26,872,577) (79,688,376)
NET ASSETS:
Beginning of period 365,435,889 445,124,265
==============================================================================================
End of period* $338,563,312 $365,435,889
==============================================================================================
* Includes undistributed (overdistributed)
net investment income of: $154,089 $(1,628)
==============================================================================================
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The U.S. Government Securities Portfolio ("Portfolio") is a separate
investment portfolio of the Smith Barney Funds, Inc. ("Fund"). The Fund, a
Maryland corporation, is registered under the Investment Company Act of 1940,
as amended, as a diversified, open-end management investment company. The Fund
consists of this Portfolio and three other separate investment portfolios:
Equity Income, Income Return Account and Short-Term U.S. Treasury Securities
Portfolios. The financial statements and financial highlights for the other
portfolios are presented in separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) security transactions are accounted for on trade date; (b) U.S.
government agencies and obligations are valued at the mean between the bid and
ask prices; (c) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value;
(d) interest income is recorded on an accrual basis; (e) gains or losses on the
sale of securities are calculated by using the specific identification method;
(f) direct expenses are charged to each class; management fees and general fund
expenses are allocated on the basis of relative net assets; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) each
portfolio intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes; (i) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
December 31, 1996, reclassifications were made to the capital accounts to
reflect permanent book/tax differences and income and gains available for
distribution under income tax regulations. Accordingly, a portion of accumulated
net realized loss and accumulated net investment loss amounting to $5,095,103
and $540,647, respectively, were reclassified to paid-in capital. Net investment
income, net realized gains and net assets were not affected by this change; and
(j) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
11
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
2. MANAGEMENT AGREEMENT AND TRANSACTIONS
WITH AFFILIATED PERSONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager for the Fund. The
management fee for the U.S. Government Securities and Income Return Account
Portfolios is determined by aggregating the assets of each Portfolio and
applying a formula calculated at an annual rate of 0.50% on the first $200
million of the aggregate average daily net assets of the two Portfolios and
0.40% on the aggregate average daily net assets in excess of $200 million; this
total is then allocated to each Portfolio based on their relative average daily
net assets. These fees are calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the six months ended June 30, 1997, SB received sales charges
of approximately $54,000 on sales of the Portfolio's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs within one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase. For the six months ended June 30, 1997, CDSCs paid to SB for Class B
shares were approximately $11,000.
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to its Class A, B and C shares calculated at an annual rate of 0.25% of
the average daily net assets for each respective class. In addition, the
Portfolio also pays a distribution fee with respect to Class B and Class C
shares calculated at the annual rate of 0.50% and 0.45% of the average daily net
assets for each class, respectively. For the six months ended June 30, 1997,
total Distribution Plan fees were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $368,624 $43,193 $55,118
================================================================================
</TABLE>
All officers and two Directors of the Fund are employees of SB.
12
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
3. INVESTMENTS
During the six months ended June 30, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
<S> <C>
================================================================================
Purchases $124,223,730
- --------------------------------------------------------------------------------
Sales 133,476,253
================================================================================
</TABLE>
At June 30, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Gross unrealized appreciation $ 5,725,037
Gross unrealized depreciation (1,110,508)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 4,614,529
================================================================================
</TABLE>
4. REPURCHASE AGREEMENTS
The Portfolio purchases (and its custodian takes possession of) U.S.
government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. REVERSE REPURCHASE AGREEMENT
The Portfolio may enter into reverse repurchase agreement transactions for
leveraging purposes. A reverse repurchase agreement involves a sale by the
Portfolio of securities that it holds with an agreement by the Portfolio to
repurchase the same securities at an agreed upon price and date. A reverse
repurchase agreement involves the risk that the market value of the securities
sold by the Portfolio may decline below the repurchase price of the securities.
The Portfolio will establish a segregated account with its custodian, in which
the Portfolio will maintain cash, U.S. government securities or other liquid
high grade debt obligations equal in value to its obligations with respect to
the reverse repurchase agreement.
13
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
At June 30, 1997, the Portfolio had the following reverse repurchase
agreement outstanding:
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C>
$17,212,500 Reverse Repurchase Agreement with Morgan
Stanley Group, Inc., dated 6/25/97 bearing
4.750% to be repurchased at $17,226,127
on 7/1/97, collateralized by $30,000,000
U.S. Treasury Note, 6.500% due 10/15/06 $17,212,500
================================================================================
</TABLE>
During the six months ended June 30, 1997, the maximum and average amount
of reverse repurchase agreements outstanding were as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Maximum amount outstanding $36,242,764
- --------------------------------------------------------------------------------
Average amount outstanding $21,327,375
================================================================================
</TABLE>
Interest rates earned on reverse repurchase agreements ranged from 4.210%
to 5.380% during the period. Total market value of the collateral for the
reverse repurchase agreement is $29,871,900.
For the six months ended June 30, 1997, interest expense from reverse
repurchase agreements totalled $351,593.
6. SECURITIES TRADED ON A TO-BE-ANNOUNCED BASIS
The Portfolio may trade securities, particularly GNMAs, on a "to-be-
announced" ("TBA") basis. In a TBA transaction, the Portfolio commits to
purchasing or selling securities for which specific information is not yet known
at the time of the trade, particularly the face amount and maturity date.
Securities purchased on a TBA basis are not settled until they are delivered to
the Portfolio, normally 15 to 45 days later. These transactions are subject to
market fluctuations and their current value is determined in the same manner as
for other portfolio securities.
As of June 30, 1997, the Portfolio held one TBA security with a cost of
$6,627,969.
14
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
7. CAPITAL SHARES
At June 30, 1997, the Fund had two billion shares of capital stock
authorized with a par value of $0.01 per share. The Portfolio has the ability to
issue multiple classes of shares. Each share of a class represents an identical
interest in the Portfolio and has the same rights. Each class bears certain
expenses specifically related to the distribution of its shares.
At June 30, 1997, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y Class Z
===========================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $291,340,969 $11,552,260 $15,494,760 $6,061,019 $17,728,490
===========================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
--------------------------- ----------------------------
Shares Amount Shares Amount
=============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 330,618 $ 4,353,591 434,053 $ 5,765,143
Shares issued on reinvestment 408,921 5,367,012 913,861 12,031,692
Shares redeemed (2,621,541) (34,532,219) (6,089,171) (80,467,760)
- ---------------------------------------------------------------------------------------------
Net Decrease (1,882,002) $(24,811,616) (4,741,257) $(62,670,925)
=============================================================================================
Class B
Shares sold 120,558 $ 1,586,065 285,992 $ 3,778,340
Shares issued on reinvestment 18,038 237,067 36,148 476,041
Shares redeemed (91,592) (1,204,723) (293,500) (3,913,310)
- ---------------------------------------------------------------------------------------------
Net Increase 47,004 $ 618,409 28,640 $ 341,071
=============================================================================================
Class C
Shares sold 35,701 $ 469,250 55,061 $ 725,736
Shares issued on reinvestment 21,322 279,664 50,186 660,064
Shares redeemed (239,978) (3,164,587) (388,960) (5,148,015)
- ---------------------------------------------------------------------------------------------
Net Decrease (182,955) $ (2,415,673) (283,713) $ (3,762,215)
=============================================================================================
Class Y
Shares sold -- -- -- --
Shares issued on reinvestment 3,343 $ 43,859 7,206 $ 95,184
Shares redeemed (24,460) (322,571) (99,666) (1,326,266)
- ---------------------------------------------------------------------------------------------
Net Decrease (21,117) $ (278,712) (92,460) $ (1,231,082)
=============================================================================================
Class Z
Shares sold 93,453 $ 1,233,742 152,496 $ 2,025,204
Shares issued on reinvestment 50,938 669,178 107,482 1,415,835
Shares redeemed (132,459) (1,742,300) (326,769) (4,320,674)
- ---------------------------------------------------------------------------------------------
Net Increase (Decrease) 11,932 $ 160,620 (66,791) $ (879,635)
=============================================================================================
</TABLE>
15
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
8. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are made or received and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Portfolio records a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transactions and the Portfolio's basis in the contract. The
Portfolio enters into such contracts to hedge a portion of its portfolio. The
Portfolio bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts) and the credit
risk should a counterparty fail to perform under such contracts.
At June 30, 1997, the Portfolio had the following open futures contracts:
<TABLE>
<CAPTION>
Future contracts Expiration # of Basis Market Unrealized
to sell Month/Year Contracts Value Value Gain
===========================================================================================
<S> <C> <C> <C> <C> <C>
U.S. 20 Year
Treasury Bond 9/97 500 $55,582,940 $55,531,250 $51,690
===========================================================================================
</TABLE>
9. CAPITAL LOSS CARRYFORWARD
At December 31, 1996, the Portfolio had, for Federal income tax purposes,
approximately $3,627,000 of capital loss carryforwards available to offset
future realized gains. To the extent that these carryforward losses can be used
to offset net realized capital gains, such gains, if any, will not be
distributed.
The amount and expiration of the carryforwards are indicated below.
Expiration occurs on December 31 of the year indicated:
<TABLE>
<CAPTION>
1997 2001 2002
==============================================================================
<S> <C> <C> <C>
Carryforward Amounts $333,000 $430,000 $2,864,000
==============================================================================
</TABLE>
16
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1997(1) 1996 1995 1994 1993 1992
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $13.24 $13.59 $12.50 $13.66 $13.87 $14.10
- -----------------------------------------------------------------------------------------------
Income (Loss)
From Operations:
Net investment income 0.44 0.84 0.92 0.91 0.98 1.06
Net realized and
unrealized gain (loss) (0.01) (0.33) 1.09 (1.11) (0.10) (0.13)
- -----------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.43 0.51 2.01 (0.20) 0.88 0.93
- ----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.43) (0.86) (0.92) (0.91) (0.98) (1.08)
Net realized gains -- -- (0.05)* (0.11)* (0.08)
- -----------------------------------------------------------------------------------------------
Total Distributions (0.43) (0.86) (0.92) (0.96) (1.09) (1.16)
- ----------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.24 $13.24 $13.59 $12.50 $13.66 $13.87
- ----------------------------------------------------------------------------------------------
Total Return 3.34%++ 3.97% 16.52% (1.48)% 6.40% 6.85%
- ----------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $286,921 $311,875 $384,534 $358,045 $468,278 $459,380
- ----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.81%+ 0.79%** 0.79% 0.76%*** 0.49% 0.50%
Net investment income 6.65+ 6.34 6.82 6.83 7.00 7.65
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 265% 57% 40% 57% 26%
===============================================================================================
<CAPTION>
Class B Shares 1997(1) 1996 1995 1994(2)
===============================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.26 $13.61 $12.51 $12.47
- -----------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.41 0.77 0.80 0.08
Net realized and unrealized gain (loss) (0.01) (0.33) 1.16 0.17
- -----------------------------------------------------------------------------------------------
Total Income From Operations 0.40 0.44 1.96 0.25
- ----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.40) (0.79) (0.86) (0.21)
- ----------------------------------------------------------------------------------------------
Total Distributions (0.40) (0.79) (0.86) (0.21)
- ----------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.26 $13.26 $13.61 $12.51
- ----------------------------------------------------------------------------------------------
Total Return 3.06%++ 3.44% 16.03% 2.04%++
- ----------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $11,836 $11,212 $11,116 $1,529
- ----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.31%+ 1.28%** 1.28% 1.21%+***
Net investment income 6.15+ 5.85 6.16 6.94+
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 265% 57% 40%
===============================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) For the period from November 7, 1994 (inception date) to December 31, 1994.
* Represents distributions from paydown gains which are reported as ordinary
income for tax purposes.
** Amount has been restated from the December 31, 1996 annual report.
*** Amount has been restated from the December 31, 1994 annual report.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
17
<PAGE>
===============================================================================
Financial Highlights (continued)
===============================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Shares 1997(1) 1996 1995 1994(2) 1993 1992(3)
==================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $13.23 $13.58 $12.50 $13.66 $13.86 $14.01
- --------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.41 0.78 0.86 0.82 0.89 0.15
Net realized and unrealized
gain (loss) (0.01) (0.33) 1.09 (1.11) (0.10) --
- --------------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.40 0.45 1.95 (0.29) 0.79 0.15
- --------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.40) (0.80) (0.87) (0.83) (0.88) (0.30)
Net realized gains -- -- (0.04)* (0.11)* --
- --------------------------------------------------------------------------------------------------
Total Distributions (0.40) (0.80) (0.87) (0.87) (0.99) (0.30)
- --------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.23 $13.23 $13.58 $12.50 $13.66 $13.86
- --------------------------------------------------------------------------------------------------
Total Return 3.10%++ 3.49% 15.93% (2.11)% 5.74% 1.07%++
- --------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $14,826 $17,249 $21,559 $21,253 $19,938 $1,954
- --------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.27%+ 1.26%** 1.25% 1.21% 1.21% 1.14%+
Net investment income 6.19+ 5.87 6.36 6.27 6.23 6.56+
- --------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 265% 57% 40% 57% 26%
==================================================================================================
<CAPTION>
Class Y Shares 1997(1) 1996 1995 1994(4) 1993(5)
==================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $13.27 $13.61 $12.51 $13.67 $13.97
- --------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.46 0.88 1.00 0.89 0.86
Net realized and unrealized
gain (loss) (0.01) (0.33) 1.06 (1.10) (0.10)
- --------------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.45 0.55 2.06 (0.21) 0.76
- --------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.45) (0.89) (0.96) (0.91) (0.95)
Net realized gains -- -- (0.04)* (0.11)*
- --------------------------------------------------------------------------------------------------
Total Distributions (0.45) (0.89) (0.96) (0.95) (1.06)
- --------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.27 $13.27 $13.61 $12.51 $13.67
- --------------------------------------------------------------------------------------------------
Total Return 3.46%++ 4.30% 16.88% (1.53)% 5.55%++
- --------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $5,309 $5,589 $6,992 $13,903 $14,118
- --------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.51%+ 0.50%** 0.49% 0.61% 0.69%+
Net investment income 6.95+ 6.64 7.22 6.82 7.29+
- --------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 265% 57% 40% 57%
==================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) On November 7, 1994, the former Class B shares were renamed Class C shares.
(3) For the period from December 2, 1992 (inception date) to December 31, 1992.
(4) On November 7, 1994, the former Class C shares were renamed Class Y shares.
