Registration Nos:	2-91948
			811-4061


	SECURITIES AND EXCHANGE COMMISSION
	Washington, D.C.  20549

	FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933	     X     

Pre-Effective Amendment No.              	           

Post-Effective Amendment No.          25       	     X     

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY 
      ACT OF 1940	     X     

Amendment No.      24      	      X    


	SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
	(Exact name of Registrant as specified in Charter)

	388 Greenwich Street, New York, New York 10013
	(Address of principal executive offices) (Zip Code)

	          (212) 816-6474          
	(Registrant's telephone number, including Area Code)

	Christina T. Sydor
	Secretary

	Smith Barney Managed Governments Fund Inc.
	388 Greenwich Street
	New York, New York 10013
	(22nd Floor)
	(Name and address of agent for service)

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

It is proposed that this filing will become effective:
   
                  immediately upon filing pursuant to Rule 485(b)
     on X November 27, 1998      pursuant to Rule 485(b)
            on                  pursuant to Rule 485(a)

The Registrant has previously filed a declaration of indefinite
registration of its shares pursuant to Rule 24f-2
under the Investment Company Act of 1940.  Registrant's Rule 24f-2
Notice for the fiscal year ended     July 31, 1998 was filed
on October 8, 1998 as Accession Number 0000091155-98-000619.     

SMITH BARNEY MANAGED GOVERNMENTS FUND INC.

CONTENTS OF REGISTRATION STATEMENT

This Registration Statement contains the following pages and
 documents

Front Cover

Contents Page

Cross-Reference Sheet

Part C - Other Information

Signature Page

Exhibits


SMITH BARNEY MANAGED GOVERNMENTS FUND INC.

	FORM N-1A

	CROSS REFERENCE SHEET

	PURSUANT TO RULE 495(a)

Part A.
Item No.					Prospectus Caption

1. Cover Page					Cover Page

2. Synopsis					Prospectus Summary

3. Condensed Financial Information		Financial Highlights;
						Performance

4. General Description of Registrant		Cover Page; Prospectus 
						Summary;
						Purchase of Shares; Investment 
						Objective and
						Management Policies; Additional 
						Information

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

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

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

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

9. Legal Proceedings				Not Applicable


Part B						Statement of 
Item No.					Additional Information Caption

10. Cover					Cover Page

11. Table of Contents				   Table of     Contents

12. General Information				    Additional 
						Information    ; Distributor

13. Investment Objectives and Policies		Investment Objective and 
						Management
						Policies

14. Management of the Fund			Management of the Fund; 
						Distributor

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

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

17. Brokerage Allocation			Investment Objective and 
						Management Policies

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

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

20. Tax Status					Taxes

21. Underwriters				Distributor

22. Calculation of Performance Data		Performance Data

23. Financial Statements				Financial Statements


PART A
PROSPECTUS

<PAGE>

<PAGE>
 
 
                                                                    SMITH BARNEY
                                                                         Managed
                                                                     Governments
                                                                       Fund Inc.
                                                             
                                                          NOVEMBER 27, 1998     
 
                                                   Prospectus begins on page one
 
 
P R O S P E C T U S


[LOGO] Smith Barney Mutual Funds
       Investing for your future.
       Every day.
<PAGE>
 
PROSPECTUS                                                  
                                                         NOVEMBER 27, 1998     
 
Smith Barney Managed Governments Fund Inc.
388 Greenwich Street
New York, New York 10013
800-451-2010
 
  Smith Barney Managed Governments Fund Inc. (the "Fund") is a diversified fund
designed to provide investors with high current income consistent with liquid-
ity and safety of capital. The Fund seeks to achieve this objective by invest-
ing in debt obligations of varying maturities issued or guaranteed by the
United States government or its agencies or instrumentalities (with emphasis on
mortgage-backed government securities) and by writing covered put and call
options against certain of such securities. The Fund also may enter into cer-
tain other options and futures transactions for hedging purposes.
 
  This Prospectus sets forth concisely certain information about the Fund,
including sales charges, distribution and service fees and expenses, that pro-
spective investors will find helpful in making an investment decision. Invest-
ors are encouraged to read this Prospectus carefully and retain it for future
reference.
 
  Additional information about the Fund is contained in a Statement of Addi-
tional Information dated November 25, 1998, (the "SAI") as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Salomon Smith Barney Financial Consultant. The SAI has been
filed with the Securities and Exchange Commission (the "SEC") and is incorpo-
rated by reference into this Prospectus in its entirety.
 
CFBDS, INC.
Distributor
 
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
 
<TABLE>   
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                           10
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   15
-------------------------------------------------
VALUATION OF SHARES                            24
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             24
-------------------------------------------------
PURCHASE OF SHARES                             26
-------------------------------------------------
EXCHANGE PRIVILEGE                             34
-------------------------------------------------
REDEMPTION OF SHARES                           37
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           40
-------------------------------------------------
PERFORMANCE                                    40
-------------------------------------------------
MANAGEMENT OF THE FUND                         41
-------------------------------------------------
DISTRIBUTOR                                    42
-------------------------------------------------
ADDITIONAL INFORMATION                         43
</TABLE>    
 
--------------------------------------------------------------------------------
 
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the distributor. This Prospectus does not constitute an offer by the Fund or
the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
PROSPECTUS SUMMARY
 
 
  The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in
this summary are to headings in the Prospectus. See "Table of Contents."
 
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management invest-
ment company designed to provide investors with high current income consistent
with liquidity and safety of capital. The Fund seeks to achieve its objective
by investing in debt obligations of varying maturities issued or guaranteed by
the United States government or its agencies or instrumentalities ("U.S. gov-
ernment securities") and by writing covered put and call options. The Fund's
portfolio of U.S. government securities will consist principally of mortgage-
backed securities issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC"). The Fund may seek to
hedge against changes in the value of its portfolio securities by purchasing
options on securities and by purchasing and selling interest rate futures con-
tracts and related options. See "Investment Objective and Management Poli-
cies."
   
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rates of
expenses to which they are subject. A fourth Class of shares, Class Y shares,
is offered only to investors meeting an initial investment minimum of
$15,000,000. See "Purchase of Shares" and "Redemption of Shares."     
 
  Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of
$500,000 or more, will be made at net asset value with no initial sales
charge, but will be subject to a contingent deferred sales charge ("CDSC") of
1.00% on redemptions made within 12 months of purchase. See "Prospectus Summa-
ry--Reduced or No Initial Sales Charge."
 
  Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first
year after purchase and 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual serv-
ice fee of 0.25% and an annual distribution fee of 0.50% of the average daily
net assets of the Class. The Class B shares' distribution fee may cause that
Class to have higher expenses and pay lower dividends than Class A shares.
 
                                                                              3
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
  Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
 
  Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of 0.25% and an annual distribution fee of 0.45% of the average
daily net assets of the Class, and investors pay a CDSC of 1.00% if they
redeem Class L shares within 12 months of purchase. The CDSC may be waived for
certain redemptions. The Class L shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares. Purchases
of the Fund's shares, which when combined with current holdings of Class L
shares of the Fund equal or exceed $500,000 in the aggregate, should be made
in Class A shares at net asset value with no sales charge, and will be subject
to a CDSC of 1.00% on redemptions made within 12 months of purchase.
 
  Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net
asset value with no initial sales charge or CDSC. They are not subject to any
service or distribution fees.
 
  In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
   
  Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Fund. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of this Class. Because the Fund's future return cannot
be predicted, however, there can be no assurance that this would be the case.
Class L shares which have a lower upfront sales charge but are subject to
higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a sub-
stantial sales charge discount and who have a short-term or undetermined time
frame.     
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
  Finally, investors should consider the effect of the CDSC period and any con-
version rights of the Classes in the context of their own investment time
frame. For example, while Class L shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature, and therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class L shares to investors with longer term investment outlooks.
 
  Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share pur-
chases of $500,000 or more, will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the pur-
chase to the net asset value of all Class A shares offered with a sales charge
held in funds sponsored by Salomon Smith Barney Inc. ("Salomon Smith Barney")
listed under "Exchange Privilege." Class A share purchases may also be eligible
for a reduced initial sales charge. See "Purchase of Shares." Because the ongo-
ing expenses of Class A shares may be lower than those for Class B and Class L
shares, purchasers eligible to purchase Class A shares at net asset value or at
a reduced sales charge should consider doing so.
 
  Salomon Smith Barney Financial Consultants may receive different compensation
for selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class L shares is the same as that of
the initial sales charge on the Class A shares.
 
  See "Purchase of Shares" and "Management of the Fund" for a complete descrip-
tion of the sales charges and service and distribution fees for each Class of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and "Ex-
change Privilege" for other differences between the Classes of shares.
 
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant directed, tax-qualified employee benefit
plans. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class L shares are available without a
sales charge as investment alternatives under both of these Programs. See "Pur-
chase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
   
DISTRIBUTOR The Fund has entered into an agreement with CFBDS, Inc. ("CFBDS")
to distribute the Fund's shares.     
 
                                                                               5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
PURCHASE OF SHARES Investors may purchase shares from a Salomon Smith Barney
Financial Consultant, an investment dealer in the selling group or a broker
that clears securities through Salomon Smith Barney. (An investment dealer in
the selling group and a broker that clears securities through Salomon Smith
Barney are collectively referred to as "Dealer Representatives.") In addition,
certain investors, including qualified retirement plans and investors purchas-
ing through certain Dealer Representatives, may purchase shares directly from
the Fund through the Fund's transfer agent, First Data Investor Services Group,
Inc. (the "Transfer Agent"). See "Purchase of Shares."     
 
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed
Retirement Plan. Investors in Class Y shares may open an account for an initial
investment of $15,000,000. Subsequent investments of at least $50 may be made
for all Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B, and Class L shares and the subsequent invest-
ment requirement for all Classes is $25. For minimum investment requirements
for all Classes through the Systematic Investment Plan, see below. See "Pur-
chase of Shares."
 
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial investment require-
ment for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes for shareholders purchasing shares through the Sys-
tematic Investment Plan on a monthly basis is $25 and on a quarterly basis is
$50. See "Purchase of Shares."
 
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
   
MANAGEMENT OF THE FUND Mutual Management Corp. ("MMC" or the "Advisor") (for-
merly known as Smith Barney Mutual Funds Management Inc.) serves as the Fund's
investment adviser and administrator. MMC is a wholly owned subsidiary of Salo-
mon Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsid-
iary of Citigroup Inc. ("Citigroup"). Citigroup businesses produce a broad
range of financial services -- asset management, banking and consumer finance,
credit and charge cards, insurance, investments, investment banking and trading
-- and use diverse channels to make them available to consumer and corpo     -
 
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
   
rate customers around the world. Among these businesses are Citibank, Commer-
cial Credit, Primerica Financial Services, Salomon Smith Barney, SSBC Asset
Management, Travelers Life & Annuity, and Travelers Property Casualty. See
"Management of the Fund."     
 
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respec-
tive net asset values next determined. See "Exchange Privilege."
 
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Salomon Smith Barney Financial Consultants. See "Valuation of Shares."
 
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are generally
paid on the last Friday of each calendar month to shareholders of record as of
three business days prior thereto. Distributions of net realized capital
gains, if any, are paid at least annually. See "Dividends, Distributions and
Taxes."
   
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."     
 
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. Historically, the yields pro-
vided by mortgage-backed U.S. government securities have exceeded the yields
on other types of U.S. government securities of comparable maturity. Thus, the
Fund's yield may at times be higher than that of mutual funds investing solely
in other types of U.S. government securities. However, mortgage-backed U.S.
government securities may be less effective than other such securities as a
means of "locking in" attractive long-term interest rates due to the need to
reinvest prepayments of principal generally and the possibility of significant
unscheduled prepayments resulting from declines in mortgage interest rates. In
addition, the market values of the U.S. government securities held in the
Fund's portfolio--and, accordingly, the Fund's net asset value--generally will
vary inversely with changes in market interest rates, both declining when
interest rates rise and rising when interest rates decline. Mortgage-backed
U.S. government securities, however, may have less potential for capital
appreciation than other investments of comparable maturities due to the like-
lihood of increased prepayments of mortgages as interest rates decline, while
having comparable risk of decline in value during periods of rising rates. See
"Investment Objective and Management Policies."
 
                                                                              7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
THE FUND'S EXPENSES The following expense table lists the costs and expenses
that an investor will incur either directly or indirectly as a shareholder of
the Fund, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and the Fund's operating
expenses for its most recent fiscal year:
 
<TABLE>   
<CAPTION>
  MANAGED GOVERNMENTS FUND                   CLASS A  CLASS B CLASS L* CLASS Y
------------------------------------------------------------------------------
  <S>                                        <C>      <C>     <C>      <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Maximum sales charge imposed on
      purchases
      (as a percentage of offering price)     4.50%    None     1.00%   None
    Maximum CDSC (as a percentage of
      original cost or redemption proceeds,
      whichever is lower)                     None**   4.50%    1.00%   None
------------------------------------------------------------------------------
  ANNUAL FUND OPERATING EXPENSES
    (as a percentage of average net assets)
    Management Fees                           0.65%    0.65%    0.65%   0.65%
    12b-1 Fees***                             0.25     0.75     0.70    None
    Other Expenses                            0.13     0.16     0.14    0.04
------------------------------------------------------------------------------
  TOTAL FUND OPERATING EXPENSES               1.03%    1.56%    1.49%   0.69%
------------------------------------------------------------------------------
</TABLE>    
   
  * Class L shares were called Class C shares until June 12, 1998. For
    shareholders who owned Class C shares of the Fund as of June 12, 1998,
    Class L shares may be purchased without paying the 1% initial sales charge
    until June 22, 2001.     
 ** Purchases of Class A shares of $500,000 or more will be made at net asset
    value with no sales charge, but will be subject to a CDSC of 1.00% on
    redemptions made within 12 months of purchase.
*** Upon conversion of Class B shares to Class A shares, such shares will no
    longer be subject to a distribution fee. Class L shares do not have a
    conversion feature and, therefore, are subject to an ongoing distribution
    fee. As a result, long-term shareholders of Class L shares may pay more
    than the economic equivalent of the maximum front-end sales charge
    permitted by the National Association of Securities Dealers, Inc.
   
  Class A shares of the Fund purchased through the Smith Barney AssetOne Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Salomon Smith Barney Financial Consultant. The sales charge and CDSC
set forth in the above table are the maximum charges imposed on purchases or
redemptions of Fund shares and investors may actually pay lower or no charges
depending on the amount purchased and, in the case of Class L and certain Class
A shares, the length of time the shares are held and whether the shares are
held through the Smith Barney 401(k) and ExecChoice(TM) Programs. See "Purchase
of Shares" and "Redemption of Shares." Salomon Smith Barney receives an annual
12b-1 service fee of 0.25% of the value of average daily net assets of Class A
shares. Salomon Smith Barney also receives, with respect to Class B shares, an
annual 12b-1 fee of 0.75% of the value of the average daily net assets of that
Class, consisting of a 0.50% distribution fee and a 0.25% service fee. For
Class L shares, Salomon Smith Barney receives an annual 12b-1 fee of 0.70% of
the value of average daily net assets of this Class, consisting of a 0.45% dis-
tribution fee and a 0.25% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.     
 
8
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
  EXAMPLE The following example is intended to assist an investor in under-
standing the various costs that an investor in the Fund will bear directly or
indirectly. The example assumes payment by the Fund of operating expenses at
the levels set forth in the table above. See "Purchase of Shares," "Redemption
of Shares" and "Management of the Fund."
 
<TABLE>
<CAPTION>
  MANAGED GOVERNMENTS FUND                    1 YEAR 3 YEARS 5 YEARS 10 YEARS*
------------------------------------------------------------------------------
  <S>                                         <C>    <C>     <C>     <C>
  An investor would pay the following
  expenses on a $1,000 investment, assuming
  (1) 5.00% annual return and (2) redemption
  at the end of each time period:
    Class A..................................  $55     $76     $99     $165
    Class B..................................   61      79      95      171
    Class L..................................   35      57      91      186
    Class Y..................................    7      22      38       86
  An investor would pay the following
  expenses on the same investment, assuming
  the same annual return and no redemption:
    Class A..................................  $55     $76     $99     $165
    Class B..................................   16      49      85      171
    Class L..................................   25      57      91      186
    Class Y..................................    7      22      38       86
------------------------------------------------------------------------------
</TABLE>
 * Ten-year figures assume conversion of Class B shares to Class A shares at
   the end of the eighth year following the date of purchase.
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                               9
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
The following information for the four year period ended July 31, 1998 has
been audited by KPMG Peat Marwick LLP, independent accountants, whose report
thereon appears in the Fund's Annual Report dated July 31, 1998. The following
information for the fiscal years ended July 31, 1989 through July 31, 1994 has
been audited by other auditors. This information should be read in conjunction
with the financial statements and related notes that also appear in the Fund's
Annual Report, which is incorporated by reference into the Statement of Addi-
tional Information.     
 
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
MANAGED GOVERNMENTS FUND
 
<TABLE>   
<CAPTION>
CLASS A SHARES                 1998   1997(1)  1996(1)   1995    1994   1993(1)
-------------------------------------------------------------------------------
<S>                           <C>     <C>      <C>      <C>     <C>     <C>
NET ASSET VALUE, BEGINNING
OF YEAR                       $12.84   12.27   $12.63   $12.50  $13.29  $12.88
-------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income          0.75    0.80     0.81     0.81    0.75    0.69
 Net realized and unrealized
   gain (loss)                 (0.06)   0.59    (0.34)    0.10   (0.74)   0.61
-------------------------------------------------------------------------------
Total Income From Operations    0.69    1.39     0.47     0.91    0.01    1.30
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income         (0.80)  (0.82)   (0.82)   (0.74)  (0.61)  (0.66)
 Net realized gains              --      --       --       --      --    (0.23)
 Capital                         --      --     (0.01)   (0.04)  (0.19)    --
-------------------------------------------------------------------------------
Total Distributions            (0.80)  (0.82)   (0.83)   (0.78)  (0.80)  (0.89)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR  $12.73  $12.84   $12.27   $12.63  $12.50  $13.29
-------------------------------------------------------------------------------
TOTAL RETURN                    5.51%  11.80%    3.76%    7.67%   0.08%  10.43%
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS)                      $374    $415     $455     $529    $371    $463
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                       1.03%   1.01%    1.04%    1.07%   1.03%   0.99%
 Net investment income          5.78    6.43     6.46     6.57    5.60    5.35
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE          363%    121%     275%     292%    236%    436%
-------------------------------------------------------------------------------
</TABLE>    
(1) Per share amounts have been calculated using the monthly average shares
    method, rather than the undistributed net investment income method,
    because it more accurately reflects the per share data for the period.
 
10
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
 
 
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
MANAGED GOVERNMENTS FUND
 
<TABLE>   
<CAPTION>
CLASS A SHARES                            1992    1991    1990    1989
------------------------------------------------------------------------
<S>                                      <C>     <C>     <C>     <C>
NET ASSET VALUE, BEGINNING OF YEAR       $12.09  $12.13  $12.19  $12.04
------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income                     0.91    0.98    1.07    0.96
 Net realized and unrealized gain (loss)   0.87    0.07   (0.03)   0.26
------------------------------------------------------------------------
Total Income From Operations               1.78    1.05    1.04    1.22
------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                    (0.91)  (0.98)  (1.07)  (0.96)
 Capital                                  (0.08)  (0.11)  (0.03)  (0.11)
------------------------------------------------------------------------
Total Distributions                       (0.99)  (1.09)  (1.10)  (1.07)
------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR             $12.88  $12.09  $12.13  $12.19
------------------------------------------------------------------------
TOTAL RETURN                              15.25%   9.02%   9.01%  10.62%
------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS)         $489    $474    $512    $622
------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                  0.82%   0.82%   0.81%   0.81%
 Net investment income                     7.23    8.12    8.87    8.12
------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                     426%    365%    163%     51%
------------------------------------------------------------------------
</TABLE>    
 
 
                                                                              11
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
 
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
MANAGED GOVERNMENTS FUND
 
<TABLE>   
<CAPTION>
CLASS B SHARES            1998(1)  1997(1)  1996(1)   1995    1994    1993(2)
-------------------------------------------------------------------------------
<S>                       <C>      <C>      <C>      <C>     <C>      <C>
NET ASSET VALUE,
BEGINNING OF YEAR         $12.84   $12.27   $12.63   $12.50  $13.29   $12.64
-------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
 Net investment income      0.67     0.74     0.75     0.75    0.69     0.47
 Net realized and
   unrealized gain (loss)  (0.05)    0.59    (0.34)    0.09   (0.75)    0.75
-------------------------------------------------------------------------------
Total Income (Loss) From
Operations                  0.62     1.33     0.41     0.84   (0.06)    1.22
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income     (0.73)   (0.76)   (0.76)   (0.67)  (0.56)   (0.41)
 Net realized gains          --       --       --       --      --     (0.16)
 Capital                     --       --     (0.01)   (0.04)  (0.17)     --
-------------------------------------------------------------------------------
Total Distributions        (0.73)   (0.76)   (0.77)   (0.71)  (0.73)   (0.57)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR                      $12.73   $12.84   $12.27   $12.63  $12.50   $13.29
-------------------------------------------------------------------------------
TOTAL RETURN                4.99%   11.23%    3.24%    7.04%  (0.46)%   9.92%++
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS)                   $74      $97     $111     $133    $389     $474
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                   1.56%    1.53%    1.56%    1.57%   1.55%    1.62%+
 Net investment income      5.27%    5.91     5.94     6.07    5.08     4.72+
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE      363%     121%     275%     292%    236%     436%
-------------------------------------------------------------------------------
</TABLE>    
(1) Per share amounts have been calculated using the monthly average shares
    method, rather than the undistributed net investment income method,
    because it more accurately reflects the per share data for the period.
(2) For the period from November 6, 1992 (inception date) to July 31, 1993.
++ Total return is not annualized, as it may not be representative of the
   total return for the year.
+  Annualized.
 
