SMITH BARNEY SHEARSON MASSACHUSETTS MUNICIPAL FUND
N-30B-2, 1994-07-27
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<PAGE>
 
DEAR SHAREHOLDER:
 
We are pleased to provide you with the Semi-Annual Report and portfolio
of investments for Smith Barney Shearson Massachusetts Municipals Fund for the
six-month period ended May 31, 1994. During the past six months, in response to
declining prices for municipal bonds, the Fund's net asset value declined to
$12.33 from $13.26 per share. For the same six month period, investors owning
Class A shares received tax-exempt distributions of $0.36 per share and a
capital gains distribution of $0.05; investors owning Class B shares received
tax-exempt distributions of $0.33 per share and a capital gains distribution of
$0.05. The total return for the period from December 1, 1993 to May 31, 1994 was
(4.04%) for Class A shares and (4.26%) for Class B shares. Further information
about the performance of your investment during the past six months and previous
fiscal periods is available on the "Financial Highlights" pages contained in the
Fund's financial statements.
 
MARKET AND ECONOMIC OVERVIEW
 
After a very strong market and rising valuations during the Fund's last fiscal 
year, municipal securities experienced increased volatility and declining    
prices during the first half of the current fiscal year. The catalyst for this
reversal was the Federal Reserve's aggressive attempt to control inflation by
increasing the Federal funds rate in four separate moves between February 4,
1994 and May 17, 1994, and the discount rate, two very sensitive indicators of
the direction of interest rates. The textbook result of an increase in
short-term rates is slower economic growth and low long-term interest rates.
However, at the time there were many leveraged investments in the marketplace
based on short-term interest rates staying low. As short-term rates rose,
investors met liquidity demands by selling long-term U.S. Treasuries which
caused an unintended and unwarranted rise in long-term interest rates. Interest
rates on municipal securities followed suit as dealers sold their municipal
inventory in order to meet the selling demands of Treasury investors. This
uncertain investment environment caused many investors to purchase shorter
maturities which are generally less volatile than longer-term issues.
 
It's clear to us from the Federal Reserve's actions of the last few months that
it will continue to raise interest rates as long as it sees inflation building
into the economy. But we believe that it will be later in the year before we see
any further movement in rates by the Federal Reserve. We think that the slowdown
in mortgage refinancings, new construction, and sales of single family homes
will translate into a slowdown in economic growth. In addition, job growth and
wage growth haven't been contributing much strength to the economy. The real
issue is whether or not the economy reaches the equilibrium state of growth with
low inflation that the Federal Reserve is striving for.
 
                                        1

<PAGE>
 
PORTFOLIO STRATEGY
 
Massachusetts' financial picture clearly has improved over the last two years as
the economy continues to improve and the state learns how to live within its tax
receipts. The success of its fiscal responsibility is evidenced by the modest
budget surplus for the 1994 fiscal year and the governor's and legislature's
ability to pass through to taxpayers a small income tax reduction.
 
Although the economy is improving, we have been emphasizing high quality
securities because the spread (the difference in yield between high quality and
lower quality securities) in the tax-exempt market is still quite narrow. Until
we feel that we are additionally compensated for buying lower-rated securities,
we will confine the majority of our holdings to the investment grade category.
 
During the past six months we've purchased debt securities issued by the new
Boston Harbor Tunnel, the Massachusetts Municipal Wholesale Electric Company,
and some of the insured hospital bonds that have been issued for Massachusetts
General Hospital, Massachusetts Eye and Ear, and Brigham and Women's Hospital.
Besides offering the additional enhancement of municipal bond insurance, these
are very well-run hospitals that we are extremely comfortable owning.
 
As interest rates rose during the fourth quarter of 1993 and the first quarter
of 1994, we shortened the Fund's average maturity to avoid some of the
volatility of the long-term bond market. More recently, believing that the worst
of the interest rise is behind us, we have begun extending the average maturity
of the Fund to try and capture a little bit more yield. This higher yield will
be important in maintaining the Fund's income stream which has been reduced by
the bond calls and refinancings of the past year and will continue to be
challenged by bond calls during the rest of 1994. As we recently wrote to you,
this situation is responsible for the recent reduction in the Fund's monthly
distribution to shareholders.
 
In closing, we welcome new investors to the Fund and thank more tenured
investors for their continued trust. As we have since the Fund's commencement of
operations in 1987, we will strive to provide you with investment performance
that best serves the interests of the Fund's shareholders.
 
Sincerely,
 
Heath B. McLendon                                       Lawrence T. McDermott
Chairman of the Board                                   Vice President and
and Investment Officer                                  Investment Officer
 
                                                        July 25, 1994
 
                                        2

<PAGE>
 
Smith Barney Shearson
Massachusetts Municipals Fund
- - --------------------------------------------------------------------------------
 PORTFOLIO HIGHLIGHTS (UNAUDITED)                                   MAY 31, 1994
- - --------------------------------------------------------------------------------

INDUSTRY BREAKDOWN
 
Pie chart depicting the allocation of the Massachusetts Municipals Fund's
investment securities held at May 31, 1994 by industry classification.  The pie
is broken in pieces representing industries in the following percentages:

             INDUSTRY                      PERCENTAGE
Industrial Revenue/Pollution General
 Revenue                                      5.3% 
General Obligations                          18.5%
Transportation                                5.8%
Housing                                      15.7%
Hospital                                     23.7%
Short Term Investment and Net Other
 Assets and Liabilities                       2.4%
Other                                         5.2%
Education                                    10.4%
Utility Revenue                              13.0%

<TABLE>
SUMMARY OF MUNICIPAL BONDS AND NOTES AND SHORT-TERM
INVESTMENTS BY COMBINED RATINGS
 
<CAPTION>
                        Standard &     Percent
  Moody's                 Poor's       of Value
- - -----------------------------------------------
  <S>           <C>        <C>            <C>
    AAA         OR         AAA             49%
    AA                      AA              3
     A                      A              31
    BAA                    BBB             12
    BA                      BB              1
    NR                      NR              3
  VMIG-1                   A-1              1
                                          ---
                                          100%
                                          ===
</TABLE>
 