(5) For the period from January 12, 1993 (inception date) to December 31, 1993.
* Represents distributions from paydown gains which are reported as ordinary
income for tax purposes.
** Amount has been restated from the December 31, 1996 annual report.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
18
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class Z Shares 1997(1) 1996 1995 1994(2)
================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.26 $13.60 $12.50 $12.47
- ------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.46 0.88 0.94 0.14
Net realized and unrealized gain (loss) (0.01) (0.33) 1.11 0.13
- ------------------------------------------------------------------------------------------------
Total Income From Operations 0.45 0.55 2.05 0.27
- ------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.45) (0.89) (0.95) (0.24)
- ------------------------------------------------------------------------------------------------
Total Distributions (0.45) (0.89) (0.95) (0.24)
- ------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.26 $13.26 $13.60 $12.50
- ------------------------------------------------------------------------------------------------
Total Return 3.47%++ 4.31% 16.89% 2.15%++
- ------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $19,671 $19,511 $20,923 $18,580
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.51%+ 0.49% 0.50% 0.34%+
Net investment income 6.95+ 6.64 7.12 7.55+
- ------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 265% 57% 40%
================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) For the period from November 7, 1994 (inception date) to December 31, 1994.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
19
<PAGE>
[This page intentionally left blank]
<PAGE>
Smith Barney SMITH BARNEY
Funds, Inc. ------------
A Member of TravelersGroup[LOGO]
Directors Investment Manager
Joseph H. Fleiss Smith Barney Mutual Funds
Donald R. Foley Management Inc.
Paul Hardin
Francis P. Martin, M.D.
Heath B. McLendon, Chairman Distributor
Roderick C. Rasmussen Smith Barney Inc.
Bruce D. Sargent
John P. Toolan
C. Richard Youngdahl, Emeritus
Custodian
Officers PNC Bank, N.A.
Heath B. McLendon
Chief Executive Officer Shareholder
Servicing Agent
Lewis E. Daidone First Data Investor Services Group, Inc.
Senior Vice President P.O. Box 9134
and Treasurer Boston, MA 02205-9134
James E. Conroy
Vice President
This report is submitted for the general
Bruce D. Sargent information of the shareholders of Smith
Vice President Barney Funds, Inc. -- U.S. Government
Securities Portfolio. It is not
Thomas M. Reynolds authorized for distribution to
Controller prospective investors unless accompanied
or preceded by a current Prospectus for
Christina T. Sydor the Portfolio, which contains
Secretary information concerning the Portfolio's
investment policies and expenses as well
as other pertinent information.
Smith Barney Funds, Inc.
388 Greenwich Street
New York, New York 10013
FD0631 8/97
SEMI-ANNUAL REPORT
[GRAPH]
SMITH BARNEY
FUNDS, INC.
INCOME RETURN
ACCOUNT PORTFOLIO
SHORT-TERM U.S.
TREASURY SECURITIES
PORTFOLIO
- -------------------
June 30, 1997
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Income Return Account and Short-Term
U.S. Treasury Securities Portfolios
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Funds,
Inc. - Income Return Account Portfolio and Short-Term U.S. Treasury Securities
Portfolio ("Portfolios") for the period ended June 30, 1997. In this report, we
summarize the period's prevailing economic and market conditions and outline our
portfolio strategy. A detailed summary of performance can be found in the
appropriate sections that follow.
Market Update
After more than six years of uninterrupted growth, the U.S. economy continued
its vigorous expansion over the past six months. The annualized Gross Domestic
Product (GDP) rate of 5.6% reported for the first quarter of 1997, coming on the
heels of an already brisk 3.8% annualized GDP growth for the fourth quarter of
1996, raised the concerns of many investors that the Federal Reserve Board
("Fed") would be forced to raise short-term interest rates. The Fed has stated
that it considers an annual growth rate of approximately 2.0% to 2.5% to be the
limit the U.S. economy can absorb without increasing inflationary pressures. As
a result of the unexpected strength in the U.S. economy, the Fed raised the
federal-funds rate by 25 basis points, or 0.25%, at its March 1997 meeting. (The
federal-funds rate is the interest rate banks charge each other for overnight
loans and a closely watched indicator of the direction of interest rates.)
Income Return Account Portfolio Performance
and Investment Strategy
For the six months ended June 30, 1997, the Income Return Account Portfolio's
Class A shares had a total return of 2.32% and slightly underperformed the 2.99%
total return for the Salomon Brothers One-Year Treasury Index over the same
period.
The Income Return Account invests in money market instruments to help provide
stability, and in longer-term securities (not to exceed five years for U.S.
government securities, and three years for corporate debt obligations) to
provide enhanced return. For defensive purposes, the Portfolio also employs an
immunization strategy. (The Portfolio's immunization strategy involves the use
of proprietary technology that helps provide support to the manager in avoiding
negative quarterly returns.) While minor day-to-day price fluctuations are
unavoidable, this strategy should produce sufficient income during adverse
market conditions to offset any potential decline in the prices of the
Portfolio's longer term securities. In extremely uncertain or volatile periods
of interest
1
<PAGE>
rates, it is possible for the Portfolio to be fully invested in short-term money
market instruments. Unlike money market funds, which generally seek to maintain
a stable net asset value (NAV) of $1.00 per share, the Income Return Account
Portfolio's NAV does fluctuate with market conditions.
Special Shareholder Notice
Assets have declined in the Income Return Account Portfolio while its fixed
costs have remained constant. As a result, the Portfolio's investment style has
been somewhat inhibited and it has become increasingly difficult to provide
competitive returns. After a careful analysis of the Portfolio's fee structure
and recent performance, we determined that no new purchases of shares of the
Portfolio would be permitted, effective February 24, 1997.
On February 25, 1997, the Board of Directors of Smith Barney Funds, Inc. --
Income Return Account Portfolio formally approved a proposed reorganization of
the Income Return Account Portfolio into Smith Barney Money Funds -- Cash
Portfolio. Under the terms of the proposed reorganization, each Income Return
Account shareholder would become a Smith Barney Money Funds -- Cash Portfolio
shareholder, receiving shares with a value equal to the value of the
shareholder's investment in the Income Return Account Portfolio. Please note
that no sales charge will be imposed in this proposed transaction.
In connection with the proposed reorganization of the Income Return Account
Portfolio, we will be mailing proxy materials in anticipation of the
shareholders meeting tentatively scheduled to take place later this year. We ask
that you take the time to read the proxy materials carefully. In that regard, we
also ask that you complete, sign and return the proxy card that will accompany
the materials as soon as possible after you receive it.
Short-Term U.S. Treasury Securities Portfolio
Performance and Investment Strategy
For the six months ended June 30, 1997, the Short-Term U.S. Treasury Securities
Portfolio's Class A shares had a total return of 2.11%, which was comparable to
its Lipper Analytical Services, Inc. peer group total return average of 2.40%.
(Lipper Analytical Services, Inc. is an independent fund-tracking organization.)
In addition, over the past six months, the Portfolio distributed dividends
totaling $0.11 per Class A share.
During the reporting period, we modestly extended the Portfolio's duration,
reflecting our positive outlook on inflation. (Duration is a measure of
volatility relative to a given change in interest rates.) In addition, we have
increased the Portfolio's holdings of 2 Year U.S. Treasury Notes as well as the
longer-maturity 10 Year and zero coupon U.S. Treasury Bonds.
2
<PAGE>
Market Outlook
In our view, much of the performance of the financial markets in recent years
has been driven by demographic factors. As baby boomers reach their peak earning
years, they have tended to put those earnings to work in financial assets. This
tendency, combined with their sheer size, has resulted in continued record
inflows into managed financial products, especially mutual funds.
We remain bullish on the bond market in the coming months. We expect interest
rates to continue to decrease for the remainder of the year, with the benchmark
30-year U.S. Treasury bond yield falling to around 6%. Moreover, we believe that
fixed-income investments should benefit from the continued steady growth of the
U.S. economy with little or no threat of higher inflationary pressures.
In closing, we would like to thank you for your investment in the Smith Barney
Funds, Inc. -- Income Return Account and Short-Term U.S. Treasury Securities
Portfolios. We look forward to continuing to help you achieve your financial
goals.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President
/s/ Patrick Sheehan
Patrick Sheehan
Vice President
August 5, 1997
3
<PAGE>
- --------------------------------------------------------------------------------
Income Return Account Portfolio
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=============================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $9.48 $9.47 $0.23 $0.00 $0.00 2.32%+
- ---------------------------------------------------------------------------------------------
12/31/96 9.60 9.48 0.47 0.00 0.03 4.08
- ---------------------------------------------------------------------------------------------
12/31/95 9.34 9.60 0.51 0.00 0.00 8.43
- ---------------------------------------------------------------------------------------------
12/31/94 9.59 9.34 0.45 0.00 0.00 2.14
- ---------------------------------------------------------------------------------------------
12/31/93 9.68 9.59 0.47 0.00 0.00 4.00
- ---------------------------------------------------------------------------------------------
12/31/92 9.65 9.68 0.52 0.00 0.00 5.85
- ---------------------------------------------------------------------------------------------
12/31/91 9.38 9.65 0.73 0.00 0.00 11.06
- ---------------------------------------------------------------------------------------------
12/31/90 9.31 9.38 0.74 0.00 0.00 9.10
- ---------------------------------------------------------------------------------------------
12/31/89 9.12 9.31 0.75 0.00 0.00 10.67
- ---------------------------------------------------------------------------------------------
12/31/88 9.26 9.12 0.72 0.00 0.00 6.48
- ---------------------------------------------------------------------------------------------
12/31/87 9.43 9.26 0.60 0.06 0.00 5.36
=============================================================================================
Total $6.19 $0.06 $0.03
=============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET ASSET VALUE
-----------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=============================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $9.48 $9.46 $0.21 $0.00 $0.00 2.02%+
- ---------------------------------------------------------------------------------------------
12/31/96 9.60 9.48 0.44 0.00 0.03 3.72
- ---------------------------------------------------------------------------------------------
12/31/95 9.34 9.60 0.48 0.00 0.00 8.06
- ---------------------------------------------------------------------------------------------
12/31/94 9.58 9.34 0.42 0.00 0.00 1.86
- ---------------------------------------------------------------------------------------------
12/31/93 9.68 9.58 0.43 0.00 0.00 3.53
- ---------------------------------------------------------------------------------------------
Inception*-12/31/92 9.69 9.68 0.04 0.00 0.00 0.31+
=============================================================================================
Total $2.02 $0.00 $0.03
=============================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
4
<PAGE>
- --------------------------------------------------------------
Income Return Account Portfolio
- --------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------
WITHOUT SALES CHARGE(1)
-----------------------
CLASS A CLASS C
==============================================================
Six Months Ended 6/30/97+ 2.32% 2.02%
- --------------------------------------------------------------
Year Ended 6/30/97 4.85 4.37
- --------------------------------------------------------------
Five Years Ended 6/30/97 4.86 N/A
- --------------------------------------------------------------
Ten Years Ended 6/30/97 6.86 N/A
- --------------------------------------------------------------
Inception* through 6/30/97 7.08 4.28
==============================================================
WITH SALES CHARGE(2)
-----------------------
CLASS A CLASS C
==============================================================
Six Months Ended 6/30/97+ 0.31% 1.02%
- --------------------------------------------------------------
Year Ended 6/30/97 2.80 3.37
- --------------------------------------------------------------
Five Years Ended 6/30/97 4.44 N/A
- --------------------------------------------------------------
Ten Years Ended 6/30/97 6.65 N/A
- --------------------------------------------------------------
Inception* through 6/30/97 6.90 4.28
==============================================================
- --------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------
WITHOUT SALES CHARGE(1)
==============================================================
Class A (6/30/87 through 6/30/97) 94.22%
- --------------------------------------------------------------
Class C (Inception* through 6/30/97) 20.95
==============================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charge with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 2.00% and Class C shares reflect
the deduction of a 1.00% CDSC, which applies if shares are redeemed within
the first year of purchase.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A and C shares are March 4, 1985, and December
16, 1992, respectively.
5
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Income Return Account Portfolio vs.
Salomon Brothers 1-Year Treasury Index+
- --------------------------------------------------------------------------------
June 1987 -- June 1997
[GRAPH]
INCOME RETURN SALOMON BROTHERS
ACCOUNT PORTFOLIO 1-YEAR TREASURY INDEX
----------------- ---------------------
6/87 10000 10000
12/87 10343 10314
12/88 11014 10944
12/89 12188 12046
12/90 13262 13122
12/91 14863 14274
12/92 15732 14960
12/93 16361 15534
12/94 16703 15942
12/95 18112 17230
12/96 18851 18315
6/97 19046 18862
+ Hypothetical illustration of $10,000 invested in Class A shares on June 30,
1987, assuming deduction of the maximum 2.00% sales charge which was in
effect at the time of such hypothetical investment and the reinvestment of
dividends (after deduction of the maximum applicable sales charge through
November 7, 1994, and thereafter at net asset value) and capital gains, if
any, at net asset value through June 30, 1997. The Salomon Brothers 1-Year
Treasury Index is composed of the most recently issued twelve-month United
States Treasury Bill which is used to track the Treasury Bill's total return
until its maturity. The index is unmanaged and is not subject to the same
management and trading expenses of a mutual fund. The performance of the
Portfolio's other classes may be greater or less than the Class A shares'
performance indicated on this chart, depending on whether greater or lesser
sales charges and fees were incurred by shareholders investing in the other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment return and principal value will fluctuate and redemption
values may be more or less than the original cost. No adjustment has been
made for shareholder tax liability on dividends or capital gains.
