SMITH BARNEY

                                                                          OREGON
                                                                      MUNICIPALS
                                                                            FUND
                                                            
                                                            AUGUST 28, 1997 
 
                                                   PROSPECTUS BEGINS ON PAGE ONE

P R O S P E C T U S

[LOGO] Smith Barney Mutual Funds
       INVESTING FOR YOUR FUTURE.
       EVERYDAY.
<PAGE>
 
PROSPECTUS                                                 
                                                           August 28, 1997 

Smith Barney Oregon Municipals Fund 
388 Greenwich Street
New York, New York 10013

(800) 451-2010 
 
  Smith Barney Oregon Municipals Fund (the "Fund") is a non-diversified munici-
pal fund that seeks to provide Oregon investors with as high a level of divi-
dend income exempt from Federal income tax and Oregon state personal income tax
as is consistent with prudent investment management and preservation of capi-
tal.
 
  This Prospectus concisely sets forth 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 August 28, 1997, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writ-
ing the Fund at the telephone number or address set forth above or by contact-
ing a Smith Barney Financial Consultant. The Statement of Additional Informa-
tion has been filed with the Securities and Exchange Commission (the "SEC") and
is incorporated by reference into this Prospectus in its entirety. 
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>
<S>                                           <C>
PROSPECTUS SUMMARY                              3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                           10
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES   12
-------------------------------------------------
OREGON MUNICIPAL SECURITIES                    18
-------------------------------------------------
VALUATION OF SHARES                            19
-------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES             19
-------------------------------------------------
PURCHASE OF SHARES                             21
-------------------------------------------------
EXCHANGE PRIVILEGE                             28
-------------------------------------------------
REDEMPTION OF SHARES                           31
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           33
-------------------------------------------------
PERFORMANCE                                    33
-------------------------------------------------
MANAGEMENT OF THE FUND                         35
-------------------------------------------------
DISTRIBUTOR                                    36
-------------------------------------------------
ADDITIONAL INFORMATION                         37
-------------------------------------------------
</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 an 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 Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
   
INVESTMENT OBJECTIVE The Fund is an open-end, non-diversified, management
investment company that seeks to provide Oregon investors with as high a level
of dividend income exempt from Federal income taxes and Oregon state personal
income tax as is consistent with prudent investment management and the preser-
vation of capital. Its investments consist primarily of intermediate- and long-
term investment-grade municipal securities issued by the State of Oregon, 
local governments in the State of Oregon and certain other municipal issuers
such as the Commonwealth of Puerto Rico ("Oregon Municipal Securities") that
pay interest which is excluded from gross income for Federal income tax pur-
poses and exempt from Oregon state personal income taxes. Intermediate- and
long-term securities generally have remaining maturities at the time of pur-
chase of three to in excess of twenty years. See "Investment Objective and Man-
agement Policies." 
     
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 C
shares, which differ principally in terms of sales charges and rate 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 $5,000,000. 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 4.00% of the purchase price and are subject to an annual
service fee of 0.15% 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 "Pro-
spectus Summary--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 by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.15% 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 C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.55% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. This CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A and Class B shares. Purchases of Fund shares
which, when combined with current holdings of Class C 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 $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any serv-
ice 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 and Class C 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 these Classes. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case.
 
  Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares,
 
4
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
they do not have a conversion feature, and therefore, are subject to an ongo-
ing distribution fee. Thus, Class B shares may be more attractive than Class C
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
purchases which, when combined with current holdings of Class A shares offered
with a sales charge, equal or exceed $500,000 in the aggregate 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 aggregate
investment may be met by adding the purchase to the net asset value of all
Class A shares, offered with a sales charge, held in funds sponsored by Smith
Barney Inc. ("Smith Barney") listed under "Exchange Privilege." Class A share
purchases may also be eligible for a reduced initial sales charge. See "Pur-
chase of Shares."

  Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares. See "Purchase of Shares" and "Man-
agement of the Fund" for a complete description of the sales charges and serv-
ice and distribution fees for each Class of shares and "Valuation of Shares,"
"Dividends, Distributions and Taxes" and "Exchange Privilege" for other dif-
ferences between the Classes of shares. 
 
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith Bar-
ney on a fully disclosed basis (an "Introducing Broker") or an investment
dealer in the selling group. See "Purchase of Shares."
 
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000. Investors in
Class Y shares may open an account for an initial investment of $5,000,000.
Subsequent investments of at least $50 may be made for all Classes. The mini-
mum investment for Class A, Class B and Class C shares and the subsequent
investment for all Classes through the Systematic Investment Plan are
described below. There is no minimum investment requirement in Class A for
unitholders who invest distributions from a unit investment trust ("UIT")
sponsored by Smith Barney. See "Purchase of Shares."

SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for Fund shares. The minimum initial investment

                                                                              5
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)

requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes for shareholders purchasing shares through
the Systematic 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
"Redemption of Shares."
 
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser and administrator. SBMFM provides
investment advisory and management services to investment companies affiliated
with Smith Barney. SBMFM is a wholly-owned subsidiary of Smith Barney Holdings
Inc. ("Holdings"). Holdings is a wholly-owned subsidiary of Travelers Group
Inc. ("Travelers"), a diversified financial services holding company engaged
through its subsidiaries principally in four business segments: Investment
Services, Consumer Finance Services, Life Insurance Services and Property &
Casualty Insurance Services. 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 Smith Barney Financial Consultants. See "Valuation of Shares."

DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly. Distributions of net realized long- and short-term capital gains, if
any, are declared and paid annually. See "Dividends, Distributions and Taxes."

REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of any
Class will be reinvested automatically in additional shares of the same Class
at current net asset value unless otherwise specified by an investor. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B shares acquired through dividend and distribu-
tion 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 will achieve its investment objective. Assets of the Fund may be invested
 
6
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
in the municipal securities of non-Oregon municipal issuers. ("Other Municipal
Securities" and together with Oregon Muncipal Securities, "Municipal
Securities").  Dividends paid by
the Fund which are derived from interest attributable to Oregon Municipal
Securities will be excluded from gross income for Federal income tax purposes
and exempt from Oregon state personal income taxes (but not from Oregon state
franchise tax or Oregon state corporate income tax). Dividends derived from
interest on obligations of non-Oregon municipal issuers will be exempt from
Federal income taxes, but may be subject to Oregon state personal income tax-
es. Dividends derived from certain municipal securities (including Oregon
Municipal Securities), however, may be a specific tax item for Federal alter-
native minimum tax purposes. The Fund may invest without limit in securities
subject to the Federal alternative minimum tax. See "Investment Objective and
Management Policies" and "Dividends, Distributions and Taxes."
     
  The Fund is more susceptible to factors adversely affecting issuers of Ore-
gon municipal securities than is a municipal bond fund that does not emphasize
these issuers. See "Oregon Municipal Securities" in the Prospectus and "Spe-
cial Considerations Relating to Oregon Municipal Securities" in the Statement
of Additional Information for further details about the risks of investing in
Oregon obligations.
 
