SMITH BARNEY PRINCIPAL PLUS FUTURES FUND LP II - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the year ended December 31, 1998

Commission File Number 0-22489

SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)

New York 13-3862967
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

c/o Smith Barney Futures Management Inc.
390 Greenwich St. - 1st Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)

(212) 723-5424
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units
of Limited
Partnership
Interest
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]

As of February 28, 1999 Limited Partnership Units with an aggregate value of
$1,332.79 were outstanding and held by non-affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

None

PART I

Item 1. Business.

(a) General development of business. Smith Barney Principal Plus
Futures Fund L.P. II (the "Partnership") is a limited partnership organized on
November 16, 1995 under the Partnership Law of the State of New York. The
Partnership engages in speculative trading of commodity interests, including
contracts on foreign currencies, commodity options and commodity futures
contracts including futures contracts on United States Treasury and other
financial instruments, foreign currencies and stock indices. The Partnership
maintains a portion of its assets in principal amounts stripped from U.S.
Treasury Bonds under the Treasury's STRIPS program ("Zero Coupons") which
payments will be due November 15, 2003. The Partnership uses the Zero Coupons
and its other assets to margin its commodities account.
A total of 60,000 Units of Limited Partnership Interest in the
Partnership (the "Units") were offered to the public. Between April 3, 1996 and
August 8, 1996, 19,897 Units were sold to the public at $1,000 per Unit.
Proceeds of the offering along with the General Partners' contribution of
$203,000 were held in escrow until August 9, 1996 at which time an aggregate of
$20,100,000 were turned over to the Partnership and the Partnership commenced
trading operations.
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership. On September 1, 1998, the Partnership's
commodity broker, Smith Barney Inc., merged with Salomon Brothers Inc. and

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changed its name to Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of
the General Partner. The General Partner is wholly owned by Salomon Smith Barney
Holdings, Inc. ("SSBH"), which is the sole owner of SSB. On October 8, 1998,
Travelers Group Inc. merged with Citicorp Inc. and changed its name to Citigroup
Inc. SSBH is a wholly owned subsidiary of Citigroup Inc.
The Partnership's trading of futures contracts on commodities is done
on United States and foreign commodity exchanges. It engages in such trading
through a commodity brokerage account maintained with SSB.
Under the Limited Partnership Agreement of the Partnership (the "Limited
Partnership Agreement"), the General Partner administers the business and
affairs of the Partnership. As of December 31, 1998, all commodity trading
decisions are made for the Partnership by John W. Henry & Company, Inc. ("JWH")
and Willowbridge Associates Inc. ("Willowbridge") (collectively, the
"Advisors"). Neither of the Advisors is affiliated with the General Partner or
SSB. The Advisors are not responsible for the organization or operation of the
Partnership.
Pursuant to the terms of the Management Agreements (the "Management
Agreements"), the Partnership is obligated to pay Willowbridge a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets
allocated to it and pay JWH a monthly management fee equal to 1/3 of 1% (4% per
year) of the month-end Net Assets allocated to it. The Partnership will also pay
Willowbridge an incentive fee payable quarterly equal to 20% of New Trading
Profits earned by it for the Partnership and JWH will receive an incentive fee
of 15% of the New Trading Profits (as defined in the Management Agreements).

2

The Customer Agreement provides that the Partnership will pay SSB a
monthly brokerage fee equal to 7/12 of 1% of month-end Net Assets allocated to
the Advisors (7% per year) in lieu of brokerage commissions on a per trade
basis. SSB will pay a portion of its brokerage fees to its financial consultants
who have sold Units and who are registered as associated persons with the
Commodity Futures Trading Commission (the "CFTC"). The Partnership will pay for
National Futures Association ("NFA") fees, exchange and clearing fees, give-up
and user fees and floor brokerage fees. Brokerage fees will be paid for the life
of the Partnership, although the rate at which such fees are paid may be
changed. The Customer Agreement between the Partnership and SSB gives the
Partnership the legal right to net unrealized gains and losses.
In addition, SSB will pay the Partnership interest on 80% of the
average daily equity maintained in cash in its account during each month at a
30-day U.S. Treasury bill rate determined weekly by SSB based on the average
non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days from
the date on which such weekly rate is determined.
In the unlikely event that the Partnership is required to meet a margin
call in excess of the cash balance in its trading accounts, SSBH will contribute
up to an amount equal to the maturity value of the Zero Coupons held by the

3

Partnership at the time of such call to the capital of the Partnership to permit
it to meet its margin obligations in excess of its cash balance. The guarantee
can only be invoked once. After the guarantee is invoked, trading will cease and
the General Partner will either wait until the end of the month in which the
Zero Coupons come due (November 2003), (the "First Payment Date"), or will
distribute cash and Zero Coupons to the limited partners. The General Partner
will provide a copy of SSBH's annual report as filed with the SEC to any limited
partner requesting it.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests. The Partnership does not engage in sales of goods or services. The
Partnership's net income from operations for the years ended December 31, 1998
and 1997 and for the period from August 9, 1996 (commencement of trading
operations) to December 31, 1996 is set forth under "Item 6. Selected Financial
Data." Partnership capital as of December 31, 1998 was $22,938,154.

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(c) Narrative description of business. See Paragraphs (a) and
(b) above. (i) through (x) - Not applicable. (xi) through
(xii) - Not applicable. (xiii) - The Partnership has no
employees.

(d) Financial Information About Foreign and Domestic Operations and
Export Sales. The Partnership does not engage in sales of goods or
services, and therefore this item is not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The General
Partner operates out of facilities provided by its affiliate, SSB.
Item 3. Legal Proceedings.
There are no material legal proceedings pending against the
Partnership or the General Partner. This section describes the major legal
proceedings, other than ordinary routine litigation incidental to the business,
to which SSBH, the parent company of this General Partner or its subsidiaries is
a party or to which any of their property is subject.
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust ("APT"), Ameritech Corporation, and an officer of
Ameritech filed suit against Salomon Brothers Inc. ("SBI") and Salomon Brothers
Realty Corporation ("SBRC") in the U.S. District Court for the Northern District
of Illinois (Harris Trust Savings Bank, not individually but solely as trustee
for the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v.
Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended

4

complaint alleges that three purchases by APT from defendants of participation
interests in net cash flow or resale proceeds of three portfolios of motels
owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of
a similar participation interest with respect to a portfolio of motels owned by
Best Inns, Inc. ("Best"), violated the Employee Retirement Income Security Act
("ERISA"), and that the purchase of the participation interests for the third
MOA portfolio and for the Best portfolio violated the Racketeer Influenced and
Corrupt Organization Act ("RICO") and state law. SBI had acquired the
participation interests in transactions in which it purchased as principal
mortgage notes issued by MOA and Best to finance purchases of motel portfolios;
95% of three such interests and 100% of one such interest were sold to APT for
purchase prices aggregating approximately $20.9 million. Plaintiffs' second
amended complaint seeks (a) judgment on the ERISA claims for the purchase prices
of the four participation interests (approximately $20.9 million), for
rescission and for disgorgement of profits, as well as other relief, and (b)
judgment on the claims brought under RICO and state law in the amount of $12.3
million, with damages trebled to $37 million on the RICO claims and punitive
damages in excess of $37 million on certain of the state law claims as well as
other relief. The court dismissed the RICO, breach of contract, and unjust