6
<PAGE>
- --------------------------------------------------------------------------------
Short-Term U.S. Treasury Securities Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Historical Performance - Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET ASSET VALUE
--------------------------
BEGINNING END INCOME CAPITAL GAIN TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDENDS DISTRIBUTIONS RETURNS
==============================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 4.05 $ 4.02 $0.11 $0.00 2.11%+
- --------------------------------------------------------------------------------------------------------------
12/31/96 4.19 4.05 0.23 0.00 2.17
- --------------------------------------------------------------------------------------------------------------
12/31/95 3.91 4.19 0.22 0.00 13.16
- --------------------------------------------------------------------------------------------------------------
12/31/94 4.16 3.91 0.18 0.00 (2.15)
- --------------------------------------------------------------------------------------------------------------
12/31/93 4.12 4.16 0.18 0.02 6.01
- --------------------------------------------------------------------------------------------------------------
12/31/92 4.09 4.12 0.19 0.01 5.92
- --------------------------------------------------------------------------------------------------------------
Inception*-12/31/91 4.01 4.09 0.03 0.01 2.85+
==============================================================================================================
Total $1.14 $0.04
==============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET ASSET VALUE
--------------------------
BEGINNING END INCOME CAPITAL GAIN TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDENDS DISTRIBUTIONS RETURNS
==============================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $4.05 $4.02 $0.12 $0.00 2.34%+
- --------------------------------------------------------------------------------------------------------------
Inception*-12/31/96 4.19 4.05 0.22 0.00 2.08+
==============================================================================================================
Total $0.34 $0.00
==============================================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WITHOUT SALES CHARGE
-----------------------------
CLASS A CLASS Y
===============================================================================
<S> <C> <C>
Six Months Ended 6/30/97+ 2.11% 2.34%
- ------------------------------------------------------------------------------
Year Ended 6/30/97 7.09 7.57
- ------------------------------------------------------------------------------
Five Years Ended 6/30/97 5.00 N/A
- ------------------------------------------------------------------------------
Inception* through 6/30/97 5.37 3.19
==============================================================================
</TABLE>
- ------------------------------------------------------------------------------
Cumulative Total Return
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WITHOUT SALES CHARGE
========================================================================================
<S> <C>
Class A (Inception* through 6/30/97) 34.27%
- ----------------------------------------------------------------------------------------
Class Y (Inception* through 6/30/97) 4.47
========================================================================================
</TABLE>
+ Total return is not annualized, as it may not be representative of the total
return for the year.
* The inception dates for Class A and Y shares are November 11, 1991 and
February 7, 1996, respectively.
7
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Short-Term U.S. Treasury Securities Portfolio vs.
Salomon Brothers 3-Year Treasury Index+
- --------------------------------------------------------------------------------
November 1991 -- June 1997
[GRAPH]
SHORT-TERM SALOMON BROTHERS
U.S. TREASURY 3-YEAR
SECURITIES PORTFOLIO TREASURY INDEX
-------------------- ------------------
11/91 10000 10000
12/91 10283 10230
12/92 10891 10902
12/93 11547 11653
12/94 11361 11471
12/95 12874 13004
12/96 13149 13674
6/97 13427 14044
+ Hypothetical illustration of $10,000 invested in shares at inception on
November 11, 1991, assuming reinvestment of dividends and capital gains, if
any, at net asset value through June 30, 1997. The Salomon Brothers 3-Year
Treasury Index is composed of the most recently issued 3-year United States
Treasury Note which is used to track the Note's total return until its
maturity. The index is unmanaged and is not subject to the same management
and trading expenses of a mutual fund. The performance of the Portfolio's
other classes may be greater or less than the Class A shares' performance
indicated on this chart, depending on whether greater or lesser fees were
incurred by shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedules of Investments (unaudited) June 30, 1997
- --------------------------------------------------------------------------------
INCOME RETURN ACCOUNT PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==================================================================================================
REPURCHASE AGREEMENTS
<S> <C> <C>
$ 76,000 Chase Manhattan Securities Inc., 5.750% due 7/1/97;
Proceeds at maturity -- $76,012; (Fully collateralized by U.S.
Treasury Note, 6.250% due 6/30/02; Market value -- $77,520) $ 76,000
76,000 Citibank Securities, 6.000% due 7/1/97;
Proceeds at maturity -- $76,013; (Fully collateralized by U.S.
Treasury Note, 6.250% due 6/30/02; Market value -- $77,520) 76,000
457,000 Union Bank of Switzerland, 6.000% due 7/1/97;
Proceeds at maturity -- $457,076; (Fully collateralized by U.S.
Treasury Note, 6.500% due 8/31/01; Market value -- $466,146) 457,000
457,000 Goldman Sachs & Co., 5.800% due 7/1/97;
Proceeds at maturity -- $457,074; (Fully collateralized by U.S.
Treasury Note, 6.125% due 8/31/98; Market value -- $466,348) 457,000
==================================================================================================
TOTAL INVESTMENTS-- 100%
(Cost -- $1,066,000*) $ 1,066,000
==================================================================================================
SHORT-TERM U.S. TREASURY SECURITIES PORTFOLIO
==================================================================================================
U.S. TREASURY OBLIGATIONS -- 95.1%
$10,500,000 U.S. Treasury Note, 6.500% due 4/30/99 $ 10,579,170
12,800,000 U.S. Treasury Note, 6.250% due 5/31/99 12,837,760
20,000,000 U.S. Treasury Note, 6.750% due 5/31/99 20,236,600
11,000,000 U.S. Treasury Note, 6.875% due 7/31/99 11,160,930
35,000,000 U.S. Treasury Note, 6.250% due 2/15/07 34,256,250
24,300,000 U.S. Treasury Strip, zero coupon to yield 7.903% due 2/15/00 20,704,572
14,236,000 U.S. Treasury Strip, zero coupon to yield 6.491% due 5/15/05 8,544,874
- --------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost -- $116,813,244) 118,320,156
==================================================================================================
REPURCHASE AGREEMENT -- 4.9%
6,038,000 Chase Manhattan Bank, 5.745% due 7/1/97,
Proceeds at maturity -- $6,038,964; (Fully collateralized
by U.S. Treasury Notes, 6.250% due 6/30/02;
Market value -- $6,158,766) (Cost -- $6,038,000) 6,038,000
==================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $122,851,244*) $124,358,156
==================================================================================================
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities (unaudited) June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME SHORT-TERM
RETURN U.S. TREASURY
ACCOUNT SECURITIES
PORTFOLIO PORTFOLIO
============================================================================================
ASSETS:
<S> <C> <C>
Investments, at value (Cost -- $1,066,000,
and $122,851,244, respectively) $1,066,000 $124,358,156
Cash 805,275 141
Interest receivable 174 1,434,005
Other assets 83,510 --
- --------------------------------------------------------------------------------------------
Total Assets 1,954,959 125,792,302
- --------------------------------------------------------------------------------------------
LIABILITIES:
Dividends payable -- 297,628
Management fees payable -- 32,379
Distribution fees payable 179 7,631
Accrued expenses 43,421 27,059
- --------------------------------------------------------------------------------------------
Total Liabilities 43,600 364,697
- --------------------------------------------------------------------------------------------
Total Net Assets $1,911,359 $125,427,605
============================================================================================
NET ASSETS:
Par value of capital shares $ 2,020 $ 312,249
Captial paid in excess of par value 2,606,053 133,550,683
Undistributed net investment income 65,311 --
Accumulated net realized loss on security transactions (762,025) (9,942,239)
Net unrealized appreciation of investments -- 1,506,912
- --------------------------------------------------------------------------------------------
Total Net Assets $1,911,359 $125,427,605
============================================================================================
Shares Outstanding:
Class A 136,227 19,421,618
- --------------------------------------------------------------------------------------------
Class C 65,802 --
- --------------------------------------------------------------------------------------------
Class Y -- 11,803,279
- --------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 9.47 $ 4.02
- --------------------------------------------------------------------------------------------
Class C* $ 9.46 --
- --------------------------------------------------------------------------------------------
Class Y (and redemption price) -- $ 4.02
- --------------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 2.04% of net asset value per share
for the Income Return Account Portfolio only) $ 9.66 $ 4.02
============================================================================================
</TABLE>
* Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
10
<PAGE>
- -------------------------------------------------------------------------------
Statements of Operations (unaudited)
- -------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
INCOME SHORT-TERM
RETURN U.S. TREASURY
ACCOUNT SECURITIES
PORTFOLIO PORTFOLIO
==================================================================================
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 266,862 $ 3,882,230
Less: Interest expense (Note 5) -- (10,326)
- ----------------------------------------------------------------------------------
Total Investment Income 266,862 3,871,904
- ----------------------------------------------------------------------------------
EXPENSES:
Registration fees 22,000 10,000
Management fees (Note 2) 21,194 263,756
Shareholder communications 6,500 11,779
Shareholder and system servicing fees 3,470 23,793
Distribution fees (Note 2) 2,322 137,484
Directors' fees 1,750 1,539
Audit and legal 1,600 11,356
Custody 675 2,373
Other 689 596
- ----------------------------------------------------------------------------------
Total Expenses 60,200 462,676
Less: Management fee waiver (20,160) --
- ----------------------------------------------------------------------------------
Net Expenses 40,040 462,676
- ----------------------------------------------------------------------------------
Net Investment Income 226,822 3,409,228
- ----------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3):
Realized Gain (Loss) From Security Transactions
(excluding short-term securities):
Proceeds from sales 24,063,184 72,371,563
Cost of securities sold 24,059,957 73,270,457
- ----------------------------------------------------------------------------------
Net Realized Gain (Loss) 3,227 (898,894)
- ----------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments:
Beginning of period 32,568 1,420,421
End of period -- 1,506,912
- ----------------------------------------------------------------------------------
Increase (Decrease) in Net Unrealized Appreciation (32,568) 86,491
- ----------------------------------------------------------------------------------
Net Loss on Investments (29,341) (812,403)
- ----------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 197,481 $ 2,596,825
==================================================================================
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997 (unaudited)
and the Year Ended December 31, 1996
<TABLE>
<CAPTION>
INCOME RETURN ACCOUNT PORTFOLIO 1997 1996
==================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 226,822 $ 1,102,761
Net realized gain 3,227 71,998
Decrease in net unrealized appreciation (32,568) (228,942)
- ----------------------------------------------------------------------------------
Increase in Net Assets From Operations 197,481 945,817
- ----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (158,934) (1,192,442)
Capital -- (54,765)
- ----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (158,934) (1,247,207)
- ----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 150,665 2,637,826
Net asset value of shares issued for
reinvestment of dividends 120,646 1,046,263
Cost of shares reacquired (16,072,335) (11,273,378)
Decrease in Net Assets From
- ----------------------------------------------------------------------------------
Fund Share Transactions (15,801,024) (7,589,289)
- ----------------------------------------------------------------------------------
Decrease in Net Assets (15,762,477) (7,890,679)
- ----------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 17,673,836 25,564,515
- ----------------------------------------------------------------------------------
End of period* $ 1,911,359 $ 17,673,836
==================================================================================
* Includes undistributed (overdistributed)
net investment income of: $ 65,311 $ (2,577)
==================================================================================
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997 (unaudited)
and the Year Ended December 31, 1996
<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY SECURITIES PORTFOLIO 1997 1996
==================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 3,409,228 $ 6,043,370
Net realized loss (898,894) (970,497)
Increase (decrease) in net unrealized appreciation 86,491 (2,503,346)
- ----------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,596,825 2,569,527
- ----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,409,228) (6,043,370)
- ----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (3,409,228) (6,043,370)
- ----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 26,206,914 44,968,002
Net asset value of shares issued for
reinvestment of dividends 1,746,220 4,448,261
Cost of shares reacquired (17,150,983) (37,603,657)
- ----------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 10,802,151 11,812,606
- ----------------------------------------------------------------------------------
Increase in Net Assets 9,989,748 8,338,763
NET ASSETS:
Beginning of period 115,437,857 107,099,094
- ----------------------------------------------------------------------------------
End of period $125,427,605 $115,437,857
==================================================================================
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Income Return Account Portfolio ("Income Return Account") and the
Short-Term U.S. Treasury Securities Portfolio ("Short-Term U.S. Treasury") are
separate investment portfolios ("Portfolios") of the Smith Barney Funds, Inc.
("Fund"). The Fund, a Maryland corporation, is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The Fund consists of these Portfolios and two other separate
investment portfolios: Equity Income and U.S. Government Securities Portfolios.
The financial statements and financial highlights for the other portfolios are
presented in separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on trade date; (b) U.S.
government agencies and obligations are valued at the mean between the bid and
ask prices; (c) securities that have a maturity of more than 60 days are valued
at prices based on market quotations for securities of similar type, yield and
maturity; (d) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premiums, which approximates value; (e)
interest income is recorded on an accrual basis; (f) gains or losses on the sale
of securities are calculated by using the specific identification method; (g)
direct expenses are charged to each portfolio and each class; management fees
and general fund expenses are allocated on the basis of relative net assets; (h)
dividends and distributions to shareholders are recorded on the ex-dividend
date; (i) each Portfolio intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; (j) the character of
income and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
December 31, 1996, reclassifications were made to the Portfolios' capital
accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Accordingly, a portion
of accumulated net realized losses and overdistributed net investment income
amounting to $876,134 and $69,296, respectively, were reclassified to paid-in
capital for Income Return Account. In addition, a portion of accumulated net
realized gains amounting to $18,822 was reclassified to paid-in capital for
Short-Term U.S. Treasury. Net investment income, net realized gains and net
assets for each Portfolio were not affected by these changes; and (k) estimates
and assumptions are required to be made regarding assets, liabilities and
changes in net assets resulting from operations when financial
14
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
2. MANAGEMENT AGREEMENTS
AND TRANSACTIONS WITH AFFILIATED PERSONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc., acts as investment manager to the Fund. The management fee
for the Income Return Account and U.S. Government Securities Portfolios is
determined by aggregating the assets of each Portfolio and applying a formula
calculated at an annual rate of 0.50% on the first $200 million of the aggregate
average daily net assets of the two Portfolios and 0.40% on the aggregate
average daily net assets in excess of $200 million; this total is then allocated
to each Portfolio based on their relative average daily net assets. Short-Term
U.S. Treasury pays SBMFM a management fee calculated at an annual rate of 0.45%
of the Portfolio's average daily net assets. These fees are calculated daily and
paid monthly. During the six months ended June 30, 1997, SBMFM waived a portion
of its management fee for Income Return Account.
Smith Barney Inc. ("SB"), another subsidiary of Smith Barney Holdings Inc.,
acts as distributor of Fund shares. For the six months ended June 30, 1997, SB
received sales charges of approximately $1,000 on sales of Income Return Account
Class A shares.
There is a contingent deferred sales charge ("CDSC") of 1.00% on Income
Return Account Class C shares if redemption occurs less than one year from
initial purchase. In addition, Income Return Account Class A shares have a 1.00%
CDSC, which applies if redemption occurs within the first year of purchase. This
CDSC only applies to those purchases of Class A shares, which, when combined
with current holdings of Class A shares equal or exceed $500,000 in the
aggregate. These purchases do not incur an initial sales charge.