AVERAGE MATURITY:      21.9 years
 
                                        3

<PAGE>
 
Smith Barney Shearson
Massachusetts Municipals Fund
- - --------------------------------------------------------------------------------
 PORTFOLIO OF INVESTMENTS (UNAUDITED)                               MAY 31, 1994
 
- - --------------------------------------------------------------------------------


                         KEY TO INSURANCE ABBREVIATIONS
- - -------------------------------------------------------------------------------
                  AMBAC -- American Municipal Bond Assurance Corporation
                  CO LEE -- College Construction Loan Association
                  FGIC  -- Federal Guaranty Insurance Corporation
                  FHA   -- Federal Housing Administration
                  FSA   -- Financial Security Assurance
                  MBIA  -- Municipal Bond Investors Assurance
 
<TABLE>
<CAPTION>
                                                                RATINGS       MARKET VALUE
FACE VALUE                                                  MOODY'S    S&P      (NOTE 1)
- - ------------------------------------------------------------------------------------------
<C>           <S>                                           <C>        <C>    <C>
MUNICIPAL BONDS AND NOTES - 97.6 %
              MASSACHUSETTS - 89.7 %
$  700,000    Boston, Massachusetts, General Obligation
              Bonds, Series A, (AMBAC Insured),
              6.500% due 7/1/12                             Aaa        AAA    $   730,625
              Boston, Massachusetts, Financing Authority,
              Industrial Development, Massachusetts
              College of Pharmacy:
   750,000    5.250% due 10/1/14                            NR         AAA        658,125
 1,000,000    5.250% due 10/1/26                            NR         AAA        841,250
   150,000    Boston, Massachusetts, Revenue Refunding
              Bonds, (FHA Insured),
              5.750% due 2/15/23                            Aa         AA-        138,562
   280,000    Boston, Massachusetts, Water & Sewer
              Commission Revenue, Series A,
              7.750% due 11/1/06                            A          A-         305,200
   250,000    Brockton, Massachusetts, Utility,
              6.125% due 6/15/18                            Baa        A-         238,437
              Dedham-Westwood Water District,
              Massachusetts, Refunding Bonds, (MBIA
              Insured):
   450,000    5.000% due 10/15/08                           Aaa        AAA        410,625
   920,000    5.100% due 10/15/12                           Aaa        AAA        817,650
   500,000    Fall River, Massachusetts, General
              Obligation Bonds, (MBIA Insured),
              7.200% due 6/1/10                             Aaa        AAA        544,375
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                        4

<PAGE>
 
Smith Barney Shearson
Massachusetts Municipals Fund
- - --------------------------------------------------------------------------------
 PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued)                   MAY 31, 1994
- - --------------------------------------------------------------------------------
 <TABLE>
<CAPTION>
                                                                RATINGS       MARKET VALUE
FACE VALUE                                                  MOODY'S    S&P      (NOTE 1)
- - ------------------------------------------------------------------------------------------
<C>           <S>                                           <C>        <C>    <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
              MASSACHUSETTS (CONTINUED)
$1,000,000    Framingham, Massachusetts, Housing
              Authority, Mortgage Revenue, (Beaver
              Terrace Apartments, Apartment A),
              6.650% due 2/20/32                            NR         AAA    $ 1,012,500
   500,000    Gloucester, Massachusetts, Municipal
              Purpose Loan,
              5.500% due 11/15/13                           Aaa        AAA        465,625
   250,000    Groveland, Massachusetts, General
              Obligation Bonds, (AMBAC Insured),
              6.850% due 6/15/06                            Aaa        AAA        270,312
   470,000    Haverhill, Massachusetts, Revenue Bonds,
              Series A, (AMBAC Insured),
              6.700% due 9/1/10                             Aaa        AAA        499,375
   500,000    Holyoke, Massachusetts, General Obligation
              Bonds, Series B, (FSA Insured),
              6.125% due 8/1/13                             Aaa        AAA        500,625
   500,000    Lowell, Massachusetts, General Obligation
              Bonds, Series B, (FSA Insured),
              5.600% due 11/1/12                            Aaa        AAA        469,375
   300,000    Lynn, Massachusetts, Water & Sewer
              Commission, General Revenue, (FGIC
              Insured),
              5.500% due 12/1/10                            Aaa        AAA        282,750
   250,000    Mansfield, Massachusetts, General
              Obligation Bonds, (AMBAC Insured),
              6.700% due 1/15/11                            Aaa        AAA        261,562
              Massachusetts Bay Transportation Authority:
   975,000    6.200% due 3/1/16                             A          A+         985,969
 2,065,000    6.100% due 3/1/23                             A          A+       2,034,025
   220,000    Massachusetts Educational Loan Authority,
              Education Loan Revenue, Issue D, Series A,
              7.650% due 1/1/07                             A          A          232,375
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                        5

<PAGE>
 
Smith Barney Shearson
Massachusetts Municipals Fund
- - --------------------------------------------------------------------------------
 PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued)                   MAY 31, 1994
- - --------------------------------------------------------------------------------
 <TABLE>
<CAPTION>
                                                                RATINGS       MARKET VALUE
FACE VALUE                                                  MOODY'S    S&P      (NOTE 1)
- - ------------------------------------------------------------------------------------------
<C>           <S>                                           <C>        <C>    <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
              MASSACHUSETTS (CONTINUED)
              Massachusetts Municipal Wholesale Electric
              Company, Power Supply Revenue, Series A:
$1,000,000    6.500% due 7/1/02                             A          BBB+   $ 1,045,000
 1,000,000    5.000% due 7/1/17                             Aaa        AAA        842,500
 2,000,000    6.125% due 7/1/19                             A          BBB+     1,930,000
   325,000    Massachusetts State College Building
              Authority Project Revenue, Series A,
              7.250% due 5/1/16                             A          A+         342,875
   300,000    Massachusetts State Construction Loan,
              Series C,
              7.000% due 8/1/12                             A          A+         328,125
   500,000    Massachusetts State Convention Center
              Authority, Series A,
              5.375% due 9/1/13                             A          A+         460,000
              Massachusetts State Health & Educational
              Facilities Authority Revenue:
   500,000    5.750% due 7/1/14                             NR         AAA        468,125
   750,000    6.300% due 8/1/18                             Baa        NR         677,813
 1,000,000    6.410% due 6/23/22                            Aaa        AAA      1,026,250
 1,000,000    5.375% due 7/1/24                             Aaa        AAA        873,750
   750,000    Addison Hospital (MBIA Insured),
              6.000% due 7/1/23                             A          NR         670,312
              Beth Israel Hospital:
   250,000    Series E,
              7.000% due 7/1/14                             Aa         A+         269,062
 1,000,000    Series G-4, Inverse Floater, (AMBAC
              Insured),
              8.623% due 7/1/25                             Aaa        AAA        910,000
 1,000,000    Brockton Hospital, Series B,
              8.100% due 7/1/13                             A          A        1,078,750
   500,000    Capital Asset Program, Series F, (MBIA
              Insured),
              7.300% due 10/1/18                            Aaa        AAA        540,000
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                        6