12
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
 
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
MANAGED GOVERNMENTS FUND
 
<TABLE>
<CAPTION>
CLASS L SHARES(1)         1998(2)  1997(2)  1996(2)   1995    1994    1993(3)
-------------------------------------------------------------------------------
<S>                       <C>      <C>      <C>      <C>     <C>      <C>
NET ASSET VALUE,
BEGINNING OF YEAR         $12.84   $12.27   $12.63   $12.50  $13.29   $13.18
-------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
 Net investment income      0.67     0.74     0.75     0.76    0.69     0.07
 Net realized and
 unrealized gain (loss)    (0.04)    0.59    (0.34)    0.08   (0.75)    0.09
-------------------------------------------------------------------------------
Total Income (Loss) From
Operations                  0.63     1.33     0.41     0.84   (0.06)    0.16
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income     (0.74)   (0.76)   (0.76)   (0.67)  (0.56)   (0.03)
 Net realized gains          --       --       --       --      --     (0.02)
 Capital                     --       --     (0.01)   (0.04)  (0.17)     --
-------------------------------------------------------------------------------
Total Distributions        (0.74)   (0.76)   (0.77)   (0.71)  (0.73)   (0.05)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR                      $12.73   $12.84   $12.27   $12.63  $12.50   $13.29
-------------------------------------------------------------------------------
TOTAL RETURN                5.07%   11.26%    3.25%    7.04%  (0.46)%   1.25%++
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S)                    $2,811   $1,866   $1,238     $299     $72      $12
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses                   1.49%    1.46%    1.49%    1.52%   1.58%    1.55%+
 Net investment income      5.28     6.01     5.99     6.12    5.05     4.80+
-------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE      363%     121%     275%     292%    236%     436%
-------------------------------------------------------------------------------
</TABLE>
(1) Class L shares were called Class C shares until June 12, 1998.
(2) Per share amounts have been calculated using the monthly average shares
    method, rather than the undistributed net investment income method, because
    it more accurately reflects the per share data for the period.
(3) For the period from June 29, 1993 (inception date) to July 31, 1993.
 ++Total return is not annualized, as it may not be representative of the total
   return for the year.
 + Annualized.
 
                                                                              13
<PAGE>
 
FINANCIAL HIGHLIGHTS (CONTINUED)
 
 
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
 
MANAGED GOVERNMENTS FUND
 
<TABLE>   
<CAPTION>
CLASS Y SHARES                              1998   1997(/1/)  1996(/1/)(/2/)
----------------------------------------------------------------------------
<S>                                        <C>     <C>        <C>
NET ASSET VALUE, BEGINNING OF YEAR         $12.84   $12.27        $12.86
----------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
 Net investment income                       0.80     0.84          0.35
 Net realized and unrealized gain (loss)    (0.06)    0.59         (0.49)
----------------------------------------------------------------------------
Total Income (Loss) From Operations          0.74     1.43         (0.14)
----------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income                      (0.84)   (0.86)        (0.44)
 Capital                                      --       --          (0.01)
----------------------------------------------------------------------------
Total Distributions                         (0.84)   (0.86)        (0.45)
----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR               $12.74   $12.84        $12.27
----------------------------------------------------------------------------
TOTAL RETURN                                 5.94%   12.16%        (1.10)%++
----------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS)         $   91   $   85        $   27
----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses                                    0.69%    0.69%*        0.78%+
 Net investment income                       6.10     6.82          6.62+
----------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE                       363%     121%          275%
----------------------------------------------------------------------------
</TABLE>    
(1) Per share amounts have been calculated using the monthly average shares
    method, rather than the undistributed net investment income method, because
    it more accurately reflects the per share data for the period.
(2) For the period from February 7, 1996 (inception date) to July 31, 1996.
 ++Total return is not annualized, as it may not be representative of the total
   return for the year.
 + Annualized.
 * Amount has been restated from the July 31, 1997 Annual Report.
 
14
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
  The investment objective of the Fund is to provide investors with high cur-
rent income consistent with liquidity and safety of capital. This objective may
not be changed without the approval of the holders of a majority of the Fund's
shares. There can be no assurance that the Fund will achieve its investment
objective.
   
  The Fund invests substantially all of its assets in U.S. government securi-
ties and, under normal circumstances, the Fund is required to invest at least
65% of its assets in such securities. The Fund's portfolio of U.S. government
securities consists primarily of mortgage-backed securities issued or guaran-
teed by GNMA, FNMA and FHLMC. Assets not invested in such mortgage-backed secu-
rities are invested primarily in direct obligations of the United States Trea-
sury, such as Treasury Bills, Treasury Notes and Treasury Bonds ("U.S. Treasury
Securities"), and other U.S. government securities. Obligations issued by U.S.
government agencies and instrumentalities include: obligations that are sup-
ported by the full faith and credit of the United States, such as GNMA certifi-
cates and obligations of the General Services Administration and Federal Mari-
time Administration; securities that are supported by the right of the issuer
to borrow from the United States Treasury, such as securities of Federal Home
Loan Banks and others; and securities that are supported only by the credit of
the instrumentality, such as FNMA and FHLMC certificates. Because the United
States government is not obligated by law to provide support to an instrumen-
tality that it sponsors, the Fund invests in obligations issued by such an
instrumentality only when the Advisor determines that the credit risk with
respect to the instrumentality does not make its securities unsuitable for
investment by the Fund.     
 
  The GNMA certificates in which the Fund will invest will be of the "modified
pass-through" type, which means that the scheduled monthly interest and princi-
pal payments related to mortgages in the pool backing the certificates will be
"passed-through" to investors. Timely payment of principal and interest on GNMA
certificates is guaranteed by GNMA and backed by the full faith and credit of
the United States, but market value and yield are not guaranteed.
 
  Mortgage participation certificates issued by FHLMC and FNMA generally repre-
sent ownership interests in a pool of fixed-rate conventional mortgages. Timely
payment of principal and interest on these certificates is guaranteed solely by
the issuer of the certificates. FHLMC is a U.S. government-created entity con-
trolled by the Federal Home Loan Banks. FNMA is a government-chartered corpora-
tion owned entirely by private stockholders, which is subject to general regu-
lation by the Secretary of Housing and Urban Development.
 
  Mortgage-backed U.S. government securities differ from conventional bonds in
that principal is paid back to the certificate holder over the life of the loan
rather than at maturity. As a result, the Fund will receive monthly scheduled
payments of
 
                                                                              15
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
principal and interest. In addition, the Fund may receive unscheduled principal
payments representing prepayments on the underlying mortgages, which will cause
the maturity of and realized yield on specific GNMA, FNMA and FHLMC certifi-
cates to vary based on the prepayment experience of the underlying pool of
mortgages. The Fund will reinvest all payments and unscheduled prepayments of
principal in additional GNMA, FNMA and FHLMC certificates or other U.S. govern-
ment securities (which may have lower interest rates than the balance of the
obligations held by the Fund), and will distribute the interest to shareholders
in the form of monthly dividends.     
 
  To the extent that they are purchased at par or at a discount, GNMA certifi-
cates offer a high degree of safety of principal investment because of the GNMA
guarantee, and other mortgage-backed U.S. government securities also are
believed to offer significant safety of principal investment. If the Fund buys
mortgage-backed U.S. government securities at a premium, however, mortgage
foreclosures and prepayments of principal by mortgagors (which may be made at
any time without penalty) may result in some loss of the Fund's principal
investment to the extent of the premium paid.
   
  The composition and weighted average maturity of the Fund's portfolio will
vary from time to time, based upon the determination of the Fund's management
of how best to further the Fund's investment objective. The Fund may invest in
U.S. government securities of all maturities: short-term, intermediate-term and
long-term. The Fund may invest without limit in securities of any issuer of
U.S. government securities, and may invest up to an aggregate of 15% of its
total assets in securities with contractual or other restrictions on resale and
other instruments that are not readily marketable (such as repurchase agree-
ments with maturities in excess of seven days). The Fund may invest up to 5% of
its net assets in U.S. government securities for which the principal repayment
at maturity, while paid in U.S. dollars, is determined by reference to the
exchange rate between the U.S. dollar and the currency of one or more foreign
countries ("Exchange Rate-Related Securities"). The interest payable on these
securities is denominated in U.S. dollars and is not subject to foreign cur-
rency risk. The Fund also is authorized to borrow in an amount of up to 10% of
its total assets under unusual or emergency circumstances, including when nec-
essary to meet redemptions, and to pledge its assets to the same extent in con-
nection with such borrowings. When the Advisor believes that market conditions
warrant, the Fund may, for temporary defensive purposes and without limitation,
invest in short-term instruments including certificates of deposit of domestic
banks and repurchase agreements involving U.S. government securities. Repur-
chase agreements also may be used as one of the Fund's normal investment
techniques.     
 
16
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
 ADDITIONAL INVESTMENTS
  In attempting to achieve its investment objective, the Fund may employ, among
others, the following portfolio strategies:
 
  Writing Options. The Fund may from time to time write covered put and call
options on U.S. government securities in its portfolio. The Fund will realize a
fee (referred to as a "premium") when it writes an option. The Fund will only
write covered put and call options, which means that for so long as the Fund
remains obligated as the writer of the option it will, in the case of a call
option, continue to own the underlying security and, in the case of a put
option, maintain an amount of cash or high-grade liquid debt securities in a
segregated account equal to the exercise price of the option. A put option
embodies the right of its purchaser to compel the writer of the option to pur-
chase from the optionholder an underlying security at a specified price at any
time during the option period. In contrast, a call option embodies the right of
its purchaser to compel the writer of the option to sell the option holder an
underlying security at a specified price at any time during the option period.
Thus, the purchaser of a put option has the right to compel the Fund to pur-
chase from it the underlying security at the agreed-upon price for a specified
time period, while the purchaser of a call option has the right to purchase
from the Fund the underlying security owned by the Fund at the agreed-upon
price for a specified time period.
 
  Upon the exercise of a put option, the Fund may suffer a loss equal to the
difference between the price at which the Fund is required to purchase the
underlying security and its market value at the time of the option exercise,
less the premium received for writing the option. Upon the exercise of a call
option, the Fund may suffer a loss equal to the excess of the security's market
value at the time of the option exercise over the Fund's acquisition cost of
the security, less the premium received for writing the option. The Fund ordi-
narily will write only covered put and call options for which a secondary mar-
ket exists on a national securities exchange or in the over-the-counter market.
 
  In order to realize a profit, to prevent an underlying security from being
called or to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the option's expiration),
the Fund may engage in a closing purchase transaction. The Fund will incur a
loss if the cost of the closing purchase transaction, plus transaction costs,
exceeds the premium received upon writing the original option. To effect a
closing purchase transaction, the Fund would purchase, prior to the exercise of
an option that it has written, an option of the same series as that on which it
desires to terminate its obligation. There can be no assurance that the Fund
will be able to effect a closing purchase transaction at a time when it wishes
to do so. The obligation of the Fund to purchase or deliver
 
                                                                              17
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
securities, respectively, upon the exercise of a covered put or call option
which it has written terminates upon the effectuation of a closing purchase
transaction.
 
  Purchasing Options. By purchasing put options on U.S. government securities,
the Fund seeks to limit the risk of loss from a decline in the market value of
the underlying securities in its investment portfolio. For the purchase of a
put option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and transac-
tion costs, unless the put option is sold at a profit before expiration in a
closing sale transaction.
 
  By buying call options on U.S. government securities the Fund could acquire
the underlying securities at prices that avoid any additional costs resulting
from substantial increases in the market value of securities at any time during
the option period. At times, the net cost of acquiring securities in this man-
ner may be less than the cost of acquiring the securities directly.
 
  The Fund may (a) enter into closing transactions with respect to put and call
options that it purchases, (b) exercise the options or (c) permit the options
to expire. Profit or loss from a closing transaction will depend on whether the
amount that the Fund receives on the transaction is more or less than the pre-
mium paid for the option plus any related transaction costs.
 
  Repurchase Agreements. The Fund may engage in repurchase agreement transac-
tions on U.S. government securities with certain member banks of the Federal
Reserve System and with certain dealers on the Federal Reserve Bank of New
York's list of reporting dealers. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a rela-
tively short period (usually not more than one week) subject to an obligation
of the seller to repurchase, and the Fund to resell, the obligation at an
agreed-upon price and time, thereby determining the yield during the Fund's
holding period. Under each repurchase agreement the selling institution will be
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. MMC, acting under the super-
vision of the Fund's Board of Directors, reviews on an ongoing basis the value
of the collateral and the creditworthiness of those banks and dealers with
which the Fund may enter into repurchase agreements to evaluate potential
risks.
 
  Zero Coupon Securities. The Fund may invest in zero coupon bonds. A zero cou-
pon bond pays no interest in cash to its holder during its life, although
interest is accrued during that period. Its value to an investor consists of
the difference between its face value at the time of maturity and the price for
which it was acquired, which is generally at significantly less than its face
value (sometimes referred to as a "deep discount" price). Because such securi-
ties usually trade at a
 
18
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
deep discount, they will be subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable matu-
rities which make periodic distributions of interest. On the other hand,
because there are no periodic interest payments to be reinvested prior to
maturity, zero coupon securities eliminate reinvestment risk and lock in a
rate of return to maturity.
   
  Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements. A reverse repurchase agreement involves the sale of a money market
instrument by the Fund and its agreement to repurchase the instrument at a
specified time and price. The Fund will maintain a segregated account consist-
ing of U.S. government securities or cash or cash equivalents to cover its
obligations under reverse repurchase agreements with broker-dealers and other
financial institutions. The Fund will invest the proceeds in other money mar-
ket instruments or repurchase agreements maturing not later than the expira-
tion of the reverse repurchase agreement. Under the Investment Company Act of
1940, as amended, (the "1940 Act") reverse repurchase agreements may be con-
sidered borrowings by the seller.     
 
  Reverse repurchase agreements create opportunities for increased returns to
the shareholders of the Fund but, at the same time, create special risk con-
siderations. Although the principal or stated value of such borrowings will be
fixed, the Fund's assets may change in value during the time the borrowing is
outstanding. To the extent the income or other gain derived from securities
purchased with borrowed funds exceed the interest or dividends the Fund will
have to pay in respect thereof, the Fund's net income or other gain will be
greater than if this type of leverage had not been used. Conversely, if the
income or other gain from the incremental assets is not sufficient to cover
this cost, the net income or other gain of the Fund will be less than if the
reverse repurchase agreement had not been used.
 
 The Fund currently intends to invest not more than 33% of its net assets in
reverse repurchase agreements.
 
  When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or
sell securities on a when-issued or delayed-delivery basis. The Fund will
enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage. In such transactions delivery
of the securities occurs beyond the normal settlement periods, but no payment
or delivery is made by the Fund prior to the actual delivery or payment by the
other party to the transaction. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on those securities may be higher or lower than the yields available
in the market on the dates when the investments are actually delivered to the
buyers. The Fund will establish with its custodian a segregated account con-
sisting of cash or equity and debt securities of any grade provided
 
                                                                             19
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
such securities have been determined by MMC to be liquid and unencumbered pur-
suant to guidelines established by the Directors in an amount equal to the
amount of its when-issued and delayed-delivery commitments. Placing securities
rather than cash in the segregated account may have a leveraging effect on the
Fund's net assets.
   
  Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities that it holds to bro-
kers, dealers and other financial organizations. These loans, if and when
made, may not exceed 33 1/3% of the Fund's assets taken at value. The Fund's
loans of securities will be collateralized at all times in a segregated
account with the Fund's custodian in an amount at least equal to 100% of the
current market value of the loaned securities. The segregated account may con-
sist of cash, cash equivalents, U.S. government securities or debt securities
of any grade provided such assets are liquid, unencumbered and marked to mar-
ket daily. By lending its portfolio securities, the Fund will seek to generate
income by continuing to receive interest on the loaned securities, by invest-
ing the cash collateral in short-term instruments or by obtaining yield in the
form of interest paid by the borrower when debt securities are used as collat-
eral.     
 
  Forward Roll Transactions. In order to enhance current income, the Fund may
invest up to 30% of its assets in forward roll transactions with respect to
mortgage-backed securities issued by GNMA, FNMA and FHLMC. In a forward roll
transaction, the Fund sells a mortgage security to a financial institution,
such as a bank or broker-dealer, and simultaneously agrees to repurchase a
similar security from the institution at a later date at an agreed upon price.
The mortgage securities that are repurchased will bear the same interest rate
as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories than those sold. During the
period between the sale and repurchase, the Fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of
the sale will be invested in short-term instruments, particularly repurchase
agreements, and the income from these investments, together with any addi-
tional fee income received on the sale will generate income for the Fund
exceeding the yield on the securities sold. Forward roll transactions involve
the risk that the market value of the securities sold by the Fund may decline
below the repurchase price of those securities. At the time that the Fund
enters into a forward roll transaction, it will place in a segregated custo-
dial account cash and liquid debt securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor
the account to insure that such equivalent value is maintained. Forward roll
transactions are considered to be borrowings by the Fund.
 
  Interest Rate Futures Contracts and Options on Futures. The Fund will enter
into interest rate futures contracts solely for the purpose of hedging against
changes in the value of its portfolio securities due to anticipated changes in
interest rates
 
20
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
and market conditions and not for purposes of speculation. An interest rate
futures contract provides for the future sale by one party and the purchase by
the other party of a certain amount of a specified financial instrument (debt
security) at a specified price, date, time and place. The Fund may enter into
futures contracts and options on futures contracts (a) without limit for bona
fide hedging purposes and (b) for other purposes, provided the aggregate ini-
tial margin deposits and premiums do not exceed 5% of the fair market value of
the Fund's assets after taking into account unrealized profits and unrealized
losses on futures contracts into which it has entered. With respect to each
long position in a futures contract or option thereon, the underlying commodity
value of such contract always will be covered by cash and cash equivalents
equal to the market value of the underlying commodity set aside in a segregated
account with the Fund's custodian.
 
  The Fund may purchase put options on interest rate futures contracts to hedge
its portfolio securities against the risk of rising interest rates, and may
purchase call options on interest rate futures contracts when it believes that
interest rates will decline, in anticipation of purchases of portfolio securi-
ties at a higher price, but may not enter into these transactions for purposes
of speculation. The Fund will write put or call options on interest rate
futures contracts as part of closing purchase transactions to terminate its
option positions, although there is no guarantee that such closing transactions
can be effected. The Fund may write put and call options on interest rate
futures contracts other than as a part of closing sale transactions, in order
to increase its ability to hedge against the effect of changes in interest
rates. The Fund will write put and call options only on interest rate futures
contracts which are traded on a domestic exchange or board of trade. A call
option gives the purchaser of such option the right to buy (assume a long posi-
tion) and obliges the Fund as its writer to sell, a specified underlying
futures contract at a stated exercise price at any time prior to the expiration
date of the option. A purchaser of a put option has the right to sell (assume a
short position), and obliges the Fund as the writer to buy, such contract at
the exercise price during the option period.
 
 CERTAIN RISK CONSIDERATIONS
 
  Historically, the yields provided by mortgage-backed U.S. government securi-
ties have exceeded the yields on other types of U.S. government securities of
comparable maturity. Thus, the Fund's yield may at times be higher than that of
mutual funds investing solely in other types of U.S. government-securities.
However, mortgage-backed U.S. government securities may be less effective than
other U.S. government securities as a means of "locking in" attractive long-
term interest rates due to the need to reinvest prepayments of principal gener-
ally and the possibility of significant unscheduled prepayments resulting from
declines in mortgage interest rates. In addition, the market values of the U.S.
government securities held in the
 
                                                                              21
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
Fund's portfolio--and, accordingly, the Fund's net asset value--generally will
vary inversely with changes in market interest rates, both declining when
interest rates rise and rising when interest rates decline. Mortgage-backed
U.S. government securities, however, may have less potential for capital
appreciation than other investments of comparable maturities due to the like-
lihood of increased prepayments of mortgages as interest rates decline, while
having comparable risk of decline in value during periods of rising rates.
 
  The purchase of securities on a when-issued or delayed-delivery basis
involves the risk that, as a result of an increase in yields available in the
marketplace, the value of the securities purchased will decline prior to the
settlement date. The sale of securities for delayed delivery involves the risk
that the prices available in the market on the delivery date may be greater
than those obtained in the sale transaction.
 
  Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities, the risk of a pos-
sible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement.
 