For the six months ended June 30, 1997, CDSCs paid to SB for Class A shares
were approximately $1,000.
Pursuant to a Distribution Plan, Income Return Account pays a distribution
fee and service fee with respect to its Class C shares calculated at an annual
rate of 0.20% and 0.15% of average daily net assets, respectively. Short-Term
U.S. Treasury pays a distribution fee and a service fee with respect to Class A
shares calculated at the annual rate of 0.10% and 0.25% of its average daily net
assets, respectively.
15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
For the six months ended June 30, 1997, total Distribution Plan fees were
as follows:
CLASS A CLASS C
================================================================================
Income Return Account -- $2,322
Short-Term U.S. Treasury $137,484 --
================================================================================
All officers and two Directors of the Fund are employees of SB.
3. Investments
During the six months ended June 30, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
INCOME
RETURN SHORT-TERM
ACCOUNT U.S. TREASURY
================================================================================
Purchases $ 8,071,219 $79,832,619
- --------------------------------------------------------------------------------
Sales 24,063,184 72,371,563
================================================================================
At June 30, 1997, aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
SHORT-TERM
U.S. TREASURY
================================================================================
Gross unrealized appreciation $1,506,912
Gross unrealized depreciation --
- --------------------------------------------------------------------------------
Net unrealized appreciation $1,506,912
================================================================================
4. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodian takes possession of) U.S.
government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolios require
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
5. REVERSE REPURCHASE AGREEMENT
A reverse repurchase agreement involves a sale by Short-Term U.S. Treasury
of securities that it holds with an agreement to repurchase the same securities
at an agreed upon price and date. A reverse repurchase agreement involves the
risk that the market value of the securities sold by the Portfolio may decline
below the repurchase price of the securities. The Portfolio will establish a
segregated account with its custodian, in which the Portfolio will maintain
cash, U.S. government securities or other liquid high grade debt obligations
equal in value to its obligations with respect to the reverse repurchase
agreements.
During the six months ended June 30, 1997 there was one reverse repurchase
agreement for the amount of $10,793,750 with an interest rate of 4.92% which
incurred interest expense of $10,326.
At June 30, 1997, Short-Term U.S. Treasury had no open reverse repurchase
agreements.
6. CAPITAL SHARES
At June 30, 1997, the Fund had two billion shares of capital stock
authorized with a par value of $0.01 per share. Each Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest in its respective Portfolio and has the same rights, except
that each class bears certain expenses specifically related to the distribution
of its shares.
At June 30, 1997, total paid-in-capital amounted to the following for each
class and respective Portfolio:
CLASS A CLASS C CLASS Y
================================================================================
Income Return Account $ 1,778,684 $689,505 --
- --------------------------------------------------------------------------------
Short-Term U.S. Treasury 86,410,675 -- $47,452,257
================================================================================
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996*
--------------------------- ---------------------------
INCOME RETURN ACCOUNT SHARES AMOUNT SHARES AMOUNT
=========================================================================================================
<S> <C> <C> <C> <C>
CLASS A
Shares sold 15,749 $ 149,665 221,871 $ 2,115,137
Shares issued on reinvestment 9,943 94,232 70,351 669,288
Shares redeemed (1,466,177) (13,938,030) (415,523) (4,034,655)
- ---------------------------------------------------------------------------------------------------------
Net Decrease (1,440,485) $(13,694,133) (123,301) $ (1,250,230)
=========================================================================================================
CLASS C
Shares sold 105 $ 1,000 54,931 $ 522,432
Shares issued on reinvestment 1,519 14,394 7,212 68,623
Shares redeemed (156,276) (1,484,646) (104,148) (993,088)
- ---------------------------------------------------------------------------------------------------------
Net Decrease (154,652) $ (1,469,252) (42,005) $ (402,033)
=========================================================================================================
CLASS Y**
Shares sold -- -- 1 $ 10
Shares issued on reinvestment 1,269 $ 12,020 3,887 36,968
Shares redeemed (68,385) (649,659) (35,888) (341,958)
- ---------------------------------------------------------------------------------------------------------
Net Decrease (67,116) $ (637,639) (32,000) $ (304,980)
=========================================================================================================
CLASS Z***
Shares sold -- -- 26 $ 247
Shares issued on reinvestment -- -- 28,488 271,384
Shares redeemed -- -- (628,796) (5,903,677)
- ---------------------------------------------------------------------------------------------------------
Net Decrease -- -- (600,282) $ (5,632,046)
=========================================================================================================
SHORT-TERM U.S. TREASURY
=========================================================================================================
CLASS A
Shares sold 2,669,102 $ 10,703,707 3,206,711 $ 13,018,952
Shares issued on reinvestment 435,036 1,746,220 1,099,875 4,448,261
Shares redeemed (4,280,211) (17,150,983) (9,277,889) (37,603,657)
- ---------------------------------------------------------------------------------------------------------
Net Decrease (1,176,073) $ (4,701,056) (4,971,303) $(20,136,444)
=========================================================================================================
CLASS Y
Shares sold 3,865,449 $ 15,503,207 7,937,830 $ 31,949,050
Shares redeemed -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Net Increase 3,865,449 $ 15,503,207 7,937,830 $ 31,949,050
=========================================================================================================
</TABLE>
* Transactions are for the period from February 7, 1996 (inception date) to
December 31, 1996 for Short-Term U.S. Treasury Class Y Shares.
** As of June 30, 1997, Class Y Shares were fully redeemed.
*** As of December 31, 1996, Class Z Shares were fully redeemed.
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
7. CAPITAL LOSS CARRYFORWARD
At December 31, 1996, Income Return Account and Short-Term U.S. Treasury
had for Federal income tax purposes approximately $765,000 and $9,043,000,
respectively, of capital loss carryforwards available to offset future realized
gains. To the extent that these capital carryforward losses are used to offset
capital gains, it is probable that the gains so offset will not be distributed.
The amount and expiration of the carryforwards are indicated below.
Expiration occurs on December 31 of the year indicated:
<TABLE>
<CAPTION>
1997 2001 2002 2003 2004
======================================================================================
<S> <C> <C> <C> <C> <C>
Income Return Account $218,000 -- $ 547,000 -- --
Short-Term U.S. Treasury -- $1,477,000 5,471,000 $1,124,000 $971,000
======================================================================================
</TABLE>
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares
--------------------------------------------------------------
Income Return Account Portfolio 1997(1) 1996 1995 1994(3) 1993 1992(4)
<S> <C> <C> <C> <C> <C> <C>
===========================================================================================================
Net Asset Value, Beginning of Period $ 9.48 $ 9.60 $ 9.34 $ 9.59 $ 9.68 $ 9.65
- -----------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.24 0.44 0.51 0.46 0.45 0.52
Net realized and unrealized gain (loss) (0.02) (0.06) 0.26 (0.26) (0.07) 0.03
- -----------------------------------------------------------------------------------------------------------
Total Income From Operations 0.22 0.38 0.77 0.20 0.38 0.55
- -----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.23) (0.47) (0.51) (0.45) (0.47) (0.52)
Capital - (0.03) - - - -
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.23) (0.50) (0.51) (0.45) (0.47) (0.52)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.47 $ 9.48 $ 9.60 $ 9.34 $ 9.59 $ 9.68
- -----------------------------------------------------------------------------------------------------------
Total Return 2.32%++ 4.08% 8.43% 2.14% 4.00% 5.85%
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 1,289 $14,948 $16,324 $18,918 $50,874 $ 48,538
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 0.80%+ 1.26% 0.69% 0.56% 0.53% 0.50%
Net investment income 4.86+ 4.82 5.38 4.60 4.67 5.33
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 92% 122% 107% 127% 152% 84%
- -----------------------------------------------------------------------------------------------------------
Class C Shares
--------------------------------------------------------------
Income Return Account Portfolio 1997(1) 1996 1995 1994(3) 1993 1992(4)
===========================================================================================================
Net Asset Value, Beginning of Period $ 9.48 $ 9.60 $ 9.34 $ 9.58 $ 9.68 $ 9.69
- -----------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.21 0.41 0.48 0.42 0.45 0.03
Net realized and unrealized gain (loss) (0.02) (0.06) 0.26 (0.24) (0.12) -
- -----------------------------------------------------------------------------------------------------------
Total Income From Operations 0.19 0.35 0.74 0.18 0.33 0.03
- -----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.21) (0.44) (0.48) (0.42) (0.43) (0.04)
Capital - (0.03) - - - -
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.21) (0.47) (0.48) (0.42) (0.43) (0.04)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.46 $ 9.48 $ 9.60 $ 9.34 $ 9.58 $ 9.68
- -----------------------------------------------------------------------------------------------------------
Total Return 2.02%++ 3.72% 8.06% 1.86% 3.53% 0.31%++
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 622 $ 2,090 $ 2,520 $ 3,055 $ 3,993 $ 10
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 1.15%+ 1.60% 1.02% 0.94% 0.90% 0.86%+
Net investment income 4.51+ 4.46 4.89 4.40 4.25 5.71+
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 92% 122% 107% 127% 152% 84%
===========================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) The Manager has waived part of its fee for the six-months ended June 30,
1997. If such fee was not waived, the per share decrease on net investment
income for Class A shares and Class C shares would have been $0.13 and
$0.05, respectively, and expense ratios would have been 1.26% (annualized)
and 1.61% (annualized), respectively.
(3) On November 7, 1994, the former Class B shares were renamed Class C shares.
(4) For the period from December 16, 1992 (inception date) to December 31,
1992.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares
--------------------------------------------------------------------
Short-Term U.S. Treasury
Securities Portfolio 1997(1) 1996 1995 1994 1993 1992
================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 4.05 $ 4.19 $ 3.91 $ 4.16 $ 4.12 $ 4.09
- ----------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.11 0.23 0.22 0.18 0.18 0.19
Net realized and unrealized gain (loss) (0.03) (0.14) 0.28 (0.25) 0.06 0.04
- ----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.08 0.09 0.50 (0.07) 0.24 0.23
- ----------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.11) (0.23) (0.22) (0.18) (0.18) (0.19)
Net realized gains - - - - (0.02) (0.01)
- ----------------------------------------------------------------------------------------------------------------
Total Distributions (0.11) (0.23) (0.22) (0.18) (0.20) (0.20)
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 4.02 $ 4.05 $ 4.19 $ 3.91 $ 4.16 $ 4.12
- ----------------------------------------------------------------------------------------------------------------
Total Return 2.11%++ 2.17% 13.16% (2.15)% 6.01% 5.92%
- ----------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 78,010 $83,324 $107,099 $88,707 $205,758 $130,280
- ----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.94%+ 0.98% 0.98% 0.91% 0.88% 0.91%
Net investment income 5.66+ 5.62 5.29 4.54 4.40 4.76
- ----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 64% 130% 29% 25% 41% 45%
================================================================================================================
<CAPTION>
Class Y Shares
------------------------------
Short-Term U.S. Treasury Securities Portfolio 1997(1) 1996(2)
=================================================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Period $ 4.05 $ 4.19
- ----------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.12 0.22
Net realized and unrealized loss (0.03) (0.14)
- ----------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.09 0.08
- ----------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.12) (0.22)
- ----------------------------------------------------------------------------------------------------------------
Total Distributions (0.12) (0.22)
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 4.02 $ 4.05
- ----------------------------------------------------------------------------------------------------------------
Total Return+++ 2.34% 2.08%
- ----------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 47,417 $ 32,114
- ----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.49% 0.58%
Net investment income 6.12 5.99
- ----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 64% 130%
================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) For the period February 7, 1996 (inception date) through December 31, 1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
21
<PAGE>
Smith Barney
Funds, Inc.
Directors
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P. Martin, M.D.
Heath B. McLendon, Chairman
Roderick C. Rasmussen
Bruce D. Sargent
John P. Toolan
C. Richard Youngdahl, Emeritus
Officers
Heath B. McLendon
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
James E. Conroy
Vice President
Bruce D. Sargent
Vice President
Patrick Sheehan
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Smith Barney
- --------------------------
A Member of TravelersGroup [Logo]
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Funds, Inc. -- Income Return Account and Short-Term U.S. Treasury
Securities Portfolios. It is not authorized for distribution to prospective
investors unless accompanied or preceded by a current Prospectus for the
Portfolio, which contains information concerning the Portfolio's investment
policies and expenses as well as other pertinent information.
Smith Barney Funds, Inc.
388 Greenwich Street
New York, New York 10013
FD0632 8/97
<PAGE>
---------------------------
1967-1997
---------------------------
[PHOTO APPEARS HERE]
30th
Anniversary
[PICTURE APPEARS HERE] Smith Barney Funds, Inc.
EQUITY INCOME
PORTFOLIO
---------------------------
SEMI-ANNUAL REPORT
---------------------------
June 30, 1997
[LOGO] Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.(SM)
<PAGE>
SMITH BARNEY FUNDS, INC.
EQUITY INCOME PORTFOLIO
================================================================================
The EQUITY INCOME PORTFOLIO seeks current income and long-term growth of income
and capital primarily through investments in common stocks.
SMITH BARNEY FUNDS, INC. - EQUITY INCOME
PORTFOLIO AVERAGE ANNUAL TOTAL RETURNS ENDED
JUNE 30, 1997
<TABLE>
<CAPTION>
WITHOUT SALES CHARGES*
-------------------------------------------
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
====================================================================
Six Months+ 18.94% 18.49% 18.49%
- --------------------------------------------------------------------
One-Year 27.00 26.05 26.04
- --------------------------------------------------------------------
Five-Year 16.23 N/A N/A
- --------------------------------------------------------------------
Ten-Year 12.15 N/A N/A
- --------------------------------------------------------------------
Since Inception++ 12.89 24.34 16.19
====================================================================
</TABLE>
<TABLE>
<CAPTION>
WITH SALES CHARGES**
--------------------------------------------
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
=====================================================================
Six Months+ 12.98% 13.49% 17.49%
- ---------------------------------------------------------------------
One-Year 20.68 21.05 25.04
- ---------------------------------------------------------------------
Five-Year 15.05 N/A N/A
- ---------------------------------------------------------------------
Ten-Year 11.58 N/A N/A
- ---------------------------------------------------------------------
Since Inception++ 12.66 23.55 16.19
=====================================================================
</TABLE>
* Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
** Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00% and Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase. Thereafter, the CDSC declines by 1.00% per year
until no CDSC is incurred. Class C shares reflect the deduction of a 1.00%
CDSC which applies if shares are redeemed within the first year of
purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Total return is not annualized as it may not be representative of the total
return for the year.