  The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), which means that
the Fund is not limited by the 1940 Act in the proportion of its assets that
it may invest in the obligations of a single issuer. The Fund's assumption of
large positions in the obligations of a small number of issuers may cause the
Fund's share price to fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers. See "Investment Objective and Management Policies."

  The Fund generally will invest at least 75% of its assets in securities
rated investment grade, and may invest the remainder of its assets in securi-
ties rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D by
Standard & Poor's Ratings Group ("S&P"), or in unrated obligations of compara-
ble quality. Securities rated Baa by Moody's or BBB by S&P, though considered
to be investment grade, have speculative characteristics. Securities rated as
low as D are extremely speculative and are in actual default of interest
and/or principal payments. 
 
  There are several risks in connection with the use of certain portfolio
strategies by the Fund, such as the use of when-issued securities, municipal
bond index futures contracts and put and call options on interest rate futures
as hedging devices, municipal leases and securities lending. See "Investment
Objective and Management Policies--Certain Portfolio Strategies."
 
                                                                              7
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
 
THE FUND'S EXPENSES The following expense table lists the costs and expenses 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, unless otherwise noted, the Fund's operat-
ing expenses for its most recent fiscal year:
 
<TABLE>
<CAPTION>
SMITH BARNEY
OREGON MUNICIPALS FUND                        CLASS A CLASS B CLASS C CLASS Y
-----------------------------------------------------------------------------
<S>                                           <C>     <C>     <C>     <C>
SHAREHOLDER TRANSACTION EXPENSES
  Maximum sales charge imposed on purchases
    (as a percentage of offering price)        4.00%   None    None    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 (net of fee waivers)         0.12%   0.12%   0.12%   0.12%
  12b-1 fees***                                0.15    0.65    0.70    None
  Other expenses****(net of expense
  reimbursement)                               0.50    0.47    0.51    0.50
-----------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES                  0.77%   1.24%   1.33%   0.62%
-----------------------------------------------------------------------------
</TABLE>

   * 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. 

  ** "Management fees" have been restated to reflect the management fee waiver
     currently in effect for the Fund. Absent the fee waiver, the management
     fee would be incurred at the rate of 0.50% of each Class' average daily
     net assets for the current fiscal period. Absent the fee waiver and
     expense reimbursement, total expenses would be at the rates of 1.41%,
     1.93%, 1.96% and 1.26% for Class A, Class B, Class C and Class Y shares,
     respectively. 

 *** Upon conversion of Class B shares to Class A shares, such shares will no
     longer be subject to a distribution fee. Class C shares do not have a con-
     version feature and, therefore, are subject to an ongoing distribution
     fee. As a result, long-term shareholders of Class C shares may pay more
     than the economic equivalent of the maximum front-end sales charge permit-
     ted by the National Association of Securities Dealers, Inc. 

**** For Class Y shares, "Other expenses" have been estimated based on expenses
     incurred by Class A shares because no Class Y shares had been sold as of
     April 30, 1997. 

  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 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 B, Class C and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 fee of 0.15% of the value of average daily net
assets of
 
8
<PAGE>
 
PROSPECTUS SUMMARY (CONTINUED)
 
Class A shares. Smith Barney also receives, with respect to Class B shares, an
annual 12b-1 fee of 0.65% of the value of average daily assets of that Class,
consisting of a 0.50% distribution fee and a 0.15% service fee. For Class C
shares, Smith Barney receives an annual 12b-1 fee of 0.70% of the value of
average daily net assets of the Class, consisting of a 0.55% distribution fee
and a 0.15% service fee. "Other expenses" in the above table include fees for
shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees.

 EXAMPLE 
 
  The following example is intended to assist an investor in understanding 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>
SMITH BARNEY
OREGON MUNICIPALS 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                                       $48     $64     $81     $132
 Class B                                        58      69      78      137
 Class C                                        24      42      73      160
 Class Y                                         6      20      35       77
------------------------------------------------------------------------------
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
 Class A                                       $48     $64     $81     $132
 Class B                                        13      39      68      137
 Class C                                        14      42      73      160
 Class Y                                         6      20      35       77
------------------------------------------------------------------------------
</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 REPRESEN-
TATION 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 two years ended April 30, 1997 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Fund's Annual Report dated April 30, 1997. The information for
the fiscal period ended April 30, 1995 has been audited by another independent
auditor. The information set out below 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 Additional
Information. As of April 30, 1997, no Class Y shares had been sold and, accord-
ingly, no comparable information is available at this time for that class. 
 
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
 
<TABLE>
<CAPTION>
                            CLASS A SHARES              CLASS B SHARES
SMITH BARNEY             -----------------------    ------------------------
OREGON MUNICIPALS FUND    1997    1996   1995(1)     1997     1996   1995(1)
------------------------------------------------------------------------------
<S>                      <C>     <C>     <C>        <C>      <C>     <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR             $10.26  $10.09  $ 9.55      $10.25  $10.09  $ 9.55
------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment
   income(2)               0.54    0.55    0.49        0.48    0.49    0.44
 Net realized and
   unrealized gain         0.16    0.22    0.54        0.17    0.22    0.55
------------------------------------------------------------------------------
Total Income From Oper-
  ations                   0.70    0.77    1.03        0.65    0.71    0.99
------------------------------------------------------------------------------
LESS DISTRIBUTIONS
FROM:
 Net investment income    (0.54)  (0.54)  (0.49)      (0.49)  (0.49)  (0.45)
 Net realized gains       (0.13)  (0.06)    --        (0.13)  (0.06)    --
 Excess of net realized
   gains                  (0.02)    --      --        (0.02)    --      --
------------------------------------------------------------------------------
Total Distributions       (0.69)  (0.60)  (0.49)      (0.64)  (0.55)  (0.45)
------------------------------------------------------------------------------
NET ASSET VALUE, END OF
  YEAR                   $10.27  $10.26  $10.09      $10.26  $10.25  $10.09
------------------------------------------------------------------------------
TOTAL RETURN(3)            7.01%   7.70%  11.08%++     6.48%   7.09%  10.59%++
------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
  (000S)                 $9,769  $7,520  $6,323     $13,184  $9,861  $6,556
------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
 Expenses(2)               0.65%   0.66%   0.82%+      1.17%   1.21%   1.36%+
 Net investment income     5.21    5.21    5.28+       4.69    4.62    4.74+
------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE      37%     75%     30%         37%     75%     30%
------------------------------------------------------------------------------
</TABLE>
(1) For the period from May 23, 1994 (inception date) to April 30, 1995.