  The risks associated with lending portfolio securities, as with other exten-
sions of credit, consist of possible loss of rights in the collateral should
the borrower fail financially. Forward roll transactions involve the risk that
the market value of the securities sold by the Fund may decline below the
repurchase price of the securities. Forward roll transactions are considered
borrowings by the Fund. Although investing the proceeds of these borrowings in
repurchase agreements or money market instruments may provide the Fund with
the opportunity for higher income, this leveraging practice will increase the
Fund's exposure to capital risk and higher current expenses. Any income earned
from the securities purchased with the proceeds of these borrowings that
exceeds the cost of the borrowings would cause the Fund's net asset value per
share to increase faster than would otherwise be the case; any decline in the
value of the securities purchased would cause the Fund's net asset value per
share to decrease faster than would otherwise be the case.
 
  There are several risks in connection with the use of futures contracts and
options on futures contracts as a hedging device. A decision of whether, when
and how to hedge involves the exercise of skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of market behavior
or unexpected trends in interest rates. There can be no assurance that there
will be a correlation between price movements in the securities underlying the
interest rate futures or options thereon, on the one hand, and price movements
in the Fund's portfolio securities which are the subject of the hedge, on the
other hand. In addition, the Fund's transactions in futures contracts or put
or call options on them will
 
22
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
be based upon predictions as to anticipated interest rate trends, which could
prove to be inaccurate. The potential loss related to the purchase of an option
on an interest rate futures contract is limited to the premium paid for the
option. Positions in futures contracts and options on futures contracts may be
closed out only on the exchange or board of trade on which they were entered
into, and there can be no assurance that an active market will exist or be
maintained or that closing transactions can be effected. Losses incurred in
hedging transactions and the costs of these transactions will affect the Fund's
performance.
 
  Year 2000--The investment management services provided to the Fund by the
Adviser and the services provided to shareholders by Salomon Smith Barney
depend on the smooth functioning of their computer systems. Many computer soft-
ware systems in use today cannot recognize the year 2000, but revert to 1900 or
some other date, due to the manner in which dates were encoded and calculated.
That failure could have a negative impact on the Fund's operations, including
the handling of securities trades, pricing and account services. The Adviser
andSalomon Smith Barney have advised the Fund that they have been reviewing all
of their computer systems and actively working on necessary changes to their
systems to prepare for the year 2000 and expect that their systems will be com-
pliant before that date. In addition, the Adviser has been advised by the
Fund's custodian, transfer agent and accounting service agent that they are
also in the process of modifying their systems with the same goal. There can,
however, be no assurance that the Adviser, Salomon Smith Barney or any other
service provider will be successful, or that interaction with other non-comply-
ing computer systems will not impair Fund services at that time.
 
  In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
 
 PORTFOLIO TURNOVER
 
  Under certain market conditions the Fund may experience high portfolio
turnover as a result of investment strategies. For example, the exercise of a
substantial number of options written by the Fund and the purchase or sale of
securities in anticipation of a rise or decline in interest rates could result
in high portfolio turnover. Short-term gains realized from portfolio transac-
tions are taxable to shareholders as ordinary income. The Fund will not con-
sider portfolio turnover rate a limiting factor in making investment decisions
consistent with its objective and policies.
 
                                                                              23
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  Further information about the Fund's investment policies, including a list
of those restrictions on its investment activities that cannot be changed
without shareholder approval, appears in the Statement of Additional Informa-
tion.
 
VALUATION OF SHARES
 
 
  The Fund's net asset value per share is determined as of the close of regu-
lar trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number
of shares of the Class outstanding.
          
  When, in the judgment of the pricing service, quoted bid prices for invest-
ments are readily available and are representative of the bid side of the mar-
ket, these investments are valued at the mean between the quoted bid and asked
prices. Investments for which, in the judgment of the pricing service, there
is no readily obtainable market quotation (which may constitute a majority of
the portfolio securities) are carried at fair value of securities of similar
type, yield and maturity. Pricing services generally determine value by refer-
ence to transactions in municipal obligations, quotations from municipal bond
dealers, market transactions in comparable securities and various relation-
ships between securities. Short-term investments that mature in 60 days or
less are valued at amortized cost whenever the Board of Directors determines
that amortized cost is fair value. Amortized cost valuation involves valuing
an instrument at its cost initially and, thereafter, assuming a constant amor-
tization to maturity of any discount or premium, regardless of the impact of
the fluctuating interest rates on the market value of the instrument. Securi-
ties and other assets that are not priced by a pricing service and for which
quotations are not available will be valued in good faith at fair value by or
under the direction of the fund's Board of Directors. Further information
regarding the Fund's valuation policies is contained in the SAI.     
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
          
 DIVIDENDS AND DISTRIBUTIONS     
   
  The Fund's policy is to declare and pay monthly dividends from its net
investment income. Dividends from net realized capital gains, if any, will be
distributed annually. The Fund may also pay additional dividends shortly
before December 31 from certain amounts of undistributed ordinary income and
capital gains realized, in order to avoid a Federal excise tax liability. If a
shareholder does not otherwise instruct, dividends and capital gain distribu-
tions will be automatically reinvested in additional same Class shares at the
appropriate net asset value, with no additional sales charge or CDSC.     
 
 
24
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
   
  The per share amounts of dividends form net investment income on Classes B
and L may be lower than that of Classes A and Y, mainly as a result of the dis-
tribution fees applicable to Class B and L shares. Similarly, the per share
amounts of dividends from net investment income on Class A shares may be lower
than that of Class Y, as a result of the service fee attributable to Class A
shares. Capital gain distributions, if any, will be the same amount across all
Classes of Fund shares (A, B, L and Y).     
 
 TAXES
   
  The following is a summary of the material federal tax considerations
affecting the Fund and Fund shareholders. Please refer to the SAI for further
discussion. In addition to the considerations described below and in the SAI,
there may be other federal, state, local, and/or foreign tax applications to
consider. Because taxes are a complex matter, prospective shareholders are
urged to consult their tax advisors for more detailed information with respect
to the tax consequences of any investment.     
   
  The Fund intends to qualify, as it has in prior years, under Subchapter M of
the Internal Revenue Code (the "Code") for tax treatment as a regulated invest-
ment company. In each taxable year that the Fund qualifies, so long as such
qualification is in the best interests of its shareholders, the Fund will pay
no federal income tax on its net investment company taxable income and long-
term capital gain that is distributed to shareholders.     
   
  Dividends paid from net investment income and net realized short-term
securities gain, are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains, derived
from the sale of securities held by the Fund for more than one year, are
taxable as long-term capital gains, regardless of the length of time a
shareholder has owned Fund shares.     
   
  Shareholders are required to pay tax on all taxable distributions, even if
those distributions are automatically reinvested in additional Fund shares. A
portion of the dividends paid by the Fund may qualify for the corporate
dividends received deduction. Dividends consisting of interest from U.S.
government securities may be exempt from state and local income taxes. The Fund
will inform shareholders of the source and tax status of all distributions
promptly after the close of each calendar year.     
   
  A shareholder's gain or loss on the disposition of Fund shares (whether by
redemption, sale or exchange), generally will be a long-term or short-term gain
or loss depending on the length of time the shares had been owned at disposi-
tion. Losses realized by a shareholder on the disposition of Fund shares owned
for six     
 
                                                                              25
<PAGE>
 
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
   
months or less will be treated as a long-term capital loss to the extent a
capital gain dividend had been distributed on such shares.     
   
  The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for share-
holders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for share-
holders who otherwise are subject to backup withholding. Any tax withheld as a
result of backup withholding does not constitute an additional tax, and may be
claimed as a credit on the shareholders' federal income tax return.     
 
PURCHASE OF SHARES
       
 SALES CHARGE ALTERNATIVES
 
  The following Classes of shares are available for purchase through this
Prospectus. See "Prospectus Summary--Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.
 
  Class A Shares. Class A shares are sold to investors at the public offering
price, which is the net asset value plus an initial sales charges as follows:
 
 
<TABLE>
<CAPTION>
                                   SALES CHARGE    DEALERS'
                      SALES CHARGE  AS A % OF   REALLOWANCE AS
      AMOUNT OF        AS A % OF      AMOUNT         % OF
      INVESTMENT      TRANSACTION    INVESTED   OFFERING PRICE
--------------------------------------------------------------
  <S>                 <C>          <C>          <C>
  Less than $25,000       4.50%        4.71%         4.00%
  $ 25,000 - 49,999       4.00         4.17          3.60
    50,000 - 99,999       3.50         3.63          3.15
   100,000 - 249,999      2.50         2.56          2.25
   250,000 - 499,999      1.50         1.52          1.35
   500,000 and over        *            *             *
--------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
  value without any initial sales charge, but will be subject to a CDSC of
  1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
  shares is payable to Salomon Smith Barney, which compensates Salomon Smith
  Barney Financial Consultants and other dealers whose clients make purchases
  of $500,000 or more. The CDSC is waived in the same circumstances in which
  the CDSC applicable to Class B and Class L shares is waived. See "Deferred
  Sales Charge Provisions" and "Waivers of CDSC."
 
  Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended (the "1933 Act"). The reduced sales charges shown above
apply to the aggregate of purchases of Class A shares of the Fund made at one
time by
 
26
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
"any person," which includes an individual and his or her immediate family, or
a trustee or other fiduciary of a single trust estate or single fiduciary
account.
 
  Class B Shares. Class B shares are sold without an initial sales charge but
are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.
   
  Class L Shares. Class L shares are sold with an initial sales charge of 1.00%
(which is equal to 1.01% of the amount invested) and are subject to a CDSC pay-
able upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 22, 2001 purchases of Class L shares by investors who were holders
of Class C shares of the Fund on June 12, 1998 will not be subject to the 1.00%
initial sales charge.     
   
  Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchases of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).     
 
 GENERAL
   
  Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a Dealer Representative. In addition, certain investors,
including qualified retirement plans purchasing through certain Dealer
Representatives, may purchase shares directly from the Fund. When purchasing
shares of the Fund, investors must specify whether the purchase is for Class A,
Class B, Class L or Class Y shares. Salomon Smith Barney and Dealer
Representative may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or
holds shares. Accounts held directly at the Transfer Agent are not subject to a
maintenance fee.     
   
  Investors in Class A, Class B and Class L shares may open an account in the
Fund by making an initial investment of at least $1,000 for each account, or
$250 for an IRA or a Self-Employed Retirement Plan. Investors in Class Y shares
may open an account by making an initial investment of $15,000,000. Subsequent
investments of at least $50 may be made for all Classes. For participants in
retirement plans qualified under Section 403(b)(7) or Section 401(c) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
L shares and the subsequent investment requirement for all Classes in the Fund
is $25. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class L shares and subsequent investment requirement
for all Classes is $25. For shareholders purchasing shares of the Fund through
the Systematic Investment Plan on a quarterly basis, the minimum initial
investment required for Class A, Class B and Class L shares and the subsequent
investment requirement for all Classes is $50. There are no minimum investment
requirements     
 
                                                                              27
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
for Class A shares for employees of Citigroup and its subsidiaries, including
Salomon Smith Barney, and Directors/Trustees of any of the Smith Barney Mutual
Funds and their spouses and children. The Fund reserves the right to waive or
change minimums, to decline any order to purchase its shares and to suspend the
offering of shares from time to time. Shares purchased will be held in the
shareholder's account by the Transfer Agent. Share certificates are issued only
upon a shareholder's written request to the Transfer Agent.     
   
  Purchase orders received by the Fund or a Salomon Smith Barney Financial
Consultant prior to the close of regular trading on the NYSE, on any day the
Fund calculates its net asset value, are priced according to the net asset
value determined on that day (the "trade date"). Orders received by a Dealer
Representative prior to the close of regular trading on the NYSE on any day the
Fund calculates its net asset value, are priced according to the net asset
value determined on that day, provided the order is received by the Fund or the
Fund's agent prior to its     
   
close of business. For shares purchased through Salomon Smith Barney or a
Dealer Representative purchasing through Salomon Smith Barney, payment for Fund
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.     
 
 SYSTEMATIC INVESTMENT PLAN
 
  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Salomon Smith Barney or the Transfer Agent is
authorized through preauthorized transfers of at least $25 on a monthly basis
or at least $50 on a quarterly basis to charge the shareholder's account held
with a bank or other financial institution on a monthly or quarterly basis as
indicated by the shareholder to provide for systematic additions to the
shareholder's Fund account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Salomon Smith
Barney or the Transfer Agent. The Systematic Investment Plan also authorizes
Salomon Smith Barney to apply cash held in the shareholder's Salomon Smith
Barney brokerage account or redeem the shareholder's shares of a Salomon Smith
Barney money market fund to make additions to the account. Additional
information is available from the Fund or a Salomon Smith Barney Financial
Consultant.
 
 SALES CHARGE WAIVERS AND REDUCTIONS
 
 INITIAL SALES CHARGE WAIVERS
 
  Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
 
28
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
employees of Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-
sharing or other benefit plan for such persons and (ii) employees of members of
the National Association of Securities Dealers, Inc., provided such sales are
made upon the assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be resold except through
redemption or repurchase, (b) offers of Class A shares to any other investment
company to effect the combination of such company with the Fund by merger,
acquisition of assets or otherwise; (c) purchases of Class A shares by any
client of a newly employed Salomon Smith Barney Financial Consultant (for a
period up to 90 days from the commencement of the Financial Consultant's
employment with Salomon Smith Barney), on the condition the purchase of Class A
shares is made with the proceeds of the redemption of shares of a mutual fund
which (i) was sponsored by the Financial Consultant's prior employer, (ii) was
sold to the client by the Financial Consultant and (iii) was subject to a sales
charge; (d) purchases by shareholders who have redeemed Class A shares in the
Fund (or Class A shares of another Smith Barney Mutual Fund that is offered
with a sales charge) and who wish to reinvest their redemption proceeds in the
Fund, provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered investment advisory
subsidiaries of Citigroup; (f) direct rollovers by plan participants of
distributions from a 401(k) plans enrolled in the Smith Barney 401(k) Program
(Note: subsequent investment will be subject to the applicable sales charge);
(g) purchases by separate accounts used to fund certain unregistered variable
annuity contracts; and (h) purchases by investors participating in a Salomon
Smith Barney fee-based arrangements. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.     
 
 RIGHT OF ACCUMULATION
 
  Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by
aggregating the
   
dollar amount of the new purchase and the total net asset value of all Class A
shares of the Fund and of other Smith Barney Mutual Funds that are offered with
a sales charge as currently listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
    
       
                                                                              29
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
 LETTER OF INTENT
 
  Class A Shares. A Letter of Intent for an amount of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes (i) all
Class A shares of the Fund and other Smith Barney Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value of all
Class A shares previously purchased and still owned. Each investment made
during the period receives the reduced sales charge applicable to the total
amount of the investment goal. If the goal is not achieved within the period,
the investor must pay the difference between the sales charges applicable to
the purchases made and the charges previously paid, or an appropriate number of
escrowed shares will be redeemed. The term of the Letter will commence upon the
date the Letter is signed, or at the option of the investor, up to 90 days
before such date. Please contact a Salomon Smith Barney Financial Consultant or
the Transfer Agent to obtain a Letter of Intent application.
   
  Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares (except purchases of
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Fund and agree to purchase a
total of $15,000,000 of Class Y shares of the Fund within 13 months from the
date of the Letter. If a total investment of $15,000,000 is not made within the
13 month period, all Class Y shares purchased to date will be transferred to
Class A shares, where they will be subject to all fees (including a service fee
of 0.25%) and expenses applicable to the Fund's Class A shares, which may
include a CDSC of 1.00%. Please contact a Salomon Smith Barney Financial
Consultant or the Transfer Agent for further information.     
 
 DEFERRED SALES CHARGE PROVISIONS
 
  "CDSC Shares" are: (a) Class B shares; (b) Class L shares; and (c) Class A
shares that were purchased without an initial sales charge but are subject to a
CDSC. A CDSC may be imposed on certain redemptions of these shares.
 
  Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class L shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
 
30
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
  Class L shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Salomon Smith Barney statement month. The following table sets forth the rates
of the charge for redemptions of Class B shares by shareholders, except in the
case of Class B shares held under the Smith Barney 401(k) Program, as described
below. See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM)
Programs."     
 
<TABLE>
<CAPTION>
      YEAR SINCE PURCHASE
      PAYMENT WAS MADE      CDSC
---------------------------------
      <S>                   <C>
      First                 4.50%
      Second                4.00
      Third                 3.00
      Fourth                2.00
      Fifth                 1.00
      Sixth and thereafter  0.00
---------------------------------
</TABLE>
   
  Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary--Alternative Purchase
Arrangements--Class B Shares Conversion Feature."     
 
  The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gain distribution reinvestments in such other funds.
For Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any CDSC will be paid to Salomon Smith Barney.
 
  To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the
 
                                                                              31
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
 
 WAIVERS OF CDSC
 
  The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of
the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) redemptions of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 ; (e) involuntary redemptions; and (f)
redemptions of shares to effect a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a
shareholder who has redeemed shares from other Smith Barney Mutual Funds may,
under certain circumstances, reinvest all or part of the redemption proceeds
within 60 days and receive pro rata credit for any CDSC imposed on the prior
redemption.
 
  CDSC waivers will be granted subject to confirmation (by Salomon Smith Barney
in the case of shareholders who are also Salomon Smith Barney clients or by the
Transfer Agent in the case of all other shareholders) of the shareholder's
status or holdings, as the case may be.
 
 SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
 
  Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans
participating ("Participating Plans") in these programs.
 
  The Fund offers to Participating Plans Class A and Class L shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
Class A and Class L shares acquired through the Participating Plans are subject
to the same service and/or distribution fees as the Class A and Class L shares
acquired by other
 
32
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
investors; however, they are not subject to any initial sales charge or CDSC.
Once a Participating Plan has made an initial investment in the Fund, all of
its subsequent investments in the Fund must be in the same Class of shares,
except as otherwise described below.
 
  Class A Shares. Class A shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
 
  Class L Shares. Class L shares of the Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000 of
Class L shares of one or more funds of the Smith Barney Mutual Funds.
   
  401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. At the end
of the fifth year after the date a Participating Plan enrolled in the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, if its total
Class L holdings in all non-money market Smith Barney Mutual Funds equal to at
least $1,000,000, it will be offered the opportunity to exchange all of its
Class L shares for Class A shares of the Fund. (For Participating Plans that
were originally established through a Salomon Smith Barney retail brokerage
account, the five year period will be calculated from the date the retail bro-
kerage account was opened.) Such Participating Plans will be notified of the
pending exchange in writing within 30 days after the fifth anniversary of the
enrollment date and, unless the exchange offer has been rejected in writing,
the exchange will occur on or about the 90th day after the fifth anniversary
date. If the Participating Plan does not qualify for the five year exchange to
Class A shares, a review of the Plan's holdings will be performed each quarter
until either the Plan qualifies or the end of the eighth year.     
 
  401(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if its total Class
L holdings in all non-money market Smith Barney Mutual Funds equal at least
$500,000 as of the calendar year-end, the Participating Plan will be offered
the opportunity to exchange all of its Class L shares for Class A shares of the
Fund. Such Plans will be notified in writing within 30 days after the last
business day of the calendar year and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the last business day
of the following March.
 
  Any Participating Plan in the Smith Barney 401(k) Program whether opened
before or after June 21, 1996, that has not previously qualified for an
exchange into Class A shares will be offered the opportunity to exchange all of
its Class L shares for Class A shares of the Fund regardless of asset size, at
the end of the eighth year after the date the Participating Plan enrolled in
the Smith Barney 401(k) Program. Such Plans will be notified of the pending
exchange in writing approximately 60
 
                                                                              33
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
days before the eighth anniversary of the enrollment date and, unless the
exchange has been rejected in writing, the exchange will occur on or about the
eighth anniversary date. Once an exchange has occurred, a Participating Plan
will not be eligible to acquire additional Class L shares of the Fund but
instead may acquire Class A shares of the Fund. Any Class L shares not con-
verted will continue to be subject to the distribution fee.
   
  Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from the Transfer Agent. For further information regarding
these Programs, investors should contact a Salomon Smith Barney Financial
Consultant.     
 
EXCHANGE PRIVILEGE
 
 
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, Class B and Class L shares are subject to min-
imum investment requirements and all shares are subject to the other require-
ments of the fund into which exchanges are made.
 