++ Inception dates for Class A, B and C shares are January 2, 1972, November
7, 1994 and December 2, 1992, respectively.
- --------------------------------------------------------------------------------
A PROUD HISTORY...
- --------------------------------------------------------------------------------
This year we proudly celebrate the 30th anniversary of the Equity Income
Portfolio. Since it began in May 1967, the Portfolio has delivered consistently
competitive returns through two wars, seven administrations and a number of
market downturns as well as the current historic bull market.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SBCIX
Class B SBCCX
Class C SBGCX
- --------------------------------------------------------------------------------
WHAT'S INSIDE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER LETTER.......................................................... 1
AN INTERVIEW WITH PORTFOLIO MANAGER AYAKO WEISSMAN AND VICE
PRESIDENT BRUCE D. SARGENT.................................................. 6
HISTORICAL PERFORMANCE...................................................... 8
SCHEDULE OF INVESTMENTS.....................................................12
STATEMENT OF ASSETS AND LIABILITIES.........................................16
STATEMENT OF OPERATIONS.....................................................17
STATEMENTS OF CHANGES IN NET ASSETS.........................................18
NOTES TO FINANCIAL STATEMENTS...............................................19
FINANCIAL HIGHLIGHTS........................................................22
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
[PICTURE OF Heath B. McLendon Chairman]
[PICTURE OF Bruce D. Sargent Vice President]
[PICTURE OF Ayako Weissman Vice President]
Dear Shareholder:
It is with great pleasure that we provide the semi-annual report for the Smith
Barney Funds Inc. - Equity Income Portfolio ("Portfolio") for the period ended
June 30, 1997. This semi-annual report commemorates the 30th anniversary of the
Portfolio. In this report, we summarize the period's prevailing economic
conditions and briefly outline the Portfolio's investment strategy. A detailed
summary of performance and current holdings can be found in the appropriate
sections that follow. In addition, a discussion with Vice President Ayako
Weissman, CFA and Vice President Bruce D. Sargent, CFA appears on page six.
CELEBRATING 30 YEARS OF SOLID PERFORMANCE
This year, we proudly celebrate the 30th anniversary of the Equity Income
Portfolio. Since it began in May of 1967, the Portfolio has delivered
consistently competitive returns through two wars, seven administrations and a
number of market downturns as well as the current historic bull market. Over the
years, the Portfolio has grown to serve more than 36,700 shareholders and has
more than $977 million in assets under management as of June 30, 1997. We thank
you for your support and confidence in our investment approach and we look
forward to continuing to serve your investment needs in the years ahead.
PERFORMANCE AND INVESTMENT STRATEGY
For the six months ended June 30, 1997, the Portfolio generated a total return
of 18.94% for Class A shares and significantly outperformed its Lipper
Analytical Services, Inc. peer group average of 14.75% for the same period.
(Lipper is an independent fund-tracking organization.)
Since its inception, the Portfolio has maintained a consistent investment
strategy. The Portfolio seeks to provide shareholders with current income and
long-term growth of capital by investing primarily in large-capitalization
companies that tend to be familiar household names.
We continue to follow a highly disciplined, bottom-up approach to investing. In
selecting investments for the Portfolio, we search for undervalued stocks of
established, well-recognized, yet temporarily out-of-favor companies or ones
that offer potential opportunities as yet unrecognized by the broader
marketplace. Typically, these are companies that may have performed poorly in
the past yet in our view are poised to turn around, because of a new management
team, new product or new business strategy. In addition, dividends play an
important role in our investment strategy. Our investment discipline requires
that the companies we invest in pay above-market dividends.
Our approach involves visiting hundreds of companies each year and meeting
regularly with the managements to understand a company's business and industry,
identify outstanding managements and target promising long-term investment
opportunities.
________________________________________________________________________________
Smith Barney Funds, Inc. -- Equity Income Portfolio 1
<PAGE>
We strive to minimize risk in the Equity Income Portfolio in a number of ways.
As of June 30, 1997, the Portfolio owned 62 securities and no single security
made up more than 3.31% of the Portfolio. In addition to this broad
diversification, the Portfolio's holdings tend to be highly liquid and the
dividends they generate help to cushion the Portfolio from the effects of
volatile markets. In fact, a principal aspect of our management strategy is that
every stock we own must provide at least the same or, if not, a higher dividend
than the average for the S&P 500 Index ("S&P 500"), an index composed of widely
held common stocks.
MARKET UPDATE AND OUTLOOK
The U.S. equity market soared to new record highs during the last six months,
driven primarily by a moderate U.S. economy and solid corporate profits. Over
the reporting period, the S&P 500 Index gained 20.6% and the Dow Jones
Industrial Average was not far behind, posting a total return of about 19%.
After experiencing significant volatility in the months leading up the Federal
Reserve Board's ("Fed") move to raise short-term interest rates 25 basis points
(0.25%) at its March 1997 meeting, the stock market rallied in response to the
Fed's decision to leave interest rates unchanged at both its May and July
meetings. The Fed raised the federal funds rate by 0.25% in March after
government reports showed lower unemployment and rising production costs -- two
principal indicators of higher inflationary pressures. (The federal funds rate
is the interest rate banks charge each other for overnight loans, is a closely
watched indicator of the direction of interest rates.) Despite historically low
unemployment, government figures released after the Fed's March meeting showed
that both consumer and wholesale prices were stabilizing or even slightly
declining. In light of this new evidence, the Fed declined to raise interest
rates further, apparently satisfied that inflationary pressures in the economy
were well contained.
Moreover, strong earnings momentum for many companies also fueled the stock
market's rise, particularly for cyclical industries and interest-rate sensitive
stocks such as the financial services sector. Currently, that sector makes up
some 15.9% of the Portfolio's holdings. In addition, health-care companies also
performed well, thanks to strong production pipelines and the expectation of a
re-acceleration in earnings.
In our opinion, the key to continued solid growth remains the positive outlook
on inflation and the ability of companies to report good profits, given a
competitive global economy. We believe the Fed's decision to leave short-term
interest rates unchanged led to higher valuation measures for many stocks and
increased investor confidence of more moderate but sustainable growth in the
U.S. economy.
As a result of nearly ideal conditions in the economy, earnings improved for
many companies. The conditions have been especially beneficial for multinational
companies that are able to generate moderate sales growth in their overseas
operations while investing in technology-led productivity improvements
domestically. New technologies have enabled companies to increase profits
through lower inventories, accelerated manufacturing processes and greater
productivity in the workplace. Moreover, this greater use of technology has
allowed industry to use fewer people, with greater productivity. We expect that
this substitution of capital for labor will continue to drive earnings growth in
the years ahead.
In our view, investors will continue to focus on industries that can provide
consistent growth and stock liquidity as market volatility increases. One
example of an industry that can capitalize on these trends is insurance.
Although the pricing power of many insurance companies has been limited, the
recent merger and acquisition activity that was well underway in other market
sectors is only beginning in this industry. For example, the Chubb Corporation,
a significant Portfolio holding, is in the midst of a major restructuring
effort. Chubb has sold two of its underperforming assets: life insurance and
real estate. We believe that, by returning to its profitable core business,
Chubb should realize strong future growth.
________________________________________________________________________________
2 Special 30th Anniversary -- 1997 Semi-Annual Report to Shareholders
<PAGE>
As we see it, a positive inflation outlook is the key to how the stock market
will perform in the coming months. Therefore, we will continue to monitor
strategic economic data closely and position the Portfolio accordingly. In
addition, we believe that the Portfolio's emphasis on consistent yield and
unrecognized value should provide investors with competitive returns in what may
be an increasingly turbulent market.
PORTFOLIO UPDATE
During the past six months, we added two new companies to the Portfolio,
Imperial Chemical (a commodity chemical manufacturer) and Duke Electric (a
Southeastern utility), both of which illustrate the Portfolio's value approach
to investing. We added the British-based Imperial Chemical after the company
announced its intention to acquire the specialty chemical business of Unilever
and spin off some of its commodity chemical manufacturing operations. Because of
the cyclical nature of the commodity chemical business, earnings for these
companies tend to be more volatile than the more consistent earnings produced by
specialty chemical manufacturers. As a result, commodity chemical stocks tend to
be less favored by many investors. We believe that Imperial Chemical's
reconfiguration should provide more stable and predictable earnings, setting the
stage for increased investor interest in the company's stock. In addition, the
cash resulting from the sale can be used to pay off some of the firm's debt,
further increasing the intrinsic value of its stock.
In our opinion, Duke Electric has one of the strongest management teams in the
industry and is well equipped to adapt to the rapidly changing utilities
industry. Nevertheless, the company's performance has remained relatively flat.
In recent years, investor interest has shifted away from utility companies, as
the full effects of deregulation still remain uncertain. We were initially
attracted to Duke Electric after the company announced plans to acquire
Panhandle Eastern, a natural gas provider. We believe that this combination
should enable Duke to widen its market share and diversify its business, making
it ultimately an extremely attractive investment opportunity.
We are pleased to share this important Equity Income Portfolio milestone with
you. We at Smith Barney Mutual Funds look forward to continuing to help you
achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Bruce Sargent
Heath B. McLendon Bruce Sargent, CFA
Chairman Vice President
/s/ Ayako Weissman
Ayako Weissman, CFA
Vice President
July 28, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS* AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<S> <C>
1. Bristol-Myers Squibb & Co. 3.3%
- --------------------------------------------------------------------------------
2. Xerox Corp. 3.2
- --------------------------------------------------------------------------------
3. Unilever, N.V. 3.1
- --------------------------------------------------------------------------------
4. Sprint Corp. 3.0
- --------------------------------------------------------------------------------
5. American Home Products Corp. 2.9
- --------------------------------------------------------------------------------
6. Baxter International, Inc. 2.8
- --------------------------------------------------------------------------------
7. Chubb Corp. 2.7
- --------------------------------------------------------------------------------
8. Mobil Corp. 2.7
- --------------------------------------------------------------------------------
9. Union Pacific Corp. 2.7
- --------------------------------------------------------------------------------
10. General Electric Co. 2.7
- --------------------------------------------------------------------------------
</TABLE>
* As a percentage of total investments.
________________________________________________________________________________
Smith Barney Funds, Inc. - Equity Income Portfolio 3
<PAGE>
SMITH BARNEY FUNDS, INC.
EQUITY INCOME PORTFOLIO
[PHOTO OF WATCH APPEARS HERE]
- --------------------------------------------------------------------------------
A STRATEGY THAT'S STOOD THE TEST OF TIME
- --------------------------------------------------------------------------------
We employ a conservative, highly disciplined and bottom-up approach to
investing. This means that individual stock selection is more influential to the
overall performance of the Portfolio rather than the present or future condition
of the economy, the financial markets or the performance of particular market
sectors. Our approach involves visiting hundreds of companies every year and
meeting with their management teams to understand a company's business and
industry, identify outstanding management teams and target promising long-term
investment opportunities.
- --------------------------------------------------------------------------------
OUR INVESTMENT PHILOSOPHY
- --------------------------------------------------------------------------------
INVEST IN VALUE
We invest in stocks of undervalued companies where significant positive change
is foreseen, and we see superior return potential.
CONTROL RISK
We systematically select stocks with factors indicating relatively strong
downside protection such as the expectation of cash return to the investor (in
the form of dividends) and high liquidity, all of which may help to reduce risk.
- --------------------------------------------------------------------------------
SELL DISCIPLINE
- --------------------------------------------------------------------------------
We generally sell stocks when...
> The dividend yield falls below 75% of the S&P 500 average
dividend yield
> A company's financial fundamentals deteriorate
________________________________________________________________________________
4 Special 30th Anniversary -- 1997 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
FOR MOST INVESTORS, WHAT COUNTS IS TIME AND NOT TIMING...
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Here are some common THE COST OF: 1967 1997 SOURCE
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
everyday examples Exchange Seat $220,000 to $1,285,000 New York
of how inflation $450,000 Stock Exchange
------------------------------------------------------------------------------------------
can take its toll Postage Stamp $0.06 $0.32 Statistical Abstract
of the U.S. 1968
------------------------------------------------------------------------------------------
Single Family Home $20,100 $120,800 National Association
of Realtors
------------------------------------------------------------------------------------------
Movie Ticket Admission $1.50 $9.00 Motion Picture Assoc.
------------------------------------------------------------------------------------------
Gallon of Milk $0.57 $2.89 Dairy Board
------------------------------------------------------------------------------------------
Gallon of Gas $0.33 $1.13 American Gas Assoc.
------------------------------------------------------------------------------------------
Minimum Wage $1.40 $4.75 U.S. Dept. of Labor
------------------------------------------------------------------------------------------
</TABLE>
-------------------------------------------------------
MUTUAL FUNDS: A 30-YEAR HISTORY OF EXTRAORDINARY GROWTH
-------------------------------------------------------
In the 1960s, corporate business mergers averaged 1,600
a year, almost three times the number recorded a decade
earlier. In the 1970s, Congress enacted important
pension legislation such as the Employees Retirement
Income Security Act (ERISA) that would have a
significant impact on the financial services industry
in the late 1970s and 1980s. In the 1980s, the
competitive environment in the mutual fund industry
heightened and the number of SEC-registered investment
advisers expanded exponentially. In the 1990s, mutual
funds have become the preferred investment choice for
investors and industry growth shows no signs of slowing
down.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1967 1997
------------------------------------------------------------------------------------------
<S> <C> <C>
Total number of mutual funds 204 6,540
------------------------------------------------------------------------------------------
Total assets under management
in the mutual fund industry $40.8 billion $3.9 trillion
------------------------------------------------------------------------------------------
Dividend yield of S&P 500 High: 3.63% High: 2.04%
Low: 2.99% Low: 1.88%
------------------------------------------------------------------------------------------
Source: Investment Company Institute
</TABLE>
______________________________________________________________________________
Smith Barney Funds,Inc. - Equity Income Portfolio 5
<PAGE>
- --------------------------------------------------------------------------------
AN INTERVIEW WITH PORTFOLIO MANAGER AYAKO WEISSMAN, CFA AND VICE PRESIDENT BRUCE
D. SARGENT, CFA
- --------------------------------------------------------------------------------
On the 30th anniversary of the Smith Barney Equity Income Portfolio, we recently
had the pleasure of speaking with Vice President Ayako Weissman, CFA, and Vice
President Bruce D. Sargent, CFA, who continues to play an important advisory
role in the Equity Income Portfolio, about their "bottom-up," value-investing
approach and some of their thoughts regarding this historic bull market.