5

enrichment claims. The court also found that defendants did not qualify as an
ERISA fiduciary and dismissed the claims based on that allegation. Defendants
moved for summary judgment on the sole remaining claim. The motion was denied,
and defendants appealed to the U.S. Court of Appeals for the Seventh Circuit.
Defendants are awaiting a decision.
Both the Department of Labor and the Internal Revenue Service have
advised SBI that they were or are reviewing the transactions in which APT
acquired such participation interests. With respect to the Internal Revenue
Service review, SSBH, SBI and SBRC have consented to extensions of time for the
assessment of excise taxes that may be claimed to be due with respect to the
transactions for the years 1987, 1988 and 1989. In August 1996, the IRS sent
SSBH, SBI and SBRC what appeared to be draft "30-day letters" with respect to
the transactions and SSBH, SBI and SBRC were given an opportunity to comment on
whether the IRS should issue 30-day letters, which would actually commence the
assessment process. In October 1996, SSBH, SBI and SBRC submitted a memorandum
setting forth reasons why the IRS should not issue 30-day letters with respect
to the transactions.
In December 1996, a complaint seeking unspecified monetary damages
was filed by Orange County, California against numerous brokerage firms,
including Smith Barney, in the U.S. Bankruptcy Court for the Central District of
California (County of Orange et al. v. Bear Stearns & Co. Inc. et al.).
Plaintiff alleges, among other things, that defendants recommended and sold to
plaintiff unsuitable securities and that such transactions were outside the
scope of plaintiff's statutory and constitutional authority (ultra vires).
Defendants' motion for summary judgment was granted with respect to the ultra
vires claims in February 1999. The court allowed the filing of an amended
complaint asserting claims based on alleged breaches of fiduciary duty.

6

In June 1998, complaints were filed in the U.S. District Court for
the Eastern District of Louisiana in two actions (Board of Liquidations, City
Debt of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
declaratory judgment that Smith Barney Inc. and another underwriter are
responsible for any damages that the City may incur in the event the Internal
Revenue Service denies tax exempt status to the City's General Obligation
Refunding Bonds Series 1991. The Company filed a motion to dismiss the
complaints in September 1998, and the complaints were subsequently amended. The
Company has filed a motion to dismiss the amended complaints.
In November 1998, a purported class action complaint was filed in
the United States District Court for the Middle District of Florida (Dwight
Brock as Clerk for Collier County v. Merrill Lynch, et al.). The complaint
alleges that, pursuant to a nationwide conspiracy, 17 broker-dealer defendants,
including SSB, charged excessive mark-ups in connection with advanced refunding
transactions. The Company intends to contest this complaint vigorously.

7

Environmental Matters
In July 1996, the City and County of Denver ("Denver") enacted an
ordinance imposing a substantial fee on any radioactive waste or
radium-contaminated material disposed of in the City of Denver. Under this
ordinance, Denver assessed a subsidiary of Salomon, the S.W. Shattuck Chemical
Company, Inc. ("Shattuck"), $9.35 million for certain disposal already carried
out. Shattuck sued to enjoin imposition of the fee on constitutional grounds.
The United States also sued, seeking to enjoin imposition of the fee on
constitutional grounds. Denver counterclaimed and moved to add SSBH as a
defendant for past costs. These cases have been consolidated before the U.S.
District Court in Colorado, which granted Shattuck's motion for a preliminary
injunction enjoining Denver from enforcing the ordinance during the pendency of
the litigation. The parties have reached a settlement.
The Company and various subsidiaries have also been named as defendants
in various matters incident to and typical of the businesses in which they are
engaged. These include numerous civil actions, arbitration proceedings and other
matters in which the Company's broker-dealer subsidiaries have been named,
arising in the normal course of business out of activities as a broker and
dealer in securities, as an underwriter of securities, as an investment banker
or otherwise. In the opinion of the Company's management, none of these actions
is expected to have a material adverse effect on the consolidated financial
condition of the Company and its subsidiaries.

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Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders for a vote
during the last fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Security
Holder Matters.
(a)Market Information. The Partnership has issued no stock.
There is no public market for the Units of Limited
Partnership Interest.
(b)Holders. The number of holders of Units of Limited
Partnership Interest as of December 31, 1998 was 1,212.
(c)Distribution. The Partnership did not declare a distribution
in 1998 or 1997.

9

Item 6. Selected Financial Data. The Partnership commenced trading operations on
August 9, 1996. Realized and unrealized trading gains, realized and unrealized
gains on Zero Coupons, interest income, net income and increase in net asset
value per Unit for the years ended December 31, 1998 and 1997 and for the period
from August 9, 1996 (commencement of trading operations) to December 31, 1996
and total assets at December 31, 1998, 1997 and 1996 were as follows:

1998 1997 1996
----------- ----------- --------

Realized and unrealized
trading gains net of brokerage
commissions and clearing fees
of $914,741, $958,141 and
$346,364, respectively $ 2,010,123 $ 372,990 $ 2,812,357

Realized and unrealized gains
on Zero Coupons 644,098 429,903 80,764

Interest income 1,126,341 1,212,251 $ 434,374
------------ ------------ -----------

$ 3,780,562 $ 2,015,144 $ 3,327,495
============ ============ ===========

Net income $ 3,174,331 $ 1,359,429 $ 2,717,561
============ ============ ===========

Increase in net asset value
per unit $186.29 $ 68.65 $135.20
======== ======== =======

Total assets $23,386,690 $23,217,865 $23,276,499
============ ============ ===========

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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(a) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its equity in its commodity futures trading
account, consisting of cash and cash equivalents, Zero Coupons, net unrealized
appreciation (depreciation) on open futures contracts and interest receivable.
Because of the low margin deposits normally required in commodity futures
trading, relatively small price movements may result in substantial losses to
the Partnership. Such substantial losses could lead to a material decrease in
liquidity. To minimize this risk, the Partnership follows certain policies
including:
(1) Partnership funds are invested only in commodity contracts which
are traded in sufficient volume to permit, in the opinion of the Advisors, ease
of taking and liquidating positions.
(2) No Advisor will initiate additional positions in any commodity if
such additional positions would result in aggregate positions for all
commodities requiring as margin more than 66-2/3% of the Partnership's assets
allocated to the Advisor.
(3) The Partnership will not employ the trading technique commonly
known as "pyramiding", in which the speculator uses unrealized profits on
existing positions as margin for the purchase or sale of additional positions in
the same or related commodities.
(4) The Partnership will not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities.

11

(5) The Advisors may, from time to time, employ trading strategies such
as spreads or straddles on behalf of the Partnership. The term "spread" or
"straddle" describes a commodity futures trading strategy involving the
simultaneous buying and selling of contracts on the same commodity but involving
different delivery dates or markets and in which the trader expects to earn a
profit from a widening or narrowing of the difference between the prices of the
two contracts.
(6) The Partnership will not permit the churning of its commodity
trading accounts.
(7) The Partnership may cease trading and liquidate all open positions
prior to its dissolution if its Net Assets (excluding assets maintained in Zero
Coupons) decrease to 10% of those assets on the day trading commenced (adjusted
for redemptions).
The Partnership is party to financial instruments with off-balance
sheet risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
include forwards, futures and options, whose value is based upon an underlying
asset, index, or reference rate, and generally represent future commitments to
exchange currencies or cash flows, or to purchase or sell other financial
instruments at specified terms at specified future dates. Each of these
instruments is subject to various risks similar to those relating to the
underlying financial instruments including market and credit risk. The General
Partner monitors and controls the Partnership's risk exposure on a daily basis
through financial, credit and risk management monitoring systems and,
accordingly believes that it has effective procedures for evaluating and
limiting the credit and market risks to which the Partnership is subject. (See
also "Item 8. Financial Statements and Supplementary Data.", for further
information on financial instrument risk included in the notes to financial
statements.)