 FUND NAME
 
  Growth Funds
    Concert Peachtree Growth Fund
    Concert Social Awareness Fund
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Balanced Fund
    Smith Barney Contrarian Fund
    Smith Barney Convertible Fund
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Funds, Inc.--Large Cap Value Fund
    Smith Barney Large Cap Blend Fund
    Smith Barney Large Capitalization Growth Fund
    Smith Barney Mid Cap Blend Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Premium Total Return Fund
    Smith Barney Small Cap Blend Fund, Inc.
    Smith Barney Special Equities Fund
 
34
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
 
  Taxable Fixed-Income Fund
       
    *Smith Barney Adjustable Rate Government Income Fund     
    Smith Barney Diversified Strategic Income Fund
       
    +Smith Barney Funds, Inc.--Short-Term High Grade Bond Fund     
    Smith Barney Funds, Inc.--U.S. Government Securities Fund
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Total Return Bond Fund
 
  Tax-Exempt Funds
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
       
    **Smith Barney Intermediate Maturity California Municipals Fund     
       
    **Smith Barney Intermediate Maturity New York Municipals Fund     
    Smith Barney Managed Municipals Fund Inc.
    Smith Barney Massachusetts Municipals Funds
    Smith Barney Municipal High Income Fund
    Smith Barney Muni Funds--Florida Portfolio
    Smith Barney Muni Funds--Georgia Portfolio
       
    **Smith Barney Muni Funds--Limited Term Portfolio     
    Smith Barney Muni Funds--National Portfolio
    Smith Barney Muni Funds--New York Portfolio
    Smith Barney Muni Funds--Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund
    Smith Barney Tax-Exempt Income Fund
 
  Global-International Funds
    Smith Barney Hansberger Global Small Cap Value Fund
    Smith Barney Hansberger Global Value Fund
    Smith Barney World Funds, Inc.--Emerging Markets Portfolio
    Smith Barney World Funds, Inc.--European Portfolio
    Smith Barney World Funds, Inc.--Global Government Bond Portfolio
    Smith Barney World Funds, Inc.--International Balanced Portfolio
    Smith Barney World Funds, Inc.--International Equity Portfolio
    Smith Barney World Funds, Inc.--Pacific Portfolio
 
  Smith Barney Concert Allocation Series Inc.
    Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
    Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
    Smith Barney Concert Allocation Series Inc.--Global Portfolio
    Smith Barney Concert Allocation Series Inc.--Growth Portfolio
    Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
    Smith Barney Concert Allocation Series Inc.--Income Portfolio
 
                                                                              35
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
 
  Money Market Funds
       
    ++Smith Barney Exchange Reserve Fund     
       
    +++Smith Barney Money Funds, Inc.--Cash Portfolio     
       
    +++Smith Barney Money Funds, Inc.--Government Portfolio     
  ***Smith Barney Money Funds, Inc.--Retirement Portfolio
       
    +Smith Barney Municipal Money Market Fund, Inc.     
       
    +Smith Barney Muni Funds--California Money Market Portfolio     
       
    +Smith Barney Muni Funds--New York Money Market Portfolio     
-------------------------------------------------------------------------------
          
  * Available for exchange with Class A and Class B shares of the Fund. In
    addition, shareholders who own Class L shares of the Fund through the
    Smith Barney 401(k) Program may exchange those shares for Class L shares
    of this fund.     
   
 ** Available for exchange with Class A, Class L and Class Y shares of the
    Fund.     
*** Available for exchange with Class A shares of the Fund.
   
  + Available for exchange with Class A and Class Y shares of the Fund.     
   
 ++ Available for exchange with Class A and Class Y shares of the Fund. In
    addition, Participating Plans opened prior to June 21, 1996 and investing
    in Class L shares may exchange Fund shares for Class L shares of this
    fund.     
 
  Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Fund that have been exchanged.
 
  Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Fund that
have been exchanged.
 
  Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without impo-
sition of any charge.
   
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. The Advisor
may determine that a pattern of frequent exchanges is excessive and contrary
to the best interests of the Fund's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by a shareholder. Upon such a determination, the Fund will provide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege and during the 15 day period the shareholder
will be required to (a) redeem his or her shares in     
 
36
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
the Fund or (b) remain invested in the Fund or exchange into any of the funds
of the Smith Barney Mutual Funds ordinarily available, which position the
shareholder would be expected to maintain for a significant period of time.
All relevant factors will be considered in determining what constitutes an
abusive pattern of exchanges.
 
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will
be made upon receipt of all supporting documents in proper form. If the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged, no signature guarantee
is required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
 
REDEMPTION OF SHARES
 
 
  The Fund is required to redeem shares tendered to it, as described below, at
a redemption price equal to their net asset value per share next determined
after receipt of a written request in proper form at no charge other than any
applicable CDSC. Redemption requests received after the close of regular trad-
ing on the NYSE are priced at the net asset value next determined.
   
  If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Transfer Agent
receives further instructions from Salomon Smith Barney, or if the sharehold-
er's account is not with Salomon Smith Barney, from the shareholder directly.
The redemption proceeds will be remitted on or before the third business day
following receipt of proper tender, except on any days on which the NYSE is
closed or as permitted under the 1940 Act, in extraordinary circumstances.
Generally, if the redemption proceeds are remitted to a Salomon Smith Barney
brokerage account, these funds will not be invested for the shareholder's ben-
efit without specific instruction and Salomon Smith Barney will benefit from
the use of temporarily uninvested funds. Redemption proceeds for shares pur-
chased by check, other than a certified or official bank check, will be remit-
ted upon clearance of the check, which may take up to ten days or more.     
 
  Shares held by Salomon Smith Barney as custodian must be redeemed by submit-
ting a written request to a Salomon Smith Barney Financial Consultant. Shares
 
                                                                             37
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
   
other than those held by Salomon Smith Barney as custodian may be redeemed
through an investor's Financial Consultant, Dealer Representative or by sub-
mitting a written request for redemption to:     
 
  Smith Barney Managed Governments Funds Inc.
  Class A, B, L or Y (please specify)
  c/o First Data Investor Services Group, Inc.
  P.O. Box 5128
  Westborough, Massachusetts 01581-5128
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed
stock power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or writ-
ten redemption request in excess of $10,000 must be guaranteed by an eligible
guarantor institution such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal Reserve System or member
firm of a national securities exchange. Written redemption requests of $10,000
or less do not require a signature guarantee unless more than one such redemp-
tion request is made in any 10-day period or the redemption proceeds are to be
sent to an address other than the address of record. Unless otherwise direct-
ed, redemption proceeds will be mailed to an investor's address of record.
First Data may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees or guardians. A redemption
request will not be deemed properly received until First Data receives all
required documents in proper form.
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
   
  Shareholders who do not have a Salomon Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should con-
tact First Data at 1-800-451-2010. Once eligibility is confirmed, the share-
holder must complete and return a Telephone/Wire Authorization Form, including
a signature guarantee, which will be provided by First Data upon request.
 (Alternatively, an investor may authorize telephone redemptions on the new
 account application with a signature guarantee when making his/her initial
 investment in the Fund.)     
 
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day the NYSE is open. Redemption requests received after
 
38
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
the close of regular trading on the NYSE are priced at the net asset value
next determined. Redemptions of shares (i) by retirement plans or (ii) for
which certificates have been issued are not permitted under this program.
 
  A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal
fee for each wire redemption. Such charges, if any, will be assessed against
the shareholder's account from which shares were redeemed. In order to change
the bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee
and certain other documentation.
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00
p.m. (Eastern time) on any day the NYSE is open. Exchange requests received
after the close of regular trading on the NYSE are priced at the net asset
value next determined.
 
  Additional Information Regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven (7) days' prior notice to shareholders.
 
 AUTOMATIC CASH WITHDRAWAL PLAN
 
  The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on
exchanges between funds or Classes of the
 
                                                                             39
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
   
Fund. Any applicable CDSC will not be waived on amounts withdrawn by a share-
holder that exceed 1.00% per month of the value of the shareholder's shares
subject to the CDSC at the time the withdrawal plan commences. (With respect to
withdrawal plans in effect prior to November 7, 1994, any applicable CDSC will
be waived on amounts withdrawn that do not exceed 2.00% per month of the share-
holder's shares subject to the CDSC.) For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Salomon Smith
Barney Financial Consultant, Introducing Broker or dealer in the selling group.
    
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
 
PERFORMANCE
 
 
 YIELD
 
  From time to time, the Fund may advertise the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is com-
puted by dividing the net investment income per share earned by the Class dur-
ing the period by the maximum public offering price per share on the last day
of the period. This income is "annualized" by assuming the amount of income is
generated each month over a one-year period and is compounded semi-annually.
The annualized income is then shown as a percentage of the net asset value.
 
 TOTAL RETURN
 
  From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class L and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this
 
40
<PAGE>
 
PERFORMANCE (CONTINUED)
 
Prospectus, then dividing the value of the investment at the end of the period
so calculated by the initial amount invested and subtracting 100%. The standard
average annual total return, as prescribed by the SEC, is derived from this
total return, which provides the ending redeemable value. Such standard total
return information may also be accompanied with nonstandard total return infor-
mation for differing periods computed in the same manner but without
annualizing the total return or taking sales charges into account. The Fund
calculates current dividend return for each Class by annualizing the most
recent monthly distribution and dividing by the net asset value of the maximum
public offering price (including sales charge) on the last day of the period
for which current dividend return is presented. The Fund's current dividend
return may vary from time to time depending on market conditions, the composi-
tion of its investment portfolio and operating expenses. These factors and pos-
sible differences in the methods used in calculating current dividend return
should be considered when comparing a Class' current return to yields published
for other investment companies and other investment vehicles. The Fund may also
include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services and other financial publications.
 
MANAGEMENT OF THE FUND
 
 
 BOARD OF DIRECTORS
   
  Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Directors. The Directors approve all significant agreements
between the Fund and the companies that furnish services to the Fund, including
agreements with the Fund's distributor, investment adviser, administrator, cus-
todian and transfer agent. The day-to-day operations of the Fund are delegated
to the Fund's investment adviser and administrator. The SAI contains general
background information regarding each Director and executive officer of the
Fund.     
 
 INVESTMENT ADVISER AND ADMINISTRATOR--MMC
   
  The Fund's investment adviser, MMC, is a registered investment adviser whose
principal executive offices are located at 388 Greenwich Street, New York, New
York 10013. MMC was incorporated in March, 1968 under the laws of Delaware and
renders investment advice to a wide variety of individual, institutional and
investment company clients that had aggregate assets under management as of
September 30, 1998 in excess of $108 billion.     
 
  Subject to the supervision and direction of the Fund's Board of Directors,
the Advisor manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfo-
lio managers and
 
                                                                              41
<PAGE>
 
MANAGEMENT OF THE FUND (CONTINUED)
 
 
securities analysts who provide research services to the Fund. Under the
investment advisory agreement, the Fund pays the Advisor a monthly fee at the
annual rate of 0.45% of the value of the Fund's average daily net assets up to
$1 billion and 0.415% of the value of its average daily net assets in excess of
$1 billion. This fee is calculated daily and paid monthly. For the fiscal year
ended July 31, 1998, the Fund paid investment advisory fees to the Advisor in
an amount equal to 0.45% of the value of its average daily net assets.
 
  MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays MMC a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets up to $1 billion and 0.185% of the value of the aver-
age daily net assets in excess of $1 billion. This fee is calculated daily and
paid monthly.
 
 PORTFOLIO MANAGEMENT
   
  James Conroy, an investment officer of MMC and a Managing Director of Salomon
 Smith Barney, has been and is respon-
sible for managing the day-to-day operations of the Fund, including the making
of investment decisions, since February 1990.     
 
  Management discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1998, is included in
the Annual Report dated July 31, 1998. A copy of the Annual Report may be
obtained upon request and without charge from a Salomon Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
   
  On October 8, 1998, the merger of Travelers Group, Inc. and Citicorp, Inc.
 was consummated thereby creating a new entity called Citigroup. Citigroup
 is a bank holding company subject to regulation under the Bank Holding
 Company Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall
 Act and certain other laws and regulations. MMC does not believe that its
 compliance with the applicable law will have a material adverse effect on
 its ability to continue to provide the Fund with the same level of in
receives.     
 
DISTRIBUTOR
   
  CFBDS is located at 21 Milk Street, Boston, MA 02109-5408. It distributes
shares of the Fund as principal underwriter and as such conducts a continuous
offering pursuant to a "best efforts" arrangement requiring CFBDS, Inc. to take
and pay for only such securities as may be sold to the public.     
 
42
<PAGE>
 
DISTRIBUTOR (CONTINUED)
   
  The Fund has adopted a plan of distribution under Rule 12b-1 under the 1940
Act (the "Plan"), pursuant to which Salomon Smith Barney is paid an annual
service fee with respect to Class A, Class B and Class L shares of the Fund at
the annual rate of 0.25% of the average daily net assets of the respective
Class. Salomon Smith Barney is also paid an annual distribution fee with
respect to Class B and Class L shares at the annual rate of 0.50% and 0.45%,
respectively, of the average daily net assets attributable to those Classes.
Class B shares which automatically convert to Class A shares eight years after
the date of original purchase will no longer be subject to distribution fees.
The fees are used by Salomon Smith Barney to pay its Financial Consultants for
servicing shareholder accounts and, in the case of Class B and Class L shares,
to cover expenses primarily intended to result in the sale of those shares.
These expenses include: advertising; the cost of printing and mailing prospec-
tuses to potential investors; payments to and expenses of Salomon Smith Barney
Financial Consultants and other persons who provide support services in con-
nection with the distribution of shares; interest and/or carrying charges; and
indirect and overhead costs of Salomon Smith Barney associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses.     
 
  The payments to Salomon Smith Barney Financial Consultants for selling
shares of a Class include a commission or fee paid by the investor or Salomon
Smith Barney at the time of sale and, with respect to Class A, Class B and
Class L shares, a continuing fee for servicing shareholder accounts for as
long as a shareholder remains a holder of that Class. Salomon Smith Barney
Financial Consultants may receive different levels of compensation for selling
different Classes of shares.
 
  Payments under the Plan with respect to Class A and Class B shares are not
tied exclusively to the distribution and shareholder service expenses actually
incurred by Salomon Smith Barney and the payments may exceed distribution
expenses actually incurred. The Fund's Board of Directors evaluates the appro-
priateness of the Plan and its payment terms on a continuing basis and in
doing so will consider all relevant factors, including expenses borne by Salo-
mon Smith Barney, amounts received under the Plan and proceeds of the CDSC.
 
ADDITIONAL INFORMATION
 
 
  The Fund was incorporated under the laws of the State of Maryland on
June 15, 1984 and is registered with the SEC as a diversified, open-end man-
agement investment company. Each Class of shares of the Fund has a par value
of $.001 per share. Each Class of shares has the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b)
the effect of the respective sales charges for each Class; (c) the distribu-
tion and/or service fees borne by each
 
                                                                             43
<PAGE>
 
ADDITIONAL INFORMATION (CONTINUED)
 
Class; (d) the expenses allocable exclusively to each Class; (e) voting rights
on matters exclusively affecting a single Class; (f) the exchange privileges of
each Class; and (g) the conversion feature of the Class B shares. The Fund's
Board of Directors does not anticipate that there will be any conflicts among
the interests of the holders of the different Classes. The Directors, on an
ongoing basis, will consider whether any such conflict exists and, if so, take
appropriate action.
 
  The Fund does not hold annual shareholder meetings. There normally will be no
meeting of shareholders for the purpose of electing Directors unless and until
such time as less than a majority of the Directors holding office have been
elected by shareholders. The Directors will call a meeting for any purpose upon
written request of shareholders holding at least 10% of the Fund's outstanding
shares, and the Fund will assist shareholders in calling such a meeting as
required by the 1940 Act. When matters are submitted for shareholder vote,
shareholders of each Class will have one vote for each full share owned and a
proportionate, fractional vote for any fractional share held of that Class.
Generally, shares of the Fund will be voted on a Fund-wide basis on all matters
except matters affecting only the interests of one or more of the Classes.
 
  PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania, serves
as custodian of the Fund's investments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
   
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of investment securities held by the Fund at the
end of the period covered. In an effort to reduce the Fund's printing and mail-
ing costs, the Fund plans to consolidate the mailing of the Fund's semi-annual
and annual reports by household. This consolidation means that a household hav-
ing multiple accounts with identical address of record will receive a single
copy of each report. In addition, the Fund also plans to consolidate the mail-
ing of its Prospectus so that a shareholder having multiple accounts (that is,
individual, IRA and for Self-Employed Retirement Plan accounts) will receive a
single Prospectus annually. Shareholders who do not want this consolidation to
apply to their accounts should contact their Salomon Smith Barney Financial
Consultant, or the Fund's Transfer Agent.     
 
44
<PAGE>
 
                                                 SALOMON SMITH BARNEY
                                                 -------------------------------
                                                    A member of citigroup [LOGO]

             Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.

 
                                                                                

                                                                    SMITH BARNEY
                                                                         MANAGED
                                                                     GOVERNMENTS
                                                                       FUND INC.

                                                            388 Greenwich Street
                                                        New York, New York 10013
 
                                                                   FD0212  11/98

 




PART B
STATEMENT OF ADDITIONAL INFORMATION

Smith Barney
Managed Governments Fund Inc.
388 Greenwich Street
New York, New York 10013
1-800-451-2010
   
Statement of Additional 
Information

November 27, 
1998
       
This Statement of Additional Information (the "SAI") expands upon 
and supplements the information contained in the current Prospectus of 
Smith Barney Managed Governments Fund Inc. (the "Fund"), dated November 
27, 1998, as amended or supplemented from time to time, and should be 
read in conjunction with the Fund's Prospectus.  The Fund's Prospectus 
may be obtained from a Salomon Smith Barney Financial Consultant or by 
writing or calling the Fund at the address or telephone number listed 
above.  This SAI, although not in itself a prospectus, is incorporated 
by reference into the Prospectus in its entirety.
       
TABLE OF CONTENTS
For ease of reference, the same section headings are used in both the 
Prospectus and this SAI, except where shown below:
Management of the Fund	............1
Investment Objective and Management Policies	....4
Purchase of Shares	.....14
Redemption of Shares	15
Distributor.......	15
Valuation of Shares	.17
Exchange Privilege	17
Performance Data (See in the Prospectus "Performance'')	18
Taxes (See in the Prospectus "Dividends, Distributions and Taxes'')
	20
Additional Information	22
Financial Statements	22
       
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the 
organizations that provide services to the Fund.  These organizations 
are as follows:
Name	Service
CFBDS, Inc. ("CFBDS" or "Distributor")		Distributor
Mutual Management Corp.  ("MMC'' or "Advisor" or 
     "Administrator")		Investment Adviser and 
Administrator
PNC Bank, National Association ("PNC" or "Custodian")	
	Custodian
First Data Investor Services Group, Inc. ("First Data'' or
      the "Transfer Agent")		Transfer Agent
       
These organizations and the functions they perform for the Fund are 
discussed in the Prospectus and in this SAI.
    

Directors and Executive Officers of the Fund

The names of the Directors and executive officers of the Fund, together 
with information as to their principal business occupations during the 
past five years, are shown below.  Each Director who is an "interested 
person'' of the Fund, as defined in the Investment Company Act of 1940, 
as amended (the "1940 Act''), is indicated by an asterisk.
   
Herbert Barg (Age 75). Private Investor.  His address is 273 
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
       
Alfred Bianchetti (Age 75).  Retired; formerly Senior Consultant to 
Dean Witter Reynolds Inc.  His address is 19 Circle End Drive, Ramsey, 
New Jersey 07446.
       
Martin Brody (Age 77).  Consultant, HMK Associates.  Retired Vice 
Chairman of the Board of Restaurant Associates Corp.  His address is 
c/o HMK Associates, 30 Columbia Turnpike, Florham Park, New Jersey 
07932.
       
Dwight B. Crane (Age 61). Professor, Harvard Business School.  His 
address is c/o Harvard Business School, Soldiers Field Road, Boston, 
Massachusetts 02163.
       
Burt N. Dorsett, Director (Age 68).  Managing Partner of Dorsett 
McCabe Management, Inc., an investment counseling firm; Director of 
Research Corporation Technologies, Inc., a non-profit patent-clearing 
and licensing firm.  His address is 201 East 62nd Street, New York, New 
York 10021.
       
Elliot S. Jaffe, Director (Age 72). Chairman of the Board and 
President of The Dress Barn, Inc.  His address is 30 Dunnigan Drive, 
Suffern, New York 10901.
       
Stephen E. Kaufman (Age 66). Attorney.  His address is 277 Park 
Avenue, New York, New York 10172.
       
Joseph J. McCann (Age 68). Financial Consultant; Retired Financial 
Executive of Ryan Homes, Inc.  His address is 200 Oak Park Place, 
Pittsburgh, Pennsylvania 15243.
       
*Heath B. McLendon, Chairman of the Board and Investment Officer 
(Age 65).  Managing Director of Salomon Smith Barney, Chairman of the 
Board of Smith Barney Strategy Advisers Inc. and President and Director 
of MMC and Travelers Investment Advisor, Inc. ("TIA"); Chairman or Co-
Chairman of the Board and Director of 58 investment companies 
associated with Salomon Smith Barney Holdings Inc. His address is 388 
Greenwich Street, New York, New York 10013.
       
Cornelius C. Rose, Jr., Director (Age 65). President, Cornelius C. 
Rose Associates, Inc., financial consultants, and Chairman and Director 
of Performance Learning Systems, an educational consultant.  His 
address is Meadwobrook Village, Building 4, Apt. 6, West Lebanon, N.H. 
03784.
    
   
James E. Conroy, Vice President and Investment Officer (Age 48).  
Investment Officer of MMC; prior to July 1993, Managing Director of 
Shearson Lehman Advisors.  Mr. Conroy serves as Investment Officer of 
certain other Smith Barney Mutual Funds.  His address is 388 Greenwich 
Street, New York, New York 10013.     

   
Lewis E. Daidone, Senior Vice President and Treasurer (Age 41). 
Managing Director of Salomon Smith Barney; Chief Financial Officer of 
Smith Barney Mutual Fund; Director and Senior Vice President of MMC and 
TIA.  Mr. Daidone serves as Senior Vice President and Treasurer of 
certain other Smith Barney Mutual Funds.  His address is 388 Greenwich 
Street, New York, New York 10013.
       