<PAGE>
 
Smith Barney Shearson
Massachusetts Municipals Fund
- - --------------------------------------------------------------------------------
 PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued)                   MAY 31, 1994
- - --------------------------------------------------------------------------------
 <TABLE>
<CAPTION>
                                                                RATINGS       MARKET VALUE
FACE VALUE                                                  MOODY'S    S&P      (NOTE 1)
- - ------------------------------------------------------------------------------------------
<C>           <S>                                           <C>        <C>    <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
              MASSACHUSETTS (CONTINUED)
$  430,000    Community College Project, Series A,
              (Co Lee Insured)
              6.600% due 10/1/22                            NR         AAA    $   437,525
 1,000,000    Faulkner Hospital, Series C,
              6.000% due 7/1/13                             Baa1       BBB+       908,750
              Massachusetts General Hospital:
 1,000,000    Series F, (AMBAC Insured),
              6.250% due 7/1/20                             Aaa        AAA        997,500
              Medical Center:
   750,000    Lahey Clinic, Series B, (MBIA Insured),
              5.375% due 7/1/23                             Aaa        AAA        656,250
              Morton Hospital & Medical Center:
              Series A,
   370,000    8.750% due 7/1/11                             NR         NR         436,138
              Series B:
 1,000,000    5.250% due 7/1/14                             NR         AAA        878,750
   500,000    5.500% due 7/1/23                             NR         AAA        440,000
   545,000    New England Memorial Hospital, Series A,
              8.875% due 7/1/13                             NR         NR         632,200
 1,000,000    Saint Memorial Medical Center, Series A,
              6.000% due 10/1/23                            Ba         NR         683,750
   750,000    South Shore Hospital, Series E, (MBIA
              Insured),
              5.500% due 7/1/20                             Aaa        AAA        672,188
              Suffolk University, Series B, (Co Lee
              Insured):
   200,000    6.250% due 7/1/12                             Baa        AAA        200,500
 1,575,000    6.350% due 7/1/22                             Baa        AAA      1,571,062
   600,000    University of Massachusetts Medical Center,
              (Co Lee Insured),
              6.000% due 7/1/23                             NR         AAA        579,000
   345,000    Youville Hospital, Series A, (FHA Insured),
              9.100% due 8/1/15                             Aa         AA-        371,306
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                        7

<PAGE>
 
Smith Barney Shearson
Massachusetts Municipals Fund
- - --------------------------------------------------------------------------------
 PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued)                   MAY 31, 1994
- - --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                                RATINGS       MARKET VALUE
FACE VALUE                                                  MOODY'S    S&P      (NOTE 1)
- - ------------------------------------------------------------------------------------------
<C>           <S>                                           <C>        <C>    <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
              MASSACHUSETTS (CONTINUED)
              Massachusetts State Housing Finance Agency,
              Housing Revenue:
$1,000,000    5.950% due 12/1/14                            Aaa        AAA    $   967,500
 2,150,000    Housing Project, Series A,
              6.375% due 4/1/21                             A1         A+       2,125,812
 1,000,000    Series 14,
              7.700% due 12/1/14                            Aaa        AAA      1,032,500
   600,000    Series 18,
              7.350% due 12/1/16                            Aa         A+         627,750
 1,000,000    Series 31,
              6.450% due 12/1/16                            Aa         A+       1,006,250
    95,000    Single Family Mortgage, Series A,
              11.000% due 12/1/09                           Aa         A+          98,206
   100,000    Single Family Mortgage, Series 5,
              8.375% due 6/1/15                             Aa         A+         104,750
              Massachusetts State Industrial Finance
              Agency Revenue:
   250,000    6.300% due 7/1/05                             Baa1       BBB        250,313
   500,000    Series A, (Babson College), (MBIA Insured),
              6.500% due 10/1/22                            Aaa        Baa1       508,750
   750,000    Series E, (Clark University),
              7.000% due 7/1/12                             A          A-         800,625
   250,000    Concord Academy, (FSA Insured),
              6.900% due 9/1/21                             Aaa        AAA        259,687
 1,000,000    Edison, Series E,
              5.875% due 8/1/08                             Baa2       BBB        945,000
   100,000    Guaranteed Loan, Series A,
              7.875% due 5/1/07                             NR         AAA        102,625
   500,000    (S.E. Massachusetts Project), Recovery
              Revenue,
              Series A,
              9.000% due 7/1/15                             NR         NR         553,750
   130,000    Massachusetts State Port Authority Revenue,
              7.750% due 7/1/18                             Aa         AA-        136,825
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                        8