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Other than the risks inherent in commodity futures trading, the
Partnership knows of no trends, demands, commitments, events or uncertainties
which will result in or which are reasonably likely to result in the
Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the General Partner may, at its
discretion, cause the Partnership to cease trading operations and liquidate all
open positions upon the first to occur of the following: (i) December 31, 2015;
(ii) at the end of the month in which the Zero Coupons purchased by the
Partnership come due (November 15, 2003), unless the General Partner elects
otherwise; (iii) the vote to dissolve the Partnership by limited partners owning
more than 50% of the Units; (iv) assignment by the General Partner of all of its
interest in the Partnership or withdrawal, removal, bankruptcy or any other
event that causes the General Partner to cease to be a general partner under the
Partnership Act unless the Partnership is continued as described in the Limited
Partnership Agreement; (v) the Partnership is required to register under the
Investment Company Act of 1940 and the General Partner determines that
dissolution is therefore in the Partnership's best interest; or (vi) the
occurrence of any event which shall make it unlawful for the existence of the
Partnership to be continued.

13

(b) Capital resources. (i) The Partnership has made no material
commitments for capital expenditures. (ii) The Partnership's capital will
consist of the capital contributions of the partners as increased or decreased
by gains or losses on commodity futures trading and Zero Coupon appreciation or
depreciation, and by expenses, interest income, redemptions of Units and
distributions of profits, if any. Gains or losses on commodity futures trading
cannot be predicted. Market moves in commodities are dependent upon fundamental
and technical factors which the Partnership may or may not be able to identify.
Partnership expenses will consist of, among other things, commissions,
management fees and incentive fees. The level of these expenses is dependent
upon the level of trading gains or losses and the ability of the Advisors to
identify and take advantage of price movements in the commodity markets, in
addition to the level of Net Assets maintained. Furthermore, the Partnership
will receive no payment on its Zero Coupons until their due date. However, the
Partnership will accrue interest on the Zero Coupons and Limited Partners will
be required to report as interest income on their U.S. tax returns in each year
their pro-rata share of the accrued interest on the Zero Coupons even though no
interest will be paid prior to their due date. In addition, the amount of
interest income payable by SSB is dependent upon interest rates over which the
Partnership has no control.

14

No forecast can be made as to the level of redemptions in any given
period. Beginning with the first full quarter ending at least six months after
trading commences (March 31, 1997), a Limited Partner may cause all of his Units
to be redeemed by the Partnership at the Net Asset Value thereof as of the last
day of a quarter (the "Redemption Date") on ten days' written notice to the
General Partner. Redemption fees equal to 2% of Redemption Net Asset Value per
Unit redeemed will be charged to any Limited Partner who redeems his Units on
the first, second or third possible redemption dates and 1% on the fourth and
fifth possible redemption dates, respectively. Thereafter, no redemption fee
will be charged. For the year ended December 31, 1998, 2,130 Units were redeemed
totaling $2,542,381. During 1998, SSB received redemption fees of $8,992. For
the year ended December 31, 1997, 1,132 Units were redeemed totaling $1,310,786.
During 1997, SSB received redemption fees of $19,277. Redemption Net Asset Value
differs from Net Asset Value calculated for financial reporting purposes in that
the accrued liability for reimbursement of offering and organization expenses
will not be included in the calculation of Redemption Net Asset Value.
Offering and organization expenses of $541,205 relating to the issuance
and marketing of Units offered were initially paid by SSB. The accrued liability
for reimbursement of offering and organization expenses will not reduce Net
Asset Value per Unit for any purpose (other than financial reporting), including
calculation of advisory and brokerage fees and the redemption value of Units.

15

Interest earned by the Partnership will be used to reimburse SSB for the
offering and organization expenses of the Partnership plus interest at the prime
rate quoted by The Chase Manhattan Bank until such time as such expenses are
fully reimbursed. As of December 31, 1998, the Partnership had reimbursed SSB
for the offering and organizational expenses plus interest at the prime rate
quoted by the Chase Manhattan Bank totaling $38,261 from interest paid to the
Partnership.
For each Unit redeemed the Partnership liquidates $1,000 (principal
amount) of Zero Coupons and will continue to liquidate $1,000 (principal amount)
of Zero Coupons per Unit redeemed. These liquidations will be at market value
which will be less than the amount payable on their due date. Moreover, it is
possible that the market value of the Zero Coupon could be less than its
purchase price plus the original issue discount amortized to date.
(c) Results of operations. For the year ended December 31, 1998, the
Net Asset Value per Unit increased 15.8% from $1,175.99 to $1,362.28. For the
year ended December 31, 1997, the Net Asset Value per Unit increased 6.2% from
$1,107.34 to $1,175.99. For the period from August 9, 1996 (commencement of
trading operations) to December 31, 1996, the net asset value per Unit increased
13.9% from $972.14 to $1,107.34. The net asset value of $972.14 at commencement
of trading operations is reflective of charging offering and organizational
expenses against the initial capital of the Partnership for financial reporting
purposes. The redemption value per unit at December 31, 1998, 1997 and 1996 were
$1,362.28, $1,180.06 and $1,129.72, respectively.

16

The Partnership experienced net trading gains of $2,924,864, before
commissions and expenses in 1998. These gains were attributable to trading in
energy and U.S. and non-U.S. interest rates products offset by losses in
currencies, grains, livestock, metals, softs and indices. The Partnership
experienced unrealized appreciation of $565,392 on Zero Coupons during 1998 and
a gain on the sale of Zero Coupons of $78,706 during 1998.
The Partnership experienced net trading gains of $1,331,131 before
commissions and expenses for the year ended December 31, 1997. Gains were
attributable to the trading of commodity futures in foreign currencies, grains,
non U.S. interest rates, metals, softs and indices and were partially offset by
losses experienced in the trading of energy products, U.S. interest rates and
livestock. The Partnership experienced unrealized appreciation of $415,817 on
Zero Coupons during 1997 and a gain on the sale of Zero Coupons of $14,086
during 1997.
The Partnership experienced net trading gains of $3,158,721 before
commissions and expenses for the period ended December 31, 1996. Gains were
attributable to the trading of commodity futures in U.S. and non-U.S. interest
rates, metals, energy and foreign currencies. These gains were partially offset
by losses experienced in the trading of indices and agricultural products. The
Partnership experienced unrealized appreciation of $80,764 on Zero Coupons
during 1996. The Partnership included in interest income the amortization of
original issue discount on Zero Coupons based on the interest method.

17

Commodity futures markets are highly volatile. Broad price fluctuations
and rapid inflation increase the risks involved in commodity trading, but also
increase the possibility of profit. The profitability of the Partnership depends
on the existence of major price trends and the ability of the Advisors to
identify those price trends correctly. Price trends are influenced by, among
other things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates. To
the extent that market trends exist and the Advisors are able to identify them,
the Partnership expects to increase capital through operations.
(d) Operational Risk
The Company is directly exposed to market risk and credit risk, which
arise in the normal course of its business activities. Slightly less direct, but
of critical importance, are risks pertaining to operational and back office
support. This is particularly the case in a rapidly changing and increasingly
global environment with increasing transaction volumes and an expansion in the
number and complexity of products in the marketplace. Such risks include:
Operational/Settlement Risk - the risk of financial and opportunity loss and
legal liability attributable to operational problems, such as inaccurate pricing
of transactions, untimely trade execution, clearance and/or settlement, or the
inability to process large volumes of transactions. The Company is subject to
increased risks with respect to its trading activities in emerging market
securities, where clearance, settlement, and custodial risks are often greater
than in more established markets.
Technological Risk - the risk of loss attributable to technological limitations
or hardware failure that constrain the Company's ability to gather, process, and
communicate information efficiently and securely, without interruption, with
customers, among units within the Company, and in the markets where the Company
participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in the
documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements.
Financial Control Risk - the risk of loss attributable to limitations in
financial systems and controls. Strong financial systems and controls ensure
that assets are safeguarded, that transactions are executed in accordance with
management's authorization, and that financial information utilized by
management and communicated to external parties, including the Company's
stockholder, creditors, and regulators, is free of material errors.