Christina T. Sydor, Secretary (Age 47). Managing Director of Salomon 
Smith Barney; General Counsel and Secretary of MMC and TIA.  Ms. Sydor 
also serves as Secretary of certain other Smith Barney Mutual Funds.  
Her address is 388 Greenwich Street, New York, New York 10013.
       
As of November 3, 1998, the Directors and officers of the Fund, as a 
group, beneficially owned less than 1.00% of the outstanding common 
stock of the Fund.  As of November 3, 1998, to the knowledge of the 
Fund and its Board of Directors, the following shareholder or "group" 
(as the term is used in Section 13(d) of the Securities Act of 1933) 
beneficially owned more than 5% of the outstanding shares of the Fund:
       
Class L Shares

Lexington Foundation Inc.
127 East State Street
Gloversville, NY 12078
Owned 34,857 (10.96%)
       

No Director, officer or employee of Salomon Smith Barney or of any 
parent or subsidiary receives any compensation from the Fund for 
serving as a Director or officer of the Fund. The Fund pays each 
Director who is not an officer, director or employee of Salomon Smith 
Barney or any of its affiliates a fee of $4,000 per annum plus $500 per 
meeting attended and each Director emeritus who is not an officer, 
director or employee of Salomon Smith Barney or any of its affiliates a 
fee of $2,000 per annum plus $250 per in-person meeting and $100 per 
telephonic meeting.  The Fund reimburses all Directors for travel and 
out-of-pocket expenses. For the fiscal year ended July 31, 1998, such 
fees and expenses totaled $11,423.05.
       
For the fiscal year ended July 31, 1998, the Directors of the Fund 
were paid the following compensation: 



      Director 

Aggregate 
Compensati
on
from the 
Fund
Pension or 
Retirement 
Benefits 
Accrued as 
Part of 
Fund Expenses
Aggregate 
Compensation 
from the Smith 
Barney
Mutual Funds
Total Number of 
Funds
for which 
Director/Trusteeship 
Serves Within Fund 
Complex
Herbert Barg 	
$6,600
     $0  
$101,600
18
Alfred 
Bianchetti 	
6,600
0
49,600
13
Martin Brody 	
5,600
    0
119,814
21
Dwight Crane 	
5,600
    0
133,850
24
Burt Dorset 	
6,600
    0
49,600
13
Elliot Jaffe 	
6,100
    0
48,500
13
Stephen 
Kaufman 	
6,600
    0
91,964
15
Joseph McCann 
	
6,600
    0
49,600
13
Heath 
McLendon 	
---
    0
---
42
Cornelius 
Rose 	
6,600
    0
49,600
13















       
_________________________
*	The aggregate remuneration paid to the Directors by the Fund for the 
fiscal year ended July 31, 1998 amounted to $11,423 (including 
reimbursement for travel and out-of-pocket expenses).
**	Upon attainment of age 80, Fund Trustees are required to change to 
emeritus status.  Trustees Emeritus are entitled to serve in emeritus 
status for a maximum of 10 years, during which time they are paid 50% 
of the annual retainer fee and meeting fees otherwise applicable to 
Fund Trustees, together with reasonable out-of-pocket expenses for 
each meeting attended.  Directors Emeritus may attend meetings but 
have no voting rights.  During the Fund's last fiscal year aggregate 
compensation paid by the Fund to Directors Emeritus totaled 
$8,600.00.
       


Investment Adviser and Administrator - MMC
       
MMC (formerly known as Smith Barney Mutual Fund Management) serves as 
investment adviser to the Fund pursuant to an investment advisory 
agreement (the "Advisory Agreement") which was most recently approved 
by the Board of Directors, including a majority of Directors who are 
not "interested persons" of the Fund or MMC (the "Independent 
Directors").  MMC is a wholly owned subsidiary of Salomon Smith Barney 
Holdings Inc. ("Holdings''), which, in turn, is a wholly owned 
subsidiary of Citigroup Inc. ("Citigroup''). The services provided by 
MMC under the Advisory Agreement are described in the Prospectus under 
"Management of the Fund.''  MMC pays the salary of any officer or 
employee who is employed by both it and the Fund.
       
As compensation for investment advisory services, the Fund pays MMC 
a fee computed daily and paid monthly at the following annual rates of 
the Fund's average daily net assets: 0.45% up to $1 billion; and 0.415% 
in excess of $1 billion.  For the fiscal years ended July 31, 1996, 
1997 and 1998, the Fund paid MMC $2,816,295, $2,661,308 and $2,503,412, 
respectively, in investment advisory fees. 
       
MMC also serves as administrator to the Fund pursuant to a written 
agreement (the "Administration Agreement''), which was most recently 
approved by the Fund's Board of Directors, including a majority of the 
Independent Directors.  The services provided by MMC under the 
Administration Agreement are described in the Prospectus under 
"Management of the Fund.''  MMC pays the salary of any officer and 
employee who is employed by both it and the Fund and bears all expenses 
incurred in connection with the performance of its services.  As 
compensation for administration services, the Fund pays MMC a fee 
computed daily and paid monthly at the annual rate of 0.20% of the 
value of the average daily net assets of the Fund up to $1 billion and 
0.185% of the value of the average daily net assets in excess of $1 
billion.  For the fiscal years ended July 31, 1996, 1997, and 1998, the 
Fund paid MMC $2,138,789, $1,182,804 and $1,112,627, respectively, in 
administration fees.
    
The Fund bears expenses incurred in its operations, including: 
taxes, interest, brokerage fees and commissions, if any; fees of 
Directors who are not officers, directors, shareholders or employees of 
Salomon Smith Barney, SEC fees and state Blue Sky qualification fees; 
charges of custodians; transfer and dividend disbursing agent's fees; 
certain insurance premiums; outside auditing and legal expenses; costs 
of maintenance of corporate existence; investors services (including 
allocated telephone and personnel expenses); costs of preparation and 
printing of prospectuses and statements of additional information for 
regulatory purposes and for distribution to existing shareholders; 
costs of shareholders' reports and corporate meetings.

Counsel and Auditors

Willkie Farr & Gallagher serves as legal counsel to the Fund.  The 
Independent Directors of the Fund have selected Stroock & Stroock & 
Lavan LLP as their legal counsel.
   
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has 
been selected as the Fund's independent auditor to examine and report 
on the Fund's financial statements and financial highlights for the 
fiscal year ending July 31, 1999.
    
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES

The Prospectus discusses the Fund's investment objective and the 
policies it employs to achieve its objective.  This section contains 
supplemental information concerning the types of securities and other 
instruments in which the Fund may invest, the investment policies and 
portfolio strategies that the Fund may utilize and certain risks 
attendant to such investments, policies and strategies.

Mortgaged-Backed Government Securities

Government National Mortgage Association ("GNMA") certificates are 
liquid securities and represent ownership interests in a pool of 
mortgages issued by a mortgage banker or other mortgagee.  
Distributions on GNMA certificates include principal and interest 
components.  GNMA, a corporate instrumentality of the U.S. Department 
of Housing and Urban Development, guarantees timely payment of 
principal and interest on GNMA certificates; this guarantee is deemed a 
general obligation of the United States, backed by its full faith and 
credit.

Each of the mortgages in a pool supporting a GNMA certificate is 
insured by the Federal Housing Administration or the Farmers Home 
Administration, or is insured or guaranteed by the Veterans 
Administration.  The mortgages have maximum maturities of 40 years.  
Government statistics indicate, however, that the average life of the 
underlying mortgages is shorter, due to scheduled amortization and 
unscheduled prepayments (attributable to voluntary prepayments or 
foreclosures).  These statistics indicate that the average life of the 
mortgages backing most GNMA certificates, which are single-family 
mortgages with 25- to 30-year maturities, ranges from two to ten years 
depending on the mortgages' coupon rate, and yields on pools of single-
family mortgages are often quoted on the assumption that the prepayment 
rate for any given pool will remain constant over the life of the pool.  
(The actual maturity of specific GNMA certificates will vary based on 
the payment experience of the underlying mortgage pool.)  Based on this 
constant prepayment assumption, GNMA certificates have had historical 
yields at least 3/4 of 1% greater than the highest grade corporate 
bonds.  Actual yield comparisons will vary with the prepayment 
experience of specific GNMA certificates.  

The Fund also may invest in pass-through securities backed by 
adjustable-rate mortgages, which have been issued by GNMA, the Federal 
National Mortgage Association ("FNMA") and the Federal Home Loan 
Mortgage Corporation ("FHLMC").  These securities bear interest at a 
rate which is adjusted monthly, quarterly or annually.  The prepayment 
experience of the mortgages underlying these securities may vary from 
that for fixed-rate mortgages.

The average maturity of FHLMC and FNMA mortgage-backed pools, like 
GNMA mortgage-backed pools, varies with the maturities of the 
underlying mortgage instruments, and a pool's stated average life also 
may be shortened by unscheduled payments on the underlying mortgages.  
Factors affecting mortgage prepayments include the level of interest 
rates, general economic and social conditions, the location of the 
mortgaged property and the age of the mortgage.  Because prepayment 
rates of individual pools vary widely, it is not possible to accurately 
predict the average life of a particular pool.  As noted above, it is a 
common practice to assume that prepayments will result in an average 
life ranging from two to ten years for pools of fixed-rate 30-year 
mortgages.  Pools of mortgages with other maturities or different 
characteristics will have varying average life assumptions.  The actual 
maturity of and realized yield on specific FHLMC and FNMA certificates 
will vary based on the prepayment experience of the underlying pool of 
mortgages.

U.S. Government Securities

Direct obligations of the United States Treasury include a variety 
of securities that differ in their interest rates, maturities and dates 
of issuance.  Treasury Bills have maturities of less than one year, 
Treasury Notes have maturities of one to ten years and Treasury Bonds 
generally have maturities of greater than ten years at the date of 
issuance.

In addition to direct obligations of the United States Treasury, 
debt obligations of varying maturities issued or guaranteed by the 
United States government or its agencies or instrumentalities ("U.S. 
government securities") include securities issued or guaranteed by the 
Federal Housing Administration, Federal Financing Bank, Export-Import 
Bank of the United States, Small Business Administration, GNMA, General 
Services Administration, Federal Home Loan Banks, FHLMC, FNMA, Maritime 
Administration, Tennessee Valley Authority, Resolution Trust 
Corporation, District of Columbia Armory Board, Student Loan Marketing 
Association and various institutions that previously were or currently 
are part of the Farm Credit System (which has been undergoing a 
reorganization since 1987).  Because the United States government is 
not obligated by law to provide support to an instrumentality that it 
sponsors, the Fund will invest in obligations of such an 
instrumentality only if MMC determines that the credit risk with 
respect to the instrumentality does not make its securities unsuitable 
for investment by the Fund.

The Fund may invest up to 5% of its net assets in U.S. government 
securities for which the principal repayment at maturity, while paid in 
U.S. dollars, is determined by reference to the exchange rate between 
the U.S. dollar and the currency of one or more foreign countries 
("Exchange Rate-Related Securities").  Exchange Rate-Related Securities 
are issued in a variety of forms, depending on the structure of the 
principal repayment formula.  The principal repayment formula may be 
structured so that the security-holder will benefit if a particular 
foreign currency to which the security is linked is stable or 
appreciates against the U.S. dollar.  In the alternative, the principal 
repayment formula may be structured so that the securityholder benefits 
if the U.S. dollar is stable or appreciates against the linked foreign 
currency.  Finally, the principal repayment formula can be a function 
of more than one currency and, therefore, be designed in either the 
aforementioned forms or a combination of those forms.

Investment in Exchange Rate-Related Securities entails special 
risks.  There is the possibility of significant changes in rates of 
exchange between the U.S. dollar and any foreign currency to which an 
Exchange Rate-Related Security is linked.  If currency exchange rates 
do not move in the direction or to the extent anticipated at the time 
of purchase of the security, the amount of principal repaid at maturity 
might be significantly below the par value of the security, which might 
not be offset by the interest earned by the Fund over the term of the 
security.  The rate of exchange between the U.S. dollar and other 
currencies is determined by the forces of supply and demand in the 
foreign exchange markets.  These forces are affected by the 
international balance of payments and other economic and financial 
conditions, government intervention, speculation and other factors.  
The imposition or modification of foreign exchange controls by domestic 
or foreign governments or intervention by central banks also could 
affect exchange rates.  Finally, there is no assurance that sufficient 
trading interest to create a liquid secondary market will exist for 
particular Exchange Rate-Related Securities due to conditions in the 
debt and foreign currency markets.  Illiquidity in the forward exchange 
market and the high volatility of the foreign exchange market may from 
time to time combine to make it difficult to sell an Exchange Rate-
Related Security prior to maturity without incurring a significant 
price loss.

Writing Put and Call Options

The principal reason for writing covered call options on securities 
is to attempt to realize, through the receipt of premiums, a greater 
return than would be realized on the securities alone.  In return for a 
premium, the writer of a covered call option forfeits the right to any 
appreciation in the value of the underlying security above the strike 
price for the life of the option (or until a closing purchase 
transaction can be effected).  Nevertheless, the call writer retains 
the risk of a decline in the price of the underlying security.  
Similarly, the principal reason for writing covered put options is to 
realize income in the form of premiums.  The writer of a covered put 
option accepts the risk of a decline in the price of the underlying 
security.  The size of the premium that the Fund may receive may be 
adversely affected as new or existing institutions, including other 
investment companies, engage in or increase their option-writing 
activities.

Options written by the Fund normally will have expiration dates 
between one and nine months from the date written.  The exercise price 
of the options may be below, equal to, or above, the current market 
values of the underlying securities at the times the options are 
written.  In the case of call options these exercise prices are 
referred to as "in-the-money," "at-the-money," and "out-of-the-money," 
respectively.
   
The Fund may write (a) in-the-money call options when the Advisor 
expects that the price of the underlying security will remain flat or 
decline moderately during the options period, (b) at-the-money call 
options when the Advisor expects that the price of the underlying 
security will remain flat or advance moderately during the option 
period and (c) out-of-money call options when the Advisor expects that 
the price of the security may increase but not above a price equal to 
the sum of the exercise price plus the premiums received from writing 
the call option.  In any of the preceding situations, if the market 
price of the underlying security declined and the security is sold at 
this lower price, the amount of any realized loss will be offset wholly 
or in part by the premium received.  Out-of-money, at-the-money and in-
the-money put options (the reverse of call options as to the relations 
of exercise price to market price) may be utilized in the same market 
environments that such call options are used in equivalent 
transactions.
    
So long as the obligation of the Fund as the writer of an option 
continues, the Fund may be assigned an exercise notice by the broker-
dealer through which the option was sold, requiring it to deliver, in 
the case of a call, or take delivery of, in the case of a put, the 
underlying security against payment of the exercise price.  This 
obligation terminates when the option expires or the Fund effects a 
closing purchase transaction.  The Fund can no longer effect a closing 
purchase transaction with respect to an option once it has been 
assigned an exercise notice.  To secure its obligation to deliver the 
underlying security when it writes a call option, or to pay for the 
underlying security when it writes a put option, the Fund will be 
required to deposit in escrow the underlying security or other assets 
in accordance with the rules of the Options Clearing Corporation (the 
"Clearing Corporation") or similar clearing corporation and the 
securities exchange on which the option is written.

An option position may be closed out only where there exists a 
secondary market for an option of the same series on a recognized 
securities exchange or in the over-the-counter market.  The Fund 
expects to write options only on national securities exchanges or in 
the over-the-counter market.

The Fund may realize a profit or loss upon entering into a closing 
transaction.  In cases in which the Fund has written an option, it will 
realize a profit if the cost of the closing purchase transaction is 
less than the premium received upon writing the original option and 
will incur a loss if the cost of the closing purchase transaction 
exceeds the premium received upon writing the original option.

Purchasing Put and Call Options

Buying a put option on a U.S. government security will give the Fund 
the right to sell the security at a particular price and may act to 
limit, until that right expires, the Fund's risk of loss through a 
decline in the market value of the security.  Any appreciation in the 
value of the underlying security will be offset in part by the amount 
of the premium that the Fund pays for the put option and any related 
transaction costs.  By purchasing a put option on a security that it 
does not own, the Fund would seek to benefit from a decline in the 
market price of its investment portfolio generally.  If the market 
price of the underlying security remains equal to or greater than the 
exercise price during the life of the put option, the Fund would lose 
its entire investment in the put option.  For the purchase of a put 
option to be profitable, the market price of the underlying security 
must decline sufficiently below the exercise price to cover the premium 
and transaction costs, unless the put option is sold at a profit before 
expiration in a closing sale transaction.  The Fund would not purchase 
a put option if, as a result of the purchase, more than 10% of the 
Fund's assets would be invested in put options.

As the holder of a call option on a U.S. government security, the 
Fund would have the right to purchase the underlying security at the 
exercise price at any time during the option period.  The Fund would 
purchase a call option to acquire the underlying security for its 
portfolio.  Utilized in this fashion, the purchase of call options 
would enable the Fund to fix its costs of acquiring the underlying 
security at the exercise price of the call option plus the premium 
paid.  Pending exercise of the call option, the Fund could invest the 
exercise price of the call option, which would otherwise have been used 
for the immediate purchase of the security, in short-term investments 
providing additional current return. At times, the net costs of 
acquiring securities in this manner may be less than the cost of 
acquiring the securities directly.  So long as it holds such a call 
option rather than the underlying security itself, the Fund is 
partially protected from any unexpected decline in the market price of 
the underlying security and could allow the call options to expire, 
incurring a loss only to the extent of the premium paid for the option.  
The Fund also could purchase call options on U.S. government securities 
to increase its return to investors at a time when the call is expected 
to increase in value due to anticipated appreciation of the underlying 
security.  The Fund would not purchase a call option if, as a result of 
the purchase, more than 10% of the Fund's assets would be invested in 
call options.

The Fund may enter into closing transactions with respect to put and 
call options that it purchases, exercise the options, or permit the 
options to expire.  Profit or loss from a closing transaction will 
depend on whether the amount that the Fund received on the transaction 
is more or less than the premium paid for the options plus any related 
transaction costs.
   
Although the Fund generally will purchase or write only those 
options for which the Advisor believes that there is an active 
secondary market so as to facilitate closing transactions, there is no 
assurance that sufficient trading interest to create a liquid secondary 
market on a securities exchange will exist for any particular options 
or at any particular time, and for some options no such secondary 
market may exist.  A liquid secondary market in an option may cease to 
exist for a variety of reasons.  In the past, for example, higher than 
anticipated trading activity or order flow, or other unforeseen events, 
have at times rendered certain of the facilities of national securities 
exchanges inadequate and resulted in the institution of special 
procedures, such as trading rotations, restrictions on certain types of 
orders or trading halts or suspensions in one or more options.  There 
can be no assurance that similar events, or events that may otherwise 
interfere with the timely execution of customers' orders, will not 
recur.
    
In such event, it might not be possible to effect closing 
transactions in particular options.  If, as a covered call option 
writer, the Fund is unable to effect a closing purchase transaction in 
a secondary market, it will not be able to sell the underlying security 
until the option expires or it delivers the underlying security upon 
exercise.
   
Securities exchanges generally have established limitations 
governing the maximum number of calls and puts of each class which may 
be held or written, or exercised within certain periods, by an investor 
or group of investors acting in concert (regardless of whether the 
options are written on the same or different securities exchanges or 
are held, written or exercised in one or more accounts or through one 
or more brokers).  It is possible that the Fund and other clients of 
the Advisor and certain of their affiliates may be considered to be 
such a group.  A securities exchange may order the liquidation of 
positions found to be in violations of these limits, and it may impose 
certain other sanctions.  At the date of this SAI, the positions and 
exercise limitations for common stocks on United States exchanges were 
3,000, 5,500 or 8,000 options per stock (i.e., options representing 
300,000, 550,000 or 800,000 shares), depending on various factors 
relating to the underlying security and the Fund's combined stock and 
options position.
    
Additional risks exist with respect to certain of the U.S. 
government securities for which the Fund may write covered call 
options.  If the Fund writes covered call options on mortgage-backed 
securities, the securities that it holds as cover may, because of 
scheduled amortization or unscheduled prepayments, cease to be 
sufficient cover.  The Fund will compensate for the decline in the 
value of the cover by purchasing an appropriate additional amount of 
those securities.
   
The trading market in options on U.S. governments securities has 
varying degrees of depth for various securities.  The Advisor will 
attempt to take appropriate measures to minimize risks relating to the 
Fund's writing and purchasing of put and call options, but there can be 
no assurance that the Fund will succeed in its options program.
    
Zero Coupon Securities

	The Fund may invest in zero coupon bonds.  A zero coupon bond pays 
no interest in cash to its holder during its life, although interest is 
accrued during that period.  Its value to an investor consists of the 
difference between its face value at the time of maturity and the price 
for which it was acquired, which is generally at significantly less 
than its face value (sometimes referred to as a "deep discount" price).  
Because such securities usually trade at a deep discount, they will be 
subject to greater fluctuations of market value in response to changing 
interest rates than debt obligations of comparable maturities which 
make periodic distributions of interest.  On the other hand, because 
there are no periodic interest payments to be reinvested prior to 
maturity, zero coupon securities eliminate reinvestment risk and lock 
in a rate of return to maturity.