<PAGE>
 
Smith Barney Shearson
Massachusetts Municipals Fund
- - --------------------------------------------------------------------------------
 PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued)                   MAY 31, 1994
- - --------------------------------------------------------------------------------
 <TABLE>
<CAPTION>
                                                                RATINGS       MARKET VALUE
FACE VALUE                                                  MOODY'S    S&P      (NOTE 1)
- - ------------------------------------------------------------------------------------------
<C>           <S>                                           <C>        <C>    <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
              MASSACHUSETTS (CONTINUED)
              Massachusetts State Water Resource
              Authority,
              Series A:
$1,000,000    6.250% due 11/1/10                            A          A-     $ 1,005,000
 1,000,000    5.500% due 3/1/17                             A          A-         895,000
   250,000    North Reading, Massachusetts, General
              Obligation Bonds, (MBIA Insured),
              6.875% due 6/15/07                            Aaa        AAA        269,375
   795,000    Plymouth County, Massachusetts,
              Certificates of Participation, Series A,
              6.750% due 10/1/04                            NR         BBB-       823,819
   500,000    Salem, Massachusetts, General Obligation
              Bonds, (AMBAC Insured),
              6.800% due 8/15/10                            Aaa        AAA        535,000
    30,000    Springfield, Massachusetts, Industrial
              Development Finance Authority, Pollution
              Control Revenue, (Monsanto Company
              Project),
              9.100% due 11/1/04                            A-1        A-          34,950
   750,000    Springfield, Massachusetts, (School Project
              Loan),
              Series B,
              7.100% due 9/1/11                             Baa        NR         777,188
   500,000    Springfield, Massachusetts, Series B,
              (MBIA Insured),
              6.000% due 1/15/13                            Aaa        AAA        493,750
   250,000    University of Massachusetts, Building
              Authority Revenue, Series A,
              7.500% due 5/1/14                             A          A+         273,750
   485,000    Webster, Massachusetts, General Obligation
              Bonds, (AMBAC Insured),
              6.700% due 9/1/10                             Aaa        AAA        511,675
   250,000    Westfield, Massachusetts, General
              Obligation Bonds, (AMBAC Insured),
              7.100% due 12/15/08                           Aaa        AAA        280,938
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                        9

<PAGE>
 
Smith Barney Shearson
Massachusetts Municipals Fund
- - --------------------------------------------------------------------------------
 PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued)                   MAY 31, 1994
- - --------------------------------------------------------------------------------
 <TABLE>
<CAPTION>
                                                                RATINGS       MARKET VALUE
FACE VALUE                                                  MOODY'S    S&P      (NOTE 1)
- - ------------------------------------------------------------------------------------------
<C>           <S>                                           <C>        <C>    <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
              MASSACHUSETTS (CONTINUED)
              Worcester, Massachusetts, Refunding &
              Construction, Series A, (MBIA Insured):
$  700,000    6.400% due 1/1/05                             Aaa        AAA    $   729,750
   330,000    6.450% due 1/1/06                             Aaa        AAA        344,025
- - ------------------------------------------------------------------------------------------
                                                                               49,121,386
- - ------------------------------------------------------------------------------------------
              PUERTO RICO - 6.4 %
 1,500,000    Commonwealth of Puerto Rico,
              5.850% due 7/1/15                             Aaa        AAA      1,470,000
   200,000    Commonwealth of Puerto Rico,
              General Obligation Bonds,
              8.000% due 7/1/08                             Baa1       A          224,000
   795,000    Commonwealth of Puerto Rico,
              Urban Renewal Housing Revenue Bonds,
              7.875% due 10/1/04                            Baa        BBB        888,413
   415,000    Puerto Rico Industrial, Medical &
              Environmental Pollution Control Facilities,
              Finance Authority Revenue Bonds, Special
              Facilities,
              (American Airlines), Series A,
              8.750% due 12/1/25                            Baa1       A+         444,569
   500,000    Puerto Rico Port Authority Revenue,
              6.300% due 6/1/23                             Baa3       BB+        455,625
- - ------------------------------------------------------------------------------------------
                                                                                3,482,607
- - ------------------------------------------------------------------------------------------
              GUAM - 1.3 %
   750,000    Guam, Apartment Authority Revenue,
              Series A,
              6.500% due 10/1/23                            NR         BBB        751,875
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                       10

<PAGE>
 
Smith Barney Shearson
Massachusetts Municipals Fund
- - --------------------------------------------------------------------------------
 PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued)                   MAY 31, 1994
- - --------------------------------------------------------------------------------
 <TABLE>
<CAPTION>
                                                                RATINGS       MARKET VALUE
FACE VALUE                                                  MOODY'S    S&P      (NOTE 1)
- - -----------------------------------------------------------------------------------------
<C>           <S>                                           <C>        <C>    <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
              U.S. VIRGIN ISLANDS - 0.2 %
              Virgin Islands Public Finance Authority
              Revenue, Matching Funds Loan Note, (Marine
              Midland), Series A:
$   15,000    7.300% due 10/1/18                            Aaa        AAA    $    16,763
   110,000    Pre-refunded,
              7.300% due 10/1/18                            Aaa        AAA        124,713
- - -----------------------------------------------------------------------------------------
                                                                                  141,476
- - -----------------------------------------------------------------------------------------
              TOTAL MUNICIPAL BONDS AND NOTES
              (Cost $54,276,141)                                               53,497,344
- - -----------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 0.6%
(Cost $300,000)
   300,000    Commonwealth of Puerto Rico, Government
              Developmental Bank,
              2.600% due 12/1/15+                           VMIG-1     A-1        300,000
- - -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $54,576,141*)                            98.2%         53,797,344
OTHER ASSETS AND LIABILITIES (NET)                                1.8             993,278
- - -----------------------------------------------------------------------------------------
NET ASSETS                                                      100.0%        $54,790,622
- - -----------------------------------------------------------------------------------------
<FN> 
* Aggregate cost for Federal tax purposes.
+ Put bonds and notes have demand features to mature within one year.
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                       11

