N-30D 1 c26151.htm Smith Barney Trust II

 

Annual Report • October 31, 2002

SMITH BARNEY DIVERSIFIED
LARGE CAP GROWTH FUND

BRIAN ROUTLEDGE

Brian Routledge has 13 years of securities business experience and leads a team of equity managers in the day-today management of the Fund. Mr. Routledge holds a BS in Finance with high honors from St. John’s University.

FUND OBJECTIVE

The Fund seeks long-term capital growth. Dividend income, if any, is incidental to this goal. Under normal market conditions, the Fund invests at least 80% of its net assets in the equity securities of U.S. large cap issuers and related investments. Companies that have market capitalizations within the top 1000 stocks of the equity market are considered large cap issuers.

FUND FACTS

 

 

FUND INCEPTION  
 
October 19, 1990      
       
       
MANAGER INVESTMENT      
INDUSTRY EXPERIENCE      
 
13 Years                
                 
                 
     
Class A
Class B
Class L
  
  
 
NASDAQ    
CFLGX
CLCBX
SMDLX
  
  
 
Inception    
10/19/90
1/4/99
9/22/00
  
 

Average Annual Total Returns as of October 31, 2002 (unaudited)

Without Sales Charges(1)  
Class A
  
Class B
  
Class L
  
One Year
(17.39
)%
(17.95
)%
(17.97
)%
Five Years
(0.76
)%
—
—
Ten Years
7.36
%
—
—
Since Inception†
9.04
%
(10.97
)%
(23.44
)%
           
With Sales Charges(2)
           
Class A
   Class B   Class L  
One Year
 (21.52 )% (22.05 )% (19.60 )%
Five Years
 (1.77 )% —   —  
Ten Years
 6.81 % —   —  
Since Inception†
 8.57 % (11.33 )% (23.80 )%

(1)     Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect deduction of all applicable sales charges with respect to Class A and L shares or the applicable contingent deferred sales charges (“CDSC”) with respect to Class B and L shares.
(2)   Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value. In addition, Class A and L shares reflect the deduction of the maximum sales charges of 5.00% and 1.00%, respectively; and Class B shares reflect the deduction of a 5.00% CDSC, which applies if shares are redeemed within one year from initial purchase. Thereafter, this CDSC declines by 1.00% per year until no CDSC is incurred. Class L shares also reflect the deduction of 1.00% CDSC, which applies if shares are redeemed within the first year of purchase.
    All figures represent past performance and are not a guarantee of future results. Investment returns and principal value will fluctuate, and redemption value may be more or less than the original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
†   Inception dates for Class A, B and L shares are October 19,1990, January 4, 1999 and September 22, 2000, respectively.

 

 

What’s Inside    
Letter to Our Shareholders 1  
Fund at a Glance 3  
Portfolio of Investments 4  
Statement of Assets and Liabilities 6  
Statement of Operations 7  
Statements of Changes in Net Assets 8  
Financial Highlights 9  
Notes to Financial Statements 12  
Report of Independent Accountants 16  
Additional Information 17  

Dear Shareholder:

Enclosed herein is the annual report for the Smith Barney Diversified Large Cap Growth Fund (“Fund”) for the fiscal year ended October 31, 2002. In this report, we summarize what we believe to be the period’s prevailing economic and market conditions and outline our investment strategy. A detailed summary of the Fund’s performance can be found in the appropriate sections that follow.We hope you find this report to be useful and informative.

Performance Review

For the year ended October 31, 2002, the Fund’s Class A shares, without sales charges, returned negative 17.39%. In comparison, the S&P 500 Barra Growth Index1 returned negative 15.03% for the same period.

Special Notices to Shareholders

We are pleased to report that during the past year, R. Jay Gerken, a managing director of Salomon Smith Barney Inc., has been elected Chairman of the Board, President and Chief Executive Officer of the Fund replacing Heath B. McLendon, who has been appointed Chairman of Salomon Smith Barney’s new Equity Research Policy Committee. Previously, Jay managed the Smith Barney Growth and Income Fund for six years; developed and managed the Smith Barney Allocation Series Inc. from inception in 1996 through the end of 2001; and was responsible for the investment design and implementation of Citigroup Asset Management’s college savings programs with the States of Illinois and Colorado.