18

Risk of Computer System Failure (Year 2000 Issue)
The Year 2000 issue is the result of existing computers in
many businesses using only two digits to identify a year in the date field.
These computers and programs, often referred to as "information technology,"
were designed and developed without considering the impact of the upcoming
change in the century. If not corrected, many computer applications could fail
or create erroneous results at the Year 2000. Such systems and processes are
dependent on correctly identifying dates in the next century.
The General Partner administers the business of the
Partnership through various systems and processes maintained by SSBH and SSB. In
addition, the operation of the Partnership is dependent on the capability of the
Partnership's Advisors, the brokers and exchanges through which the Advisors
trade, and other third parties to prepare adequately for the Year 2000 impact on
their systems and processes. The Partnership itself has no systems or
information technology applications relevant to its operations.
The General Partner, SSB, SSBH and their parent organization
Citigroup Inc. have undertaken a comprehensive, firm-wide evaluation of both
internal and external systems (systems related to third parties) to determine
the specific modifications needed to prepare for the year 2000. The combined
Year 2000 program in SSB is expected to cost approximately $140 million over the
four years from 1996 through 1999, and involve over 450 people at the peak
staffing level. SSB expects to complete all compliance and certification work by
June 1999. At this time, over 95% of SSBH systems have completed the correction
process and are Year 2000 compliant. Over 73% of the systems have completed
certification testing. The Year 2000 project at SSBH remains on schedule.

19

The systems and components supporting the General Partner's
business that require remediation have been identified and modifications have
been made to bring them into Year 2000 compliance. Testing of these systems was
completed in the fourth quarter of 1998. Final testing and certification are
expected to be completed by the end of the first quarter of 1999.
This expenditure and the General Partner's resources dedicated
to the preparation for Year 2000 do not and will not have a material impact on
the operation or results of the Partnership.
The General Partner has requested and received statements from
the Advisors that each has undertaken its own evaluation and remediation plans
to identify any of its computer systems that are Year 2000 vulnerable. Each
Advisor has confirmed it is taking immediate actions to remedy those systems as
necessary. The General Partner will continue to inquire into and to confirm each
Advisor's readiness for Year 2000.
The most likely and most significant risk to the Partnership
associated with the lack of Year 2000 readiness is the failure of outside
organizations, including the commodities exchanges, clearing organizations, or
regulators with which the Partnership interacts to resolve their Year 2000
issues in a timely manner. This risk could involve the inability to determine
the value of the Partnership at some point in time and would make effecting
purchases or redemptions of Units in the Partnership infeasible until such
valuation was determinable.

20

SSB has successfully participated in industry-wide testing
including: The Streetwide Beta Testing organized by the Securities Industry
Association (SIA), a government securities clearing test with the Federal
Reserve Bank of New York, The Depository Trust Company, and The Bank of new
York, and Futures Industry Association participants test. The firm is also
participating in the streetwide testing which commenced in March 1999.
It is possible that problems may occur that would require some
time to repair. Moreover, it is possible that problems will occur outside SSBH
for which SSBH could experience a secondary effect. Consequently, SSBH is
preparing comprehensive, written contingency plans so that alternative
procedures and a framework for critical decisions are defined before any
potential crisis occurs.
The goal of Year 2000 contingency planning is a set of alternate
procedures to be used in the event of a critical system failure or a failure by
a supplier or counterparty. Planning work was completed in December 1998, and
testing of alternative procedures will be conducted in the first half of 1999.
European Economic and Monetary Union
European Economic and Monetary Union ("EMU") is an historic event in
Europe involving the unification of currency in eleven major countries. The new
unified currency, called the Euro, is expected to compete on a global scale with
the U.S. Dollar and the Japanese Yen.

21

Introduction of the Euro began on January 1, 1999, when the European
Central Bank assumed control of the monetary policy for participating nations.
Exchange rates between the participating countries were fixed and the Euro is
available for electronic payments. Also on January 1, 1999, various issuers
re-denominated their securities and harmonized bond payment conventions. A
three-year transition period began on January 1, 1999, after which Euro notes
and coins will be issued by the European Central Bank and national currencies
will be phased out.
The Company completed a successful conversion to the Euro and has
commenced trading and settlement in the new currency with no major exceptions.
As the preceding risks are largely interrelated, so are the Company's
actions to mitigate and manage them. The Company's Chief Administrative Officer
is responsible for, among other things, oversight of global operations and
technology. An essential element in mitigating the risks noted above is the
optimization of information technology and the ability to manage and implement
change. To be an effective competitor in an information-driven business of a
global nature requires the development of global systems and databases that
ensure increased and more timely access to reliable data.
(e) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 requires that an entity recognize all derivatives in the statement of
financial condition and measure those instruments at fair value. SFAS 133 is
effective for fiscal year beginning after June 15, 1999 SFAS 133 is expected to
have no material impact on the financial statements of the Partnership as all
commodity interests are recorded at fair value, with changes therein reported in
the statement of income and expenses.

21

Item 7A. Quantitative and Qualitative Disclosures About Market Risk Introduction
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification effects among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.

22

Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the Partnership's
market risk exposures contain "forward-looking statements" within the meaning of
the safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor except for statements of historical
fact (such as the terms of particular contracts and the number of market risk
sensitive instruments held during or at the end of the reporting period).

23

The Partnership's risk exposure in the various market sectors traded by
the Advisors is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized). Exchange maintenance margin requirements have been
used by the Partnership as the measure of its Value at Risk. Maintenance margin
requirements are set by exchanges to equal or exceed the maximum losses
reasonably expected to be incurred in the fair value of any given contract in
95%-99% of any one-day intervals. The maintenance margin levels are established
by dealers and exchanges using historical price studies as well as an assessment
of current market volatility (including the implied volatility of the options on
a given futures contract) and economic fundamentals to provide a probabilistic
estimate of the maximum expected near-term one-day price fluctuation.
Maintenance margin has been used rather than the more generally available
initial margin, because initial margin includes a credit risk component which is
not relevant to Value at Risk.
In the case of market sensitive instruments which are not exchange
traded (almost exclusively currencies in the case of the Partnership), the
margin requirements for the equivalent futures positions have been used as Value
at Risk. In those rare cases in which a futures-equivalent margin is not
available, dealers' margins have been used.

24

The fair value of the Partnership's futures and forward positions does
not have any optionality component. However, certain of the Advisors trade
commodity options. The Value at Risk associated with options is reflected in the
following table as the margin requirement attributable to the instrument
underlying each option. Where this instrument is a futures contract, the futures
margin, and where this instrument is a physical commodity, the
futures-equivalent maintenance margin has been used. This calculation is
conservative in that it assumes that the fair value of an option will decline by
the same amount as the fair value of the underlying instrument, whereas, in
fact, the fair values of the options traded by the Partnership in almost all
cases fluctuate to a lesser extent than those of the underlying instruments.
In quantifying the Partnership's Value at Risk, 100% positive
correlation in the different positions held in each market risk category has
been assumed. Consequently, the margin requirements applicable to the open
contracts have simply been added to determine each trading category's aggregate
Value at Risk. The diversification effects resulting from the fact that the
Partnership's positions are rarely, if ever, 100% positively correlated have not
been reflected.