<PAGE>
 
Smith Barney Shearson
Massachusetts Municipals Fund
- - --------------------------------------------------------------------------------
 STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)                    MAY 31, 1994
- - --------------------------------------------------------------------------------
 <TABLE>
<S>                                                          <C>             <C>
ASSETS:
    Investments, at value (Cost $54,576,141)(Note 1)
      See accompanying schedule                                              $53,797,344
    Receivable for investment securities sold                                  1,500,000
    Interest receivable                                                        1,086,266
    Receivable for Fund shares sold                                              135,710
- - ----------------------------------------------------------------------------------------
      TOTAL ASSETS                                                            56,519,320
- - ----------------------------------------------------------------------------------------
LIABILITIES:
    Due to custodian                                         $1,558,519
    Payable for Fund shares redeemed                            52,215
    Investment advisory fee payable (Note 2)                    24,493
    Dividends payable                                           14,736
    Administration fee payable (Note 2)                         13,996
    Distribution fee payable (Note 3)                           10,132
    Service fees payable (Note 3)                                6,902
    Custodian fees payable (Note 2)                              4,000
    Transfer agent fees payable (Note 2)                         2,200
    Accrued expenses and other payables                         41,505
- - ----------------------------------------------------------------------------------------
      TOTAL LIABILITIES                                                        1,728,698
- - ----------------------------------------------------------------------------------------
NET ASSETS                                                                   $54,790,622
- - ----------------------------------------------------------------------------------------
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                       12

<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
 
 <TABLE>
- - -----------------------------------------------------------------------------------------
 STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (continued)
                                                                    MAY 31, 1994
- - -----------------------------------------------------------------------------------------
<S>                                                                          <C>
NET ASSETS CONSIST OF:
    Distributions in excess of net investment income earned
  to date                                                                    $   (77,778)
    Accumulated net realized loss on investments sold                           (290,873)
    Unrealized depreciation of investments                                      (778,797)
    Par value                                                                      4,444
    Paid-in capital in excess of par value                                    55,933,626
- - -----------------------------------------------------------------------------------------
TOTAL NET ASSETS                                                             $54,790,622
- - -----------------------------------------------------------------------------------------
NET ASSETS:
    CLASS A SHARES:
    NET ASSET VALUE and redemption price per share
    ($30,452,160 / 2,469,658 shares of beneficial interest 
  outstanding)                                                                    $12.33
- - -----------------------------------------------------------------------------------------
    MAXIMUM OFFERING PRICE per share ($12.33 / .955)
    (based on sales charge of 4.5% of the offering price on May 31,
  1994)                                                                           $12.91
- - -----------------------------------------------------------------------------------------
    CLASS B SHARES:
    NET ASSET VALUE and redemption price per share+
    ($24,338,462 / 1,974,159 shares of beneficial interest
  outstanding)                                                                    $12.33
- - -----------------------------------------------------------------------------------------
<FN> 
+ Redemption price per share is equal to Net Asset Value less any applicable
  contingent deferred sales charge.
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                       13

<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
 
- - --------------------------------------------------------------------------------
 STATEMENT OF OPERATIONS (UNAUDITED)
                                           FOR THE SIX MONTHS ENDED MAY 31, 1994
- - --------------------------------------------------------------------------------
 
<TABLE>
<S>   <C>                                                      <C>           <C>
INVESTMENT INCOME:
      Interest                                                               $ 1,726,293
EXPENSES:
      Investment advisory fee (Note 2)                         $ 96,672
      Distribution fee (Note 3)                                  58,363
      Administration fee (Note 2)                                55,241
      Service fees (Note 3)                                      41,431
      Shareholder reports expense                                28,023
      Legal and audit fees                                       27,364
      Transfer agent fees (Notes 2 and 4)                        11,130
      Custodian fees (Note 2)                                    11,010
      Trustees' fees and expenses (Note 2)                        6,727
      Other                                                      21,354
      Fees waived by investment adviser and administrator
      (Note 2)                                                  (73,429)
- - ----------------------------------------------------------------------------------------
      TOTAL EXPENSES                                                             283,886
- - ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME                                                          1,442,407
- - ----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
  (NOTES 1 AND 5):
      Net realized loss on investments sold during the
      period                                                                    (338,188)
      Net unrealized depreciation of investments during the
      period                                                                  (3,485,321)
- - ----------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS                               (3,823,509)
- - ----------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS                         $(2,381,102)
- - ----------------------------------------------------------------------------------------
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                       14

<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
<TABLE>
- - --------------------------------------------------------------------------------
  STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
 
<CAPTION>
                                                             SIX MONTHS        YEAR
                                                               ENDED          ENDED
                                                              5/31/94        11/30/93
                                                             (UNAUDITED)
<S>                                                          <C>            <C>
Net investment income                                        $1,442,407     $2,337,962
Net realized gain/(loss) on investments sold during the
  period                                                       (338,188)       312,979
Net unrealized appreciation/(depreciation) of investments
  during the period                                          (3,485,321)     1,619,280
- - --------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
  operations                                                 (2,381,102)     4,270,221
Distributions to shareholders from net investment income:
    Class A                                                    (893,891)    (1,684,213)
    Class B                                                    (599,153)      (649,337)
Distributions to shareholders in excess of net investment
  income:
    Class A                                                      --            (24,485)
    Class B                                                      --             (9,440)
Distributions to shareholders from net realized gain on
  investments:
    Class A                                                    (120,422)      (140,498)
    Class B                                                     (84,059)       (21,375)
Net increase in net assets from Fund share transactions
  (Note 6):
    Class A                                                     194,990      3,828,288
    Class B                                                   3,765,710     19,047,087
- - --------------------------------------------------------------------------------------
Net increase/(decrease) in net assets                          (117,927)    24,616,248
NET ASSETS:
Beginning of period                                          54,908,549     30,292,301
- - --------------------------------------------------------------------------------------
End of period (including distributions in excess of net
  investment income of $77,778 and $27,141, respectively)   $54,790,622    $54,908,549
- - --------------------------------------------------------------------------------------
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                       15

<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
- - --------------------------------------------------------------------------------
 FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
 