(2) The investment adviser and administrator waived all or part of their fees
    for the years ended April 30, 1997 and April 30, 1996 and the period ended
    April 30, 1995. In addition, the investment adviser has reimbursed the Fund
    for $53,166, $85,446 and $64,336 in expenses for the years ended April 30,
    1997 and April 30, 1996 and the period ended April 30, 1995, respectively.
    If such fees were not waived and expenses were not reimbursed, the per
    share effect on net investment income and the expense ratios would have
    been as follows: 
<TABLE>
<CAPTION>
                                          EXPENSE RATIOS
               PER SHARE DECREASES     WITHOUT FEE WAIVERS
             IN NET INVESTMENT INCOME   AND REIMBURSEMENT
             ------------------------  ----------------------
              1997     1996     1995    1997    1996    1995
            -------- -------- -------- ------  ------  ------
   <S>      <C>      <C>      <C>      <C>     <C>     <C>
   Class A     $0.07    $0.11    $0.12   1.41%   1.75%   2.05%+
   Class B      0.07     0.11     0.11   1.93    2.29    2.59+
</TABLE>

(3) Total return for Class A and B shares for the period ended April 30, 1995
    includes the effect of a cash contribution from the investment adviser
    which was made on October 24, 1994. The total amount of this contribution
    was $251,349 and $221,556 for Class A and B Shares, respectively. Without
    this cash contribution the total returns would have been 6.23% and 5.55%,
    respectively. 

  ++Total return is not annualized, as it may not be representative of the
    total return for the year.
  + Annualized.
 
10
<PAGE>
 

FINANCIAL HIGHLIGHTS (CONTINUED) 
 
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
 
<TABLE>
<CAPTION>
                                    CLASS C SHARES
                                    ----------------
SMITH BARNEY
OREGON MUNICIPALS FUND               1997   1996(1)
------------------------------------------------------
<S>                                 <C>     <C>
NET ASSET VALUE, BEGINNING OF YEAR  $10.26  $10.28
------------------------------------------------------
INCOME FROM OPERATIONS:
 Net investment income(2)             0.47    0.45
 Net realized and unrealized gain     0.17    0.06
------------------------------------------------------
Total Income From Operations          0.64    0.51
------------------------------------------------------
LESS DISTRIBUTIONS FROM:
 Net investment income               (0.48)  (0.47)
 Net realized gains                  (0.13)  (0.06)
 Excess of net realized gains        (0.02)      --
------------------------------------------------------
Total Distributions                  (0.63)  (0.53)
------------------------------------------------------
NET ASSET VALUE, END OF YEAR        $10.27  $10.26
------------------------------------------------------
TOTAL RETURN                          6.43%    4.99%++
------------------------------------------------------
NET ASSETS, END OF YEAR (000S)        $913    $614
------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
 Expenses(2)                          1.21%    1.25%+
 Net investment income                4.66    4.80+
------------------------------------------------------
PORTFOLIO TURNOVER RATE                 37%      75%
------------------------------------------------------
</TABLE>

(1) For the period from May 16, 1995 (inception date) to April 30, 1996. 

(2) The investment adviser and administrator waived all or part of their fees
    for the year ended April 30, 1997 and the period ended April 30, 1996. In
    addition, the investment adviser has reimbursed the Fund for $53,166 and
    $85,446 in expenses for the year ended April 30, 1997 and the period ended
    April 30, 1996, respectively. If such fees were not waived and expenses
    were not reimbursed, the per share effect on the net investment income and
    the expense ratios would have been as follows: 
 
<TABLE>
<CAPTION>
                                         EXPENSE RATIOS
               PER SHARE DECREASES    WITHOUT FEE WAIVERS
            TO NET INVESTMENT INCOME   AND REIMBURSEMENT
            ------------------------  -------------------
                1997         1996        1997      1996
            ------------ ------------ ---------- ---------
   <S>      <C>          <C>          <C>        <C>
   Class C         $0.06        $0.10      $1.96      2.38%+
</TABLE>

  ++Total return is not annualized, as it may not be representative of the
    total return for the year.
  + Annualized.
 
                                                                              11
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
 
  The investment objective of the Fund is to provide Oregon investors with as
high a level of dividend income exempt from Federal income taxes and Oregon
state personal income tax as is consistent with prudent investment management
and the preservation of capital. This investment objective may not be changed
without the approval of the holders of a majority of the Fund's outstanding
shares. There can be no assurance that the Fund's investment objective will be
achieved.

  The Fund will operate subject to an investment policy providing that, under
normal market conditions, the Fund will invest at least 80% of its net assets
in Municipal Securities, and at least 65% of the aggregate principal amount of
the Fund's investments in Oregon Municipal Securities, which pay interest
which is excluded from gross income for Federal income tax purposes and which
is exempt from Oregon state personal income tax. The Fund may invest up to 20%
of its net assets in Other Municipal Securities, the
interest on which is excluded from gross income for Federal income tax pur-
poses (not including the possible applicability of a Federal alternative mini-
mum tax), but which is subject to Oregon state personal income tax. When SBMFM
believes that market conditions warrant adoption of a temporary defensive
investment posture, the Fund may invest without limit in Other Municipal
Securities and in "Temporary Investments" as described below. 
 
  The Fund generally will invest at least 75% of its total assets in invest-
ment grade debt obligations rated no lower than Baa, MIG 3 or Prime-1 by
Moody's or BBB, SP-2 or A-1 by S&P, or in unrated obligations of comparable
quality. Unrated securities will be considered to be investment grade if
deemed by SBMFM to be comparable in quality to instruments so rated, or if
other outstanding obligations of the issuers thereof are rated Baa or better
by Moody's or BBB or better by S&P. The balance of the Fund's assets may be
invested in securities rated as low as C by Moody's or D by S&P, or comparable
unrated securities. (These securities are sometimes referred to as "junk
bonds.") Securities rated Baa by Moody's or BBB by S&P, though considered to
be investment grade, have speculative characteristics. Securities rated as low
as D are extremely speculative and are in actual default of interest and/or
principal payments. A description of the rating systems of Moody's and S&P is
contained in the Statement of Additional Information.
 
  The Fund's average weighted maturity will vary from time to time based on
the judgment of SBMFM. The Fund intends to focus on intermediate- and long-
term obligations, that is, obligations generally having remaining maturities
at the time of purchase of three to in excess of twenty years.
 
  The value of debt securities varies inversely to changes in the direction of
interest rates. When interest rates rise, the value of debt securities gener-
ally falls, and when interest rates fall, the value of debt securities gener-
ally rises.
 
12
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
  Low and Comparable Unrated Securities. While the market values of low-rated
and comparable unrated securities tend to react less to fluctuations in inter-
est rate levels than the market values of higher-rated securities, the market
values of certain low-rated and comparable unrated municipal securities also
tend to be more sensitive than higher-rated securities to short-term corporate
and industry developments and changes in economic conditions (including reces-
sion) in specific regions or localities or among specific types of issuers. In
addition, low-rated securities and comparable unrated securities generally
present a higher degree of credit risk. During an economic downturn or a pro-
longed period of rising interest rates, the ability of issuers of low-rated and
comparable unrated securities to service their payment obligations, meet pro-
jected goals or obtain additional financing may be impaired. The risk of loss
due to default by such issuers is significantly greater because low-rated and
comparable unrated securities generally are unsecured and frequently are subor-
dinated to the prior payment of senior indebtedness. The Fund may incur addi-
tional expenses to the extent it is required to seek recovery upon a default in
payment of principal or interest on its portfolio holdings.
 
