Edgar Filing: HYPERION STRATEGIC MORTGAGE INCOME FUND INC

Schedule 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities and Exchange Act
of 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))

[X] Definitive Proxy Statement

[ ] Definitive Additional Materials

[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.

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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
One Liberty Plaza, 36th floor, o New York, New York 10006-1404

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

January 30, 2003
To the Stockholders:

The Annual Meeting of Stockholders of The Hyperion Strategic Mortgage
Income Fund, Inc. (the "Fund") will be held at The Downtown Association,
60 Pine Street (between William and Pearl Streets), New York, New York 10005, on
April 15, 2003, at 11:00 a.m., for the following purposes:

1. To elect directors (Proposal 1).

2. To ratify or reject the selection of PricewaterhouseCoopers
LLP as the independent accountants of the Fund for the fiscal
year ending November 30, 2003 (Proposal 2).

3. To transact any other business that may properly come before
the meeting.

The close of business on January 20, 2003 has been fixed as the record
date for the determination of stockholders entitled to receive notice of and to
vote at the meeting.

By Order of the Board of Directors,

Joseph Tropeano
Secretary

WE NEED YOUR PROXY VOTE IMMEDIATELY.

YOU MAY THINK YOUR VOTE IS NOT IMPORTANT, BUT IT IS VITAL. THE MEETING OF
STOCKHOLDERS OF THE FUND WILL BE UNABLE TO CONDUCT ANY BUSINESS IF LESS THAN A
MAJORITY OF THE SHARES ELIGIBLE TO VOTE IS REPRESENTED. IN THAT EVENT, THE FUND,
AT THE STOCKHOLDERS' EXPENSE, WOULD CONTINUE TO SOLICIT VOTES IN AN ATTEMPT TO
ACHIEVE A QUORUM. CLEARLY, YOUR VOTE COULD BE CRITICAL TO ENABLE THE FUND TO
HOLD THE MEETING AS SCHEDULED, SO PLEASE RETURN YOUR PROXY CARD IMMEDIATELY. YOU
AND ALL OTHER STOCKHOLDERS WILL BENEFIT FROM YOUR COOPERATION.

Instructions for Signing Proxy Cards

The following general rules for signing proxy cards may be of
assistance to you and avoid the time and expense to the Fund involved in
validating your vote if you fail to sign your proxy card properly.

1. Individual Accounts. Sign your name exactly as it appears in the
registration on the proxy card.

2. Joint Accounts. Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration.

3. All Other Accounts. The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration. For
example:

Registration Valid Signature
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Corporate Accounts

(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp. c/o John Doe, Treasurer John Doe
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee

Trust Accounts

(1) ABC Trust John B. Doe, Trustee
(2) Jane B. Doe, Trustee u/t/d 12/28/78 Jane B. Doe

Custodial or Estate Accounts

(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr.
UGMA
(2) John B. Smith John B. Smith, Jr., Executor

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
One Liberty Plaza, 36th floor o New York, New York 10006-1404

PROXY STATEMENT

This proxy statement is furnished in connection with a solicitation by
the Board of Directors of The Hyperion Strategic Mortgage Income Fund, Inc. (the
"Fund") of proxies to be used at the Annual Meeting of Stockholders of the Fund
to be held at The Downtown Association, 60 Pine Street (between William and
Pearl Streets), New York, New York 10005, at 11:00 a.m. on April 15, 2003 (and
at any adjournment or adjournments thereof) for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders. This proxy statement and
the accompanying form of proxy are first being mailed to stockholders on or
about January 30, 2003. Stockholders who execute proxies retain the right to
revoke them by written notice received by the Secretary of the Fund at any time
before they are voted. Unrevoked proxies will be voted in accordance with the
specifications thereon and, unless specified to the contrary, will be voted FOR
the re-election of the one nominee for Class I director, and FOR the
ratification of the selection of PricewaterhouseCoopers LLP as the independent
accountants of the Fund for the fiscal year ending November 30, 2003. The close
of business on January 20, 2003 has been fixed as the record date for the
determination of stockholders entitled to receive notice of and to vote at the
meeting. Each stockholder is entitled to one vote for each share held.
Abstentions will be treated as shares that are present and entitled to vote for
purposes of determining the presence of a quorum but as unvoted for purposes of
determining the approval of any matters submitted to stockholders for a vote.
Broker non-votes will not be counted for purposes of determining the presence of
a quorum or determining whether a proposal has been approved. On the record date
there were 10,138,297 shares outstanding.

PROPOSAL 1: ELECTION OF DIRECTORS

The Fund's Articles of Incorporation provide that the Fund's Board of
Directors shall be divided into three classes: Class I, Class II and Class III.
The terms of office of the present directors in each class expire at the Annual
Meeting in the year indicated or thereafter in each case when their respective
successors are elected and qualified: Class I, 2003; Class II, 2004; and Class
III, 2005. At each subsequent annual election, Directors chosen to succeed those
whose terms are expiring will be identified as being of that same class and will
be elected for a three-year term. The effect of these staggered terms is to
limit the ability of other entities or persons to acquire control of the Fund by
delaying the replacement of a majority of the Board of Directors.