<TABLE>
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
 
<CAPTION>
                                                           SIX MONTHS              YEAR
                                                             ENDED                ENDED
                                                            5/31/94             11/30/93#
                                                           (UNAUDITED)
<S>                                                          <C>                   <C>
Net asset value, beginning of period                          $13.26               $12.63
- - -----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income***                                        0.35                 0.72
Net realized and unrealized gain/(loss) on investments         (0.87)                0.72
- - -----------------------------------------------------------------------------------------
Total from investment operations                               (0.52)                1.44
- - -----------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income                           (0.36)               (0.73)
Distributions in excess of net investment income                  --                (0.01)
Distributions from net realized capital gains                  (0.05)               (0.07)
Distributions from capital                                        --                   --
- - -----------------------------------------------------------------------------------------
Total distributions                                            (0.41)               (0.81)
- - -----------------------------------------------------------------------------------------
Net asset value, end of period                                $12.33               $13.26
- - -----------------------------------------------------------------------------------------
Total return++                                                 (4.04%)              11.74%
- - -----------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (000's)                            $30,452              $32,592
Ratio of operating expenses to average net assets**             0.81%+               0.82%
Ratio of net investment income to average net assets            5.44%+               5.49%
Portfolio turnover rate                                           26%                  10%
- - -----------------------------------------------------------------------------------------
<FN> 
  * The Fund commenced operations on December 21, 1987. Any shares outstanding
    prior to November 6, 1992 were designated as Class A shares.
 ** Annualized expense ratios before voluntary waiver of fees and/or
    reimbursement of expenses by investment adviser and/or administrator for the
    six months ended May 31, 1994, the fiscal years ended November 30, 1993,
    1992, 1991, 1990, 1989, and the fiscal period ended November 30, 1988 were
    1.07%,1.18%,1.32%,1.28%, 1.09%, 1.72% and 2.00%, respectively.
*** Net investment income before voluntary waiver of fees and/or reimbursement
    of expenses by investment adviser and/or administrator for the six months
    ended May 31, 1994, the fiscal years ended November 30, 1993, 1992, 1991,
    1990, 1989, and the fiscal period ended November 30, 1988 were $0.33, $0.67,
    $0.69, $0.77, $0.80, $0.74 and $0.66, respectively.
  + Annualized.
 ++ Total return represents aggregate total return for the periods indicated
    and does not reflect any applicable sales charge.
  # Per share amounts have been calculated using the monthly average shares
    method, which more appropriately presents the per share data as the
    undistributed method does not accord with results of operations for this
    period.
</TABLE>

                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                       16

<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
      YEAR          YEAR          YEAR          YEAR          PERIOD
      ENDED         ENDED         ENDED         ENDED         ENDED
    11/30/92      11/30/91      11/30/90      11/30/89      11/30/88*
      <C>           <C>           <C>           <C>            <C>
      $12.28        $11.81        $12.11        $11.88         $11.40
- - ----------------------------------------------------------------------
        0.77          0.84          0.84          0.88           0.82
        0.43          0.48         (0.27)         0.21           0.54
- - ----------------------------------------------------------------------
        1.20          1.32          0.57          1.09           1.36
- - ----------------------------------------------------------------------
       (0.77)        (0.84)        (0.85)        (0.86)         (0.82)
          --            --            --            --             --
       (0.04)           --         (0.02)           --          (0.06)
       (0.04)        (0.01)           --            --             --
- - ----------------------------------------------------------------------
       (0.85)        (0.85)        (0.87)        (0.86)         (0.88)
- - ----------------------------------------------------------------------
      $12.63        $12.28        $11.81        $12.11         $11.88
- - ----------------------------------------------------------------------
       10.06%        11.57%         4.93%         9.43%         12.25%
- - ----------------------------------------------------------------------
     $27,354       $19,621       $18,036       $20,375        $14,548
        0.71%         0.66%         0.74%         0.58%          0.67%+
        6.12%         6.89%         7.00%         7.24%          7.00%+
          73%           87%           51%           28%           128%
- - ----------------------------------------------------------------------
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                       17


<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
- - --------------------------------------------------------------------------------

<TABLE>
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
 
<CAPTION>
                                                    SIX MONTHS      YEAR         PERIOD
                                                      ENDED         ENDED         ENDED
                                                     5/31/94      11/30/93#     11/30/92*
                                                   (UNAUDITED)
<S>                                                    <C>          <C>          <C>
Net asset value, beginning of period                   $13.26       $12.63       $ 12.52
- - ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income***                                 0.32         0.66          0.06
Net realized and unrealized gain/(loss) on
  investments                                           (0.87)        0.72          0.10
- - ----------------------------------------------------------------------------------------
Total from investment operations                        (0.55)        1.38          0.16
- - ----------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income                    (0.33)       (0.67)        (0.05)
Distributions in excess of net investment
  income                                                   --        (0.01)           --
Distributions from net realized capital gains           (0.05)       (0.07)           --
- - ----------------------------------------------------------------------------------------
Total Distributions:                                    (0.38)       (0.75)        (0.05)
- - ----------------------------------------------------------------------------------------
Net asset value, end of period                         $12.33       $13.26       $ 12.63
- - ----------------------------------------------------------------------------------------
Total return+                                           (4.26)%      11.09%         1.29%
- - ----------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)                  $24,388      $22,317        $2,938
Ratio of operating expenses to average net
  assets**                                               1.33%++      1.31%         1.34%++
Ratio of net investment income to average net
  assets                                                 4.92%++      4.99%         5.49%++
Portfolio turnover rate                                    26%          10%           73%
- - ----------------------------------------------------------------------------------------
<FN> 
  * The Fund commenced selling Class B shares on November 6, 1992.
 ** Annualized expense ratios before voluntary waiver of fees and/or
    reimbursement of expenses by investment adviser and/or administrator for the
    six months ended May 31, 1994, the year ended November 30, 1993 and the
    fiscal period ended November 30, 1992 were 1.59%, 1.68% and 1.94%,
    respectively.
*** Net investment income before voluntary waiver of fees and/or reimbursement
    of expenses by investment adviser and/or administrator for the six months
    ended May 31, 1994, the year ended November 30, 1993 and the fiscal period
    ended November 30, 1992 were $0.30, $0.61 and $0.05, respectively.
  + Total return represents aggregate total return for the periods indicated
    and does not reflect any applicable sales charge.
 ++ Annualized.
 #  Per share amounts have been calculated using the monthly average shares
    method, which more appropriately presents the per share data as the
    undistributed method does not accord with results of operations for this
    period.
</TABLE>
 
                       SEE NOTES TO FINANCIAL STATEMENTS.
 