25

The Partnership's Trading Value at Risk in Different Market Sectors
The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category as of December 31, 1998. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1998, the
Partnership's total capitalization was $22,938,154.
December 31, 1998
%
of Total
Market Sector Value at Risk Capitalization

Currencies $ 89,101 0.39%
Energy 84,000 0.37%
Grains 22,300 0.10%
Interest rates U.S 115,800 0.50%
Interest rates Non-U.S. 517,604 2.26%
Metals 81,000 0.35%
Softs 69,854 0.30%
-------- ------

Total $979,959 4.27%
======== ======

Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership
is typically many times the applicable margin requirement (margin requirements
generally range between 2% and 15% of contract face value) as well as the
capitalization of the Partnership. The magnitude of the Partnership's open
positions creates a "risk of ruin" not typically found in most other investment
vehicles. Because of the size of its positions, certain market conditions --
unusual, but historically recurring from time to time -- could cause the
Partnership to incur severe losses over a short period of time. The foregoing
Value at Risk table -- as well as the past performance of the Partnership --
give no indication of this "risk of ruin."

26

Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. However, these balances (as well as any market
risk they represent) are immaterial.
Materiality as used in this section, "Qualitative and Quantitative
Disclosures About Market Risk," is based on an assessment of reasonably possible
market movements and the potential losses caused by such movements, taking into
account the leverage, optionality and multiplier features of the Partnership's
market sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures - except for (i) those disclosures that are statements of
historical fact and (ii) the descriptions of how the Partnership manages its
primary market risk exposures - constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Advisors for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of the Partnership's risk

27

controls to differ materially from the objectives of such strategies. Government
interventions, defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in historical price
relationships, an influx of new market participants, increased regulation and
many other factors could result in material losses as well as in material
changes to the risk exposures and the management strategies of the Partnership.
There can be no assurance that the Partnership's current market exposure and/or
risk management strategies will not change materially or that any such
strategies will be effective in either the short- or long- term. Investors must
be prepared to lose all or substantially all of their investment in the
Partnership
The following were the primary trading risk exposures of the
Partnership as of December 31, 1998, by market sector.
Interest Rates. Interest rate risk is the principal market exposure of
the Partnership. Interest rate movements directly affect the price of the
futures positions held by the Partnership and indirectly the value of its stock
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the
Partnership's profitability. The Partnership's primary interest rate exposure is
to interest rate fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations -- e.g., Australia. The General Partner anticipates that G-7

28

interest rates will remain the primary market exposure of the Partnership for
the foreseeable future. The changes in interest rates which have the most effect
on the Partnership are changes in long-term, as opposed to short-term, rates.
Consequently, even a material change in short-term rates would have little
effect on the Partnership were the medium- to long-term rates to remain steady.
Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the
risk profile of the Partnership's currency sector will change significantly in
the future, although it is difficult at this point to predict the effect of the
introduction of the Euro on the Advisors' currency trading strategies. The
currency trading Value at Risk figure includes foreign margin amounts converted
into U.S. dollars with an incremental adjustment to reflect the exchange rate
risk inherent to the dollar-based Partnership in expressing Value at Risk in a
functional currency other than dollars.
Stock Indices. The Partnership's primary equity exposure is to equity
price risk in the G-7 countries. The stock index futures traded by the
Partnership are by law limited to futures on broadly based indices. As of
December 31, 1998, the Partnership's primary exposures were in the S&P 500,
Financial Times (England), Nikkei (Japan) and Hang Seng (Hong Kong) stock

29

indices. The General Partner anticipates little, if any, trading in non-G-7
stock indices. The Partnership is primarily exposed to the risk of adverse price
trends or static markets in the major U.S., European and Japanese indices.
(Static markets would not cause major market changes but would make it difficult
for the Partnership to avoid being "whipsawed" into numerous small losses.)
Metals. The Partnership's primary metal market exposure is to
fluctuations in the price of gold and silver. Although certain of the Advisors
will from time to time trade base metals such as aluminum and copper, the
principal market exposures of the Partnership have consistently been in the
precious metals, gold and silver. The Advisors' gold trading has been
increasingly limited due to the long-lasting and mainly non-volatile decline in
the price of gold over the last 10-15 years. However, silver prices have
remained volatile over this period, and the Advisors have from time to time
taken substantial positions as they have perceived market opportunities to
develop. The General Partner anticipates that gold and silver will remain the
primary metals market exposure for the Partnership.
Commodities. The Partnership's primary commodities exposure is to
agricultural price movements which are often directly affected by severe or
unexpected weather conditions. Coffee, cocoa, cotton and sugar accounted for the
substantial bulk of the Partnership's commodity exposure as of December 31,
1998.

30

Energy. The Partnership's primary energy market exposure is to gas and
oil price movements, often resulting from political developments in the Middle
East. Oil prices are currently depressed, but they can be volatile and
substantial profits and losses have been and are expected to continue to be
experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the
Partnership as of December 31, 1998. Foreign Currency Balances. The
Partnership's primary foreign currency balances are in Japanese yen, German
marks, British pounds and French francs. The Advisor regularly converts foreign
currency balances to dollars in an attempt to control the Partnership's
non-trading risk.
Securities Positions. The Partnership's only market exposure in
instruments held other than for trading is in its securitites portfolio. The
Partnership maintains a portion of its assets in principal amounts stripped from
U.S. Treasury Bonds under the Treasury's STRIPS program. Violent fluctuations in
prevailing interest rates could cause immaterial mark-to-market losses on the
Partnership's securities.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors the Partnership's performance and the
concentration of its open positions, and consults with the Advisors concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require certain of the Advisors to close out
individual positions as well as enter programs traded on behalf of the
Partnership. However, any such intervention would be a highly unusual event. The
General Partner primarily relies on the Advisors' own risk control policies
while maintaining a general supervisory overview of the Partnership's market
risk exposures.

31

Each Advisor applies its own risk management policies to its trading.
The Advisors often follow diversification guidelines, margin limits and stop
loss points to exit a position. The Advisors' research of risk management often
suggests ongoing modifications to their trading programs.
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisors to discuss their risk management and to
look for any material changes to the Advisors' portfolio balance and trading
techniques. The Advisors are required to notify the General Partner of any
material changes to their programs.
In the unlikely event that the Partnership is required to meet a margin
call in excess of the cash balance in its trading accounts, SSBH will contribute
up to an amount equal to the maturity value of the Zero Coupons held by the
Partnership at the time of such call to the capital of the Partnership to permit
it to meet its margin obligations in excess of its cash balance.

32

Item 8. Financial Statements and Supplementary Data.

SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
INDEX TO FINANCIAL STATEMENTS

Page
Number

Oath or Affirmation F-2

Report of Independent Accountants. F-3

Financial Statements:
Statement of Financial Condition at
December 31, 1998 and 1997. F-4

Statement of Income and Expenses
for the year ended December 31, 1998
and 1997 and for the period from
August 9, 1996 (commencement of trading operations)
to December 31, 1996. F-5

Statement of Partners' Capital for
the years ended December 31, 1998, 1997
and 1996 . F-6

Notes to Financial Statements. F-7 - F-11

F-1

Continued

To The Limited Partners of
Smith Barney Principal PLUS
Futures Fund L.P. II

To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.