The term of Robert F. Birch, the member of Class I, currently serving
on the Board of Directors, expires at this year's Annual Meeting. The persons
named in the accompanying form of proxy intend to vote at the Annual Meeting
(unless directed not to so vote) for the re-election of Mr. Birch. The nominee
has indicated that he will serve if elected, but if he should be unable to
serve, the proxy or proxies will be voted for any other person determined by the
persons named in the proxy in accordance with their judgment.

As described above, there is one nominee for election to the Board of
Directors at this time. Proxies cannot be voted for a greater number of persons
than the nominee currently proposed to serve on the Board of Directors.

Information Concerning Nominees/Directors

The following tables provide information concerning each of the five
members and nominee of the Board of Directors of the Fund. The nominee is listed
first in the tables under the Class I directors.

Position(s) Held with Number of
Fund and Term of Office Principal Occupation(s) Portfolios in Fund
Name, Address and Length of Time During Past 5 Years and Complex Overseen
and Age Served Other Directorships Held by Director by Director
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Class I Nominee/Director to serve until 2006 Annual Meeting of Stockholders:

Disinterested Director

Robert F. Birch Director, Member of the Chairman and President, New America High 3
c/o One Liberty Plaza, Audit Committee, Member Income Fund (1992-Present); Chairman of the
36th floor, New York, of Nominating and Board and Co-Founder,The China Business
New York 10006-1404 Compensation Committees, Group, Inc. (1996-Present); Director of
Age 66 Member of Executive Brandywine Funds (2) (2001-Present).
Committee
Formerly, Director and Strategic Planning
Elected for One Year Consultant, Dewe Rogerson, Ltd. (1994-1998)
Term/Director since June
2002

The terms of the Class II and III Directors do not expire this year.
The following table sets forth certain information regarding the Directors in
such classes.

Class II Director to serve until 2004 Annual Meeting of Stockholders:

Disinterested Director

Rodman L. Drake Director, Member of the Director and/or Trustee of several investment 3
c/o One Liberty Plaza, Audit Committee, companies (3) advised by Hyperion Capital
36th floor, New York, Chairman of Nominating Management, Inc. (1989-Present); Co-founder,
New York 10006-1404 and Compensation Baringo Capital LLC (2002-Present); Director,
Age 60 Committees Animal Medical Center (2002-Present);
Director, Hotelevision, Inc. (1999-Present);
Elected for Two Year Chairman, Metro Cash Card International
Term/Director since June (1999-Present). Director, Parsons
2002 Brinckerhoff, Inc. (1995-Present); Director,
Absolute Quality Inc. (2000- Present);
Trustee of Excelsior Funds (33)
(1994-Present).

Formerly, President, Continuation Investments
Group Inc. (1997-2001); Director, Alliance
Group Services, Inc. (1998-2001).

Class II Director to serve until 2004 Annual Meeting of Stockholders:

Disinterested Director

Harry E. Petersen, Jr. Director, Member of the Director and/or Trustee of several investment 3
c/o One Liberty Plaza, Audit Committee, Member companies (3) advised by Hyperion Capital
36th floor, New York, of Compensation and Management, Inc. or by its affiliates
New York 10006-1404 Nominating Committees, (1992-Present).
Age 78 Member of Executive
Committee Formerly, Senior Consultant to Cornerstone
Equity Advisors, Inc. (1998-2001); Senior
Elected for Two Year Consultant to Potomac Babson Inc. (1995-1998).
Term/Director since June
2002

Class III Director to serve until 2005 Annual Meeting of Stockholders:

Interested Director

Lewis S. Ranieri* Director, Member of the Chairman and Chief Executive Officer of 3
c/o One Liberty Plaza, Executive Committee Ranieri & Co., Inc. (since 1988); President of
36th floor, New York, LSR Hyperion Corp., a general partner of the
New York 10006-1404 Elected for Three Year limited partnership that is the general
Age 56 Term/Director since partner of Hyperion Partners L.P. ("Hyperion
June 2002 Partners") (since 1988); Director and Chairman
of the Board of Hyperion Capital Management,
Chairman/Elected Inc. (since June 2002); Director and President
annually since June 2002 of Hyperion Funding II Corp., the general
partner of the limited partnership that is the
general partner of Hyperion Partners II, L.P.
(Hyperion Partners II) (since 2002); Chairman
and President of various other direct and
indirect subsidiaries of Hyperion Partners (since
1989) and Hyperion Partners II (since 1995);
Chairman of the Board (1989-December 1998 and
June 2002 through present) and/or Director
(since 1989) of several investment companies
(3) advised by Hyperion Capital Management, Inc.
or by its affiliates.

Formerly, Director and Vice Chairman of the
Board of Hyperion Capital Management, Inc.
(from November 1998 through June 2002);
Director and Chairman of the Board of Hyperion
Capital Management, Inc. (1989-November 1998);
Director and Chairman of Bank United Corp.,
and Director of Bank United (1988-2001);
Director of Lend Lease Hyperion Mortgage
Opportunity Fund, Inc. (formerly, Equitable
Real Estate Hyperion Mortgage Opportunity
Fund, Inc.) and Lend Lease Hyperion High Yield
Commercial Mortgage Fund, Inc. (formerly,
Equitable Real Estate Hyperion High Yield
Commercial Mortgage Fund, Inc.) (1995-1999).