Separately, effective June 2002, Brian Routledge leads the team responsible for the management of the Fund. From July 2001 until June 2002, Mr. Routledge shared this responsibility with another portfolio manager. On May 13, 2002, Smith Barney Fund Management LLC became the Fund’s investment manager, replacing its affiliate, Citi Fund Management Inc.

Portfolio Manager Market and Fund Overview

The past 12 months have been marked by great volatility for the U.S. economy and the stock market in general.The macroeconomic environment over the period was dominated by geopolitical risks, corporate scandals, declining consumer confidence, and concerns about the general strength of the global economy. Growth stocks,2 which during the past few years have generally underperformed relative to value stocks,3 staged a strong comeback over the last six months.We also believe that by historical standards, the value/growth relative performance gap has been extreme since 2000. In our opinion, there is mounting evidence that the global economy is slowly emerging from a difficult period that caused substantial profit pressure for U.S. growth companies over the past 18 months.We feel that this evidence is highlighted by the past three quarters of moderate U.S. Gross Domestic Product (“GDP”)4 growth.

During the period we reduced the Fund’s exposure to major pharmaceutical firms that we believe could experience profit pressures from new competition.We also took profits in more defensive areas such as consumer non-durables and pharmaceuticals, where we believed current valuations appeared to adequately reflect the reality of slow secular growth potential (e.g., Merck & Co Inc., Eli Lilly & Co., Coca-Cola Co.).After benefiting from lower exposure to more cyclical technology companies compared to our benchmark during the prior year, we have selectively added to some semiconductor and computer software companies (e.g., Linear Technologies Corp., Network Appliance Inc.) as valuations, in our opinion, became more attractive and growth expectations became more achievable. Additionally, we have added to existing holdings in consumer cyclical, finance, and consumer services to position the Fund to benefit from what we believe will be a gradual improvement in economic growth prospects. The Fund’s top five holdings as of October 31, 2002 were Microsoft Corp., General Electric Co.,Wal-Mart Stores Inc., Pfizer Inc., and Johnson & Johnson.

Throughout the period, the greatest contributor to the Fund’s performance was sector selection, specifically, the Fund’s position relative to its benchmark in the finance and telecommunication services sectors.Additionally, we believe that our stock

1
The S&P 500 Barra Growth Index is a capitalization-weighted index composed of stocks of the S&P 500 with lower book-to-price ratios relative to the S&P 500 as a whole. Please note that an investor cannot invest directly in an index.
 
2 Growth stocks are shares of companies believed to exhibit the potential for faster-than-average growth within their industries.
3 Value stocks are shares that are considered to be inexpensive relative to their asset values or earning power.
4 Gross Domestic Product (“GDP”) is the market value of the goods and services produced by labor and property in the U.S. GDP comprises consumer and government purchases, private domestic investments and net exports of goods and services.
 

1 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

selection in the consumer non-durables and healthcare sectors also positively contributed to the Fund’s performance, compared to its benchmark.Within the S&P 500 Barra Growth Index, the most significant positive contributions to performance came from the consumer staples and materials sectors, while the information technology and healthcare sectors had the largest negative impacts on Index performance.