By: Daniel A. Dantuono, Chief Financial Officer
Smith Barney Futures Management Inc.
General Partner, Smith Barney Principal PLUS
Futures Fund L.P. II

Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, N.Y. 10013
212-723-5424

F-2

Report of Independent Accountants

To the Partners of
Smith Barney Principal PLUS Futures Fund L.P. II:

In our opinion, the accompanying statement of financial condition and the
related statements of income and expenses and of partners' capital present
fairly, in all material respects, the financial position of Smith Barney
Principal PLUS Futures Fund L.P. II at December 31, 1998 and 1997, and the
results of its operations for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the management of the
General Partner; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by the management of the General Partner,
and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

New York, New York
February 26, 1999

F-3

Smith Barney Principal PLUS
Futures Fund L.P. II
Statement of Financial Condition
December 31, 1998 and 1997

1998 1997

Assets:
Equity in commodity futures
trading account:
Cash (Note 3c) $ 8,835,664 $ 8,500,216
Net unrealized appreciation on
open futures contracts 903,705 720,274
Zero Coupons, $16,838,000 and
$18,968,000 principal amount
in 1998 and 1997, respectively, due
November 15, 2003, at fair value
(amortized cost $12,384,517 and
$13,081,092 in 1998 and 1997,
respectively) (Notes 1 and 2) 13,446,490 13,577,673
----------- -----------
23,185,859 22,798,163
Receivable from SSB on sale
of Zero Coupons 174,309 419,702
Interest Income 26,522 --
----------- -----------
$23,386,690 $23,217,865
=========== ===========

Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 77,866 $ 74,685
Management fees 35,086 34,365
Incentive fees -- 1,244
Due to SSB (Note 6) -- 77,269
Other 37,245 30,223
Redemptions payable 298,339 693,875
----------- -----------
448,536 911,661
----------- -----------
Partners' capital (Notes 1, 5, and 7):
General Partner, 203 Unit equivalents
outstanding in 1998 and 1997 276,543 238,726
Limited Partners, 16,635 and
18,765 Units of Limited Partnership
Interest outstanding in 1998
and 1997, respectively 22,661,611 22,067,478
----------- -----------
22,938,154 22,306,204
$23,386,690 $23,217,865
=========== ===========

See notes to financial statements.

F-4

Smith Barney Principal PLUS
Futures Fund L.P. II
Statement of Income and Expenses
for the years ended December 31, 1998 and 1997 and
from August 9, 1996 (commencement of trading operations)
to December 31, 1996

1998 1997 1996

Income:
Net gains on trading of
commodity interests:
Realized gains on closed positions $ 2,741,433 $ 852,313 $ 2,917,265
Change in unrealized gains
on open positions 183,431 478,818 241,456
----------- ----------- -----------
2,924,864 1,331,131 3,158,721
Less, Brokerage commissions
including clearing fees of
$19,687, $16,092 and $6,901,
respectively (Note 3c) (914,741) (958,141) (346,364)
----------- ----------- -----------
Net realized and unrealized gains 2,010,123 372,990 2,812,357
Gain on sale of Zero Coupons 78,706 14,086 --
Unrealized appreciation on Zero Coupons 565,392 415,817 80,764
Interest income (Notes 2c, 3c and 6) 1,126,341 1,212,251 434,374
----------- ----------- -----------
3,780,562 2,015,144 3,327,495
----------- ----------- -----------
Expenses:
Management fees (Note 3b) 384,863 404,339 146,507
Incentive fees (Note 3b) 167,031 191,624 421,541
Other expenses 54,337 59,752 41,886
----------- ----------- -----------
606,231 655,715 609,934
----------- ----------- -----------
Net income $ 3,174,331 $ 1,359,429 $ 2,717,561
=========== =========== ===========

Net income per Unit of Limited
Partnership Interest and
General Partner Unit
equivalent (Notes 1 and 7) $ 186.29 $ 68.65 $ 135.20
=========== =========== ===========

See notes to financial statements.

F-5

Smith Barney Principal PLUS
Futures Fund L.P. II
Statement of Partners' Capital for the years ended
December 31, 1998, 1997 and 1996

Limited General
Partners Partner Total

Partners' capital at December 31, 1995 $ 1,000 $ 1,000 $ 2,000
Proceeds from offering of 19,896
Units of Limited Partnership Interest
and General Partner's
contribution representing 202 Unit
equivalents (Note 1) 19,896,000 202,000 20,098,000
Offering and organization costs (Note 6) (554,400) (5,600) (560,000)
------------ ------------ ------------
Opening Partnership capital for operations 19,342,600 197,400 19,540,000
Net income 2,690,171 27,390 2,717,561
------------ ------------ ------------
Partners' capital at December 31, 1996 22,032,771 224,790 22,257,561
Net income 1,345,493 13,936 1,359,429
Redemption of 1,132 Units of Limited
Partnership Interest (1,310,786) -- (1,310,786)
------------ ------------ ------------
Partners' capital at December 31, 1997 22,067,478 238,726 22,306,204
Net income 3,136,514 37,817 3,174,331
Redemption of 2,130 Units of Limited
Partnership Interest (2,542,381) -- (2,542,381)
------------ ------------ ------------
Partners' capital at December 31, 1998 $ 22,661,611 $ 276,543 $ 22,938,154
============ ============ ============

See notes to financial statements.

F-6

Smith Barney Principal PLUS
Futures Fund L.P. II
Notes to Financial Statements

1. Partnership Organization:
Smith Barney Principal PLUS Futures Fund L.P. II (the "Partnership") is a
limited partnership which was organized on November 16, 1995 under the
partnership laws of the State of New York. The Partnership engages in the
speculative trading of a diversified portfolio of commodity interests,
including futures contracts, options and forward contracts. The commodity
interests that are traded by the Partnership are volatile and involve a high
degree of market risk. The Partnership will maintain a portion of its assets
in principal amounts stripped from U.S. Treasury Bonds under the Treasury's
STRIPS program which payments are due approximately seven years from the date
trading commenced ("Zero Coupons"). Between April 3, 1996 (commencement of
offering period) and August 8, 1996, 19,896 Units of Limited Partnership
Interest ("Units") were sold at $1,000 per Unit. The proceeds of the offering
were held in an escrow account until August 9, 1996, at which time they were
turned over to the Partnership for trading. The Partnership was authorized to
sell 60,000 Units during the offering period of the Partnership. Smith Barney
Futures Management Inc. acts as the general partner (the "General Partner")
of the Partnership. On September 1, 1998, the Partnership's commodity broker,
Smith Barney Inc., merged with Salomon Brothers Inc and changed its name to
Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General
Partner. The General Partner is wholly owned by Salomon Smith Barney
Holdings, Inc. ("SSBH"), which is the sole owner of SSB. On October 8, 1998,
Travelers Group Inc. merged with Citicorp Inc. and changed its name to
Citigroup Inc. SSBH is a wholly owned subsidiary of Citigroup Inc.

The General Partner and each limited partner share in the profits and losses
of the Partnership in proportion to the amount of partnership interest owned
by each except that no limited partner shall be liable for obligations of
the Partnership in excess of his initial capital contribution and profits,
if any, net of distributions.

The Partnership will be liquidated upon the first to occur of the following:
December 31, 2015; at the end of the month in which the Zero Coupons
purchased come due (November, 2003) ("First Payment Date"), unless the
General Partner elects otherwise, or under certain other circumstances as
defined in the Limited Partnership Agreement. The General Partner, in its
sole discretion, may elect not to terminate the Partnership as of the First
Payment Date. In the event that the General Partner elects to continue the
Partnership, each limited partner shall have the opportunity to redeem all
or some of his Units.