Reverse Repurchase Agreements

	The Fund may enter into reverse repurchase agreements.  A reverse 
repurchase agreement involves the sale of a money market instrument by 
the Fund and its agreement to repurchase the instrument at a specified 
time and price.  The Fund will maintain a segregated account consisting 
of U.S. government securities or cash or cash equivalents to cover its 
obligations under reverse repurchase agreements with broker-dealers and 
other financial institutions.  The Fund will invest the proceeds in 
other money market instruments or repurchase agreements maturing not 
later than the expiration of the reverse repurchase agreement.  Under 
the Investment Company Act of 1940, as amended, reverse repurchase 
agreements may be considered borrowing by the seller.

	Reverse repurchase agreements create opportunities for increased 
returns to the shareholders of the Fund but, at the same time, create 
special risk considerations.  Although the principal or stated value of 
such borrowings will be fixed, the Fund's assets may change in value 
during the time the borrowing is outstanding.  To the extent the income 
or other gain derived from securities purchased with borrowed funds 
exceeds the interest or dividends the Fund will have to pay in respect 
thereof, the Fund's net income or other gain will be greater than if 
this type of leverage had not been used.  Conversely, if the income or 
other gain from the incremental assets is not sufficient to cover this 
cost, the net income or other gain of the Fund will be less than if the 
reverse repurchase agreement had not been used.

	The Fund currently intends to invest not more than 33% of its net 
assets in reverse repurchase agreements.

When-Issued Securities and Delayed Delivery Transactions
   
In order to secure what the Advisor considers to be an advantageous 
price or yield, the Fund may purchase U.S. government securities on a 
when-issued basis or purchase or sell U.S. government securities for 
delayed delivery.  The Fund will enter into such purchase transactions 
for the purpose of acquiring portfolio securities and not for the 
purpose of leverage.  Delivery of the securities in such cases occurs 
beyond the normal settlement periods, but no payment or delivery is 
made by the Fund prior to the reciprocal delivery or payment by the 
other party to the transaction.  In entering into a when-issued or 
delayed-delivery transaction, the Fund relies on the other party to 
consummate the transaction and may be disadvantaged if the other party 
fails to do so.
    
U.S. government securities normally are subject to changes in value 
based upon changes, real or anticipated, in the level of interest rates 
and, to a lesser extent, the public's perception of the 
creditworthiness of the issuers.  In general, U.S. government 
securities tend to appreciate when interest rates decline and 
depreciate when interest rates rise.  Purchasing U.S. government 
securities on a when-issued basis or delayed-delivery basis, therefore, 
can involve the risk that the yields available in the market when the 
delivery takes place may actually be higher than those obtained in the 
transaction itself.  Similarly, the sale of U.S. government securities 
for delayed delivery can involve the risk that the prices available in 
the market when the delivery is made may actually be higher than those 
obtained in the transaction itself.
   
The Fund will at all times maintain in a segregated account at the 
Custodian, cash or liquid securities equal to the amount of the Fund's 
when-issued or delayed-delivery commitments.  For the purpose of 
determining the adequacy of the securities in the account, the 
deposited securities will be valued at market or fair value.  If the 
market or fair value of such securities declines, additional cash or 
securities will be placed in the account on a daily basis so that  the 
value of the account will equal the amount of such commitments by the 
Fund.  Placing securities rather than cash in the account may have a 
leveraging effect on the Fund's assets.  That is, to the extent that 
the Fund remains substantially fully invested in securities at the time 
that it has committed to purchase securities on a when-issued basis, 
there will be greater fluctuation in its net asset value than if it had 
set aside cash to satisfy its purchase commitments.  On the settlement 
date, the Fund will meet its obligations from then-available cash flow, 
the sale of securities held in the separate account, the sale of other 
securities or, although it normally would not expect to do so, from the 
sale of the when-issued or delayed-delivery securities themselves 
(which may have a greater or lesser value than the Fund's payment 
obligations).
    
Lending of Portfolio Securities
   
As stated in the Prospectus, consistent with applicable regulatory 
requirements the Fund may lend securities from its portfolio to 
brokers, dealers and other financial organizations. The Fund may not 
lend its portfolio securities to Salomon Smith Barney or its affiliates 
without specific authorization from the Securities and Exchange 
Commission (the "SEC").  Loans of portfolio securities by the Fund will 
be collateralized by cash, letters of credit or securities issued or 
guaranteed by the United States government or its agencies which are 
maintained at all times in an amount equal to at least 100% of the 
current market value of the loaned securities.  From time to time, the 
Fund may return a part of the interest earned from the investment of 
collateral received for securities loaned to the borrower and/or a 
third party, which is unaffiliated with the Fund or with Salomon Smith 
Barney and which is acting as a "finder."
       
In lending its portfolio securities, the Fund can increase its 
income by continuing to receive interest on the loaned securities, as 
well as either investing the cash collateral in short-term instruments 
or by obtaining yield in the form of interest paid by the borrower when 
U.S. government securities are used as collateral.  Requirements of the 
SEC, which may be subject to further modifications, currently provide 
that the following conditions must be met whenever portfolio securities 
are loaned: (a) the Fund must receive at least 100% cash collateral or 
equivalent securities from the borrower; (b) the borrower must increase 
such collateral whenever the market value of the securities rises above 
the level of such collateral; (c) the Fund must be able to terminate 
the loan at any time; (d) the Fund must receive reasonable interest on 
the loan, as well as an amount equal to any dividends, interest or 
other distributions on the loaned securities, and any increase in 
market value; (e) the Fund may pay only reasonable custodian fees in 
connection with the loan; and (f) voting rights on the loaned 
securities may pass to the  borrower; however, if a material event 
adversely affecting the investment occurs, the Fund's Board of 
Directors must terminate the loan and regain the right to vote the 
securities.  The risks in lending portfolio  securities, as with other 
extensions of secured credit, consist of possible delay in receiving 
additional collateral or in the recovery of the securities or possible 
loss of rights in the collateral should the borrower fail financially.  
Loans will be made to firms deemed by MMC to be of good standing and 
will not be made unless, in the judgment of the Advisor, the 
consideration to be earned from such loans would justify the risk.
    
Transactions in Interest Rate Futures Contracts and Related Options

The Fund may enter into interest rate futures contracts and options 
on interest rate futures contracts that are traded on a U.S. exchange 
or board of trade.  These investments may be made by the Fund for the 
purpose of hedging against changes in the value of its portfolio 
securities due to anticipated changes in interest rates and market 
conditions and not for purposes of speculation.  The Fund will not be 
permitted to enter into futures and options contracts (other than those 
considered bona fide hedging by the Commodity Futures Trading 
Commission) for which aggregate initial margin deposits and premiums 
exceed 5% of the fair market value of the Fund's assets, after taking 
into account unrealized profits and unrealized losses on contracts into 
which it has entered.

An interest rate futures contract provides for the future sale by 
one party and the purchase by the other party of a certain amount of 
specified interest rate sensitive financial instruments (debt 
securities) at a specified price, date, time and place.

The purpose of entering into a futures contract by the Fund is to 
protect the Fund from fluctuations in interest rates on securities 
without actually buying or selling the securities.  For example, if the 
Fund owns long-term U.S. government securities and interest rates are 
expected to increase, the Fund may enter into a futures contract to 
sell U.S. Treasury Bonds.  Such a transaction would have much the same 
effect as the Fund's selling some of the long-term bonds in its 
portfolio.  If interest rates increase as anticipated, the value of 
certain long-term U.S. government securities in the portfolio would 
decline, but the value of the Fund's futures contracts would increase 
at approximately the same rate, thereby keeping the net asset value of 
the Fund from declining as much as it may have otherwise.  Of course, 
because the value of portfolio securities will far exceed the value of 
the futures contracts sold by the Fund, an increase in the value of the 
futures contracts can only mitigate - but not totally offset - the 
decline in the value of the portfolio.  If, on the other hand, the Fund 
held cash reserves and interest rates are expected to decline, the Fund 
may enter into futures contracts for the purchase of U.S. government 
securities in anticipation of later purchases of securities.  The Fund 
can accomplish similar results by buying securities with long 
maturities and selling securities with short maturities.  But by using 
futures contracts as an investment tool to reduce risk, given the 
greater liquidity in the futures market than in the cash market, it may 
be possible to accomplish the same result more easily and more quickly.

No consideration will be paid or received by the Fund upon entering 
into a futures contract.  Initially, the Fund will be required to 
deposit with the broker an amount of cash or cash equivalents equal to 
approximately 1% to 10% of the contract amount (this amount is subject 
to change by the board of trade on which the contract is traded and 
members of such board of trade may charge a higher amount).  This 
amount is known as "initial margin" and is in the nature of a 
performance bond or good faith deposit on the contract which is 
returned to the Fund, upon termination of the futures contract, 
assuming that all contractual obligations have been satisfied.  
Subsequent payments, known as "variation margin," to and from the 
broker, will be made daily as the price of the securities underlying 
the futures contract fluctuates, making the long and short positions in 
the futures contract more or less valuable, a process known as 
"marking-to-market."  In addition, when the Fund enters into a long 
position in futures or options on futures, it must deposit and maintain 
in a segregated account with its custodian an amount of cash or cash 
equivalents equal to the total market value of such futures contract, 
less the amount of initial margin for the contract and any profits on 
the contract that may be held by the broker.  At any time prior to the 
expiration of a futures contract, the Fund may elect to close the 
position by taking an opposite position, which will operate to 
terminate the Fund's existing position in the contract.
   
There are several risks in connection with the use of futures 
contracts as a hedging device.  Successful use of futures contracts by 
the Fund is subject to the ability of the Advisor to predict correctly 
movements in the direction of interest rates.  These predictions 
involve skills and techniques that may be different from those involved 
in the management of the Fund.  In addition, there can be no assurance 
that there will be a perfect correlation between movements in the price 
of the securities underlying the futures contract and movements in the 
price of the securities which are the subject of the hedge.  A decision 
as to whether, when and how to hedge involves the exercise of skill and 
judgment, and even a well-conceived hedge may be unsuccessful to some 
degree because of market behavior or unexpected trends in interest 
rates.
    
Although the Fund intends to enter into futures contracts only if 
there is an active market for such contracts, there is no assurance 
that a liquid market will exist for the contracts at any particular 
time.  Most domestic futures exchanges and boards of trade limit the 
amount of fluctuation permitted in futures contract prices during a 
single trading day.  Once the daily limit has been reached in a 
particular contract no trades may be made that day at a price beyond 
that limit.  It is possible that futures contract prices could move to 
the daily limit for several consecutive trading days with little or no 
trading, thereby preventing prompt liquidation of futures positions and 
subjecting some futures traders to substantial losses.  In such event, 
and in the event of adverse price movements, the Fund would be required 
to make daily cash payments of variation margin.  In such 
circumstances, an increase in the value of the portion of the portfolio 
being hedged, if any, may partially or completely offset losses on the 
futures contract.

If the Fund had hedged against the possibility of an increase in 
interest rates adversely affecting the value of securities held in its 
portfolio and rates decrease instead, the Fund will lose part or all of 
the benefit of the increased value of securities which it has hedged 
because it will have offsetting losses in its futures positions.  In 
addition, in such situations, if the Fund has insufficient cash, it may 
have to sell securities to meet daily variation margin requirements at 
a time when it may be disadvantageous to do so.  These sales of 
securities may, but will not necessarily, be at increased prices which 
reflect the decline in interest rates.

Purchasing Options.  Options on interest rate futures contracts are 
similar to options on securities, except that an option on an interest 
rate futures contract gives the purchaser the right, in return for the 
premium paid, to assume a position in an interest rate futures contract 
(rather than to purchase securities) at a specified exercise price at 
any time prior to the expiration date of the option.  A call option 
gives the purchaser of such option the right to take a long position, 
and obliges its writer to take a short position in a specified 
underlying futures contract at a stated exercise price at any time 
prior to the expiration date of the option.  A purchaser of a put 
option has the right to enter into a short position, and the writer has 
the obligation to enter into a long position in such contract at the 
exercise price during the option period.  If an option is exercised on 
the last trading day prior to the expiration date of the option, the 
settlement will be made entirely in cash equal to the difference 
between the exercise price of the option and the closing price of the 
interest rate futures contract on the expiration date.  The potential 
loss related to the purchase of an option on interest rate futures 
contracts is limited to the premium paid for the option (plus 
transaction costs), and there are no daily cash payments to reflect 
changes in the value of the underlying contract.  However, the value of 
the option does change daily and that change is reflected in the net 
asset value of the Fund.
   
The purchase of put options on interest rate futures contracts is 
analogous to the purchase of protective puts on debt securities so as 
to hedge a portfolio of debt securities against the risk of rising 
interest rates.  The Fund may purchase put options on interest rate 
futures contracts if the Advisor anticipates a rise in interest rates.  
Because of the inverse relationship between trends in interest rates 
and the values of debt securities, a rise in interest rates would 
result in a decline in the value of the Fund's portfolio securities.  
Because the value of an interest rate futures contract moves inversely 
in relation to changes in interest rates, as is the case with debt 
securities, a put option on such a contract becomes more valuable as 
interest rates rise.  By purchasing put options on interest rate 
futures contracts at a time when the Advisor expects interest rates to 
rise, the Fund would seek to realize a profit to offset the loss in 
value of its portfolio securities, without the need to sell such 
securities.
       
The Fund may purchase call options on interest rate futures 
contracts if the Advisor anticipates a decline in interest rates.  
Historically, unscheduled prepayments on mortgage-backed securities 
(such as GNMA certificates) have increased in periods of declining 
interest rates, as mortgagors have sought to refinance at lower 
interest rates.  As a result, if the Fund purchases such securities at 
a premium prior to a period of declining interest rates, the subsequent 
prepayments at par will reduce the yield on such securities by 
magnifying the effect of the premium in relationship to the principal 
amount of securities, and may, under extreme circumstances, result in a 
loss to the Fund.  This effect may not be offset by any appreciation in 
value in a debt security normally attributable to the interest rate 
decline.  To protect itself against the possible erosion of principal 
on securities purchased at a premium, the Fund may purchase call 
options on interest rate futures.  The option would increase in value 
as interest rates decline, thereby tending to offset any reductions of 
the yield on portfolio securities purchased at a premium resulting from 
the effect of prepayments on the amortization of such premiums.
    
Writing Options.  The Fund may write put and call options on 
interest rate futures contracts other than as part of closing sale 
transactions, in order to increase its ability to hedge against changes 
in interest rates.  A call option gives the purchaser of such option 
the right to take a long position, and obliges the Fund as its writer 
to take a short position in a specified underlying futures contract at 
a stated exercise price at any time prior to the expiration date of the 
option.  A purchaser of a put option has the right to take a short 
position, and obliges the Fund as the writer to take a long position in 
such contract at the exercise price during the option period.
   
The writing of a call option on a futures contract constitutes a 
partial hedge against declining prices of the debt securities which are 
deliverable upon exercise of the futures contract.  If the futures 
price at expiration is below the exercise price, the Fund will retain 
the full amount of the option premium, which provides a partial hedge 
against any decline that may have occurred in the Fund's holdings of 
debt securities.  If a put option is exercised, the net cost to the 
Fund of the debt securities acquired by it will be reduced by the 
amount of the option premium received.  Of course, if market prices 
have declined, the Fund's purchase price upon exercise of the option 
may be greater than the price at which the debt securities might be 
purchased in the cash market, and, therefore, a loss may be realized 
when the difference between the exercise price and the market value of 
the debt securities is greater than the premium received for writing 
the option.
    
As is currently the case with respect to its purchases of futures, 
the Fund will write put and call options on interest rate futures 
contracts only as a hedge against changes in the value of its 
securities that may result from market conditions, and not for purposes 
of speculation.

When the Fund writes a call or a put option, it will be required to 
deposit initial margin and variation margin pursuant to brokers' 
requirements similar to those applicable to interest rate futures 
contracts described above.  In addition, net option premiums received 
for writing options will be included as initial margin deposits.  At 
any time prior to the expiration of the option, the Fund may elect to 
close the position.

In addition to the risks that apply to all options transactions, 
there are several special risks relating to options on interest rate 
futures contracts.  These risks include the lack of assurance of 
perfect correlation between price movements in the option on interest 
rate futures, on the one hand, and price movements in the portfolio 
securities that are the subject of the hedge, on the other hand.  In 
addition, the Fund's writing of put and call options on interest rate 
futures will be based upon predictions as to anticipated interest rate 
trends, which predictions could prove to be inaccurate.  The ability to 
establish and close out positions on such options will be subject to 
the maintenance of a liquid market, and there can be no assurance that 
such a market will be maintained or that closing transactions will be 
effected.  Moreover, the option may not be subject to daily price 
fluctuation limits while the underlying futures contract is subject to 
such limits, and as a result normal pricing relationships between 
options and the underlying futures contract may not exist when the 
future is trading at its price limit.  In addition, there are risks 
specific to writing (as compared to purchasing) such options.  While 
the Fund's risk of loss with respect to purchased put and call options 
on interest rate futures contracts is limited to the premium paid for 
the option (plus transaction costs), the writer of an option who does 
not have a covering position in the underlying futures contract is 
subject to risk of loss on the futures contract less the premium 
received.  When the Fund writes such an option, it is obligated to a 
broker for the payment of initial and variation margin.

Under policies adopted by the Board of Directors, the Fund's 
investment in premiums paid for call and put options at any one time 
may not exceed 5% of the value of the Fund's total assets.

Investment Restrictions

Restrictions numbered 1 through 7 below have been adopted by the Fund 
as fundamental policies.  These restrictions cannot be changed without 
approval by the holders of a majority of the outstanding shares of the 
Fund, defined as the lesser of (a) 67% or more of the shares present at 
a meeting if the holders of more than 50% of the outstanding shares are 
present in person or by proxy or (b) more than 50% of the Fund's 
outstanding shares.  The remaining restrictions may be changed by a 
vote of the Fund's Board of Directors at any time.

The Fund will not:

	1.	Invest in a manner that would cause it to fail to be a 
"diversified company" under the 1940 Act and the rules, 
regulations and orders thereunder.

2.	Issue "senior securities" as defined in the 1940 Act and the 
rules, regulations and orders thereunder, except as permitted 
under the 1940 Act and the rules, regulations and orders 
thereunder

3.	Invest more than 25% of its total assets in securities, the 
issuers of which are in the same industry.  For purposes of this 
limitation, U.S. government securities (including its agencies 
and instrumentalities) and securities of state or municipal 
governments and their political subdivisions are not considered 
to be issued by members of any industry.

4.	Borrow money, except that (a) the Fund may borrow from banks for 
temporary or emergency (not leveraging) purposes, including the 
meeting of redemption requests which might otherwise require the 
untimely disposition of securities, and (b) the Fund may, to the 
extent consistent with its investment policies, enter into reverse 
repurchase agreements, forward roll transactions and similar 
investment strategies and techniques.  To the extent that it 
engages in transactions described in (a) and (b), the Fund will be 
limited so that no more than 33 1/3% of the value of its total 
assets (including the amount borrowed), valued at the lesser of 
cost or market, less liabilities (not including the amount 
borrowed)  valued at the time the borrowing is made, is derived 
from such transactions.

5.	Make loans.  This restriction does not apply to: (a) the purchase 
of debt obligations in which the Fund may invest consistent with 
its investment objectives and policies; (b) repurchase agreements; 
and (c) loans of its portfolio securities, to the fullest extent 
permitted under the 1940 Act.

6.	Engage in the business of underwriting securities issued by other 
persons, except to the extent that the Fund may technically be 
deemed to be an underwriter under the Securities Act of 1933, as 
amended, in disposing of portfolio securities.

7.	Purchase or sell real estate, real estate mortgages, commodities 
or commodity contracts, but this restriction shall not prevent the 
Fund from (a) investing in securities of issuers engaged in the 
real estate business or the business of investing in real estate 
(including interests in limited partnerships owning or otherwise 
engaging in the real estate business or the business of investing 
in real estate) and securities which are secured by real estate or 
interests therein;  (b) holding or selling real estate received in 
connection with securities it holds or held;  (c)  trading in 
futures contracts and options on futures contracts (including 
options on currencies to the extent consistent with the Funds' 
investment objective and policies);  or (d) investing in real 
estate investment trust securities.

8.	Purchase any securities on margin (except for such short-term 
credits as are necessary for the clearance of purchases and sales 
of portfolio securities) or sell any securities short (except 
"against the box").  For purposes of this restriction, the deposit 
or payment by the Fund of underlying securities and other assets 
in escrow and collateral agreements with respect to initial or 
maintenance margin in connection with futures contracts and 
related options and options on securities, indexes or similar 
items is not considered to be the purchase of a security on 
margin.

9.	Purchase or sell oil, gas or other mineral exploration or 
development programs.

10.	Purchase restricted securities, illiquid securities (such 
as repurchase agreements with maturities in excess of seven days) 
or other securities which are not readily marketable if more than 
15% of the total assets of the Fund would be invested in such 
securities.

11.	Purchase any security if as a result the Fund would then 
have more than 5% of its total assets (taken at current value) 
invested in securities of companies that have been in continuous 
operations for fewer than three years, except that this 
restriction will not apply to U.S. government securities.  (For 
purposes of this restriction, issuers include predecessors, 
sponsors, controlling persons, general partners and guarantors of 
underlying assets.)