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* Mr. Ranieri is an "interested person" as defined in the 1940 Act,
because of his affiliations with Hyperion Capital Management, Inc., the
Fund's Advisor.

Class III Director to serve until 2005 Annual Meeting of Stockholders:

Disinterested Director

Leo M. Walsh, Jr. Director, Chairman of Director and/or Trustee of several investment 3
c/o One Liberty Plaza, the Audit Committee, companies (3) advised by Hyperion Capital
36th floor, New York, Member of Nominating Management, Inc. or by its affiliates
New York 10006-1404 and Compensation (1989-Present); Financial Consultant for Medco
Age 70 Committees Health Solutions Inc. (formerly Merck-Medco
Managed Care LLC) (1994-Present); Director of
Elected for Three Year Lend Lease Hyperion Mortgage Opportunity Fund,
Term/Director since Inc. (formerly, Equitable Real Estate Hyperion
June 2002 Mortgage Opportunity Fund, Inc.) and Lend
Lease Hyperion High Yield CMBS Fund, Inc.
(formerly, Equitable Real Estate Hyperion High
Yield Commercial Mortgage Fund, Inc.)
(1999-Present).

Officers of the Fund

The officers of the Fund are chosen each year at the first meeting of
the Board of Directors of the Fund following the Annual Meeting of Stockholders,
to hold office at the discretion of the Board of Directors until the meeting of
the Board following the next Annual Meeting of Stockholders and until their
successors are chosen and qualified. The Board of Directors has elected six
officers of the Fund. Except where dates of service are noted, all officers
listed below served as such throughout the 2002 fiscal year. An asterisk (*)
indicates a person is an "interested persons" as defined in the 1940 Act,
because of affiliations with Hyperion Capital Management, Inc., the Fund's
Advisor. The following table sets forth information concerning each officer of
the Fund who served during all or part of the last fiscal year of the Fund:

Term of Office and
Name, Address Position(s) Held Length of Time Principal Occupation(s)
and Age with Fund Served During Past 5 Years
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Lewis S. Ranieri* Chairman Elected Annually Please see "Information Concerning
c/o One Liberty Plaza, 36th Since June 2002 Directors."
floor, New York, New York
10006-1404
Age 56

Clifford E. Lai* President Elected Annually President (since November 1998) of
c/o One Liberty Plaza, 36th Since June 2002 Hyperion Capital Management, Inc.
floor, New York, New York (March 1993-Present); President (since
10006-1404 June 1997) of Hyperion 2005 Investment
Age 48 Grade Opportunity Term Trust, Inc. (Senior
Vice President from April 1993 to June
1997); President of The Hyperion Total
Return Fund, Inc. (since October 1995);
Director and Chairman of the Board of the
Lend lease Hyperion High-Yield CMBS Fund,
Inc. (since October 2000); Senior Vice
President of the Lend Lease Hyperion
High-Yield Commercial Mortgage Fund, Inc.
(November 1998-December 1999); Senior Vice
President of the Equitable Real Estate
Hyperion High-Yield Commercial Mortgage
Fund, Inc. (September 1995-November 1998)

John Dolan* Vice President Elected Annually Chief Investment Strategist
c/o One Liberty Plaza, 36th Since June 2002 (1998-Present)and Chief Investment Officer
floor, New York, New York (since 2002) of Hyperion Capital
10006-1404 Management, Inc.
Age 49

Patricia A. Sloan* Vice President Elected Annually Consultant of Ranieri & Co., Inc.
c/o One Liberty Plaza Since June 2002 (2000-Present). Formerly, Secretary,
36th floor, New York Director and/or Trustee of several
New York 10006-1404 investment companies (3) advised by
Age 59 Hyperion Capital management, Inc. or by
its affiliates (1989-2002).

Joseph Tropeano* Secretary Elected Annually Director and Compliance Officer, Hyperion
c/o One Liberty Plaza, Since June 2002 Capital Management, Inc. (1993-Present);
36th floor, New York, New Secretary and Compliance Officer of
York 10006-1404 several investment companies (3) advised
Age 40 by Hyperion Capital Management, Inc.
(1994-Present); Secretary and Compliance
Officer, Lend Lease Hyperion Capital
Advisors, LLC (1995-Present); Secretary
and Compliance Officer of Lend Lease
Hyperion High-Yield CMBS Fund, Inc.
(1998-Present).

Formerly, Assistant Secretary and
Compliance Officer, AIG Hyperion Inc.
(1994-2002); Vice President and Compliance
Officer, Hyperion Distributors, Inc.
(1994-1998).

Thomas F. Doodian* Treasurer Elected Annually Managing Director, Chief Operating Officer
c/o One Liberty Plaza, 36th Since June 2002 (1998-Present) and Director of Finance and
floor, New York, New York Operations, Hyperion Capital Management,
10006-1404 Inc. (July 1995-Present). Treasurer of
Age 43 several investment companies (3) advised
by Hyperion Capital Management, Inc.
(February 1998- Present).

Fund Shares owned by Directors and Officers

The following table sets forth, for each Director, the aggregate dollar
range of equity securities owned of the Fund and of all funds overseen by each
Director in the Fund Complex as of November 30, 2002. The information as to
beneficial ownership is based on statements furnished to the Fund by each
Director.