  While the market for municipal securities is considered to be generally ade-
quate, the existence of limited markets for particular low-rated and comparable
unrated securities may diminish the Fund's ability to (a) obtain accurate mar-
ket quotations for purposes of valuing such securities and calculating its net
asset value and (b) sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in the financial markets.
The market for certain low-rated and comparable unrated securities is rela-
tively new and has not fully weathered a major economic recession. Any such
economic downturn also could adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon.
 
  Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during the periods of declining
interest rates, the Fund may have to replace the security with a lower yielding
security, thus resulting in a decreased return to the Fund.
 
  The Fund may invest in "Municipal leases," which generally are participations
in intermediate- and short-term debt obligations issued by municipalities con-
sisting of leases or installment purchase contracts for property or equipment.
Although Municipal leases do not constitute general obligations of the munici-
pality for which the municipality's taxing power is pledged, a Municipal lease
is ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. However, certain Munici-
pal leases contain "non-
 
                                                                              13
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
appropriation" clauses which provide that the municipality has no obligation
to make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. In addition to the "non-
appropriation" risk, these securities represent a relatively new type of
financing that has not yet developed the depth of marketability associated
with more conventional bonds. Although "non-appropriation" Municipal leases
are often secured by the underlying property, disposition of the property in
the event of foreclosure might prove difficult. There is no limitation on the
percentage of the Fund's assets that may be invested in Municipal leases. In
evaluating Municipal leases, SBMFM will consider such factors as it deems
appropriate, which may include: (a) whether the lease can be canceled; (b) the
ability of the lease obligee to direct the sale of the underlying assets; (c)
the general creditworthiness of the lease obligor; (d) the likelihood that the
municipality will discontinue appropriating funding for the leased property in
the event such property is no longer considered essential by the municipality;
(e) the legal recourse of the lease obligee in the event of such a failure to
appropriate funding; (f) whether the security is backed by a credit enhance-
ment such as insur-ance; and (g) any limitations which are imposed on the
lease obligor's ability to utilize substitute property or services rather than
those covered by the lease obligation.
 
  The Fund may invest without limit in private activity bonds. Interest income
on certain types of private activity bonds issued after August 7, 1986 to
finance non-governmental activities is a specific tax preference item for pur-
poses of the Federal individual and corporate alternative minimum taxes. Indi-
vidual and corporate shareholders may be subject to a Federal alternative min-
imum tax to the extent the Fund's dividends are derived from interest on those
bonds. Dividends derived from interest income on Oregon Municipal Securities
are a component of the "current earnings" adjustment item for purposes of the
Federal corporate alternative minimum tax.
 
  The Fund may also invest in zero coupon securities. Such bonds carry an
additional risk in that, unlike bonds which pay interest throughout the period
to maturity, the Fund will realize no cash until the cash payment date unless
a portion of such securities is sold and, if the issuer defaults, the Fund may
obtain no return at all on its investments.
 
  The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the pro-
portion of its assets that it may invest in the obligations of a single issu-
er. The Fund intends to conduct its operations, however, so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which will relieve the Fund of any liability
for Federal income tax and Oregon state franchise tax to the extent its earn-
ings are distributed to shareholders.
 
14
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
To so qualify, among other requirements, the Fund will limit its investments so
that, at the close of each quarter of the taxable year, (a) not more than 25%
of the market value of the Fund's total assets will be invested in the securi-
ties of a single issuer and (b) with respect to 50% of the market value of its
total assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer and the Fund will not own more
than 10% of the outstanding voting securities of a single issuer. The Fund's
assumption of large positions in the obligations of a small number of issuers
may cause the Fund's share price to fluctuate to a greater extent than that of
a diversified company as a result of changes in the financial condition or in
the market's assessment of the issuers.
 
  The Fund may invest without limit in debt obligations that are repayable out
of revenue streams generated from economically-related projects or facilities.
Sizable investments in such obligations could involve an increased risk to the
Fund should any of the related projects or facilities experience financial dif-
ficulties. In addition, the Fund may invest up to an aggregate of 15% of its
total assets in securities with contractual or other restrictions on resale and
other instruments which are not readily marketable. The Fund also is authorized
to borrow up to 10% of its total assets (including the amount borrowed) valued
at market less liabilities (not including the amount borrowed) in order to meet
anticipated redemptions and to pledge its assets to the same extent in connec-
tion with the borrowings.
 
  Further information about the Fund's investment policies, including a list of
those restrictions on the Fund's investment activities that cannot be changed
without shareholder approval, appears in the Statement of Additional Informa-
tion.
 
  CERTAIN PORTFOLIO STRATEGIES
 
  In attempting to achieve its investment objective, the Fund may employ, among
others, the following portfolio strategies.

  When-Issued Securities. New issues of Oregon Municipal Securities (and other
tax-exempt obligations) frequently are offered on a when-issued basis, which
means that delivery and payment for such securities normally take place within
15 to 45 days after the date of the commitment to purchase. The payment obliga-
tion and the interest rate that will be received on when-issued securities are
fixed at the time the buyer enters into the commitment. Oregon Municipal Secu-
rities, like other investments made by the Fund, may decline or appreciate in
value before their actual delivery to the Fund. Due to fluctuations in the
value of securities purchased and sold on a when-issued basis, the yields
obtained on these securities may be higher or lower than the yields available
in the market on the date when the investments actually are delivered to the
buyers. The Fund will not accrue income with respect to a when-issued security
prior to its stated delivery date. The Fund will establish a segregated account
with the Fund's custodian consisting of cash, debt securities of 
 
                                                                              15
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)

any grade or equity securities, having a value equal to or greater than the
Fund's purchase commitments, provided such securities have been determined by
the SBMFM to be liquid and unencumbered, and are marked to market daily, pursu-
ant to guidelines established by the Trustees. Placing securities rather than
cash in the segregated account may have a leveraging effect on the Fund's net
assets. The Fund generally will make commitments to purchase Oregon Municipal
Securities (and other tax-exempt obligations) on a when-issued basis only with
the intention of actually acquiring the securities, but the Fund may sell such
securities before the delivery date if it is deemed advisable. 
 
  Temporary Investments. Under normal market conditions, the Fund may hold up
to 20% of its total assets in cash or money market instruments, including tax-
able money market instruments ("Temporary Investments"). In addition, when
SBMFM believes that market conditions warrant, including when acceptable Oregon
Municipal Securities are not available, the Fund may take a temporary defensive
posture and invest without limitation in Temporary Investments. Tax-exempt
securities eligible for short-term investment by the Fund are municipal notes
having, at the time of purchase, a rating within the three highest rating cate-
gories of Moody's or S&P or, if not rated, having an issue of outstanding debt
securities rated within the three highest rating categories of Moody's or S&P,
and certain taxable short-term instruments having quality characteristics com-
parable to those for tax-exempt investments. As a defensive position only, the
Fund may enter in repurchase agreements with banks which are the issuers of
instruments acceptable for purchase by the Fund and with certain dealers on the
Federal Reserve Bank of New York's list of reporting dealers. To the extent the
Fund holds Temporary Investments, it may not achieve its investment objective.