12.	Make investments for the purpose of exercising control or 
management.

13.	Engage in the purchase or sale of put, call, straddle or 
spread options or in the writing of such options, except that (a) 
the Fund may purchase and sell options on U.S. government 
securities, write covered put and call options on U.S. government 
securities and enter into closing transactions with respect to 
such options and (b) the Fund may sell interest rate futures 
contracts and write put and call options on interest rate futures 
contracts.
   
Certain restrictions listed above permit the Fund without 
shareholder approval to engage in investment practices that the Fund 
does not currently pursue.  The Fund has no present intention of 
altering its current investment practices as otherwise described in the 
Prospectus and this SAI and any future change in those practices would 
require Board approval and appropriate disclosure to investors.  If a 
percentage restriction is complied with at the time of an investment, a 
later increase or decrease in the percentage of assets resulting from a 
change in the values of portfolio securities or in the amount of the 
Fund's assets will not constitute a violation of such restriction.
    
Portfolio Turnover
   
While the Fund does not intend to trade in securities for short-term 
profits, securities may be sold without regard to the amount of time 
that they have been held by the Fund when warranted by the 
circumstances.  Certain practices which may be employed by the Fund 
would result in a turnover rate in excess of 100%.  A portfolio 
turnover rate of 100% would occur, for example, if all of the Fund's 
securities were replaced once during a period of one year.  For the 
1998, 1997 and 1996 fiscal years, the Fund's rates of portfolio 
turnover (the lesser of purchases or sales of portfolio securities, 
excluding short-term securities, for the year divided by the monthly 
average value of portfolio securities) were  363%, 121% and 275%, 
respectively.
    




Portfolio Transactions
   
Decisions to buy and sell securities for the Fund are made by the 
Advisor, subject to the overall supervision and review of the Fund's 
Board of Directors.  Portfolio securities transactions for the Fund are 
effected by or under the supervision of the Advisor.
       
The Fund normally purchases newly issued U.S. government securities 
directly from the U.S. Treasury or from the agency or instrumentality 
that is the issuer.  Certain U.S. government securities are purchased 
from an underwriter acting as principal.  Other purchases and sales 
usually are placed with those dealers from which it appears that the 
best price or execution will be obtained; such dealers may be acting as 
either agents or principals.  No brokerage commissions typically are 
paid by the Fund on purchases and sales of portfolio securities.  The 
purchase price paid by the Fund to underwriters of newly issued 
securities and dealers in the after-market normally are executed at a 
price between the bid and asked prices.
       
The Advisor selects dealers for portfolio transactions in its best 
judgment and in a manner deemed fair and reasonable to shareholders.  
The primary considerations are the availability of the desired security 
and the prompt execution of orders in an effective manner at the most 
favorable prices.  Subject to these considerations, dealers which 
provide supplemental investment research and statistical or other 
services to the Advisor may receive orders for portfolio transactions 
by the Fund.  Information so received enables the Advisor to supplement 
its own research and analysis with the views and information of other 
securities firms.  Such information may be useful to the Advisor in 
serving both the Fund and other clients, and, conversely, supplemental 
information obtained by the placement of business of other clients may 
be useful to the Advisor in carrying out its obligations to the Fund.
       

While investment decisions for the Fund are made independently from 
those of the other accounts managed by the Advisor, investments of the 
type that the Fund may make also may be made by such other accounts.  
When the Fund and one or more other accounts managed by the Advisor are 
prepared to invest in, or desire to dispose of, the same security, 
available investments or opportunities for sales will be allocated in a 
manner believed by the Advisor to be equitable to each.  In some cases, 
this procedure may adversely affect the price paid or received by the 
Fund or the size of the position obtained or disposed of by the Fund.
    
PURCHASE OF SHARES

Volume Discounts

The schedule of sales charges on Class A shares described in the 
Prospectus applies to purchases made by any "purchaser,'' which is 
defined to include the following: (a) an individual; (b) an 
individual's spouse and his or her children purchasing shares for his 
or her own account; (c) a trustee or other fiduciary purchasing shares 
for a single trust estate or single fiduciary account; (d) a pension, 
profit-sharing or other employee benefit plan qualified under Section 
401(a) of the Internal Revenue Code of 1986, as amended (the "Code''), 
and qualified employee benefit plans of employers who are "affiliated 
persons'' of each other within the meaning of the 1940 Act; (e) tax-
exempt organizations enumerated in Section 501(c)(3) or (13) of the 
Code; and (f) a trustee or other professional fiduciary (including a 
bank, or an investment adviser registered with the SEC under the 
Investment Advisers Act of 1940, as amended) purchasing shares of the 
Fund for one or more trust estates or fiduciary accounts.  Purchasers 
who wish to combine purchase orders to take advantage of volume 
discounts should contact a Salomon Smith Barney Financial Consultant.

Combined Right of Accumulation

Reduced sales charges, in accordance with the schedule in the 
Prospectus, apply to any purchase of Class A shares if the aggregate 
investment in Class A shares of the Fund and in Class A shares of other 
Smith Barney Mutual Funds offered with a sales charge, including the 
purchase being made, of any purchaser is $25,000 or more.  The reduced 
sales charge is subject to confirmation of the shareholder's holdings 
through a check of appropriate records. The Fund reserves the right to 
terminate or amend the combined right of accumulation at any time after 
written notice to shareholders.  For further information regarding the 
right of accumulation, shareholders should contact a Salomon Smith 
Barney Financial Consultant.



Determination of Public Offering Price
   
The Fund offers its shares to the public on a continuous basis.  The 
public offering price for a Class A and Class Y share of the Fund is 
equal to the net asset value per share at the time of purchase, plus 
for Class A shares an initial sales charge based on the aggregate 
amount of the investment.  The public offering price for a Class B and 
Class L share (and Class A share purchases, including applicable rights 
of accumulation, equaling or exceeding $500,000), is equal to the net 
asset value per share at the time of purchase and no sales charge is 
imposed at the time of purchase.  A contingent deferred sales charge 
("CDSC''), however, is imposed on certain redemptions of Class B and 
Class L shares, and Class A shares when purchased in amounts equaling 
or exceeding $500,000.  The method of computation of the public 
offering price is shown in the Fund's financial statements incorporated 
by reference in their entirety into this SAI.
    
REDEMPTION OF SHARES

The right of redemption may be suspended or the date of payment 
postponed (a) for any period during which the New York Stock Exchange, 
Inc. ("NYSE'') is closed (other than for customary weekend and holiday 
closings), (b) when trading in markets the Fund normally utilizes is 
restricted, or an emergency exists, as determined by the SEC, so that 
disposal of the Fund's investments or determination of net asset value 
is not reasonably practicable or (c) for such other periods as the SEC 
by order may permit for the protection of the Fund's shareholders.

Distribution in Kind

If the Board of Directors of the Fund determines that it would be 
detrimental to the best interests of the remaining shareholders of the 
Fund to make a redemption payment wholly in cash, the Fund may pay, in 
accordance with SEC rules, any portion of a redemption in excess of the 
lesser of $250,000 or 1.00% of the Fund's net assets by a distribution 
in kind of portfolio securities in lieu of cash.  Securities issued as 
a distribution in kind may incur brokerage commissions when 
shareholders subsequently sell those securities.

Automatic Cash Withdrawal Plan

An automatic cash withdrawal plan (the "Withdrawal Plan'') is available 
to shareholders who own shares with a value of at least $10,000 and who 
wish to receive specific amounts of cash monthly or quarterly.  
Withdrawals of at least $50 may be made under the Withdrawal Plan by 
redeeming as many shares of the Fund as may be necessary to cover the 
stipulated withdrawal payment.  Any applicable CDSC will not be waived 
on amounts withdrawn by shareholders that exceed 1.00% per month of the 
value of a shareholder's shares at the time the Withdrawal Plan 
commences.  (With respect to Withdrawal Plans in effect prior to 
November 7, 1994, any applicable CDSC will be waived on amounts 
withdrawn that do not exceed 2.00% per month of the value of a 
shareholder's shares at the time the Withdrawal Plan commences.)  To 
the extent that withdrawals exceed dividends, distributions and 
appreciation of a shareholder's investment in the Fund, there will be a 
reduction in the value of the shareholder's investment and continued 
withdrawal payments will reduce the shareholder's investment and may 
ultimately exhaust it.  Withdrawal payments should not be considered as 
income from investment in the Fund.  Furthermore, as it generally would 
not be advantageous to a shareholder to make additional investments in 
the Fund at the same time he or she is participating in the Withdrawal 
Plan, purchases by such shareholders in amounts of less than $5,000 
ordinarily will not be permitted.

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




DISTRIBUTOR
   
CFBDS serves as the Fund's distributor pursuant to a written agreement 
dated October 8, 1998 (the "Distribution Agreement"), which was 
approved by the Fund's Board of Directors on July 15, 1998. Prior to 
the merger of Travelers Group, Inc. and Citicorp Inc. on October 8, 
1998, Salomon Smith Barney served as the Fund's distributor. For the 
fiscal years ended July 31, 1996, 1997 and 1998, Salomon Smith Barney 
received $279,000, $148,000 and $144,000, respectively, in sales 
charges for the sale of the Fund's Class A shares and did not reallow 
any portion thereof to dealers.  For the fiscal years ended July 31, 
1996, 1997, and 1998, Salomon Smith Barney received $489,000, $216,000 
and $141,000, respectively, representing CDSC on redemption of the 
Fund's Class B shares.
       
When payment is made by the investor before the settlement date, 
unless otherwise directed by the investor, the funds will be held as a 
free credit balance in the investor's brokerage account, and Salomon 
Smith Barney may benefit from the temporary use of the funds.  The 
Fund's Board of Directors has been advised of the benefits to Salomon 
Smith Barney resulting from three-day settlement procedures and will 
take such benefits into consideration when reviewing the Advisory, 
Administration and Distribution Agreements for continuance.
       
For the fiscal year ended July 31, 1998, Salomon Smith Barney 
incurred distribution expenses totaling approximately $1,662,117 
consisting of approximately $80,118 for advertising, $6,544 for 
printing and mailing of prospectuses, $925,669 for support services, 
$609,890 to Salomon Smith Barney Financial Consultants, and $105 in 
accruals for interest on the excess of Salomon Smith Barney expenses 
incurred in distributing the Fund's shares over the sum of the 
distribution fees and CDSC received by Salomon Smith Barney from the 
Fund.
       
Distribution Arrangements

To compensate Salomon Smith Barney for the services it provides and for 
the expense it bears, the Fund has adopted a services and distribution 
plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act.  Under the 
Plan, the Fund pays Salomon Smith Barney a service fee, accrued daily 
and paid monthly, calculated at the annual rate of 0.25% of the value 
of the Fund's average daily net assets attributable to the Class A, 
Class B and Class L shares. In addition, the Fund pays Salomon Smith 
Barney a distribution fee with respect to the Class B and Class L 
shares primarily intended to compensate Salomon Smith Barney for its 
initial expense of paying Financial Consultants a commission upon sales 
of those shares.  The Class B distribution fee is calculated at the 
annual rate of 0.50% of the value of the Fund's average daily net 
assets attributable to the shares of the Class.  The Class L 
distribution fee is calculated at the annual rate of 0.45% of  the 
value of the Fund's average daily net assets attributable to the shares 
of the Class.        

The following service and distribution fees were incurred pursuant 
to a Distribution Plan during the periods indicated:

Distribution Plan Fees


Fiscal Year
Ended 
7/31/98

Fiscal Year 
Ended 
7/31/97

Fiscal Year 
Ended 7/31/96
Class A	
$975,661
1,078,392
1,252,233
Class B	
$631,602
775,428
923,663
Class L*	
$16,373
10,458
5,915
*Class L shares were called Class C shares until June 12, 1998.
       
Under its terms, the Plan continues from year to year, provided such 
continuance is approved annually by vote of the Fund's Board of 
Directors, including a majority of the Independent Directors.  The Plan 
may not be amended to increase the amount of the service and 
distribution fees without shareholder approval, and all material 
amendments of the Plan also must be approved by the Directors and 
Independent  Directors in the manner described above.  The Plan may be 
terminated with respect to a Class at any time, without penalty, by 
vote of a majority of the Independent Directors or by vote of a 
majority of the outstanding voting securities of the Class (as defined 
in the 1940 Act) on not more than 30 days' written notice to any other 
party to the Plan.  Pursuant to the Plan, Salomon Smith Barney will 
provide the Fund's Board of Directors with periodic reports of amounts 
expended under the Plan and the purpose for which such expenditures 
were made.
    
VALUATION OF SHARES

Each Class' net asset value per share is calculated on each day, Monday 
through Friday, except days on which the NYSE is closed.  The NYSE 
currently is scheduled to be closed on New Year's Day, Martin Luther 
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence 
Day, Labor Day, Thanksgiving and Christmas, and on the preceding Friday 
or subsequent Monday when one of these holidays falls on a Saturday or 
Sunday, respectively.  Because of the differences in distribution fees 
and Class-specific expenses, the per share net asset value of each 
Class may differ.  The following is a description of the procedures 
used by the Fund in valuing its assets.

Securities listed on a national securities exchange will be valued on 
the basis of the last sale on the date on which the valuation is made 
or, in the absence of sales, at the mean between the closing bid and 
asked prices.  U.S. government securities will be valued at the mean 
between the closing bid and asked prices on each day, or, if market 
quotations for those securities are not readily available, at fair 
value, as determined in good faith by the Fund's Board of Directors.  
Over-the-counter securities will be valued on the basis of the bid 
price at the close of business on each day, or, if market quotations 
for those securities are not readily available, at fair value, as 
determined in good faith by the Fund's Board of Directors.  Short-term 
obligations with maturities of 60 days or less are valued at amortized 
cost, which constitutes fair value as determined by the Fund's Board of 
Directors.  Amortized cost involves valuing an instrument at its 
original cost to the Fund and thereafter assuming a constant 
amortization to maturity of any discount or premium, regardless of the 
effect of fluctuating interest rates on the market value of the 
instruments.  All other securities and other assets of the Fund will be 
valued at fair value as determined in good faith by the Fund's Board of 
Directors.

EXCHANGE PRIVILEGE

Except as noted below, shareholders of any of the Smith Barney Mutual 
Funds may exchange all or part of their shares for shares of the same 
Class of other Smith Barney Mutual Funds, to the extent such shares are 
offered for sale in the shareholder's state of residence, on the basis 
of relative net asset value per share at the time of exchange as 
follows:
   
A.	Class A and Class Y shareholders of the Fund who wish to 
exchange all or a portion of their shares for shares of the 
respective Class in any of the funds of the Smith Barney 
Mutual Fund Complex may do so without imposition of any 
charge.
       
B. Class B shares of any fund may be exchanged without a sales 
charge.  Class B shares of the Fund exchanged for Class B 
shares of another fund will be subject to the higher 
applicable CDSC of the two funds. Upon an exchange, the new 
Class B shares will be deemed to have purchased on the same 
date as the Class B shares of the Fund that have been 
exchanged.        
C. Upon exchange, the new Class L shares will be deemed to have 
been purchased on the same date as the Class L shares of the 
fund that have been exchanged.
    
Dealers other than Salomon Smith Barney must notify the Transfer Agent 
of the investor's prior ownership of Class A shares of the same Class 
in a fund with different investment objectives when they believe that a 
shift between funds is an appropriate investment decision.  This 
privilege is available to shareholders residing in any state in which 
the fund shares being acquired may legally be sold.  Prior to any 
exchange, the shareholder would obtain and review a copy of the current 
prospectus of each fund into which an exchange is being considered.  
Prospectuses may be obtained from a Salomon Smith Barney Financial 
Consultant.

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

PERFORMANCE DATA

From time to time, the Fund may quote its yield or total return in 
advertisements or in reports and other communications to shareholders.  
The Fund may include comparative performance information in advertising 
or marketing the Fund's shares.  Such performance information may 
include data from the following industry and financial publications: 
Barron's, Business Week, CDA Investment Technologies, Inc., Changing 
Times, Forbes, Fortune, Institutional Investor, Investors Business 
Daily, Money, Morningstar Mutual Funds Values, The New York Times, USA 
Today and The Wall Street Journal.

Average Annual Total Return

"Average annual total return" figures are computed according to a 
formula prescribed by the SEC.  The formula can be expressed as 
follows:

				P(1 = T)n = ERV

Where		P	=	a hypothetical initial payment of $1,000.

		T	=	average annual total return.

		n	=	number of years.

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

The Fund's average annual total returns for Class A shares were as 
follows for the periods indicated:
   
	0.73% for the one-year period beginning August 1, 1997 through July 
31, 1998;
	4.72% per annum during the five-year period beginning on August 1, 
1993 through July 31, 1998; and
	7.74% per annum during the ten-year period beginning in August 1, 
1988 through July 31, 1998.
       
The average annual total return figures assume that the maximum 4.50% 
sales charge has been deducted from the investment at the time of 
purchase.  If the maximum sales charge of 4.50% had not been deducted 
at the time of purchase, the average annual total return for the same 
periods would have been 5.51%, 5.70%, and 8.24%, respectively.
    
The Fund's average annual total returns for Class B shares were as 
follows for the periods indicated:
   
	0.53% for the one-year period beginning August 1, 1997 through July 
31, 1998; 
	4.98% for the five-year period beginning August 1, 1993 through 
July 31, 1998; and	
	6.20% per annum during the period from commencement of operations 
(November 6, 1992) through July 31, 1998.
       
The average annual total return figures assume that the maximum 
applicable CDSC has been deducted from the investment at the time of 
redemption.  If the maximum applicable CDSC had not been deducted at 
the time of redemption, the average annual total return for the same 
periods would have been 4.99%, 5.14% and 6.20%, respectively.
       
The Fund's average total returns for Class L shares (formerly 
designated Class C shares) were as follows for the periods indicated: 
       
	3.04% for the one-year period beginning August 1,  1997 through 
July 31, 1998; 
	4.96% for the five-year period beginning August 1, 1993 through 
July 31, 1998; and
	5.13% per annum during the period from commencement of operations 
(June 29, 1993) through July 31, 1998.
       
The average annual total return figures assume that the maximum 
applicable CDSC has been deducted from the investment at the time of 
redemption.  If the maximum applicable CDSC had not been deducted at 
the time of redemption, the average annual total return for the same 
periods would have been 5.07%, 5.17% and 5.33%, respectively.
    
Aggregate Total Return

"Aggregate total return" figures represent the cumulative change in the 
value of an investment in the Class for the specified period and are 
computed by the following formula: 

					ERV-P
					     P

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

The Fund's aggregate total returns for Class A shares were as follows 
for the periods indicated:
   
	0.73% for the one-year period beginning August 1, 1997 through July 
31, 1998;
	25.96% during the five-year period beginning on August 1, 1993 
through July 31, 1998; and
	110.76% during the ten-year period beginning on August 1, 1988 
through July 31, 1998.
       
These aggregate total return figures assume that the maximum 4.50% 
sales charge has been deducted from the investment at the time of 
purchase.  If the maximum sales charge had not been deducted at the 
time of purchase, the Class A shares' aggregate total return for the 
same periods would have been 5.51%, 31.93%, and 120.74%, respectively.
    The Fund's aggregate total returns for Class B shares were as 
follows for the periods indicated:
   
	0.53% for the one-year period beginning August 1, 1997 through July 
31, 1998; and
	41.20% during the period from commencement of operations (November 
6, 1992) through July 31, 1998.
       
These aggregate total return figures assume that the maximum applicable 
CDSC has been deducted from the investment at the time of redemption.  
If the maximum CDSC had not been deducted at the time of redemption, 
the Class B shares' aggregate total return for the same periods would 
have been 4.99% and 41.20%, respectively.
       
The Fund's aggregate total returns for Class L shares (formerly 
designated Class C shares) were as follows for the periods indicated:
       
	3.04% for the one-year period beginning August 1, 1997 through July 
31, 1998; and
	28.99% during the period from commencement of operations (June 29, 
1993) through July 31, 1998.
       	
These aggregate total return figures assume that the maximum applicable 
CDSC has been deducted from the investment at the time of redemption.  
If the maximum CDSC had not been deducted at the time of redemption, 
the Class L shares' aggregate total return for the same periods would 
have been 5.07% and 30.26%, respectively.
    
Performance will vary from time to time depending upon market 
conditions, the composition of the Fund's portfolio, operating expenses 
and the expenses exclusively attributable to the Class.  Consequently, 
any given performance quotation should not be considered representative 
of the Class' performance for any specified period in the future.  
Because performance will vary, it may not provide a basis for comparing 
an investment in the Class with certain bank deposits or other 
investments that pay a fixed yield for a stated period of time.  
Investors comparing the Class' performance with that of other mutual 
funds should give consideration to the quality and maturity of the 
respective investment companies' portfolio securities.

It is important to note that the total return figures set forth above 
are based on historical earnings and are not intended to indicate 
future performance

TAXES

Taxation of the Fund

The following is a summary of certain Federal income tax considerations 
that may affect the Fund and its shareholders.  This summary is not 
intended as a substitute for individual tax advice and investors are 
urged to consult their own tax advisors as to the tax consequences of 
an investment in the Fund.
   