Aggregate Dollar Range of
Equity Securities in All
Funds Overseen by Director
Dollar Range of Equity or Nominee in Family of
Name of Director Securities in the Fund Investment Companies
---------------------------------------------------------------------------------------------------------------

Robert F. Birch $50,001-$100,000 $50,001-$100,000
Rodman L. Drake $10,001-$50,000 $10,001-$50,000
Harry E. Petersen, Jr. None $1-$10,000
Lewis Ranieri None None
Leo M. Walsh, Jr. $50,001-$100,000 Over $100,000

As of January 20, 2003, each Director's individual beneficial
shareholdings of the Fund constitute less than 1% of the outstanding shares of
the Fund, and as a group, the Directors and officers of the Fund own
beneficially less than 1% of the Fund.

Principal Holders

To the best of the Fund's knowledge, as of January 20, 2003, no person
owned beneficially more than 5% of the Fund's outstanding shares.

Interested Persons

Mr. Ranieri serves as a Director and Chairman of the Board of the
Advisor. As a result of his service with the Advisor and certain affiliations
with the Advisor as described below, the Fund considers Mr. Ranieri to be an
"interested person" of the Fund within the meaning of Section 2(a)(19) of the
1940 Act.

Committees and Board of Directors' Meetings

The Fund has a standing Audit Committee presently consisting of Messrs.
Walsh, Drake, Petersen and Birch, all of whom are members of the Board of
Directors and are currently non-interested persons of the Fund. The principal
functions of the Fund's Audit Committee are to recommend to the Board the
appointment of the Fund's accountants, to review with the accountants the scope
and anticipated costs of their audit and to receive and consider a report from
the accountants concerning their conduct of the audit, including any comments or
recommendations they might want to make in that connection. The Board of
Directors has adopted a written charter for the Audit Committee which is filed
herein as Exhibit A. The Audit Committee did not meet in 2002 because the Fund
commenced operations in July 2002. The Report of the Audit Committee is
presented below. During the last fiscal year of the Fund, the full Board of
Directors met two times. All of the Directors attended both Board meetings. The
Fund has a Nominating and a Compensation Committee. The Nominating and
Compensation Committees presently consist of Messrs. Drake, Birch, Petersen and
Walsh. Because there were no vacancies on the Board, the Nominating Committee
did not meet in 2002. The function of the Nominating Committee is to recommend
candidates for election to the Board as independent directors. The Committee
will consider nominees recommended by stockholders. Such recommendations should
be submitted in writing to the Secretary of the Fund. The function of the
Compensation Committee is to determine the compensation paid to the independent
directors. The Compensation Committee met once during 2002. The Fund has an
Executive Committee. The Executive Committee presently consists of Messrs.
Birch, Petersen and Ranieri. The function of the Executive Committee is to
approve dividends for the Fund when the full Board of Directors cannot meet. The
Executive Committee did not meet during 2002.

Report of the Audit Committee

On January 15, 2003, the Audit Committee reviewed and discussed with
management the Fund's audited financial statements as of and for the year ended
November 30, 2002. The Audit Committee discussed with PricewaterhouseCoopers LLP
the matters required to be discussed by Statement of Auditing Standards No. 61,
Communications with Audit Committees, as amended, by the Auditing Standards
Board of the American Institute of Certified Public Accountants.

The Audit Committee received and reviewed the written disclosures and
the letter from PricewaterhouseCoopers LLP required by Independence Standard
No. 1, Independence Discussion with Audit Committees, as amended, by the
Independence Standards Board, and have discussed with the auditors the auditors'
independence.

Based on the reviews and discussions referred to above, the Audit
Committee recommends to the Board of Directors that the financial statements
referred to above be included in the Fund's Annual Report to stockholders
required by Section 30(e) of the Investment Company Act of 1940, as amended and
Rule 30e-1 thereunder for the year ended November 30, 2002.

Leo M. Walsh, Jr. - Audit Committee Chairman
Rodman L. Drake - Audit Committee Member
Harry E. Petersen, Jr. - Audit Committee Member
Robert F. Birch - Audit Committee Member

Compensation of Directors and Executive Officers

No remuneration was paid by the Fund to persons who were directors,
officers or employees of Hyperion Capital Management, Inc. or any affiliate
thereof for their services as directors or officers of the Fund. Each director
of the Fund, other than those who are officers or employees of Hyperion Capital
Management, Inc. or any affiliate thereof, is entitled to receive a fee of
$10,000 per year plus $1,000 for each Board of Directors' meeting attended.
Members of the Audit Committee receive $750 for each Audit Committee meeting
attended, other than meetings held on days when there is also a directors'
meeting. The following table sets forth information concerning the compensation
received by directors for the twelve month period ended November 30, 2002.

Total Directors' Compensation
Directors' Compensation from the Fund and the Fund
from the Fund Complex*
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Robert F. Birch $7,000 $39,607
Rodman L. Drake $7,000 $28,750
Harry E. Petersen, Jr. $7,000 $38,125
Leo M. Walsh, Jr. $7,000 $38,125

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*Total number of registered investment companies in fund complex is currently
three (The Hyperion Total Return Fund, Inc., Hyperion Strategic Mortage Income
Fund, Inc. and Hyperion 2005 Investment Grade Opportunity Term Trust, Inc.).
From June 2002 to December 2002, there were four funds in the complex, including
the Hyperion 2002 Term Trust, Inc. which closed in December 2002.