                                       18

<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
- - --------------------------------------------------------------------------------
 NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- - --------------------------------------------------------------------------------

1.   SIGNIFICANT ACCOUNTING POLICIES
 
Smith Barney Shearson Massachusetts Municipals Fund (the "Fund") was organized
on January 13, 1987 under the laws of the Commonwealth of Massachusetts as a
"Massachusetts business trust." The Fund is a nondiversified, open-end
management investment company registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"). As of November 6, 1992, the Fund offered two classes of shares: Class A
shares and Class B shares. Class A shares are sold with a front-end sales
charge. Class B shares may be subject to a contingent deferred sales charge
("CDSC"). Both classes of shares have identical rights and privileges except
with respect to the effect of the respective sales charges, the distribution
and/or service fees borne by each class, expenses allocable exclusively to each
class, voting rights on matters affecting a single class, the exchange privilege
of each class and the conversion feature of Class B shares. The following is a
summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
 
Portfolio valuation:  Securities are valued by The Boston Company Advisors, Inc.
("Boston Advisors") after consultation with an independent pricing service (the
"Service") approved by the Fund's Board of Trustees. When, in the judgement of
the Service, quoted bid prices for investments are readily available and are
representative of the bid side of the market, these investments are valued at
the mean between the quoted bid prices and asked prices. Investments for which,
in the judgement of the Service, there are no readily obtainable market
quotations (which may constitute a majority of the portfolio securities) are
carried at fair value as determined by the Service, based on methods which
include consideration of: yields or prices of municipal securities of comparable
quality, coupon, maturity and type; indications as to values from dealers; and
general market conditions. Short-term investments that mature in 60 days or less
are valued at amortized cost whenever the Fund's Board of Trustees determines
that amortized cost reflects the fair value of those investments.
 
Securities transactions and investment income:  Securities transactions are
recorded as of the trade date. Interest income is recorded on the accrual basis.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date. Realized gains and losses from
securities sold are recorded on the identified cost basis. Investment income and
realized and unrealized gains and losses are allocated based upon relative net
assets of each class.
 
                                       19

<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
- - --------------------------------------------------------------------------------
 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
- - --------------------------------------------------------------------------------
 
Dividends and distributions to shareholders:  Dividends from net investment
income are determined on a class level. It is the policy of the Fund to declare
dividends from net investment income daily and to pay such dividends on the last
business day of the Smith Barney Inc. ("Smith Barney") statement month.
Distributions from net realized capital gains are declared and paid annually,
after the end of the fiscal year in which earned. Additional distributions of
net investment income and capital gains for the Fund may be made at the
discretion of the Board of Trustees in order to avoid the application of a 4%
nondeductible excise tax on certain undistributed amounts of net investment
income and capital gains. To the extent net realized capital gains can be offset
by capital losses and carryforwards, it is the policy of the Fund not to
distribute such gains. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. The differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund as a whole.
 
Federal income taxes:  It is the policy of the Fund to qualify as a regulated
investment company, which distributes exempt-interest dividends by complying
with the requirements of the Internal Revenue Code applicable to regulated
investment companies and by distributing substantially all of its earnings to
its shareholders. Therefore, no Federal income tax provision is required.
 
2.   INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND
     OTHER TRANSACTIONS
 
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Management
Corp., which is controlled by Smith Barney Holdings Inc. ("Holdings"). Holdings
is a wholly owned subsidiary of The Travelers Inc. Under the Advisory Agreement,
the Fund pays a monthly fee at the annual rate of .35% of the value of the
Fund's average daily net assets up to $500 million and .32% of the value of its
average daily net assets in excess of $500 million.
 
Prior to April 20, 1994, the Fund was party to an administration agreement with
Boston Advisors, an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). Under this agreement, the Fund paid a monthly fee based on the
following annual rates: .20% of the value of the Fund's average daily net assets
up
 
                                       20

<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
- - --------------------------------------------------------------------------------
 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
- - --------------------------------------------------------------------------------
 
to $500 million and .18% of the value of its average daily net assets in excess
of $500 million.
 
As of the close of business on April 20, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as the
Fund's administrator. The new administration agreement contains substantially
the same terms and conditions, including the level of fees, as the predecessor
agreement.
 
As of the close of business on April 20, 1994, the Fund also entered into a sub-
administration agreement ("Sub-Administration Agreement") with Boston Advisors.
Under the Sub-Administration Agreement, Boston Advisors is paid a portion of the
fee paid by the Fund to SBA at a rate agreed upon from time to time between SBA
and Boston Advisors.
 
From time to time, Greenwich Street Advisors and the Fund's administrator may
voluntarily waive a portion or all of their respective fees otherwise payable to
them and reimburse expenses. For the six months ended May 31, 1994, Greenwich
Street Advisers and Boston Advisors, the Fund's prior administrator, voluntarily
waived fees of $46,728 and $26,701, respectively.
 
For the six months ended May 31, 1994, Smith Barney received $68,967 from
investors representing commissions (sales charges) on sales of Class A shares.
 
A CDSC is generally payable by a shareholder in connection with the redemption
of Class B shares within five years after the date of purchase. In circumstances
in which the CDSC is imposed, the amount of the charge ranges between 4.5% and
1% of net asset value depending on the number of years since the date of
purchase. For the six months ended May 31, 1994, Smith Barney received $20,259
from investors in CDSCs on the redemption of Class B shares.
 
No officer, director or employee of Smith Barney or of any parent or subsidiary
of Smith Barney receives any compensation from the Fund for serving as a Trustee
or officer of the Fund. The Fund pays each Trustee who is not an officer,
director or employee of Smith Barney or any of its affiliates $1,000 per annum
plus $100 per meeting attended and reimburses each such Trustee for travel and
out-of-pocket expenses.
 