  Financial Futures and Options Transactions. The Fund may enter into financial
futures contracts and invest in options on financial futures contracts that are
traded on a U.S. exchange or board of trade. Such investments, if any, by the
Fund will be made solely 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 where the transactions are economically appropriate
to the reduction of risks inherent in the management of the Fund. The futures
contracts or options on futures contracts that may be entered into by the Fund
will be restricted to those that are either based on a municipal bond index or
relate to debt securities the prices of which are anticipated by SBMFM to cor-
relate with the prices of the Municipal Bonds owned or to be purchased by the
Fund. 
 
  In entering into a financial futures contract, the Fund will be required to
deposit with the broker through which it undertakes the transaction an amount
of cash or cash equivalents equal to approximately 5% of the contract amount.
This amount, which is known as "initial margin," is subject to change by the
exchange or board
 
16
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
of trade on which the contract is traded, and members of the exchange or board
of trade may charge a higher amount. Initial margin is in the nature of a per-
formance bond or good faith deposit on the contract that is returned to the
Fund upon termination of the futures contract, assuming all contractual obli-
gations have been satisfied. In accordance with a process known as "marking-
to-market," subsequent payments known as "variation margin," to and from the
broker will be made daily as the price of the index or securities underlying
the futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable. 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 posi-
tion in the contract.
 
  A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at
a specified price, date, time and place. Unlike the direct investment in a
futures contract, an option on a financial futures contract gives the pur-
chaser the right, in return for the premium paid, to assume a position in the
financial futures contract at a specified exercise price at any time prior to
the expiration date of the option. Upon exercise of an option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
futures margin account, which represents the amount by which the market price
of the futures contract exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the futures contract.
The potential loss related to the purchase of an option on financial futures
contracts is limited to the premium paid for the option (plus transaction
costs). The value of the option may change daily and that change would be
reflected in the net asset value of the Fund.
 
  Regulations of the Commodity Futures Trading Commission applicable to the
Fund require that its transactions in financial futures contracts and options
on financial futures contracts engaged in for other than bona fide hedging
purposes be limited such that no such transactions may be entered into by the
Fund if the aggregate initial margin deposits and premiums paid by the Fund
exceed 5% of the market value of its assets. In addition, the Fund will, with
respect to its purchases of financial futures contracts, establish a segre-
gated account consisting of cash or cash equivalents in an amount equal to the
total market value of the futures contracts, less the amount of initial margin
on deposit for the contracts. The Fund's ability to trade in financial futures
contracts and options on financial futures contracts may be limited to some
extent by the requirements of the Code, applicable to a regulated investment
company that are described below under "Dividends, Distributions and Taxes."
 
  Lending of Portfolio Securities. The Fund has the ability to lend securities
from its portfolio to brokers, dealers and other financial organizations. Such
loans, if and
 
                                                                             17
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
when made, may not exceed 20% of the Fund's total assets, taken at value.
Loans of portfolio securities by the Fund will be collateralized by cash, let-
ters of credit or U.S. government securities which are maintained at all times
in an amount equal to at least 100% of the current market value (determined by
marking to market daily) of the loaned securities. The risks in lending port-
folio securities, as with other extensions of secured credit, consist of pos-
sible delays 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 SBMFM to be of good
standing and will not be made unless, in the judgment of SBMFM, the considera-
tion to be earned from such loans would justify the risk.
 
OREGON MUNICIPAL SECURITIES
 
  The interest on Oregon Municipal Securities is, in the opinion of bond coun-
sel to the issuers, excluded from gross income for Federal income tax purposes
and exempt from Oregon state personal income tax, and for that reason gener-
ally is fixed at a lower rate than it would be if it were subject to such tax-
es. Interest income on certain municipal securities (including Oregon Munici-
pal Securities) is a specific tax preference item for purposes of the Federal
individual and corporate alternative minimum taxes.
 
  CLASSIFICATIONS
 
  The two principal classifications of Oregon Municipal Securities are "gen-
eral obligation bonds" and "revenue bonds." General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are payable from the rev-
enues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source, but not from the issuer's general taxing power. Sizable investments in
such obligations could involve an increased risk to the Fund should any of
such related facilities experience financial difficulties. In addition, cer-
tain types of private activity bonds issued by or on behalf of public authori-
ties to obtain funds for privately operated facilities are included in the
term Oregon Municipal Securities, provided the interest paid thereon is
excludable from gross income for Federal income tax purposes and exempt from
Oregon state personal income tax. Private activity bonds generally do not
carry the pledge of the credit of the issuing municipality.
 
  SPECIAL CONSIDERATIONS
 
  The Fund normally will invest at least 65% of its total assets in Oregon
Municipal Securities, and therefore it is more susceptible to factors
adversely affecting issuers of Oregon Municipal Securities than a tax-exempt
mutual fund that is not concentrated in issuers of Oregon Municipal Securities
to this degree.
 
18
<PAGE>
 
VALUATION OF SHARES
 
 
  The Fund's net asset value per share is determined as of the close of regular
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 that Class outstanding.
 
  Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Fund's Board of Trustees. Certain
securities may be valued on the basis of prices provided by pricing services
approved by the Boardof Trustees. Short-term investments that mature in 60 days
or less are valued at amortized cost whenever the Trustees determine that amor-
tized cost is fair value. Amortized cost valuation involves valuing an instru-
ment at its cost initially and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. Further information
regarding the Fund's valuation policies is contained in the Statement of Addi-
tional Information.
 
DIVIDENDS, DISTRIBUTIONS AND TAXES
 
 
 DIVIDENDS AND DISTRIBUTIONS

  The Fund declares dividends from its net investment income (that is, income
other than its net realized long- and short-term capital gains) monthly. Dis-
tributions of net realized long- and short-term capital gains, if any, are
declared and paid annually. 
 
  If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make an additional
distribution shortly before December 31 of each year of any undistributed ordi-
nary income or capital gains and expects to pay any other distributions as are
necessary to avoid the application of this tax.
 
  If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions may
be treated as a tax-free return of capital (up to the amount of the sharehold-
er's tax basis in his or her shares). The amount treated as a tax-free return
of capital will reduce a shareholder's adjusted basis in his or her shares.
Pursuant to the requirements of the 1940 Act and other applicable laws, a
notice will accompany any distribution paid from sources other than net invest-
ment income. In the event the Fund distributes
 
                                                                              19
<PAGE>
 

DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED) 
 
amounts in excess of its net investment income and net realized capital gains,
such distributions may have the effect of decreasing the Fund's total assets,
which may increase the Fund's expense ratio.
 