Compliance With Section 16 Reporting Requirements

Section 16(a) of the Securities Exchange Act of 1934 requires the
Fund's officers and directors and persons who own more than ten percent of a
registered class of the Fund's equity securities to file reports of ownership
and changes in ownership with the SEC and the New York Stock Exchange. Officers,
directors and greater than ten-percent stockholders are required by SEC
regulations to furnish the Fund with copies of all Section 16(a) forms they
file.

Based solely on its review of the copies of such forms received by the
Fund and written representations from certain reporting persons that all
applicable filing requirements for such persons had been complied with, the Fund
believes that, during the fiscal year ended November 30, 2002, all filing
requirements applicable to the Fund's officers, directors, and greater than
ten-percent beneficial owners were complied with, except that all of the initial
Form 3 filings were late because of an administrative error.

Required Vote

Election of the listed nominees for director requires the affirmative
vote of the holders of a majority of the shares of common stock of the Fund
present or represented by proxy at the Annual Meeting.

PROPOSAL 2: RATIFICATION OR REJECTION OF
SELECTION OF INDEPENDENT ACCOUNTANTS

The Board of Directors of the Fund will consider, and it is expected
that they will recommend, the selection of PricewaterhouseCoopers LLP ("PwC") as
independent accountants of the Fund for the fiscal year ending November 30, 2003
at a meeting scheduled to be held on March 11, 2003. The appointment of
accountants is approved annually by the Audit Committee of the Board of
Directors and is subsequently submitted to the stockholders for ratification or
rejection. The Fund has been advised by PwC that at November 30, 2002 neither
that firm nor any of its partners had any direct or material indirect financial
interest in the Fund. A representative of PwC will be at the meeting to answer
questions concerning the Fund's financial statements and will have an
opportunity to make a statement if he or she chooses to do so.

Audit Fees

The Fund will pay PwC $50,000 for its audit of the Fund's November 30,
2002 financial statements. During 2002, the total audit fees paid to PwC for all
of the funds (consisting of the Fund, The Hyperion Total Return Fund, Inc.,
Hyperion 2005 Investment Grade Opportunity Term Trust, Inc and Hyperion 2002
Term Trust, Inc.), was $187,000.

Financial Information Systems Design and Implementation

The Fund did not pay PwC for any other professional services relating
to the Fund's financial information for the fiscal year ended November 30, 2002.
Hyperion Capital Management, Inc. (the "Advisor") is a subsidiary of Hyperion
Partners L.P., a Delaware limited partnership ("Hyperion Partners"). The sole
general partner of Hyperion Partners is Hyperion Ventures L.P., a Delaware
limited partnership ("Hyperion Ventures"). The Advisor did not pay PwC for any
other professional services relating to the Advisor's financial information
systems for the fiscal year ended November 30, 2002.

All Other Fees

The Fund paid PwC $8,410.00 for other non-audit professional services
for the fiscal year ended November 30, 2002. The Advisor, Hyperion Partners or
Hyperion Ventures did not pay PwC for any other professional services for the
fiscal year ended November 30, 2002. The Fund's Audit Committee has determined
that the provision of the services by PwC to the Advisor, Hyperion Partners or
Hyperion Ventures is compatible with maintaining PwC's independence.

Required Vote

Ratification of the selection of PwC as independent accountants of the
Fund requires the affirmative vote of the holders of a majority of the
outstanding shares of common stock of the Fund present or represented by proxy
at the Annual Meeting.

ADDITIONAL INFORMATION

The Advisor

The Advisor is a Delaware corporation organized in February 1989 and a
registered investment advisor under the Investment Advisers Act of 1940, as
amended. The business address of the Advisor and its officers and directors is
One Liberty Plaza, 36th floor, New York, New York 10006-1404. Subject to the
authority of the Board of Directors, the Advisor is responsible for overall
management of the Fund's business affairs. As of December 31, 2002, the Advisor
had $6.8 billion in assets under management. The Advisor's clients include
pensions, foundations and endowments, insurance companies and closed-end mutual
funds. In its investment process, the Advisor focuses on relative value
opportunities, particularly in the MBS and ABS markets.

The Advisor is a subsidiary of HCM Holdings, Inc. ("HHI"). LSR Capital
HCM, L.L.C. ("LSR") owns 61.75% of HHI. LSR Hyperion Corp. is the managing
member of LSR. Lewis S. Ranieri is the sole shareholder of LSR Hyperion Corp.

Lewis S. Ranieri, a former Vice Chairman of Salomon Brothers Inc
("Salomon Brothers"), is the Chairman of the Board of the Advisor and Chairman
and Director of the Fund. Mr. Andrew Carter is Vice Chairman of the Advisor, but
does not serve on the Advisor's Board of Directors. Clifford E. Lai, the
President of the Fund, is the President and a Director of the Advisor, and may
be entitled, in addition to receiving a salary from the Advisor, to receive a
bonus based upon a portion of the Advisor's profits. Mr. John Feeney is a
Director and Managing Director, Marketing of the Advisor. Mr. John H. Dolan is a
Director and Managing Director, Chief Investment Officer of the Advisor and Vice
President of the Fund. Mr. Thomas F. Doodian, Treasurer of the Fund, and Mr.
Joseph Tropeano, Secretary of the Fund, are also employees of the Advisor.