AYAKO, HAS THIS HISTORIC BULL MARKET BEEN A CHALLENGING TIME FOR YOUR "BOTTOM-
UP" VALUE INVESTMENT APPROACH?
AYAKO: No matter how volatile the stock market may become, we remain committed
to our "bottom-up," value approach that seeks to identify out-of-favor companies
with predictable earnings. (Bottom-up investors look for outstanding performance
potential from individual stocks before considering the impact of economic
trends. Top-down investors first look at general economic trends and then select
those industries and companies that should benefit from these trends.) Since
investment decisions for the Portfolio are generally made because of company-
specific reasons rather than current economic or market conditions, we will
continue to take advantage of attractive buying opportunities as they appear.
Yet the competitive resurgence of U.S. corporations has made our job a little
easier. In the past, a company's management would often go on record to say that
a particular problem had been identified and was going to be addressed. Then,
after much fanfare, nothing would happen and the stock's price would languish.
Now, when a company's stock is out of favor, management often comes under
intense scrutiny either by the investment community or a board of directors.
Whereas before a company turnaround might take years, today meaningful change
usually occurs within one year.
BRUCE, WHAT IS THE ROLE OF DIVIDEND-PAYING STOCKS IN THE PORTFOLIO?
BRUCE: Dividend-paying stocks are an important aspect of our investment
strategy. Every stock we purchase must provide at least the same or a higher
dividend than the average yield of the S&P 500. However, while dividend-paying
stocks can help smooth out short-term market volatility, the Equity Income
Portfolio's investment focus shifted slightly three years ago, from higher-
yielding stocks and convertible securities to equities with better capital
appreciation potential. This change was made to better position the Portfolio to
capitalize on investment opportunities. That subtle shift in the Portfolio's
investment emphasis has been extremely beneficial to shareholders.
ONE OF THE CENTRAL QUESTIONS FACING INVESTORS TODAY IS, WILL THE HIGH LEVEL OF
CORPORATE PROFITS DRIVING THIS BULL MARKET CONTINUE, OR WILL PROFITS REVERT BACK
TO THEIR LOWER HISTORICAL NORMS?
AYAKO: We believe that high U.S. corporate profits are here to stay. In the
early to mid-1980s, most U.S. corporations were poorly managed, had low
profitability and were not competitive in the global marketplace. During that
time, U.S. corporations lost significant market share to lower-cost, more-
efficient importers. That situation has changed dramatically so that we think
the U.S. corporate model right now has become the prototype of preference for
most of the world's economies. U.S. corporations are now models of efficiency,
innovation, and profitability.
BRUCE: While corporate profits have been growing recently at more than double
the rate of economic growth, there are some aspects of corporate profitability
that still haven't been fully appreciated by investors. Although profits are
indisputably high, pretax profit margins for many U.S. corporations are not as
high as they have been historically. We think there may still be some room for
corporations to improve their pretax profitability.
________________________________________________________________________________
6 Special 30th Anniversary -- 1997 Semi-Annual Report to Shareholders
<PAGE>
Another factor behind U.S. corporate leadership has been the implementation of
compensation policies that reward performance. A decade ago, incentive-based
compensation tied to a stock's price or return on equity for management was
virtually unheard of in most U.S. corporations. While management salaries were
extremely high, bonuses were not necessarily awarded based on corporate
performance. Today, however, there's been a pronounced shift toward rewarding
management with stock options or other forms of compensation based exclusively
on performance. Now shareholders and management teams alike share mutual
interests and have a much more unified stake in how a company does.
SO MARKET CONDITIONS ARE REALLY DIFFERENT THIS TIME?
AYAKO: Yes. Because of a confluence of deregulation, technological change and
the revolution in communications, information in the global capital markets
travels faster and is more accessible. However, having widespread and virtually
instant information also means that global investors can react more quickly and
in a more coordinated fashion to particular events such as the stock market
correction of 1987 and the interest rate hikes by the Federal Reserve Board in
1994.
Technological advances such as faster and more powerful computers have increased
productivity in industries and companies throughout the world. In addition, the
ongoing revolution in technology has spurred industries and companies to
restructure their labor forces as new products and services are created. Workers
are now producing more and their output has fueled a growth in corporate
profits, which in turn has helped support rising stock prices. However, in
periods of rapid change, investors should expect continued short-term market
volatility.
BRUCE: I agree with Ayako. In a fast-paced and dynamic global economy,
marketplace pressures have become much more intense, but large U.S. corporations
have successfully met the challenge. Many of these companies can deliver goods
and services faster and more efficiently than the competition. U.S. corporations
are now more flexible, more entrepreneurial and less bureaucratic and have
become more adept at reacting quickly to changes in the marketplace.
BRUCE, ON THE 30TH ANNIVERSARY OF THE EQUITY INCOME PORTFOLIO, WHAT HAS BEEN THE
MOST SIGNIFICANT CHANGE IN THE LAST THREE YEARS?
BRUCE: Although the Equity Income Portfolio's value-investing style has remained
the same for more than three decades, we thought that the growth and income
category had become very broad in terms of the investment objectives and
policies of funds covered under the category since the Portfolio was launched in
1967.
Consequently, a few years back we changed the Fund's name from the Income and
Growth Portfolio to the Equity Income Portfolio. We think the equity income
classification is more representative of the Portfolio's objectives and has been
a better benchmark to evaluate its performance against the competition.
BRUCE AND AYAKO, WHY DID YOU BECOME PORTFOLIO MANAGERS?
BRUCE: I joined Smith Barney after graduate school thinking I was going to be an
investment banker. To be honest, I had a tremendous interest in the stock market
that I didn't truly appreciate until I began working.
My interest in value investing grew out of the challenging bear market of the
early 1970s. During the formative years of my career, my experiences in a
seemingly endless bear market impressed upon me the importance of buying
securities based on their real, intrinsic worth, not selecting them based on
momentum or the hope that you would be offered a higher price.
AYAKO: I was a technology analyst from 1984 until 1987 and then joined Smith
Barney. In the mid 1980s, technology stocks entered a deep recession. Whatever
stocks we followed went down, and I had to tell my clients to avoid most issues
we covered. Those experiences taught me in a very real way the advantages of
value investing.
AYAKO AND BRUCE, THANK YOU FOR TALKING WITH US. OUR SINCERE CONGRATULATIONS ON
THE 30TH ANNIVERSARY OF THE SMITH BARNEY FUNDS, INC. - EQUITY INCOME PORTFOLIO.
________________________________________________________________________________
Smith Barney Funds, Inc. -- Equity Income Portfolio 7
<PAGE>
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns/(1)/
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/97 $14.79 $17.41 $0.17 $0.00 18.94%+
- -------------------------------------------------------------------------------------------------------------------------
12/31/96 14.59 14.79 0.36 1.79 16.06
- -------------------------------------------------------------------------------------------------------------------------
12/31/95 12.18 14.59 0.39 1.18 33.05
- -------------------------------------------------------------------------------------------------------------------------
12/31/94 13.31 12.18 0.42 0.14 (4.31)
- -------------------------------------------------------------------------------------------------------------------------
12/31/93 12.48 13.31 0.46 0.73 16.38
- -------------------------------------------------------------------------------------------------------------------------
12/31/92 12.51 12.48 0.51 0.40 7.23
- -------------------------------------------------------------------------------------------------------------------------
12/31/91 10.54 12.51 0.73 0.05 26.57
- -------------------------------------------------------------------------------------------------------------------------
12/31/90 12.69 10.54 0.70 0.25 (9.46)
- -------------------------------------------------------------------------------------------------------------------------
12/31/89 11.00 12.69 0.70 0.31 25.11
- -------------------------------------------------------------------------------------------------------------------------
12/31/88 10.05 11.00 0.63 0.17 17.67
- -------------------------------------------------------------------------------------------------------------------------
12/31/87 11.40 10.05 0.50 0.63 (2.83)
- -------------------------------------------------------------------------------------------------------------------------
Total $5.57 $5.65
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns/(1)/
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/97 $14.74 $17.36 $0.10 $0.00 18.49%+
- -------------------------------------------------------------------------------------------------------------------------
12/31/96 14.54 14.74 0.24 1.79 15.22
- -------------------------------------------------------------------------------------------------------------------------
12/31/95 12.15 14.54 0.29 1.18 32.07
- -------------------------------------------------------------------------------------------------------------------------
Inception* -- 12/31/94 12.54 12.15 0.09 0.14 (1.28)+
- -------------------------------------------------------------------------------------------------------------------------
Total $0.72 $3.11
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS C SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns/(1)/
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/97 $14.76 $17.38 $0.10 $0.00 18.49%+
- -------------------------------------------------------------------------------------------------------------------------
12/31/96 14.57 14.76 0.24 1.79 15.15
- -------------------------------------------------------------------------------------------------------------------------
12/31/95 12.18 14.57 0.29 1.18 32.01
- -------------------------------------------------------------------------------------------------------------------------
12/31/94 13.30 12.18 0.34 0.14 (4.91)
- -------------------------------------------------------------------------------------------------------------------------
12/31/93 12.48 13.30 0.36 0.73 15.46
- -------------------------------------------------------------------------------------------------------------------------
Inception* -- 12/31/92 12.87 12.48 0.06 0.40 (0.57)+
- -------------------------------------------------------------------------------------------------------------------------
Total $1.39 $4.24
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS Y SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns/(1)/
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/97 $14.80 $17.41 $0.20 $0.00 19.07%+
- -------------------------------------------------------------------------------------------------------------------------
Inception* -- 12/31/96 15.06 14.80 0.41 1.79 12.86+
- -------------------------------------------------------------------------------------------------------------------------
Total $0.61 $1.79
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
________________________________________________________________________________
8 Special 30th Anniversary -- 1997 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS Z SHARES
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE
-----------------------
BEGINNING END INCOME CAPITAL GAIN TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDENDS DISTRIBUTIONS RETURNS(1)
=========================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $14.82 $17.45 $0.20 $0.00 19.19%+
- ---------------------------------------------------------------------------------------------------------
12/31/96 14.61 14.82 0.41 1.79 16.47
- ---------------------------------------------------------------------------------------------------------
12/31/95 12.19 14.61 0.42 1.18 33.41
- ---------------------------------------------------------------------------------------------------------
Inception* -- 12/31/94 12.54 12.19 0.12 0.14 (0.73)+
=========================================================================================================
Total $1.15 $3.11
=========================================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS QUARTERLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------------------------------------------------------------------
WITHOUT SALES CHARGE(1)
----------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS Z
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/97+ 18.94% 18.49% 18.49% 19.07% 19.19%
- ---------------------------------------------------------------------------------------------------------
Year Ended 6/30/97 27.00 26.05 26.04 27.42 27.46
- ---------------------------------------------------------------------------------------------------------
Five Years Ended 6/30/97 16.23 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
Ten Years Ended 6/30/97 12.15 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
Inception* through 6/30/97 12.89 24.34 16.19 23.60 25.87
=========================================================================================================
<CAPTION>
WITH SALES CHARGE(2)
----------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Y CLASS Z
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/97+ 12.98% 13.49% 17.49% 19.07% 19.19%
- ---------------------------------------------------------------------------------------------------------
Year Ended 6/30/97 20.68 21.05 25.04 27.42 27.46
- ---------------------------------------------------------------------------------------------------------
Five Years Ended 6/30/97 15.05 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
Ten Years Ended 6/30/97 11.58 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
Inception* through 6/30/97 12.66 23.55 16.19 23.60 25.87
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN
- ---------------------------------------------------------------------------------------------------------
WITHOUT SALES CHARGE(1)
=========================================================================================================
<S> <C>
Class A (6/30/87 through 6/30/97) 214.70%
- ---------------------------------------------------------------------------------------------------------
Class B (Inception* through 6/30/97) 78.00
- ---------------------------------------------------------------------------------------------------------
Class C (Inception* through 6/30/97) 98.81
- ---------------------------------------------------------------------------------------------------------
Class Y (Inception* through 6/30/97) 34.38
- ---------------------------------------------------------------------------------------------------------
Class Z (Inception* through 6/30/97) 83.85
=========================================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the applicable
sales charges with respect to Class A shares or the contingent deferred
sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00% and Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase. Thereafter the CDSC declines by 1.00% per year
until no CDSC is incurred. Class C shares reflect the deduction of a 1.00%
CDSC, which applies if shares are redeemed within the first year of
purchase.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
* Inception dates for Class A, B, C, Y and Z shares are January 2, 1972,
November 7, 1994, December 2, 1992, February 6, 1996 and November 7, 1994,
respectively.
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Equity Income Portfolio 9
<PAGE>
SMITH BARNEY FUNDS, INC.
EQUITY INCOME PORTFOLIO
GROWTH OF $10,000 INVESTED IN CLASS A SHARES
OF THE SMITH BARNEY FUNDS, INC. - EQUITY INCOME PORTFOLIO
VS. THE STANDARD & POOR'S 500 STOCK INDEX*
May 18, 1967 - June 30, 1997
PLOT POINTS
- -----------
<TABLE>
<CAPTION>
Smith Barney Funds, Inc.
EQUITY INCOME S&P 500 TOTAL
DATE PORTFOLIO Index RETURN
- ---- ------------- ------- ------
<S> <C> <C> <C>
5/18/67 9,427 10,000
12/31/67 9,670 11,031 10.31%
12/31/68 11,945 12,252 11.07%
12/31/69 10,636 11,218 -8.44%
12/31/70 10,887 11,661 3.95%
12/31/71 12,073 13,329 14.30%
12/31/72 12,652 15,861 19.00%
12/31/73 10,134 13,531 -14.69%
12/31/74 8,357 9,949 -28.47%
12/31/75 11,282 13,654 37.23%
12/31/76 15,461 16,921 23.93%
12/31/77 15,709 15,709 -7.16%
12/31/78 15,997 16,743 6.58%
12/31/79 19,370 19,857 18.60%
12/31/80 25,639 26,311 32.50%
12/31/81 28,703 25,016 -4.92%
</TABLE>
* Hypothetical illustration of $10,000 invested in Class A shares on May 18,
1967, assuming deduction of the maximum 5.00% sales charge at the time of
investment and reinvestment of dividends and capital gains, if any, at net
asset value through June 30, 1997. The Standard & Poor's 500 Stock Index ("S&P
500") is an index composed of widely held common stocks traded on the New York
Stock Exchange, American Stock Exchange and the NASDAQ Stock Market. Figures
for the index include reinvestment of dividends. The index is unmanaged and is
not subject to the same management and trading expenses as a mutual fund. The
performance of the Portfolio's other classes may be greater or less than the
Class A shares' performance
________________________________________________________________________________
10 Special 30th Anniversary -- 1997 Semi-Annual Report to Shareholders
<PAGE>
EQUITY INCOME PORTFOLIO...