  The per share dividends on Class B and Class C shares may be lower than the
per share dividends on Class A and Class Y shares principally as a result of
the distribution fee applicable with respect to Class B and Class C shares. The
per share dividends on Class A shares of the Fund may be lower than the per
share dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be
in the same amount for Class A, B, C and Y shares.
 
 TAXES

  The Fund has qualified and intends to continue to qualify each year as a reg-
ulated investment company under the Code and will designate and pay exempt-
interest dividends derived from interest earned on qualifying tax-exempt obli-
gations. Such exempt-interest dividends may be excluded by shareholders from
their gross income for Federal income tax purposes although (a) all or a por-
tion of such exempt-interest dividends will be a specific preference item for
purposes of the Federal individual and corporate alternative minimum taxes to
the extent they are derived from certain types of private activity bonds issued
after August 7, 1986 and (b) all exempt-interest dividends will be a component
of the "current earnings" adjustment item for purposes of the Federal corporate
alternative minimum tax. In addition, corporate shareholders may incur a
greater Federal "environmental" tax liability through the receipt of the Fund's
dividends and distributions. Dividends derived from interest on Oregon Munici-
pal Securities also will be exempt from Oregon state personal income (but not
corporate franchise or corporate income) taxes. 
 
  Dividends paid from taxable net investment income, if any, and distributions
of any net realized short-term capital gains (whether from tax-exempt or tax-
able securities) are taxable to shareholders as ordinary income, regardless of
how long shareholders have held their Fund shares and whether such dividends or
distributions are received in cash or reinvested in additional Fund shares.
Distributions of net realized long-term capital gains will be taxable to share-
holders as long-term capital gains, regardless of how long shareholders have
held their Fund shares and whether such distributions are received in cash or
reinvested in additional shares. Furthermore, as a general rule, a sharehold-
er's gain or loss on a sale or redemption of his or her shares will be a long-
term capital gain or loss if the shareholder has held the shares for more than
one year and will be a short-term capital gain or loss if the shareholder has
held the shares for one year or less. The Fund's dividends and distributions
will not qualify for the dividends-received deduction for corporations.
 
20
<PAGE>
 

DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED) 
 
 
  Statements as to the tax status of each shareholder's dividends and distribu-
tions are mailed annually. Each shareholder will also receive, if appropriate,
various written notices after the close of the Fund's prior taxable year as to
the Federal income tax status of his or her dividends and distributions which
were received from the Fund during the Fund's prior taxable year. These state-
ments set forth the dollar amount of income excluded from Federal income taxes
or Oregon state personal income taxes and the dollar amount, if any, subject to
Federal income taxes. Moreover, these statements will designate the amount of
exempt-interest dividends that is a specific preference item for purposes of
the Federal individual and corporate alternative minimum taxes. Shareholders
should consult their tax advisors with specific reference to their own tax
situations.
 
PURCHASE OF SHARES
 
 
 GENERAL

  The Fund offers four classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class Y shares are sold without an initial sales charge or CDSC and are
available only to investors investing a minimum of $5,000,000. See "Prospectus
Summary-- Alternative Purchase Arrangements" for a discussion of factors to
consider in selecting which Class of shares to purchase. 

  Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, with an Introducing Broker or with an investment dealer in
the selling group. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class B, Class C or Class Y shares. Smith
Barney and other broker/dealers 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 Fund's trans-
fer agent, First Data Investor Services Group Inc. (the "Transfer Agent") are
not subject to a maintenance fee. 

  Investors in Class A, Class B and Class C shares may open an account in the
Fund by making an initial investment of at least $1,000. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000. Sub-
sequent investments of at least $50 may be made for all Classes. For sharehold-
ers purchasing shares of the Fund through the Fund's Systematic Investment Plan
on a monthly basis, the minimum initial investment requirement for Class A,
Class B and Class C shares and the subsequent investment requirement for all
Classes is $25. For shareholders purchasing shares of the Fund through the Sys-
tematic Invest -
 
                                                                              21
<PAGE>
 

PURCHASE OF SHARES (CONTINUED) 

ment Plan on a quarterly basis, the minimum initial investment requirement for
Class A, Class B and Class C shares and the subsequent investment requirement
for all Classes is $50. There are no minimum investment requirements for Class
A shares for employees of Travelers and its subsidiaries, including Smith Bar-
ney, unitholders who invest distributions from a UIT sponsored by Smith Barney,
and Trustees of the Fund 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.

  The minimum initial and subsequent investment requirements in the Fund for an
account established under the Uniform Gift to Minors Act is $250 and the subse-
quent investment requirement is $50. 
 
  Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset val-
ue, are priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular trad-
ing 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 Smith Barney prior to Smith Barney's close of business
(the "trade date"). For shares purchased through Smith Barney or Introducing
Brokers purchasing through Smith Barney, payment for Fund shares is due on the
third business day (the "settlement date") 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, 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 an account 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 share-
holder who has insufficient funds to complete the transfer will be charged a
fee of up to $25 by Smith Barney or the Transfer Agent. The Systematic Invest-
ment Plan also authorizes Smith Barney to apply cash held in the shareholder's
Smith Barney brokerage account or redeem the shareholder's shares of a Smith
Barney money market fund to make additions to the account. Additional informa-
tion is available from the Fund or a Smith Barney Financial Consultant. 
 
 
22
<PAGE>
 

PURCHASE OF SHARES (CONTINUED) 
 
 INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
 
  The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
 
<TABLE>
<CAPTION>
                                                                    DEALERS
                         SALES CHARGE AS % SALES CHARGE AS %    REALLOWANCE AS
  AMOUNT OF INVESTMENT    OF TRANSACTION   OF AMOUNT INVESTED % OF OFFERING PRICE
---------------------------------------------------------------------------------
  <S>                    <C>               <C>                <C>
      Under $ 25,000           4.00%              4.17%              3.60%
  $ 25,000 - $ 49,999          3.50               3.63               3.15
  $ 50,000 - $ 99,999          3.00               3.09               2.70
  $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 Smith Barney, which compensates 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 C shares is waived. See "Deferred Sales
  Charge Alternatives" 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 reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "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. 

 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
employees of Travelers and its subsidiaries and any of 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 Securi-
ties Dealers, Inc., provided such sales are made upon the assurance of the
purchaser that the purchase is made for investment purposes and that the secu-
rities 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 Smith Barney
Financial Consultant (for a period up to 
 
                                                                             23
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)

90 days from the commencement of the Financial Consultant's employment with
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 fund of the Smith Barney Mutual Funds that are offered with a sales
charge) and who wish to reinvest their redemption proceeds in the Fund, pro-
vided the reinvestment is made within 60 calendar days of the redemption; (e)
purchases by accounts managed by registered investment advisory subsidiaries of
Travelers; (f) investments of distributions from a UIT sponsored by Smith Bar-
ney; and (g) purchases by investors participating in a Smith Barney fee based
arrangement. In order to obtain such discounts, the purchaser must provide suf-
ficient 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 aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
offered with a sales charge 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.
 