2. Accounting Policies:
a. All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The
commodity interests are recorded on trade date and open contracts are
recorded in the statement of financial condition at fair value on the last
business day of the year, which represents market value for those
commodity interests for which market quotations are readily available.
Investments in commodity interests denominated in foreign currencies are
translated into U.S. dollars at the exchange rates prevailing on the last
business day of the year. Realized gains (losses) and changes in
unrealized values on commodity interests are recognized in the period in
which the contract is closed or the changes occur and are included in net
gains (losses) on trading of commodity interests.
b. Income taxes have not been provided as each partner is individually liable
for the taxes, if any, on his share of the Partnership's income and
expenses.
c. The original issue discount on the Zero Coupons is being amortized over
their life using the interest method and is included in interest income.
d. Zero Coupons are recorded in the statement of financial condition at fair
value. Realized gain (loss) on the sale of Zero Coupons is determined on
the amortized cost basis of the Zero Coupons at the time of sale.
F-7

e. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
these estimates.
3. Agreements:
a. Limited Partnership Agreement:
The General Partner administers the business and affairs of the
Partnership including selecting one or more advisors to make trading
decisions for the Partnership.
b. Management Agreements:
The General Partner, on behalf of the Partnership, has entered into
Management Agreements with John W. Henry & Company, Inc. ("JWH") and
Willowbridge Associates Inc. ("Willowbridge") (the "Advisors"), which
provide that the Advisors have sole discretion in determining the
investment of the assets of the Partnership allocated to each Advisor by
the General Partner. As compensation for services, the Partnership is
obligated to pay Willowbridge a monthly management fee of 1/6 of 1% (2%
per year) of month-end Net Assets allocated to it and pay JWH a monthly
management fee of 1/3 of 1% (4% per year) of month-end Net Assets
allocated to it. The Partnership will also pay Willowbridge an incentive
fee payable quarterly equal to 20% of New Trading Profits, as defined,
earned by it for the Partnership and JWH will receive an incentive fee of
15% of the New Trading Profits.
c. Customer Agreement:
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay SSB a monthly brokerage fee equal to 7/12 of 1%
of month-end Net Assets allocated to the Advisors (7% per year) in lieu of
brokerage commissions on a per trade basis. A portion of this fee is paid
to employees of SSB who have sold Units of the Partnership. This fee does
not include exchange, clearing, user, give-up, floor brokerage and NFA
fees which will be borne by the Partnership. All of the Partnership's
assets are deposited in the Partnership's account at SSB. The Partnership
maintains a portion of these assets in Zero Coupons and a portion in cash.
The Partnership's cash is deposited by SSB in segregated bank accounts, to
the extent required by Commodity Futures Trading Commission regulations.
At December 31, 1998 and 1997, the amount of cash held for margin
requirements was $1,083,052 and $2,469,749, respectively. SSB will pay the
Partnership interest on 80% of the average daily equity maintained in cash
in its account during each month at a 30-day U.S. Treasury bill rate
determined weekly by SSB based on the average noncompetitive yield on
3-month U.S. Treasury bills maturing in 30 days from the date on which
such weekly rate is determined. The Customer Agreement between the
Partnership and SSB gives the Partnership the legal right to net
unrealized gains and losses. The Customer Agreement may be terminated by
either party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
activity are shown in the statement of income and expenses. All of the
commodity interests owned by the Partnership are held for trading purposes.
The fair value of these commodity interests, including options thereon, if
applicable, at December 31, 1998 and 1997 was $903,705 and $720,274,
respectively, and the average fair value during the period then ended, based
on a monthly calculation, was $982,632 and $814,445, respectively.
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner. Beginning with the end of the first full quarter ending at
least six months after trading commences (March 31, 1997), on 10 days' notice
to the General Partner, a limited partner may require the Partnership to
redeem his Units at their Redemption Net Asset Value as of the last day of a
quarter. Redemption fees equal to 2% of Redemption Net Asset Value per Unit

F-8

redeemed will be charged to any limited partner who redeems his Units on the
first, second or third possible redemption date, and 1% on the fourth and
fifth possible redemption dates. Thereafter, no redemption fee will be
charged. During 1998 and 1997, SSB received redemption fees of $8,992 and
$19,277. Redemption Net Asset Value differs from Net Asset Value calculated
for financial reporting purposes in that the accrued liability for
reimbursement of offering and organization expenses will not be included in
the calculation of Redemption Net Asset Value.
6. Offering and Organization Costs:
Offering and organization expenses of $541,205 relating to the issuance and
marketing of Units offered were initially paid by SSB. The accrued liability
for reimbursement of offering and organization expenses will not reduce Net
Asset Value per Unit for any purpose (other than financial reporting),
including calculation of advisory and brokerage fees and the redemption value
of Units. Interest earned by the Partnership will be used to reimburse SSB
for the offering and organization expenses of the Partnership plus interest
at the prime rate quoted by the Chase Manhattan Bank until such time as such
expenses are fully reimbursed. As of December 31,1998, the Partnership had
reimbursed SSB for the offering and organization expenses plus interest at
the prime rate quoted by Chase Manhattan Bank totaling $38,261 from interest
paid to the Partnership.
7. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest for the years
ended December 31, 1998, and 1997 and for the period from August 9, 1996
(commencement of trading operations) to December 31, 1996 were as follows:

1998 1997 1996

Net realized and
unrealized gains $ 120.90 $ 18.91 $ 139.92
Realized and unrealized
gains on Zero Coupons 36.63 22.05 4.03
Interest income 63.05 61.06 21.60
Expenses (34.29) (33.37) (30.35)
--------- --------- ---------
Increase for period 186.29 68.65 135.20
Net asset value per Unit,
beginning of period 1,175.99 1,107.34 972.14
--------- --------- ---------
Net asset value per Unit,
end of period $ 1,362.28 $1,175.99 $ 1,107.34
========= ========= =========
Redemption value per Unit,
end of period* $ 1,362.28 $1,180.06 $ 1,129.72
========= ========= =========

- ------------------
*For the purpose of a redemption, any accrued liability for reimbursement of
offering and organization expenses will not reduce redemption net asset value
per Unit.
8. Guarantee:
In the unlikely event that the Partnership is required to meet a margin call
in excess of the cash balance in its trading accounts, SSBH will contribute
up to an amount equal to the maturity value of the Zero Coupons held by the
Partnership at the time of such call to the capital of the Partnership to
permit it to meet its margin obligations in excess of its cash balance. The
guarantee can only be invoked once. After the guarantee is invoked, trading
will cease and the General Partner will either wait until the First Payment
Date or will distribute cash and Zero Coupons to the limited partners.
9. Financial Instrument Risks:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial

F-9

instruments may include forwards, futures and options, whose value is based
upon an underlying asset, index, or reference rate, and generally represent
future commitments to exchange currencies or cash flows, to purchase or sell
other financial instruments at specific terms at specified future dates, or,
in the case of derivative commodity instruments, to have a reasonable
possibility to be settled in cash or with another financial instrument. These
instruments may be traded on an exchange or over-the-counter ("OTC").
Exchange traded instruments are standardized and include futures and certain
option contracts. OTC contracts are negotiated between contracting parties
and include forwards and certain options. Each of these instruments is
subject to various risks similar to those related to the underlying financial
instruments including market and credit risk. In general, the risks
associated with OTC contracts are greater than those associated with exchange
traded instruments because of the greater risk of default by the counterparty
to an OTC contract.

Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including
interest and foreign exchange rate movements and fluctuations in commodity
or security prices. Market risk is directly impacted by the volatility and
liquidity in the markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of a
counterparty to perform according to the terms of a contract.

Credit risk with respect to exchange traded instruments is reduced to the
extent that an exchange or clearing organization acts as a counterparty to
the transactions. The Partnership's risk of loss in the event of
counterparty default is typically limited to the amounts recognized in the
statement of financial condition and not represented by the contract or
notional amounts of the instruments. The Partnership has concentration risk
because the sole counterparty or broker with respect to the Partnership's
assets is SSB.

The General Partner monitors and controls the Partnership's risk exposure on
a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership
is subject. These monitoring systems allow the General Partner to
statistically analyze actual trading results with risk adjusted performance
indicators and correlation statistics. In addition, on-line monitoring
systems provide account analysis of futures, forwards and options positions
by sector, margin requirements, gain and loss transactions and collateral
positions.

The notional or contractual amounts of these instruments, while not recorded
in the financial statements, reflect the extent of the Partnership's
involvement in these instruments. At December 31, 1998, the Partnership's
commitment to purchase and sell these instruments was $57,847,242 and
$52,605,224, respectively, as detailed below. All of these instruments
mature within one year of December 31, 1998. However, due to the nature of
the Partnership's business, these instruments may not be held to maturity.
At December 31, 1998, the fair value of the Partnership's derivatives,
including options thereon, if applicable, was $903,705, as detailed below.
December 31, 1998 Notional or Contractual Amount of Commitments

To Purchase To Sell Fair Value

Currencies
-Exchange Traded Contracts $ 558,900 $ 552,600 $ (6,300)
-OTC Contracts 3,487,638 1,291,020 24,255
Energy -- 812,280 27,010
Grains -- 810,535 27,312
Interest Rates U.S. 7,605,156 8,066,963 (65,138)
Interest Rates Non-U.S 44,897,799 38,932,518 818,733
Softs 918,411 742,768 44,210
Metals 379,338 1,396,540 33,623
----------- ----------- ---------
Total $57,847,242 $52,605,224 $ 903,705
=========== =========== =========

F-10

At December 31, 1997, the Partnership's commitment to purchase and sell these
instruments was $103,162,990 and $65,919,874, respectively, and the fair
value of the Partnership's derivatives, including options thereon, if
applicable, was $720,274, as detailed below.

December 31, 1997
Notional or Contractual
Amount of Commitments

To Purchase To Sell Fair Value

Currencies
-Exchange Traded Contracts $ -- $ 4,026,713 $ 62,013
-OTC Contracts 7,813,559 14,869,435 (37,009)
Energy -- 2,381,490 165,550
Grains 2,958,744 679,250 (102,587)
Interest Rates U.S. 27,054,925 -- 163,819
Interest Rates Non-U.S 58,496,762 38,054,369 189,136
Softs 3,987,204 842,675 (129,803)
Metals 2,851,796 4,180,877 336,934
Indices -- 885,065 72,221
------------ ----------- ---------
Total $103,162,990 $65,919,874 $ 720,274
============ =========== =========

10. New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 requires that an entity recognize all derivatives in the statement
of financial condition and measure those instruments at fair value. SFAS
133 is effective for fiscal years beginning after June 15, 1999. SFAS 133
is expected to have no material impact on the financial statements of the
Partnership as all commodity interests are recorded at fair value, with
changes therein reported in the statement of income and expenses.

F-11

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the last two fiscal years and any subsequent interim
period, no independent accountant who was engaged as the principal accountant to
audit the Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs are
managed by its General Partner, Smith Barney Futures Management Inc. Investment
decisions are made by the Advisors.
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are managed
by Smith Barney Futures Management Inc., its General Partner. SSB, an affiliate
of the General Partner, is the commodity broker for the Partnership and receives
brokerage commissions for such services, as described under "Item 1. Business."
Brokerage commissions and clearing fees of $914,741 were paid for the year ended
December 31, 1998. Management fees of $384,863 were paid or payable to the
Advisors for the year ended December 31, 1998. In addition, incentive fees of
$167,031 were paid to the Advisors for the year ended December 31, 1998.

33

Item 12. Security Ownership of Certain Beneficial Owners and Management.

(a). Security ownership of certain beneficial owners. The Partnership knows
of no person who beneficially owns more than 5% of the Units outstanding.
(b). Security ownership of management. Under the terms of the Limited
Partnership Agreement, the Partnership's affairs are managed by the General
Partner. The General Partner owns Units of partnership interest equivalent to
203 (1.2%) Units of Limited Partnership Interest.
(c). Changes in control. None.

Item 13. Certain Relationships and Related Transactions.
Smith Barney Inc. and Smith Barney Futures Management Inc. would be
considered promoters for purposes of Item 404(d) of Regulation S-K. The nature
and the amounts of compensation each promoter will receive from the Partnership
are set forth under "Item 1. Business." and "Item 11. Executive Compensation."

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements:
Statement of Financial Condition at December 31, 1998 and 1997.
Statement of Income and Expenses for the years ended December
31, 1998 and 1997 and for period from August 9, 1996
(commencement of trading operations) to December 31, 1996.
Statement of Partners' Capital for the years ended December 31,
1998, 1997 and 1996.

34

(2) Financial Statement Schedules: Financial Data Schedule for the
year ended December 31, 1998.

(3) Exhibits:

3.1 - Limited Partnership Agreement (filed as Exhibit 3.1 to the
Registration Statement on Form S-1 (File No. 33-80723) and
incorporated herein by reference).
3.2 - Certificate of Limited Partnership of the Partnership as filed
in the office of the Secretary of State of the State of New York
(filed as Exhibit 3.2 to the Registration Statement on Form S-1
(File No. 33-80723) and incorporated herein by reference).
10.1- Customer Agreement between the Partnership and Smith Barney
Shearson Inc. (filed as Exhibit 10.1 to the Registration
Statement on Form S-1 (File No. 33-80723) and incorporated
herein by reference).
10.3- Escrow Instructions relating to escrow of subscription funds
(filed as Exhibit 10.3 to the Registration Statement on Form S-1
(File No. 33-80723) and incorporated herein by reference).

35

10.5- Management Agreement among the Partnership, the General
Partner and John W. Henry & Company, Inc. (JWH) (filed as
Exhibit 10.5 to the Registration Statement on Form S-1 (File No.
33-80723) and incorporated herein by reference).
10.6- Management Agreement among the Partnership, the General
Partner and Willowbridge Associates Inc. (filed as Exhibit 10.6
to the Registration Statement on Form S-1 (File No. 33-80723)
and incorporated herein by reference).
10.7- Letters extending Management Agreements with John W. Henry &
Company, Inc. and Willowbridge Associates Inc. (filed herein).

(b) Reports on 8-K: None Filed.

36

Supplemental Information To Be Furnished With Reports Filed Pursuant To
Section 15(d) Of The Act by Registrants Which Have Not Registered Securities
Pursuant To Section 12 Of the Act.

Annual Report to Limited Partners

37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York and State of New York on the 24th day of March 1999.

SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II

By: Smith Barney Futures Management Inc.
(General Partner)

By /s/ David J. Vogel
David J. Vogel, President & Director

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.

/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel, Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President

/s/ Michael Schaefer /s/ Daniel A. Dantuono
Michael Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director

/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director

/s/ Shelley Ullman
Shelley Ullman
Director
38