For more than 30 years, a solid Fund with a sturdy track record
[PHOTO]
Ayako Weissman joins
Equity Income Portfolio's
management team
<TABLE>
<CAPTION>
PLOT POINTS
- ---------------
EQUITY INCOME TOTAL
DATE PORTFOLIO S&P 500 RETURN
- ---------- -------------- ----------- ----------
<S> <C> <C> <C>
12/31/82 36,575 30,407 21.55%
12/31/83 42,834 37,267 22.56%
12/31/84 47,195 39,604 6.27%
12/31/85 60,077 52,170 31.73%
12/31/86 72,719 61,905 18.66%
12/31/87 70,663 65,156 5.25%
12/31/88 83,150 75,945 16.58%
12/31/89 104,029 99,967 31.63%
12/31/90 94,188 96,858 -3.11%
12/31/91 119,208 126,303 30.40%
12/31/92 127,818 135,914 7.61%
12/31/93 148,760 149,587 10.06%
12/31/94 142,341 151,547 1.31%
12/31/95 189,386 208,422 37.53%
12/31/96 219,811 256,255 22.95%
6/30/97 261,434 309,044 20.60%
</TABLE>
NOTE: ONLY USE HIGHLIGHTED ROWS FOR PLOT PLANTS.
indicated on this chart, depending on whether greater or lesser sales charges
and fees were incurred by shareholders investing in other classes. All
figures represent past performance and are not a guarantee of future results.
Investment returns and principal value will fluctuate, and redemption value
may be more or less than the original cost. No adjustment has been made for
shareholder tax liability on dividends or capital gains.
________________________________________________________________________________
Smith Barney Funds, Inc. - Equity Income Portfolio 11
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C>
COMMON STOCKS -- 92.9%
AEROSPACE -- 2.5%
110,000 Lockheed Martin Corp. $11,391,875
20,000 Primex Technologies Inc. 427,500
150,000 United Technologies Corp. 12,450,000
- --------------------------------------------------------------------------------
24,269,375
- --------------------------------------------------------------------------------
ALUMINUM -- 1.5%
200,000 Reynolds Metals Co. 14,250,000
- --------------------------------------------------------------------------------
AUTO PARTS -- 1.2%
350,000 Federal Mogul Corp. 12,250,000
- --------------------------------------------------------------------------------
AUTOMOBILES -- 1.0%
250,000 Ford Motor Corp. 9,437,500
- --------------------------------------------------------------------------------
BUILDING MATERIALS -- 1.1%
250,000 Masco Corp. 10,437,500
- --------------------------------------------------------------------------------
CHEMICALS -- 2.1%
250,000 Imperial Chemical Industries ADR 14,218,750
150,000 Olin Corp. 5,859,375
- --------------------------------------------------------------------------------
20,078,125
- --------------------------------------------------------------------------------
CONGLOMERATES -- 4.4%
80,000 Alexander Baldwin, Inc. 2,090,000
400,000 General Electric Co. 26,150,000
300,000 National Services Industries, Inc. 14,606,250
- --------------------------------------------------------------------------------
42,846,250
- --------------------------------------------------------------------------------
DATA PROCESSING: OFFICE EQUIPMENT -- 5.7%
100,000 Minnesota Mining & Manufacturing Co. 10,200,000
200,000 Pitney Bowes Inc. 13,900,000
400,000 Xerox Corp. 31,550,000
- --------------------------------------------------------------------------------
55,650,000
- --------------------------------------------------------------------------------
DRUGS -- 8.5%
375,000 American Home Products Corp. 28,687,500
400,000 Bristol-Myers Squibb & Co. 32,400,000
200,000 Eli Lilly & Co. 21,862,500
- --------------------------------------------------------------------------------
82,950,000
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 2.2%
200,000 Duke Energy Corp. 9,587,500
425,000 Entergy Corp. 11,634,375
- --------------------------------------------------------------------------------
21,221,875
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 2.2%
400,000 Emerson Electric Co. 22,025,000
- --------------------------------------------------------------------------------
FOODS -- 2.1%
450,000 HJ Heinz & Co. 20,756,250
- --------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
________________________________________________________________________________
12 Special 30th Anniversary -- 1997 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
==========================================================================================
<S> <C>
HOUSEHOLD PRODUCTS -- 5.2%
400,000 Kimberly-Clark Corp. $ 19,900,000
140,000 Unilever, N.V. 30,520,000
- ------------------------------------------------------------------------------------------
50,420,000
- ------------------------------------------------------------------------------------------
INSURANCE - BROKERAGE -- 1.3%
105,000 Aon Corp. 5,433,750
100,000 Marsh & McLennan Cos., Inc. 7,137,500
- ------------------------------------------------------------------------------------------
12,571,250
- ------------------------------------------------------------------------------------------
INSURANCE - MULTILINE -- 3.7%
120,000 Aetna Life & Casualty Co. 11,250,000
150,000 American General Corp. 7,162,500
100,000 Cigna Corp. 17,750,000
- ------------------------------------------------------------------------------------------
36,162,500
- ------------------------------------------------------------------------------------------
INSURANCE - PROPERTY CASUALTY -- 5.1%
400,000 Chubb Corp. 26,750,000
300,000 St. Paul Cos., Inc. 22,875,000
- ------------------------------------------------------------------------------------------
49,625,000
- ------------------------------------------------------------------------------------------
MACHINE TOOLS -- 1.9%
470,000 Stanley Works 18,800,000
- ------------------------------------------------------------------------------------------
MAJOR REGIONAL BANKS -- 3.7%
100,000 Banc One Corp., Exchange $3.50, Series C 9,300,000
250,000 Fleet Financial Group Inc. 15,812,500
200,000 Great Western Financial Corp. 10,750,000
- ------------------------------------------------------------------------------------------
35,862,500
- ------------------------------------------------------------------------------------------
MEDICAL PRODUCTS AND SUPPLIES -- 3.7%
520,000 Baxter International, Inc. 27,170,000
110,000 McKesson Corp. 8,525,000
- ------------------------------------------------------------------------------------------
35,695,000
- ------------------------------------------------------------------------------------------
METALS - MISCELLANEOUS -- 1.2%
220,000 Crown Cork and Seal, Inc. 11,756,250
- ------------------------------------------------------------------------------------------
MONEY CENTER BANKS -- 2.1%
208,000 Chase Manhattan Bank Corp. 20,189,000
- ------------------------------------------------------------------------------------------
NATURAL GAS - PIPELINES -- 2.8%
250,000 Brooklyn Union Gas 7,156,250
250,000 El Paso Natural Gas 13,750,000
200,000 Enron Global Power & Pipelines, LLC 6,662,500
- ------------------------------------------------------------------------------------------
27,568,750
- ------------------------------------------------------------------------------------------
OIL INTEGRATED - DOMESTIC -- 1.9%
350,000 Ashland, Inc. 16,231,250
50,000 Unocal Corp. 1,940,625
- ------------------------------------------------------------------------------------------
18,171,875
- ------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
________________________________________________________________________________
Smith Barney Funds, Inc. -- Equity Income Portfolio 13
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
==========================================================================================
<S> <C>
OIL INTEGRATED - INTERNATIONAL -- 8.1%
215,000 Chevron Corp. $ 15,896,563
240,000 Exxon Corp. 14,760,000
380,000 Mobil Corp. 26,552,500
400,000 Royal Dutch Petroleum Co. 21,750,000
- ------------------------------------------------------------------------------------------
78,959,063
- ------------------------------------------------------------------------------------------
OIL WELL EQUIPMENT AND SERVICES -- 1.2%
325,000 Dresser Industries, Inc. 12,106,250
- ------------------------------------------------------------------------------------------
PAPER PRODUCTS -- 1.7%
350,000 International Paper Co. 16,996,875
- ------------------------------------------------------------------------------------------
PHOTOGRAPHY -- 2.4%
300,000 Eastman Kodak Co. 23,025,000
- ------------------------------------------------------------------------------------------
PUBLISHING -- 0.6%
100,000 McGraw Hill Cos., Inc. 5,881,250
- ------------------------------------------------------------------------------------------
PUBLISHING - NEWSPAPERS -- 2.3%
250,000 Dow Jones & Co. 10,046,875
250,000 New York Times Co., Class A Shares 12,375,000
- ------------------------------------------------------------------------------------------
22,421,875
- ------------------------------------------------------------------------------------------
RAILROADS -- 2.7%
375,000 Union Pacific Corp. 26,437,500
- ------------------------------------------------------------------------------------------
RETAIL -- 0.9%
175,000 Sears, Roebuck & Co. 9,406,250
- ------------------------------------------------------------------------------------------
TELEPHONE -- 5.9%
250,000 Bellsouth Corp. 11,593,750
400,000 GTE Corp. 17,550,000
550,000 Sprint Corp. 28,943,750
- ------------------------------------------------------------------------------------------
58,087,500
- ------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $623,941,952) 906,315,563
==========================================================================================
FACE
AMOUNT SECURITY VALUE
==========================================================================================
CONVERTIBLE DEBENTURES -- 0.6%
ENERGY -- 0.6%
$ 5,800,000 Oryx Energy, 7.500% due 5/15/14
(Cost -- $5,547,625) 5,713,000
==========================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
________________________________________________________________________________
14 Special 30th Anniversary -- 1997 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
======================================================================================================
<S> <C>
REPURCHASE AGREEMENTS -- 6.5%
$ 3,075,000 Chase Securities Corp., 5.745% due 7/1/97;
Proceeds at maturity -- $3,075,491; (Fully collateralized
by U.S. Treasury Notes, 6.250% due 6/30/02;
Market value -- $3,136,503) $ 3,075,000
60,000,000 Goldman Sachs & Co., 5.794% due 7/1/97;
Proceeds at maturity -- $60,009,657; (Fully collateralized
by U.S. Treasury Notes, 6.125% due 8/31/98;
Market value -- $61,227,293) 60,000,000
- ------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $63,075,000) 63,075,000
======================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $692,564,577*) $975,103,563
======================================================================================================
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
________________________________________________________________________________
Smith Barney Funds, Inc. -- Equity Income Portfolio 15
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1997
- -----------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (Cost -- $692,564,577) $975,103,563
Cash 671
Receivable for Fund shares sold 337,426
Receivable for securities sold 1,164,551
Dividends and interest receivable 1,827,655
- ------------------------------------------------------------------------------
TOTAL ASSETS 978,433,866
- ------------------------------------------------------------------------------
LIABILITIES:
Management fees payable 464,774
Distribution costs payable 297,598
Accrued expenses 112,957
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 875,329
- ------------------------------------------------------------------------------
TOTAL NET ASSETS $977,558,537
==============================================================================
NET ASSETS:
Par value of capital shares $ 561,298
Capital paid in excess of par value 644,280,966
Overdistributed net investment income (1,158,018)
Accumulated net realized gain on security transactions 51,335,305
Net unrealized appreciation of investments 282,538,986
- ------------------------------------------------------------------------------
TOTAL NET ASSETS $977,558,537
==============================================================================
SHARES OUTSTANDING
Class A 42,287,827
----------------------------------------------------------------------------
Class B 1,224,058
----------------------------------------------------------------------------
Class C 2,204,416
----------------------------------------------------------------------------
Class Y 2,598,726
----------------------------------------------------------------------------
Class Z 7,814,730
----------------------------------------------------------------------------
NET ASSET VALUE
Class A (and redemption price) $ 17.41
----------------------------------------------------------------------------
Class B* $ 17.36
----------------------------------------------------------------------------
Class C** $ 17.38
----------------------------------------------------------------------------
Class Y (and redemption price) $ 17.41
----------------------------------------------------------------------------
Class Z (and redemption price) $ 17.45
----------------------------------------------------------------------------
CLASS A MAXIMUM PUBLIC OFFERING PRICE PER SHARE
(net asset value plus 5.26% of net asset value per share) $ 18.33
==============================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from initial purchase (See Note 2).
**Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
________________________________________________________________________________
16 Special 30th Anniversary -- 1997 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1997
- -------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
<S> <C>
Dividends $ 10,307,989
Interest 2,100,954
Less: Foreign withholding tax (99,828)
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 12,309,115
- -------------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 2,574,086
Distribution fees (Note 2) 1,107,603
Shareholder and system servicing fees 256,499
Registration fees 56,649
Shareholder communications 39,758
Custody 18,353
Audit and legal 14,567
Directors' fees 11,881
Other 4,384
- -------------------------------------------------------------------------------------------------
TOTAL EXPENSES 4,083,780
- -------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 8,225,335
- -------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 210,489,314
Cost of securities sold 159,174,700
- -------------------------------------------------------------------------------------------------
NET REALIZED GAIN 51,314,614
- -------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 185,094,122
End of period 282,538,986
- -------------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION 97,444,864
- -------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 148,759,478
- -------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS $156,984,813
=================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
________________________________________________________________________________
Smith Barney Funds, Inc. - Equity Income Portfolio 17
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 8,225,335 $ 18,225,859
Net realized gain 51,314,614 90,148,657
Increase in net unrealized appreciation 97,444,864 10,795,938
- ------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 156,984,813 119,170,454
- ------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (9,613,428) (18,560,723)
Net realized gains -- (90,678,646)
- -------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS (9,613,428) (109,239,369)
- ------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sales of shares 32,774,109 77,117,814
Net asset value of shares issued for
reinvestment of dividends 8,274,200 98,396,742
Cost of shares reacquired (48,372,823) (99,848,727)
- -------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
FUND SHARE TRANSACTIONS (7,324,514) 75,665,829
- ------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 140,046,871 85,596,914
NET ASSETS:
Beginning of period 837,511,666 751,914,752
- ------------------------------------------------------------------------------------------------
END OF PERIOD* $977,558,537 $ 837,511,666
================================================================================================
* Includes undistributed (overdistributed) net investment
income of: $ (1,158,018) $ 230,075
================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
________________________________________________________________________________
18 Special 30th Anniversary -- 1997 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Equity Income Portfolio ("Portfolio"), is a separate investment portfolio of
the Smith Barney Funds, Inc. ("Fund"). The Fund, a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company and consists of this
Portfolio and three other separate investment portfolios: U.S. Government
Securities, Income Return Account and Short-Term U.S. Treasury Securities
Portfolios. The financial statements and financial highlights for the other
portfolios are presented in separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolio are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing prices on such markets;
securities for which no sales price was reported and U.S. government and agency
obligations are valued at the mean between the bid and ask prices; (c)
securities that have a maturity of more than 60 days are valued at prices based
on market quotations for securities of similar type, yield and maturity; (d)
securities maturing within 60 days or less are valued at cost plus accreted
discount, or minus amortized premium, which approximates value; (e) dividend
income is recorded on the ex-dividend date and interest income is recorded on
the accrual basis; foreign dividends are recorded on the ex-dividend date or as
soon as practical after the Portfolio determines the existence of a dividend
declaration after exercising reasonable due diligence; (f) gains or losses on
the sale of securities are calculated by using the specific identification
method; (g) dividends and distributions to shareholders are recorded on the ex-
dividend date; (h) direct expenses are charged to each class; management fees
and general portfolio expenses are allocated on the basis of relative net
assets; (i) the accounting records are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars based on the rate of exchange of such currencies against U.S. dollars on
the date of valuation. Purchases and sales of securities, and income and
expenses are translated at the rate of exchange quoted on the respective date
that such transactions are recorded. Differences between income and expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank; (j) the Portfolio intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
(k) the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1996, reclassifications were made to the
Portfolio's capital accounts to reflect permanent book/tax differences and
income and gains available for distributions under income tax regulations.
Accordingly, a portion of accumulated realized loss amounting to $178,747 and a
portion of accumulated net investment loss amounting to $564,939 was
reclassified to paid-in capital. Net investment income, net realized gains and
net assets were not affected by this change; and (l) estimates and assumptions
are required to be made regarding assets, liabilities and changes in net assets
resulting from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ.
2. MANAGEMENT AGREEMENT AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager of the Fund. The
Portfolio pays SBMFM a management fee calculated at an annual rate of 0.60% on
the Portfolio's average daily
________________________________________________________________________________
Smith Barney Funds, Inc. -- Equity Income Portfolio 19
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
net assets up to $500 million, 0.55% on the next $500 million and 0.50% on
average daily net assets in excess of $1.0 billion. These fees are calculated
daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of Fund
shares and primary broker for its portfolio agency transactions. For the six
months ended June 30, 1997, SB received brokerage commissions of $148,212 and
sales charges of approximately $250,000 on sales of the Portfolio's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B shares,
which applies if redemption occurs less than one year from initial purchase and
declines thereafter by 1.00% per year until no CDSC is incurred. Class C shares
have a 1.00% CDSC, which applies if redemption occurs within the first year of
purchase. For the six months ended June 30, 1997, CDSCs paid to SB were:
CLASS B CLASS C
================================================================================
CDSCs $25,000 $1,000
================================================================================
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to its Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets of each respective class. In addition, the Portfolio
also pays a distribution fee with respect to Class B and C shares calculated at
the annual rate of 0.75% of the average daily net assets of each class. For the
six months ended June 30, 1997, total Distribution Plan fees were as follows:
CLASS A CLASS B CLASS C
================================================================================
Distribution Plan Fees $845,950 $87,191 $174,462
================================================================================
All officers and two Directors of the Fund are employees of SB.
3. INVESTMENTS
During the six months ended June 30, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
================================================================================
Purchases $187,891,050
- --------------------------------------------------------------------------------
Sales 210,489,314
================================================================================
At June 30, 1997, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $283,799,531
Gross unrealized depreciation (1,260,545)
- --------------------------------------------------------------------------------
Net unrealized appreciation $282,538,986
================================================================================
4. REPURCHASE AGREEMENTS
The Portfolio purchases (and its custodian take possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Portfolio requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. CAPITAL SHARES
At June 30, 1997, the Fund had two billion shares of capital stock authorized
with a par value of $0.01 per share. The Portfolio has the ability to issue
multiple classes of shares. Each share of a class represents an identical
interest in the Portfolio and has the same rights, except that each class bears
certain expenses specifically related to the distribution of its shares.
________________________________________________________________________________
20 Special 30th Anniversary --- 1997 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
At June 30, 1997, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y CLASS Z
<S> <C> <C> <C> <C> <C>
===========================================================================================================
Total Paid-in Capital $455,551,658 $ 18,375,332 $29,939,598 $ 40,440,322 $100,535,354
===========================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996*
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
===========================================================================================================
<S> <C> <C> <C> <C>
CLASS A
Shares sold 708,948 $ 11,296,679 1,572,895 $ 23,892,544
Shares issued on reinvestment 389,181 6,390,558 5,161,353 77,820,683
Shares redeemed (2,478,167) (39,358,502) (5,390,653) (83,086,170)
- -----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (1,380,038) $(21,671,265) 1,343,595 $ 18,627,057
===========================================================================================================
CLASS B
Shares sold 310,328 $ 4,967,465 622,419 $ 9,553,511
Shares issued on reinvestment 6,466 106,176 110,323 1,654,996
Shares redeemed (102,455) (1,629,646) (110,106) (2,171,232)
- -----------------------------------------------------------------------------------------------------------
Net Increase 214,339 $ 3,443,995 592,636 $ 9,037,275
===========================================================================================================
CLASS C
Shares sold 136,769 $ 2,199,625 309,334 $ 4,772,481
Shares issued on reinvestment 12,740 208,852 256,939 3,861,171
Shares redeemed (205,170) (3,234,975) (348,965) (5,369,299)
- -----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (55,661) $ (826,498) 217,308 $ 3,264,353
===========================================================================================================
CLASS Y
Shares sold 559,731 $ 8,818,990 2,038,995 $ 31,633,477
Shares redeemed -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Net Increase 559,731 $ 8,818,990 2,038,995 $ 31,633,477
===========================================================================================================
CLASS Z
Shares sold 346,833 $ 5,491,350 478,209 $ 7,265,801
Shares issued on reinvestment 95,305 1,568,614 996,127 15,059,892
Shares redeemed (261,544) (4,149,700) (592,793) (9,222,026)
- -----------------------------------------------------------------------------------------------------------
Net Increase 180,594 $ 2,910,264 881,543 $ 13,103,667
===========================================================================================================
</TABLE>
* For Class Y shares, transactions are for the period from February 6, 1996
(inception date) to December 31, 1996.
________________________________________________________________________________
Smith Barney Funds, Inc. -- Equity Income Portfolio 21
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
CLASS A SHARES 1997/(1)/ 1996 1995 1994/(2)/ 1993 1992
<S> <C> <C> <C> <C> <C> <C>
================================================================================================================
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.79 $ 14.59 $ 12.18 $ 13.31 $ 12.48 $ 12.51
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.15 0.36 0.39 0.43 0.46 0.50
Net realized and unrealized gain (loss) 2.64 1.99 3.59 (1.00) 1.56 0.38
- ----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.79 2.35 3.98 (0.57) 2.02 0.88
- ----------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.17) (0.36) (0.39) (0.42) (0.46) (0.51)
Net realized gains(3) -- (1.79) (1.18) (0.14) (0.73) (0.40)
- -----------------------------------------------------------------------------------------------------------------
Total Distributions (0.17) (2.15) (1.57) (0.56) (1.19) (0.91)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 17.41 $ 14.79 $ 14.59 $ 12.18 $ 13.31 $ 12.48
- -----------------------------------------------------------------------------------------------------------------
TOTAL RETURN 18.94%++ 16.06% 33.05% (4.31)% 16.38% 7.23%
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $ 736,406 $645,935 $617,431 $ 544,572 $627,870 $573,085
- -----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.93%+ 0.95% 1.02% 0.96% 0.91% 0.92%
Net investment income 1.83+ 2.28 2.78 3.31 3.42 3.97
- -----------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 26% 49% 51% 27% 46% 39%
- -----------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS/(4)/ $ 0.06 $ 0.06 $ 0.06 -- -- --
=================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) On October 10, 1994 the former Class C shares were exchanged into Class A
shares; therefore for the period from January 1, 1994 to October 9, 1994 the
Class C share activity is included with the Class A share activity.
(3) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as the result may not be representative of
the total return for the year.
+ Annualized.
________________________________________________________________________________
22 Special 30th Anniversary -- 1997 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
CLASS B SHARES 1997/(1)/ 1996 1995 1994/(2)/
========================================================================================
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.74 $ 14.54 $ 12.15 $ 12.54
- ----------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.08 0.25 0.24 0.03
Net realized and unrealized gain (loss) 2.64 1.98 3.62 (0.19)
- ----------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.72 2.23 3.86 (0.16)
- ----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.10) (0.24) (0.29) (0.09)
Net realized gains(3) -- (1.79) (1.18) (0.14)
- ----------------------------------------------------------------------------------------
Total Distributions (0.10) (2.03) (1.47) (0.23)
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 17.36 $ 14.74 $ 14.54 $ 12.15
- ----------------------------------------------------------------------------------------
TOTAL RETURN 18.49%++ 15.22% 32.07% (1.28)%++
- ----------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000s) $21,248 $14,883 $ 6,065 $ 354
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.71%+ 1.71% 1.73% 1.59%+*
Net investment income 1.06+ 1.55 1.83 2.11+
- ----------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 26% 49% 51% 27%
- ----------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS/(4)/ $ 0.06 $ 0.06 $ 0.06 --
========================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) For the period from November 7, 1994 (inception date) to December 31, 1994.
(3) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
________________________________________________________________________________
Smith Barney Funds, Inc. -- Equity Income Portfolio 23
<PAGE>
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
CLASS C SHARES 1997/(1)/ 1996 1995 1994/(2)/ 1993 1992/(3)/
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.76 $ 14.57 $ 12.18 $ 13.30 $ 12.48 $ 12.87
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.08 0.24 0.27 0.31 0.38 0.17
Net realized and unrealized gain (loss) 2.64 1.98 3.59 (0.95) 1.53 (0.10)
- ------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.72 2.22 3.86 (0.64) 1.91 0.70
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.10) (0.24) (0.29) (0.34) (0.36) (0.06)
Net realized gains(4) -- (1.79) (1.18) (0.14) (0.73) (0.40)
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (0.10) (2.03) (1.47) (0.48) (1.09) (0.46)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 17.38 $ 14.76 $ 14.57 $ 12.18 $ 13.30 $ 12.48
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 18.49%++ 15.15% 32.01% (4.91)% 15.46% (0.57)%++
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000s) $ 38,320 $33,365 $29,758 $ 27,507 $15,408 $ 1,504
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.70%+ 1.73% 1.79% 1.75% 1.65% 1.58%+
Net investment income 1.06+ 1.50 2.00 2.49 2.59 1.80+
- ------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 26% 49% 51% 27% 46% 39%
- ------------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS/(5)/ $ 0.06 $ 0.06 $ 0.06 -- -- --
==================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) On November 7, 1994, the former Class B shares were renamed Class C shares.
(3) For the period from December 2, 1992 (inception date) to December 31, 1992.
(4) Net short-term gains, if any, are included and reported as ordinary income
for income tax purposes.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
________________________________________________________________________________
24 Special 30th Anniversary -- 1997 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
CLASS Y SHARES CLASS Z SHARES
-------------------------- --------------------------------------------
1997/(1)/ 1996/(2)(3)/ 1997/(1)/ 1996 1995 1994/(4)/
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 14.80 $ 15.06 $ 14.82 $ 14.61 $ 12.19 $ 12.54
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.17 0.36 0.17 0.42 0.43 0.07
Net realized and
unrealized gain (loss) 2.64 1.58 2.66 1.99 3.59 (0.16)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.81 1.94 2.83 2.41 4.02 (0.09)
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.20) (0.41) (0.20) (0.41) (0.42) (0.12)
Net realized gains(5) -- (1.79) -- (1.79) (1.18) (0.14)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.20) (2.20) (0.20) (2.20) (1.60) (0.26)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 17.41 $ 14.80 $ 17.45 $ 14.82 $ 14.61 $ 12.19
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 19.07%++ 12.86%++ 19.19%++ 16.47% 33.41% (0.73)%++
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000s) $ 45,256 $ 30,169 $ 136,328 $113,160 $98,661 $ 80,010
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.60%+ 0.66%+ 0.60%+ 0.62% 0.69% 0.42%+
Net investment income 2.17+ 3.02+ 2.16+ 2.62 3.11 3.88+
- -----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 26% 49% 26% 49% 51% 27%
- -----------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS/(6)/ $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.06 --
=============================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from February 6, 1996 (inception date) to December 31, 1996.
(4) For the period from November 7, 1994 (inception date) to December 31, 1994.
(5) Net short term gains, if any, are included and reported as ordinary income
for income tax purposes.
(6) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
________________________________________________________________________________
Smith Barney Funds, Inc. -- Equity Income Portfolio 25
<PAGE>
SMITH BARNEY
FUNDS, INC.
DIRECTORS
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P. Martin, M.D.
Heath B. McLendon, Chairman
Roderick C. Rasmussen
Bruce D. Sargent
John P. Toolan
C. Richard Youngdahl, Emeritus
OFFICERS
Heath B. McLendon
Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
Bruce D. Sargent
Vice President
Ayako Weissman
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
INVESTMENT ADVISER
Smith Barney Mutual Funds Management Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
PNC Bank, N.A.
SHAREHOLDER SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is for the information of shareholders of Smith Barney Funds, Inc. -
Equity Income Portfolio, but it may also be used as sales literature when
preceded or accompanied by the current prospectus, which gives details about
charges, expenses, investment objectives and operating policies of the Fund. If
used as sales material after September 30, 1997, this report must be accompanied
by performance information for the most recently completed calendar quarter.
SMITH BARNEY
- ---------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY FUNDS, INC.
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
FD0628 8/97