 GROUP PURCHASES
 
  Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth under
"Initial Sales Charge Alternative--Class A Shares," and will be based upon the
aggregate sales of Class A shares of Smith Barney Mutual Funds offered with a
sales charge to, and share holdings of, all members of the group. To be eligi-
ble for such reduced sales charges or to purchase at net asset value, all pur-
chases must be pursuant to an employer or partnership-sanctioned plan meeting
certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide
 
24
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
for payroll deductions. Smith Barney may also offer a reduced sales charge or
net asset value purchase for aggregating related fiduciary accounts under such
conditions that Smith Barney will realize economies of sales efforts and sales
related expenses. An individual who is a member of a qualified group may also
purchase Class A shares at the reduced sales charge applicable to the group as
a whole. The sales charge is based upon the aggregate dollar value of Class A
shares offered with a sales charge that have been previously purchased and are
still owned by the group, plus the amount of the current purchase. A "qualified
group" is one which (a) has been in existence for more than six months, (b) has
a purpose other than acquiring Fund shares at a discount and (c) satisfies uni-
form criteria which enable Smith Barney to realize economies of scale in its
costs of distributing shares. A qualified group must have more than 10 members,
must be available to arrange for group meetings between representatives of the
Fund and the members, and must agree to include sales and other materials
related to the Fund in its publications and mailings to members at no cost to
Smith Barney. In order to obtain such reduced sales charge or to purchase at
net asset value, the purchaser must provide sufficient information at the time
of purchase to permit verification that the purchase qualifies for the reduced
sales charge. Approval of group purchase reduced sales charge plans is subject
to the discretion of Smith Barney.
 
 LETTER OF INTENT
 
  Class A Shares. A Letter of Intent for amounts 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 dur-
ing 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 actually 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.
 
  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. Such investors must
make an initial minimum purchase of $1,000,000 in Class Y shares of the Fund
and agree to purchase a total of $5,000,000 of Class Y shares of the Fund
within six months from the date of the Letter. If a total investment of
$5,000,000 is not made
 
                                                                              25
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
within the six month period, all Class Y shares purchased to date will be
transferred to Class A shares, where they will be subject to all fees (includ-
ing a service fee of 0.15%) and expenses applicable to the Fund's Class A
shares, which may include a CDSC of 1.00%. The Fund expects that such a trans-
fer will not be subject to Federal income taxes. Please contact the Transfer
Agent or a Smith Barney Financial Consultant for further information.
 
 DEFERRED SALES CHARGE ALTERNATIVES

  "CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC. 
 
  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;
and (c) with respect to Class B shares, shares redeemed more than five years
after their purchase; or (d) with respect to Class C shares and Class A shares
that are CDSC Shares, shares redeemed more than 12 months after their purchase.
 
  Class C 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 aggre-
gated and deemed to have been made on the last day of the preceding Smith Bar-
ney statement month. The following table sets forth the rates of the charge for
redemptions of Class B shares by shareholders.
 
<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 through eighth  0.00
--------------------------------
</TABLE>
 
 
26
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)

  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 pro-
portion 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 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 addi-
tional shares through dividend reinvestment. During the fifteenth month after
the 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) involuntary
redemptions; and (e) 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. 
 
                                                                              27
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also 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.
 
EXCHANGE PRIVILEGE

  Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
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 C
shares are subject to minimum investment requirements and all shares are sub-
ject to the other requirements of the fund into which exchanges are made. 
 
 FUND NAME
 
 Growth Funds
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    
    Smith Barney Disciplined Small Cap Fund, Inc. 
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Growth Opportunity Fund
    
    Smith Barney Large Capitalization Growth Fund 
    Smith Barney Managed Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Special Equities Fund
 
 Growth and Income Funds
    
    Concert Social Awareness Fund 
    Smith Barney Convertible Fund
    Smith Barney Funds, Inc.--Equity Income Portfolio
    Smith Barney Growth and Income Fund
    Smith Barney Premium Total Return Fund
    
    Smith Barney Utilities Fund
 
 Taxable Fixed-Income Funds
    **Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
    
    ++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities
    Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
 
28
<PAGE>
 

EXCHANGE PRIVILEGE (CONTINUED) 
 
 
 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 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 Tax-Exempt Income Fund
 
 International Funds
    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.--Growth Portfolio 
    
    Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
    
    Smith Barney Concert Allocation Series Inc.--Income Portfolio 
 
 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, Class C and Class Y shares of the
   Fund.

  **Available for exchange with Class A and Class B shares of the Fund. 

 ***Available for exchange with Class A shares of the Fund. 
   +Available for exchange with Class B and Class C shares of the Fund.
  ++Available for exchange with Class A and Class Y shares of the Fund.
 
                                                                              29
<PAGE>
 

EXCHANGE PRIVILEGE (CONTINUED) 

  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 C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C 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. SBMFM 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 sus-
pending the exchange privilege and during the 15 day period the shareholder
will be required to (a) redeem his or her shares in the Fund or (b) remain
invested in the Fund or exchange into any 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 con-
sidered 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, plus any applicable sales
charge differential. Redemption procedures discussed below are also applicable
for exchanging shares, and exchanges will be made upon receipt of all support-
ing 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.
 
 
30
<PAGE>
 
REDEMPTION OF SHARES
 
 
  The Fund is required to redeem the shares of the Fund 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 trading 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 redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Transfer Agent receives
further instructions from Smith Barney, or if the shareholder's account is not
with 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 pro-
ceeds are remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.
 
  Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
 
 Smith Barney Oregon Municipals Fund
 Class A, B, C 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 the Transfer Agent together with the redemption
request. Any signature appearing on a share certificate, stock power or on a
written redemption request in excess of $2,000 must be guaranteed by an eligi-
ble guarantor institution such as a domestic bank, savings and loan institu-
tion, domestic credit union, member bank of the Federal Reserve System or mem-
ber firm of a national securities
     
                                                                              31
<PAGE>
 

REDEMPTION OF SHARES (CONTINUED) 

exchange. Written redemption requests of $2,000 or less do not require a signa-
ture guarantee unless more than one such redemption request is made in any 10-
day period. Redemption proceeds will be mailed to an investor's address of rec-
ord. The Transfer Agent may require additional supporting documents for redemp-
tions made by corporations, executors, administrators, trustees or guardians. A
redemption request will not be deemed properly received until the Transfer
Agent receives all required documents in proper form. 
 
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM FOR SHAREHOLDERS WHO DO NOT HAVE A
SMITH BARNEY BROKERAGE ACCOUNT
 
  Certain shareholders 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 contact the Transfer Agent at (800) 451-2010. Once
eligibility is confirmed, the shareholder must complete and return a Telephone
Wire Authorization Form, including a signature guarantee, that will be provided
by the Transfer Agent 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 the Transfer
Agent at (800) 451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after 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 pro-
gram. 
 