The Advisor provides advisory services to several other registered
investment companies which invest in MBS. Its management includes several
individuals with extensive experience in originating, evaluating and investing
in MBS, RMBS and ABS, and in using hedging techniques. Lewis S. Ranieri was
instrumental in the development of the secondary MBS market and the creation and
development of secondary markets for conventional mortgage loans, COs and other
mortgage-related securities. While at Salomon Brothers, Mr. Ranieri directed
that firm's activities in the mortgage, real estate and U.S. Government
guaranteed areas. Clifford E. Lai was Managing Director and Chief Investment
Strategist for Fixed Income at First Boston Asset Management Corporation. John
H. Dolan, Director and Chief Investment Officer of the Advisor, will be
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Dolan was recently appointed to Chief Investment Officer of the Advisor and has
served as Chief Investment Strategist of the Advisor since 1998. Formerly, Mr.
Dolan was Managing Director at Bankers Trust.

The Administrator

The Fund has entered into an Administration Agreement with Hyperion
Capital Management, Inc. (the "Administrator"). The Administrator performs
administrative services necessary for the operation of the Fund, including
maintaining certain books and records of the Fund, and preparing reports and
other documents required by federal, state, and other applicable laws and
regulations, and provides the Fund with administrative office facilities. For
these services, the Fund pays a fee monthly at an annual rate of 0.20% of its
average weekly assets. For the period July 26, 2002 through November 30, 2002,
the Administrator earned $99,521 in Administration fees, of which the
Administrator waived $4,201. In addition, the Administrator has entered into
Administration Agreements with two other investment companies, with the
following fee structure:

Name Administration Fee
-----------------------------------------------------------------------------------------------------------------------

a monthly fee paid at an annual rate of:
The Hyperion Total Return Fund, Inc. 0.20% of its average weekly net assets

a monthly fee paid at an annual rate of:
Hyperion 2005 Investment Grade 0.17% of the first $100 million of its average weekly net assets
Opportunity Term Trust, Inc. 0.145% of the next $150 million
0.12% of any amounts above $250 million

Investment Companies Managed by the Advisor

In addition to acting as advisor to the Fund, the Advisor acts as
investment advisor to the following other investment companies at the indicated
annual compensation.

Approximate Net Assets
Name of Fund Investment Advisory Fees at November 30, 2002
----------------------------------------------------------------------------------------------------------------------

The Hyperion Total Return Fund, Inc. 0.65% of its average weekly net assets $282,568,434

Hyperion 2005 Investment Grade 0.65% of its average weekly net assets $167,288,677
Opportunity Term Trust, Inc.

The Sub-Advisor

As noted above, the Advisor, has engaged the Sub-Advisor to provide
sub-investment advisory services for investments in CMBS. The Sub-Advisor, a
registered investment advisor, is a Delaware limited liability company,
organized on June 2, 1995, and as of May 31, 2002, managed approximately $1.29
billion in CMBS. The business address of the Sub-Advisor and its officers and
managers is One Liberty Plaza, 165 Broadway, 37th Floor, new York, New York
10006-1404.

Brokerage Commissions

The Fund paid an aggregate of $712.50 in brokerage commissions,
including futures commissions, on its securities purchases during its last
fiscal year, all of which were paid to entities that are not affiliated with the
Fund or the Advisor.

The Advisor and the Sub-Advisor have discretion to select brokers and
dealers to execute portfolio transactions initiated by the Advisor and the
Sub-Advisor and to select the markets in which such transactions are to be
executed. The Agreements provide, in substance, that in executing portfolio
transactions and selecting brokers or dealers, the primary responsibility of the
Advisor and the Sub-Advisor is to seek the best combination of net price and
execution for the Fund. It is expected that securities will ordinarily be
purchased in primary markets, and that in assessing the best net price and
execution available to the Fund, the Advisor and the Sub-Advisor will consider
all factors they deem relevant, including the price, dealer spread, the size,
type and difficulty of the transaction involved, the firm's general execution
and operation facilities and the firm's risk in positioning the securities
involved. Transactions in foreign securities markets may involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States.

In selecting brokers or dealers to execute particular transactions and
in evaluating the best net price and execution available, the Advisor and the
Sub-Advisor are authorized to consider "brokerage and research services" (as
those terms are defined in Section 28(e) of the Securities Exchange Act of
1934). The Advisor and the Sub-Advisor are also authorized to cause the Fund to
pay to a broker or dealer who provides such brokerage and research services a
commission for executing a portfolio transaction which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction. The Advisor and the Sub-Advisor must determine in good faith,
however, that such commission was reasonable in relation to the value of the
brokerage and research services provided, viewed in terms of that particular
transaction or in terms of all the accounts over which the Advisor or the
Sub-Advisor exercise investment discretion. Research services furnished by
brokers through whom the Fund effects securities transactions may be used by the
Advisor and the Sub-Advisor in servicing all of the accounts for which
investment discretion is exercised by the Advisor or the Sub-Advisor, and not
all such services may be used by the Advisor or the Sub-Advisor in connection
with the Fund.