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Fund's custodian. The Shareholder Services Group, Inc., a
subsidiary of First Data Corporation, serves as the Fund's transfer agent.
 
                                       21

<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
- - --------------------------------------------------------------------------------
 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
- - --------------------------------------------------------------------------------
 
3.   DISTRIBUTION PLAN
 
Smith Barney acts as distributor of the Fund's shares pursuant to a distribution
agreement with the Fund, and sells shares of the Fund through Smith Barney or
its affiliates.
 
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a Services and
Distribution Plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for both Class A and Class B
shareholders, and covers expenses incurred in distributing Class B shares. Smith
Barney is paid an annual service fee with respect to Class A and Class B shares
of the Fund at the rate of .15% of the value of the average daily net assets of
each respective class of shares. Smith Barney is also paid an annual
distribution fee with respect to Class B shares at the rate of .50% of the value
of the average daily net assets attributable to those shares. During the six
months ended May 31, 1994, the Fund incurred $23,922 in service fees for Class A
shares. During the six months ended May 31, 1994, the Fund incurred $17,509 and
$58,363 in service fees and distribution fees, respectively, for Class B shares.
 
4.   EXPENSE ALLOCATION
 
Expenses of the Fund not directly attributable to the operations of any class of
shares are prorated between the classes based upon the relative net assets of
each class. Operating expenses directly attributable to a class of shares are
charged to that class' operations. In addition to the above servicing and
distribution fees, class specific operating expenses include transfer agent fees
of $5,224 and $5,906, for Class A and Class B shares, respectively.
 
5.   PURCHASES AND SALES OF SECURITIES
 
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments, for the six months ended May 31, 1994 amounted to
$18,509,071 and $14,507,805, respectively.
 
At May 31, 1994, the aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost amounted to $1,109,016, and
the aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value amounted to $1,887,813.
 
                                       22

<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
- - --------------------------------------------------------------------------------
 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
- - --------------------------------------------------------------------------------
 
<TABLE>
6.   SHARES OF BENEFICIAL INTEREST
 
At May 31, 1994, an unlimited number of shares of beneficial interest divided
into two classes (Class A and Class B), with a par value of $.001 per share were
authorized. Changes in shares of beneficial interest for the Fund were as
follows:
 
<CAPTION>
                                        SIX MONTHS ENDED                YEAR ENDED
                                             5/31/94                     11/30/93
          Class A shares:               Shares      Amount          Shares      Amount
- - -----------------------------------------------------------------------------------------
<S>                                   <C>         <C>              <C>         <C>
Sold                                   226,704    $2,931,412        493,233    $6,501,607
Issued as reinvestment of dividends     53,718       695,028         93,256     1,223,534
Redeemed                              (268,052)   (3,431,450)      (295,101)   (3,896,853)
- - -----------------------------------------------------------------------------------------
Net increase                            12,370    $  194,990        291,388    $3,828,288
- - -----------------------------------------------------------------------------------------
</TABLE>
 
<TABLE>
<CAPTION>
                                        SIX MONTHS ENDED                YEAR ENDED
                                             5/31/94                     11/30/93
          Class B shares:              Shares       Amount          Shares       Amount
- - ------------------------------------------------------------------------------------------
<S>                                   <C>         <C>             <C>          <C>
Sold                                   383,280    $4,942,469      1,458,949    $19,170,821
Issued as reinvestment of dividends     33,987       439,551         33,642       444,988
Redeemed                              (125,726)   (1,616,310)       (42,563)     (568,722)
- - ------------------------------------------------------------------------------------------
Net increase                           291,541    $3,765,710      1,450,028    $19,047,087
- - ------------------------------------------------------------------------------------------
</TABLE>
 
7.   CONCENTRATION OF CREDIT
 
The Fund primarily invests in debt obligations issued by the Commonwealth of
Massachusetts and its political subdivisions, agencies and public authorities to
obtain funds for various public purposes. The Fund is more susceptible to
factors adversely affecting issuers of Massachusetts municipal securities than
is a municipal bond fund that is not concentrated in these issuers to the same
extent. Uncertain economic conditions may affect the ability of Massachusetts
municipal securities to meet their financial obligations.
 
8.   LINE OF CREDIT
 
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Continental Bank N.A. under an Amended and Restated Line of
Credit
 
                                       23

<PAGE>
 
Smith Barney Shearson
MASSACHUSETTS MUNICIPALS FUND
- - --------------------------------------------------------------------------------
 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
- - --------------------------------------------------------------------------------
 
Agreement (the "Agreement") dated April 30, 1992, primarily for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. Under this Agreement, the
Fund may borrow up to the lesser of $25 million or 10% of its net assets.
Interest is payable either at the bank's Money Market Rate or the London
Interbank Offered Rate (LIBOR) plus .375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to aggregate amount of indebtedness pursuant to the Agreement of no less than 5
to 1. During the six months ended May 31, 1994, the Fund did not borrow under
the Agreement.
 
                                       24

<PAGE>

MASSACHUSETTS
MUNICIPALS
FUND

TRUSTEES
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
James J. Crisona
Robert A. Frankel
Dr. Paul Hardin
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon

OFFICERS
Heath B. McLendon
Chairman of the Board and
Investment Officer                                                            

Stephen J. Treadway
President

Richard P. Roelofs
Executive Vice President

Lawrence T. McDermott
Vice President and
Investment Office

Karen L. Mahoney-Malcomson
Investment Officer

Lewis E. Daidone  
Treasurer

Christina T. Sydor
Secretary


This report is submitted for the      
general information of the            
shareholders of Smith Barney          
Shearson Massachusetts                
Municipals Fund.  It is not           
authorized for distribution to        
prospective investors unless          
accompanied or preceded by an         
effective Prospectus for the          
Fund, which contains information      
concerning the Fund's investment      
policies, fees and expenses as        
well as other pertinent information.  

SMITH BARNEY
- - ------------

SMITH BARNEY SHEARSON
MUTUAL FUNDS                          
Two World Trade Center                
New York, New York  10048             
                                      
Fund 41,209                           
FD2227 G4                             




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