  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 com-
plete 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 fund being acquired is identical to the registra-
tion of the
 
32
<PAGE>
 

REDEMPTION OF SHARES (CONTINUED) 

shares of the fund exchanged. Such exchange requests may be made by calling
the Transfer Agent at (800) 451-2010 between 9:00 a.m. and 5:00 p.m. (New York
City time) on any day the NYSE is open. 
 
  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. The withdrawal
plan will be carried over on exchanges between funds or Classes of the Fund.
Any applicable CDSC will not be waived on amounts withdrawn by a shareholder
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 with-
drawal 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 Smith Barney
Financial Consultant.
 
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 its 30-day "yield" and "equivalent
taxable yield" for each Class of shares. The yield refers to the income gener-
ated by
 
                                                                             33
<PAGE>
 
PERFORMANCE (CONTINUED)
 
an investment in those shares over the 30-day period identified in the adver-
tisement and is computed by dividing the net investment income per share earned
by the Class during the period by the maximum public offering price per share
on the last day of the period. This income is "annualized" by assuming that the
amount of income is generated each month over a one-year period and is com-
pounded semi-annually. The annualized income is then shown as a percentage of
the net asset value.
 
  The equivalent taxable yield demonstrates the yield on a taxable investment
necessary to produce an after-tax yield equal to the Fund's tax-exempt yield
for each Class. It is calculated by increasing the yield shown for the Class to
the extent necessary to reflect the payment of taxes at specified tax rates.
Thus, the equivalent taxable yield always will exceed the Fund's yield.
 
 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 C and Class Y shares of the Fund. These figures are based on histori-
cal earnings and are not intended to indicate future performance. Total return
is computed for a specific 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 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 information 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 pre-
sented. The current dividend return for each Class may vary from time to time
depending on market conditions, the composition of its investment portfolio and
operating expenses. These factors and possible 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 informa-
tion may include data from Lipper Analytical Services, Inc. or similar indepen-
dent services that monitor the performance of mutual funds or other industry
publications.
 
34
<PAGE>
 

MANAGEMENT OF THE FUND 
 
 
 BOARD OF TRUSTEES
 
  Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Trustees. The Trustees approve all significant agreements
between the Fund and the companies that furnish services to the Fund, includ-
ing agreements with its distributor, investment adviser, administrator, custo-
dian and transfer agent. The day-to-day operations of the Fund are delegated
by the Board to the Fund's investment adviser and administrator. The Statement
of Additional Information contains background information regarding each
Trustee and executive officer of the Fund.
 
 INVESTMENT ADVISER AND ADMINISTRATOR

  SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser. SBMFM (through predecessor entities) has been
in the investment counseling business since 1934 and is a registered invest-
ment adviser. SBMFM renders investment advice to investment companies that had
aggregate assets under management as of July 31, 1997 in excess of $81 bil-
lion. 

  Subject to the supervision and direction of the Fund's Board of Trustees,
SBMFM 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 securities analysts who provide research services to the
Fund. For investment advisory services rendered, the Fund pays SBMFM a fee at
an annual rate of 0.30% of the value of its average daily net assets. For the
fiscal year ended April 30, 1997, SBMFM waived investment advisory fees equal
to 0.30% of the value of the average daily net assets of the Fund. 

  SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered, the Fund pays
SBMFM a fee at the following annual rates of average daily net assets: 0.20%
to $500 million and 0.18% of the value of its average daily net assets in
excess of $500 million. For the period ended April 30, 1997, SBMFM waived
administration fees equal to 0.20% of the value of the average daily net
assets of the Fund. 
 
 PORTFOLIO MANAGEMENT
 
  Peter M. Coffey, Vice President and Investment Officer of the Fund since
May 10, 1994 and a Managing Director of SBMFM, is responsible for managing the
day-to-day operations of the Fund including making all investment decisions.

  Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal period ended April 30, 1997 is included
in the 
 
                                                                             35
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MANAGEMENT OF THE FUND (CONTINUED) 

Annual Report dated April 30, 1997. A copy of the Annual Report may be obtained
upon request and without charge from a Smith Barney Financial Consultant or by
writing or calling the Fund at the address or phone number listed on page one
of this Prospectus. 
 
DISTRIBUTOR
 
 
  Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee
with respect to Class A, Class B and Class C shares of the Fund at the annual
rate of 0.15% of the average daily net assets of the respective Class. Smith
Barney is also paid a distribution fee with respect to Class B and Class C
shares at the rate of 0.50% and 0.55%, respectively, of the average daily net
assets attributable to those Classes. Class B shares which automatically con-
vert to Class A shares eight years after the date of original purchase will no
longer be subject to a distribution fee. The fees are used by Smith Barney to
pay its Financial Consultants for servicing shareholder accounts and, in the
case of Class B and Class C shares, to cover expenses primarily intended to
result in the sale of those shares. These expenses include: advertising
expenses; the cost of printing and mailing prospectuses to potential investors;
payments to and expenses of Smith Barney Financial Consultants and other per-
sons who provide support services in connection with the distribution of
shares; interest and/or carrying charges; and indirect and overhead costs of
Smith Barney in connection with the sale of Fund shares, including lease, util-
ity, communications and sales promotion expenses.
 
  The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.

  Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Fund's Trustees will
evaluate the appropriateness of the Plan and its payment terms on a continuing
basis and in so doing will consider all relevant factors, including expenses
borne by Smith Barney, amounts received under the Plan and proceeds of the
CDSC. 
 
36
<PAGE>
 
ADDITIONAL INFORMATION
 
 
  The Fund was organized on March 10, 1994 under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." The Fund is registered with the SEC as a non-diversified,
open-end management investment company.
 
  Each Class of the Fund represents an identical interest in the Fund's invest-
ment portfolio. As a result, the Classes have 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 distribution
and/or service fees borne by each Class; (d) the expenses allocable exclusively
to each Class; (e) voting rights on matters exclusively affecting a single
Class; (f) the exchange privilege of each Class; and (g) the conversion feature
of the Class B shares. The Board of Trustees does not anticipate that there
will be any conflicts among the interests of the holders of the different Clas-
ses. The Trustees, 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
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees 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 Class.
 
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
 
  First Data Investor Services Group, Inc., located at Exchange Place, Boston,
Massachusetts 02109, serves as the Fund's transfer agent.
 
  The Fund sends to each of its shareholders a semi-annual report and an
audited annual report, which include listings of the investment securities held
by the Fund at the end of the reporting period. In an effort to reduce the
Fund's printing and mailing costs, the Fund plans to consolidate the mailing of
its semi-annual and annual reports by household. This consolidation means that
a household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this consol-
idation to apply to their account should contact their Financial Consultants or
the Transfer Agent.
 
                                                                              37
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                                               SMITH BARNEY
                                               ---------------------------------
                                               A Member of TravelersGroup [LOGO]
 
 
 
 
 
 
                                                                    SMITH BARNEY
                                                                          OREGON
                                                                      MUNICIPALS
                                                                            FUND
 
                                                            388 Greenwich Street
                                                        New York, New York 10013
                                                                
                                                                FD0543 8/97