The Fund has qualified and intends to continue to qualify each year as 
a regulated investment company under the Code.  Provided that the Fund 
(a) qualifies as a regulated investment company and (b) distributes at 
least 90% of its net investment income (including, for this purpose, 
net realized short-term capital gains), the Fund will not be liable for 
Federal income taxes to the extent that its net investment income and 
its net realized long- and short-term capital gains, if any, are 
distributed to its shareholders.  Interest received from U.S. 
government securities, and short-term gains from the sale of U.S. 
government securities and from the Fund's options transactions, will 
qualify toward this 90% limitation. 
    
Taxation of Fund Shareholders

The Fund will pay dividends consisting of substantially all of its net 
investment income monthly. Distributions of net realized short-term 
capital gains, if any, generally are declared and paid annually, 
although they may be declared or paid more or less frequently at the 
discretion of the Fund's Board of Directors.  The Fund will distribute 
net realized long-term capital gains, if any, at the end of the fiscal 
year in which they are earned.  Dividends from net investment income 
and distributions of net realized short-term capital gains are taxable 
to a shareholder as ordinary income for Federal income tax purposes, 
regardless of whether the shareholder receives the dividends or 
distributions in additional shares or in cash. Distributions of net 
realized long-term capital gains are taxable to a shareholder as long-
term capital gains, regardless of how long the shareholder has held the 
Fund's shares and regardless of whether the distribution is received in 
additional shares or in cash.  However, if a shareholder receives a 
distribution taxable as long-term capital gain with respect to any 
share and if such share is held by the shareholder for six months or 
less, then any loss on the redemption or exchange of such share, up to 
the amount of the distribution, will be treated as long-term capital 
loss.  Dividends and distributions paid by the Fund generally will not 
be eligible for the dividends received deduction for corporations.
   
If a shareholder (a) incurs a sales charge in acquiring shares of 
the Fund, (b) disposes of those shares within 90 days and (c) acquires 
shares in a mutual fund for which the otherwise applicable sales charge 
is reduced by reason of a reinvestment right (i.e., exchange 
privilege), the original sales charge increases the shareholder's tax 
basis in the original shares only to the extent that the otherwise 
applicable sales charge for the second acquisition is not reduced.  The 
portion of the original sales charge that does not increase the 
shareholder's tax basis in the original shares would be treated as 
incurred with respect to the second acquisition and, as a general rule, 
would increase the shareholder's tax basis in the newly acquired 
shares. Furthermore, the same rule also applies to a disposition of the 
newly acquired shares made within 90 days of the second acquisition.  
This provision prevents a shareholder from immediately deducting the 
sales charge by shifting his or her investment in a family of mutual 
funds.
    
Investors considering buying shares of the Fund on or just prior to 
a record date for a taxable dividend or capital gain distribution 
should be aware that, regardless of whether the price of the Fund 
shares to be purchased reflects the amount of the forthcoming 
distribution payment, any such payment will be a taxable dividend or 
distribution payment.

If a shareholder fails to furnish a correct taxpayer identification 
number, fails to fully report dividend or interest income, or fails to 
certify that he or she has provided a correct taxpayer identification 
number and that he or she is not subject to "backup withholding," then 
the shareholder may be subject to a 31% backup withholding tax with 
respect to (a) dividends and distributions and (b) proceeds of any 
redemption of Fund shares.  An individual's taxpayer identification 
number is his or her social security number. The backup withholding tax 
is not an additional tax and may be credited against a shareholder's 
regular Federal income tax liability.

Taxation of the Fund's Investments

Gains or losses on the sales of securities by the Fund generally will 
be long-term capital gains or losses if the securities have been held 
by the Fund for more than one year and will be short-term capital gains 
or losses if the securities have been held by the Fund for one year or 
less.  If the Fund acquires a debt security at a substantial discount, 
a portion of any gain on its sale or redemption may be characterized as 
ordinary income, rather than capital gains, to the extent that it 
reflects accrued market discount.

When the Fund writes a covered call option on a debt security, it 
will receive a premium.  If an option which the Fund has written 
expires on its stipulated expiration date, or if the Fund enters into a 
closing purchase transaction, the Fund will realize a gain (or loss if 
the cost of a closing purchase transaction exceeds the premium received 
when the option was written) without regard to any unrealized gain or 
loss on the underlying security. Subject to the "straddle rules" 
discussed below, any such gain or loss is recognized as a short-term 
capital gain or loss for Federal income tax purposes.  If a call option 
written by the Fund is exercised, the Fund will realize (subject to the 
straddle rules discussed below) a capital gain or loss from the sale of 
the underlying security, and will treat the premium originally received 
as additional proceeds from the sale.  Such gain or loss will be long-
term or short-term depending on the holding period of the underlying 
security.  If a put option written by the Fund is exercised, the Fund 
will treat the premium received as an adjustment to its purchase price 
of the debt security and the Fund's holding period with respect to the 
debt security that it has acquired will begin on the date of purchase 
of the debt security, rather than  on the date that the put was 
written.

For Federal income tax purposes, gains and losses on interest rate 
futures contracts, options on interest rate futures contracts, and 
certain other options that are traded on a qualified board of trade 
(collectively referred to herein as "section 1256 contracts") are taxed 
pursuant to a special "mark-to-market system."  Pursuant to the mark-
to-market system, the Fund may be treated as realizing a greater or 
lesser amount of gains or losses than actually realized.  As a general 
rule, gain or loss on section 1256 contracts is treated as 60% long-
term capital gain or loss and 40% short-term capital gain or loss, and 
accordingly, the mark-to-market system generally will affect the amount 
of capital gains or losses taxable to the Fund and the amount of 
distributions to a shareholder.  Moreover, if the Fund invests in both 
section 1256 contracts and "offsetting positions" in such contracts, 
then the Fund might not be able to receive the benefit of certain 
recognized losses for an indeterminate period of time.  The Fund 
expects that its activities with respect to section 1256 contracts and 
offsetting positions in such contracts (a) will not cause it or its 
shareholders to be treated as receiving a materially greater amount of 
capital gains or distributions than actually realized or received and 
(b) will permit it to use substantially all of its losses for the 
fiscal years in which such losses actually occur.
   
Section 1092 of the Code provides rules, overriding the rules 
described above, in the case of straddles. Straddles are defined to 
include "offsetting positions" in actively traded personal property.  
It is not clear under current law under what circumstances one 
investment made by the Fund, such as in options or futures contracts, 
would be treated as "offsetting" another investment also held by the 
Fund, such as the  underlying debt security (or vice versa) and, 
therefore, whether the Fund may be treated as having entered into a 
straddle.  In general, investment positions may be offsetting if there 
is a substantial diminution in the risk of loss from holding one 
position by reason of holding one or more other positions.  If two or 
more positions constitute a straddle, a realized loss from one position 
(including a mark-to-market loss) must be deferred to the extent of 
unrecognized gain in an offsetting position.  Furthermore, with respect 
to such positions, the holding period rules described above may be 
modified to recharacterize long-term gain as short-term gain, or to 
recharacterize short-term loss as long-term loss.  Moreover, interest 
and other carrying charges allocable to personal property that is part 
of a straddle must be capitalized. Section 1092 also provides that 
"wash sale" rules are applicable to transactions in which a position is 
sold at a loss and a new offsetting position is acquired within or has 
been held for a prescribed period.  To the extent that the straddle 
rules apply to positions established by the Fund, losses realized by 
the Fund may be deferred or recharacterized as long-term losses, and 
long-term gains realized by the Fund may, for certain purposes, be 
converted to short-term gains.
    
The foregoing is only a summary of certain tax considerations 
generally affecting the Fund and its shareholders, and is not intended 
as a substitute for careful tax planning.  Shareholders are urged to 
consult their tax advisors with specific reference to their own tax 
situations, including state and local tax liabilities.


ADDITIONAL INFORMATION

The Fund was incorporated on June 15, 1984 under the name Shearson 
Government Mortgage Income Fund Inc.  On January 20, 1988, November 4, 
1992, July 30, 1993 and October 14, 1994, the Fund changed its name to 
Shearson Lehman Managed Governments Inc., Shearson Lehman Brothers 
Managed Governments Fund, Smith Barney Shearson Managed Governments 
Fund Inc. and Smith Barney Managed Governments Fund Inc., respectively.

PNC, located at 17th and Chestnut Streets, Philadelphia, 
Pennsylvania, serves as the custodian of the Fund.  Under its custody 
agreement with the Fund, PNC holds the Fund's portfolio securities and 
keeps all necessary accounts and records.  For its services, PNC 
receives a monthly fee based upon the month-end market value of 
securities held in custody and also receives securities transactions 
charges.  The assets of the Fund are held under bank custodianship in 
compliance with the 1940 Act.

First Data, located at Exchange Place, Boston, Massachusetts 02109, 
serves as the Fund's transfer agent.  Under the transfer agency 
agreement, First Data maintains the shareholder account records for the 
Fund, handles certain communications between shareholders and the Fund 
and distributes dividends and distributions payable by the Fund.  For 
these services, First Data receives a monthly fee computed on the basis 
of the number of shareholder accounts that it maintains for the Fund 
during the month and is reimbursed for certain out-of-pocket expenses.

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



						Smith Barney
						Managed
						Governments
						Fund Inc.


Statement of

Additional 
Information














   
November 27, 1998 
    









Smith Barney
Managed Governments Fund Inc.
388 Greenwich Street
New York, NY  10013
 ...................................Fund........................	
	   	SALOMON SMITH BARNEY
								A Member of Citigroup 

    





27



	PART C

Item 24. Financial Statements and Exhibits

(a)	Financial Statements:

		Included in Part A:

		Financial Highlights

		Included in Part B:

	The Registrant's Annual Report for the year ended July 31, 1998 
and the report of Independent Accountants dated September 15, 1998, are 
incorporated by reference to the Definitive 30b-1 filed on October 26, 
1998 as Accession # 0000091155-98-000637.

		Included in Part C:

		Consent of Independent Accountants

(b)	Exhibits

Exhibit No.	Description of Exhibits

		All references are to the Registrant's Registration 
Statement on Form N-1A (the "Registration Statement") as 
filed with the SEC on June 29, 1984 (File Nos. 2-91948 and 
811-4061).

(1)(a)		Registrant's Articles of Incorporation dated June 18, 
1984 are incorporated by reference to the Registration 
Statement.

(b)		Form of Articles of Amendment to Articles of Incorporation 
dated August 20, 1984, May 20, 1988, November 4, 1992, 
November 19, 1992, July 30, 1993 and October 14, 1994 and 
November 7, 1994, respectively, are incorporated by 
reference to Post-Effective Amendment No. 20 to the 
Registration Statement filed on November 7, 1994 ("Post-
Effective Amendment No. 20").

(c) Articles of Amendment to Articles of Incorporation dated
June 1, 1998, filed herein.

(2)		Registrant's By-Laws are incorporated by reference to the 
Registration Statement.

(3)		Not Applicable.

(4)(a)		Registrant's form of stock certificate for Class A 
shares is incorporated by reference to Pre-Effective 
Amendment No. 1 to the Registration Statement as filed with 
the SEC on August 8, 1985 ("Pre-Effective Amendment No. 1").

(b)		Registrant's form of stock certificate for Class B shares is 
incorporated by reference to Post-Effective Amendment No. 13 
to the Registration Statement as filed with the SEC on 
October 23, 1992 ("Post-Effective Amendment No. 13").

(5)		Investment Advisory Agreement dated July 30, 1993 between 
the Registrant and Greenwich Street Advisors is incorporated 
by reference to Post-Effective Amendment No. 16 to the 
Registration Statement as filed with the SEC on September 
30, 1993 ("Post-Effective Amendment No. 16")

(b)		Form of Transfer of Investment Advisory Agreement dated as 
of November 7, 1994, among  Registrant, Mutual Management 
Corp. and SBMFM is incorporated by reference to Post 
Effective Amendment No. 21 dated November 30, 1995.

(6)(a)	Distribution Agreement dated July 30, 1993 between the 
Registrant and Smith Barney Shearson Inc. is incorporated by 
reference to Post-Effective Amendment No. 16.

(b) Form of Distribution Agreement dated October 8, 1998 between
 the Registrant and CFBDS, Inc. is filed herein.

(7)		Not Applicable.

(8)		Form of Custody Agreement between the Registrant and PNC 
Bank, National Association dated as of July 12, 1995 is 
incorporated by reference to Post Effective Amendment No. 21 
dated November 30, 1995

(9)(a)		Transfer Agency Agreement dated August 2, 1993 between 
the Registrant and The Shareholder Services Group, Inc. is 
incorporated by reference to Post-Effective Amendment No. 12 
to the Registration Statement filed with the SEC on October 
23, 1992.

(b)		Administration Agreement dated April 20, 1994 between the 
Registrant and Smith, Barney Advisers, Inc. ("SBA") is 
incorporated by reference to Post-Effective Amendment No. 
20.

(10)		Not Applicable.

(11)(a)		Consent of Independent Accountants is filed herewith 

(b)		Consent of Morningstar Mutual Fund Values is incorporated by 
reference to Post-Effective Amendment No. 13.

(12)		Not Applicable.

(13)		Not Applicable.

   
(14)		Form of Smith Barney Defined Contributions Plan Document is 
incorporated by reference to Post Effective Amendment No. 23 filed on 
December 
6, 1996
    

(15)(a)	Amended and Restated Services and Distribution Plan pursuant 
to Rule 12b-1 between the Registrant and Smith Barney Inc. 
("Smith Barney") is incorporated by reference to Post-
Effective Amendment No. 20.

(b) Form of Amended and Restated Services and Distribution Plan 
pursuant to Rule 12b-1 dated October 8, 1998 between the 
Registrant and Salomon Smith Barney, Inc.

(16)		Performance Data is incorporated by reference to Post-
Effective Amendment No. 7 to the Registration Statement as 
filed with the SEC on November 29, 1988.

(17)		Financial Data Schedule is filed herein.

(18)(a)	Form of Rule 18f-(3)d Multiple Class Plan A Registrant is 
incorporated by reference to Post Effective Amendment No. 21 dated 
November 30, 1995.

(b)		Rule 18f-3(d) Multiple Class Plan filed herein.

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

		None

Item 26.	Number of Holders of Securities

			(1)					(2)
			Title of Class		Number of Record Holders
						by Class as of October 
						31, 1997

		Common stock, par		Class A 23,169
		value $.001 per share		Class B   5,601
						Class C       92
						Class Y        9

Item 27.	Indemnification

		Response to this item is incorporated by reference to Post-
Effective Amendment No. 13.

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

Investment Adviser and Administrator - - Mutual Management Corp. 
("MMC")
(f/k/a Smith Barney Mutual Funds Management Inc.), was 
incorporated in December 1968 under the laws of the State of 
Delaware. MMC is a wholly owned subsidiary of Salomon Smith Barney 
Holdings 
Inc. ("Holdings"),(formerly known as Smith Barney Holdings Inc.), which 
in 
turn is a wholly owned subsidiary of Citigroup Inc. MMC is registered as 
an investment adviser under the Investment Advisers Act of 1940 (the 
"Advisers Act") and has, through its predecessors, been in the 
investment counseling business since 1934. MMC serves as the Investment
Advisor and Administrator for the Fund.

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

Item 29.	Principal Underwriters

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

In addition, CFBDS is also the distributor for CitiFunds(SM) 
International Growth & Income Portfolio, CitiFunds(SM) International 
Growth Portfolio, CitiFunds(SM) Intermediate Income Portfolio, 
CitiFunds(SM) Short-Term U.S. Government Income Portfolio, CitiFunds(SM) 
Large Cap Growth Portfolio, CitiFunds(SM) Cash Reserves, CitiFunds(SM) 
U.S. Treasury Reserves, CitiFunds(SM) Premium U.S. Treasury Reserves, 
CitiFunds(SM) Premium Liquid Reserves, CitiFunds(SM) Tax Free Reserves, 
CitiFunds(SM) California Tax Free Reserves, CitiFunds(SM) Connecticut 
Tax Free Reserves, CitiFunds(SM) New York Tax Free Reserves, 
CitiFunds(SM) Balanced Portfolio, CitiFunds(SM) Small Cap Value 
Portfolio, CitiFunds(SM) Growth & Income Portfolio, CitiFunds(SM) Small 
Cap Growth Portfolio, CitiFunds(SM) National Tax Free Income Portfolio, 
CitiFunds(SM) New York Tax Free Income Portfolio, CitiFunds(SM) 
California Tax Free Income Portfolio, CitiSelect(R) VIP Folio 200, 
CitiSelect(R) VIP Folio 300, CitiSelect(R) VIP Folio 400, CitiSelect(R) 
VIP Folio 500, CitiFunds(SM) Small Cap Growth VIP Portfolio, 
CitiSelect(R) Folio 200, CitiSelect(R) Folio 300, CitiSelect(R) Folio 
400, and CitiSelect(R) Folio 500. CFBDS is also the placement agent for 
Large Cap Value Portfolio, Small Cap Value Portfolio, International 
Portfolio, Foreign Bond Portfolio, Intermediate Income Portfolio, Short-
Term Portfolio, Growth & Income Portfolio, Large Cap Growth Portfolio, 
Small Cap Growth Portfolio, International Equity Portfolio, Balanced 
Portfolio, Government Income Portfolio, Tax Free Reserves Portfolio, 
Cash Reserves Portfolio and U.S. Treasury Reserves Portfolio. 

In addition, CFBDS is also the distributor for the following Salomon 
Brothers funds:  Salomon Brothers Opportunity Fund Inc., Salomon 
Brothers Investors Fund Inc., Salomon Brothers Capital Fund Inc., 
Salomon Brothers Series Funds Inc., Salomon Brothers Institutional 
Series Funds Inc., Salomon Brothers Variable Series Funds Inc.

    

(b)	The information required by this Item 29 with respect to each 
director and officer of CFBDS is incorporated by reference to Schedule A 
of Form BD filed by CFBDS pursuant to the Securities and Exchange Act of 
1934 (File No. 8-32417).

(c)	not applicable






Item 30.	Location of Accounts and Records
   
The accounts and records of the Registrant are located, in whole or in 
part, at the office of the Registrant and the following locations:

	NAME						ADDRESS

	Mutual Management Corp.			388 Greenwich Street, 22nd 
Floor
	(Investment Adviser and Administrator)		New York, NY   
10013

CFBDS, Inc.					21 Milk Street, 5th Floor
	(Distributor)					Boston, MA   02109

	PNC Bank, National Association 		17th and Chestnut 
Streets 
(Custodian) 		Philadelphia, PA 19103 

First Data Investor Services Group Inc.  		One Exchange Place, 
(Transfer Agent) 		Boston, MA    02109

    
Item 31.	Management Services

	Not applicable.


Item 32.	Undertakings
   
(a)	Not applicable.

(b)	Not applicable 

(c)	Registrant undertakes to furnish each person to whom a prospectus 
is delivered with a copy of Registrant's latest report to shareholders, 
upon request and without charge.    

EXHIBIT INDEX

   
Exhibit No.	Exhibit

(1)(c)		Amendment to Articles of Incorporation dated June 1, 1998.

(6)(b)		Distribution Agreement between the Registrant and CFBDS, 
Inc. dated  October 8, 1998.

(11)(a)	Consent of KPMG Peat Marwick LLP

(15)(b)	Amended and Restated Services and Distribution Plan pursuant
 to Rule 12b-1 dated October 8, 1998, between the Registrant and Salomon 
Smith Barney, Inc.

(17)	Financial Data Schedule

(18)	Rule 18f-3(d) Multiple Class Plan
    
	

	SIGNATURES
   
	Pursuant to the requirements of the Securities Act of 1933, as 
amended, and the Investment Company Act of 1940, as amended, the 
Registrant, SMITH BARNEY MANAGED GOVERNMENTS FUND INC.,
has duly caused this Amendment to the Registration Statement to be 
signed on 
its behalf 
by the undersigned, thereunto duly authorized, all in the City of New 
York, State of New York on the 27th day of November 1998.     

			SMITH BARNEY MANAGED GOVERNMENTS
			FUND INC.


			By: /s/ Heath B. McLendon 
			       Heath B. McLendon,
			       Chairman of the Board
						
	WITNESS our hands on the date set forth below.

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

Signature			Title				Date

/s/ Heath B. McLendon  	Chairman of the Board		11/27/98
Heath B. McLendon		(Chief Executive Officer)

/s/ Lewis E. Daidone    		Treasurer (Chief Financial 
	11/27/98	
Lewis E. Daidone		and Accounting Officer)

/s/ Herbert Barg*		Director			11/27/98		
Herbert Barg

/s/ Alfred Bianchetti*		Director			11/27/98		
Alfred Bianchetti

/s/ Martin Brody*		Director			11/27/98		
Martin Brody

/s/ Dwight Crane*		Director			11/27/98		
Dwight Crane

/s/ Burt N. Dorsett*		Director			11/27/98		
Burt N. Dorsett

/s/ Elliot S. Jaffe *		Director			11/27/98		
	
Elliot S. Jaffe

/s/ Stephen Kaufman*		Director			11/27/98		
	
Stephen Kaufman

/s/ Joseph McCann*		Director			11/27/98		
	
Joseph McCann

/s/ Cornelius C. Rose, Jr*.	Director			11/27/98		
	
Cornelius C. Rose, Jr.

______________________________________________________________

* Signed by Heath B. McLendon, their duly authorized attorney-in-fact, 
pursuant 
to power of attorney dated November 27, 1996.

/s/ Heath B. McLendon
Heath B. McLendon