OTHER BUSINESS

The Board of Directors of the Fund does not know of any other matter
which may come before the meeting. If any other matter properly comes before the
meeting, it is the intention of the persons named in the proxy to vote the
proxies in accordance with their judgment on that matter.

PROPOSALS TO BE SUBMITTED BY STOCKHOLDERS

All proposals by stockholders of the Fund that are intended to be
presented at the Fund's next Annual Meeting of Stockholders to be held in 2004
must be received by the Fund for inclusion in the Fund's proxy statement and
proxy relating to that meeting no later than November 1, 2003.

EXPENSES OF PROXY SOLICITATION

The cost of preparing and assembling material in connection with this
solicitation of proxies will be borne by the Fund. The cost of mailing material
in connection with this solicitation of proxies will be borne by the Advisor. In
addition to the use of the mails, proxies may be solicited personally by regular
employees of the Fund, Hyperion Capital Management, Inc., or Georgeson
Shareholder, paid solicitors for the Fund, or by telephone or telegraph. The
anticipated cost of solicitation by the paid solicitors will be approximately
$5,000. The Fund's agreement with Georgeson Shareholder provides that such paid
solicitors will perform a broker search and deliver proxies in return for the
payment of their fee plus the expenses associated with this proxy solicitation.
Brokerage houses, banks and other fiduciaries will be requested to forward proxy
solicitation material to their principals to obtain authorization for the
execution of proxies, and they will be reimbursed by the Fund for out-of-pocket
expenses incurred in this connection.

January 30, 2003

EXHIBIT A

The Hyperion Strategic Mortgage Income Fund, Inc.

AUDIT COMMITTEE CHARTER

Adopted June 18, 2002

1. Requirements for Membership: The Audit Committee shall consist of at least
three directors, each of whom has no relationship to the company, or its
management, that may interfere with the exercise of their independence from
management and the company ("Independent"). The restrictions contained in
Attachment A to this Charter shall apply to every Committee member.

At least one member of the Committee shall have accounting or related financial
management expertise, as the Board of Directors interprets such qualification in
its business judgment. Each member of the Committee shall be financially
literate, as such qualification is interpreted by the Board of Directors in its
business judgment, or must become financially literate within a reasonable
period of time after appointment to the Committee.

2. Responsibilities: The Audit Committee's responsibilities are:

a. oversight of the company's accounting and financial reporting
policies and practices, its system of internal controls and,
as appropriate, the internal controls of certain service
providers;

b. oversight of the quality and objectivity of the company's
financial statements and the independent audit thereof;

c. maintenance of a liaison between the independent auditors and
the Board of Directors; and

d. evaluation of the external auditors, and recommendation to the
Board of Directors as to selection, retention, or termination
of the external auditor.

3. Duties and Powers: The duties and powers of the Audit Committee are:

a. oversight of the external independent auditors; using meetings
with the auditors, including private meetings, as desired by
the committee or the auditors: (i) to review the plan for and
the scope of the annual audit and any special audits; (ii) to
discuss any matters of concern relating to the financial
statements, including any adjustment to the statements
recommended by the auditors, or other matters arising from the
audit; (iii) to consider the auditors' comments with respect
to financial policies, procedures, and internal control, and
to consider management's responses to the comments; and (iv)
to review the form of opinion the auditors propose to submit
to the Board of Directors and the shareholders;

b. Consideration of the effect of any changes in accounting
principles or practices proposed by management or the
auditors;

A-1

c. Review of security valuation procedures employed with respect
to any asset or class of asset for which there is not a
readily determinable market value;

d. Evaluation of the independence of the auditors, including
receipt and evaluation of specific reports and representations
from the auditors as to any other services provided to the
company and any services provided to management or any
affiliate; discussion with the auditors with respect to any
disclosed relationships that may impact the objectivity and
independence of the auditors; and recommendation to the Board
of Directors as to any action considered appropriate to ensure
the independence of the auditors;

e. Recommendation to the Board of Directors on the selection,
retention or termination of the auditors;

(The external auditors are ultimately accountable to the Board
of Directors and audit committee, which have the ultimate
authority and responsibility to select, evaluate and, where
appropriate, replace the external auditors or to nominate the
external auditors to be proposed for shareholder approval in
any proxy statement.)

f. Review the auditors' charges to the company for services;

g. Investigate any improprieties or suspected improprieties in
company activities;

h. Report its activities to the Board of Directors on a regular
basis and make any recommendations deemed necessary or
appropriate.

4. The Committee shall meet on a regular basis and may hold special meetings, as
desired. Such meetings shall include meetings with management, as appropriate.

5. The Committee has the authority to retain special counsel and other experts
or consultants as it deems appropriate to discharge its responsibilities.

