[Front cover]
SEMI-ANNUAL REPORT
Smith Barney
Oregon
Municipals
Fund
October 31, 1996
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Smith Barney Oregon Municipals Fund
Dear Shareholder:
We are pleased to bring you the semi-annual report of the Smith Barney Oregon
Municipals Fund for the period ended October 31, 1996. In this report, we
summarize the period's prevailing economic and market conditions and outline
the Fund's investment strategy. A detailed summary of the Fund's performance
can be found in the appropriate sections that follow in the semi-annual
report.
Oregon Municipals Fund's Performance and Investment Strategy
The Smith Barney Oregon Municipals Fund seeks to pay its shareholders as high
a level of dividend income exempt from Federal income taxes and Oregon state
personal income tax as is consistent with prudent investing and the
preservation of capital.
For the six months ended October 31, 1996, the Class A shares of the Oregon
Municipals Fund had a total return of 5.04%. In comparison, the Fund's Lipper
Analytical Services, Inc. Oregon municipal bond fund peer average had a total
return of 4.33% for the same time period. (Lipper is an independent fund
tracking organization.) As of October 31, 1996, approximately 94% of the
Oregon Municipals Fund's holdings were in investment-grade securities, with
roughly 34% invested in AAA-rated bonds, the highest rating. (An
investment-grade security is a security with a rating of BBB/Baa or better
from Standard & Poor's Ratings Services or Moody's Investors Service, Inc.,
two major credit reporting and bond rating agencies.)
During the period covered by this report, the Fund maintained its
high-quality credit orientation. The largest sectors of the Oregon Municipals
Fund were education bonds (17.2%), multi-family housing bonds (14.1%), and
single-family housing bonds (10.7%).
In response to market conditions, the Oregon Municipals Fund has maintained a
bias toward good quality, higher coupon bonds, with a focus on current income
more so than on total return. As a general rule, we concentrate on the
coupon, maturity and call features of the Fund's holdings rather than the
specific purpose for which the municipal bonds are being issued. However, the
Fund remains broadly diversified across various sectors.
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Market and Economic Overview
Because of the uncertainty surrounding the future direction of the U.S.
economy, the bond markets have continued to experience significant volatility
over the past six months. However, since April, this heightened volatility
has been confined to a narrow yield range from 6.75% and 7.20% on 30-year
U.S. Treasury yields.
The heightened bond market volatility of recent months stems from several
conditions in the U.S. economy, with the most important being the underlying
strength of the U.S. economy. For example, gross domestic product (GDP) in
the U.S. for the second quarter of 1996 grew at an annualized rate of 4.7%,
up from 2.0% in the first quarter. This pace of economic growth has caused
pressures on both labor and capital to increase, yet there have been no signs
of a pick-up in inflation. Bond market investors have closely monitored
recent U.S. economic data for signs of whether the rate of U.S. economic
growth will moderate, or whether the economy will continue to grow at its
current pace. While the majority of key U.S. economic announcements in the
beginning of 1996 months pointed towards a strengthening rather than a
weakening economy, government reports released during the months of September
and October suggest that the economy may be headed for a slowdown.
Over the last weeks of September and the beginning of October, the bond
markets, including the municipal bond market, have rallied. The markets
started to climb with the announcement that the Federal Reserve Board (the
Fed) would not raise short-term rates at their Federal Open Market Committee
meeting on September 24, 1996. In our view, the bond markets rallied because
of two reasons. One, there appears to be little or no evidence of upward
pressure on inflation, in spite of signs of strong economic growth in 1996
and extremely tight labor markets. Two, U.S. economic growth in the third
quarter slowed substantially -- to roughly a 2% annual rate, from 4.7% in the
second quarter. Therefore, inflation fears -- and the need for Fed tightening
- -- which had pushed the yield on the 30-year Treasury up to the 7.20% range
in early September seem to have subsided. In addition, rates have continued
to fall since the November elections.
Oregon Economic Highlights
As of October 31, 1996, Oregon's general obligation debt was rated double-A
by Fitch Investors Service, L.P., one of the three major credit reporting and
bond rating agencies. Oregon's double-A rating is based on the State's strong