6. The Committee shall review and assess the adequacy of this charter on an
annual basis.

A-2

ATTACHMENT A
AUDIT COMMITTEE CHARTER
INDEPENDENCE REQUIREMENT OF INDEPENDENT DIRECTORS

In addition to the definition of Independent provided in the text of the
Charter, the following restrictions shall apply to every audit committee member:

a. Employees. A director who is an employee (including
non-employee executive officers) of the company or any of its
affiliates may not serve on the Audit Committee until three
years following the termination of his or her employment. In
the event the employment relationship is with a former parent
or predecessor of the company, the director could serve on the
Audit Committee after three years following the termination of
the relationship between the company and the former parent or
predecessor.

b. Business Relationship. A director (i) who is a partner,
controlling shareholder, or executive officer of an
organization that has a business relationship with the
company, or (ii) who has a direct business relationship with
the company (e.g., a consultant) may serve on the Audit
Committee only if the company's Board of Directors determines
in its business judgment that the relationship does not
interfere with the director's exercise of independent
judgment. In making a determination regarding the independence
of a director pursuant to this paragraph, the Board of
Directors should consider, among other things, the materiality
of the relationship to the company, to the director, and, if
applicable, to the organization with which the director is
affiliated.

"Business Relationships" can include commercial, industrial,
banking, consulting, legal, accounting and other
relationships. A director can have this relationship directly
with the company, or the director can be a partner, officer or
employee of an organization that has such a relationship. The
director may serve on the Audit Committee without the
above-referenced Board of Directors' determination after three
years following the termination of, as applicable, either (1)
the relationship between the organization with which the
director is affiliated and the company, (2) the relationship
between the director and his or her partnership status,
shareholder interest or executive officer position, or (3) the
direct business relationship between the director and the
company.

c. Cross Compensation Committee Link. A director who is employed
as an executive of another corporation where any of the
company's executives serves on that corporation's compensation
committee may not serve on the Audit Committee.

d. Immediate Family. A director who is an Immediate Family member
of an individual who is an executive officer of the company or
any of its affiliates cannot serve on the Audit Committee
until three years following the termination of such employment
relationship.

"Immediate Family" includes a person's spouse, parents,
children, siblings, mothers-in-law and fathers-in-law, sons
and daughters-in-law, brothers and sisters-in-law, and anyone
(other than employees) who shares such person's home.

A-3

PROXY

THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.

THIS PROXY SOLICITED ON BEHALF OF THE DIRECTORS

The undersigned hereby appoints Clifford E. Lai and JOSEPH TROPEANO
each of them, attorneys and proxies for the undersigned, with full power of
substitution and revocation, to represent the undersigned and to vote on behalf
of the undersigned all shares of The Hyperion Strategic Mortgage Income Fund,
Inc. (the "Fund") which the undersigned is entitled to vote at the Annual
Meeting of Stockholders of the Fund to be held at The Downtown Association, 60
Pine Street (between William and Pearl Streets), New York, New York 10005, on
April 15, 2003 at 11:00 a.m., and at any adjournments thereof. The undersigned
hereby acknowledges receipt of the Notice of Annual Meeting and accompanying
Proxy Statement and hereby instructs said attorneys and proxies to vote said
shares as indicated hereon. In their discretion, the proxies are authorized to
vote upon such other business as may properly come before the Meeting. A
majority of the proxies present and acting at the Meeting, in person or by
substitute (or, if only one shall be so present, then that one), shall have and
may exercise all of the power or authority of said proxies hereunder. The
undersigned hereby revokes any proxy previously given.

(Continued and to be signed on the reverse side)

--------------------------------------------------------------------------------
COMMENTS:

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

14475

ANNUAL MEETING OF STOCKHOLDERS OF
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
April 15, 2003

Please date, sign and mail your proxy card
in the envelope provided as soon as
possible.
----------------------------------
COMPANY NUMBER
----------------------------------
ACCOUNT NUMBER
----------------------------------
NUMBER OF SHARES
----------------------------------

Please detach and mail in the envelope provided.

--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF
DIRECTOR AND "FOR" PROPOSAL 2.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE. [X]
--------------------------------------------------------------------------------
1. Election of Director Nominee (Class I)

NOMINEES
[ ] FOR ALL NOMINEES ( ) Robert F. Birch

[ ] WITHHOLD AUTHORITY FOR
ALL NOMINEES

[ ] FOR ALL EXCEPT
(See instructions below)

Instruction: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee you wish to
withhold, as shown here: (X)

For Against Abstain
2. Ratification or rejection of the [ ] [ ] [ ]
selection of independent
accountants (a vote "For" is a vote
for ratification).

This proxy, if properly executed, will be voted in the manner directed by the
stockholder. If no direction is made, this proxy will be voted FOR the election
of the nominee as Director in Proposal 1 and FOR the ratification of the
selection of PricewaterhouseCoopers LLP as the independent accountants of the
Fund in Proposal 2. Please refer to the Proxy Statement for a discussion of the
Proposals.

PLEASE VOTE, DATE AND SIGN THE REVERSE SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.

--------------------------------------------------------------------------------
To change the address on your account, please check the box at the right and
indicate your new address in the address space above. Please note that changes
to the registered name(s) on the account may not be submitted via this
method.[ ]

Please check if you plan on attending the meeting. [ ]

Signature of Stockholder ___________________________________ Date:___________

Note: This proxy must be signed exactly as the name appears hereon. When shares
are held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give full title. If the
signer is a corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If signer is a partnership, please sign in
partnership name by authorized person.