Portfolio Manager Market and Fund Outlook

In our opinion, following six quarters of sub-par economic growth, the economy modestly rebounded in the first three quarters of 2002. However, we believe that the recovery thus far has been relatively muted by historical standards.The U.S. Federal Reserve Board (“Fed”) has responded aggressively to the current economic stresses over the last couple of years by sharply reducing key short-term interest rates. At this level, we feel that monetary policy should be accommodative enough to support a recovery.We believe the Fed has shown a willingness to aggressively fight further deterioration of economic growth. In our opinion, low inflation and an economic recovery that is too slow to create a significant number of new jobs gives the Fed the latitude necessary to keep monetary policy in its current highly accommodative stance well into 2003. Consumer spending continues to remain healthy and income fundamentals we think point toward continued modest (approximately 2%-3%) growth in consumer spending over the next several quarters. Several factors have helped the consumer sector through a difficult period of low job creation including: tax cuts, mortgage refinancing, and zero-percent auto financing. On the corporate level, we believe income fundamentals may improve going forward. We feel that cost-cutting and continued solid productivity growth over the past couple of years, combined with a gradually improving economy should lead to improved corporate profits, which should ultimately provide the foundation for rising employment and increased business investment. In addition, we believe that inflation will remain contained into 2003, as competitive pressures in the early stages of an economic recovery are likely to keep pricing pressures muted.

We will continue to be opportunistic in the current environment.We endeavor to increase exposure to what we feel are solid growth companies selling at attractive prices.

Thank you for your investment in the Smith Barney Diversified Large Cap Growth Fund.We look forward to continuing to help you meet your investment objectives.

Sincerely,

R. Jay Gerken
Brian Routledge
Chairman
Portfolio Manager
 
November 18, 2002

 

 

The information provided in this letter by the portfolio manager represents the opinion of the portfolio manager and is not intended to be a forecast of future events, a guarantee of future results or investment advice.Views expressed are those of the portfolio manager and may differ from those of other portfolio managers or of the firm as a whole. Furthermore, there is no assurance that certain securities will remain in or out of the Fund or that the percentage of the Fund’s assets in various sectors will remain the same. Please refer to pages 4 through 5 for a list and percentage breakdown of the Fund’s holdings. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio manager’s views are as of October 31, 2002 and are subject to change.

2 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

Smith Barney Diversified Large Cap Growth Fund at a Glance

Growth of $10,000 Invested in shares of the
Smith Barney Diversified Large Cap Growth Fund Class A vs. Benchmarks

Growth of a $10,000 Investment

A $10,000 investment in the Fund’s Class A shares made on October 31, 1992 would have grown to $19,322 with sales charge as of 10/31/02.The graph shows how the performance of the Fund’s Class A shares compares to its benchmarks over the same period.

The graph includes the maximum initial sales charge on the Fund’s Class A shares (no comparable charge exists for the index) and assumes all dividends and distributions from the Fund are reinvested at net asset value.

Notes: All Fund performance numbers represent past performance, and are no guarantee of future results. The Fund’s share price and investment return will fluctuate so that the value of an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Total returns include change in share price and reinvestment of dividends and distributions, if any. Total return figures “with sales charge” are provided in accordance with SEC guidelines for comparative purposes for prospective investors and reflect voluntary fee waivers which may be terminated at any time. If the waivers were not in place, the Fund’s returns would have been lower. The maximum sales charge of 5.00% for the Fund’s Class A shares went into effect on January 4, 1999. Investors may not invest directly in an index. The performance of the Fund’s other classes may be greater or less than the performance of Class A shares performance indicated on this chart, depending on whether greater or lesser sales charges and fees were incurred by shareholders investing in other classes.

Top Ten Equity Holdings*

1 . Microsoft Corp 7.64 %
         
2 . General Electric Co 6.25  
         
3 . Wal-Mart Stores Inc 5.92  
         
4 . Pfizer Inc 5.19  
         
5 . Johnson & Johnson 4.56  
         
6 . The Coca Cola Co 3.36  
         
7 . International Business Machines Corp. 2.93  
         
8 . Intel Corp 2.91  
         
9 . The Procter & Gamble Co 2.61  
         
10 . Merck & Co. Inc 2.52  
* As a percentage of total investments. All figures are as of 10/31/02 and subject to change at any time.

3 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

Portfolio of Investments October 31, 2002     
   SHARES   SECURITY VALUE  
 
COMMON STOCKS — 96.3%      
Commercial Services — 2.5%      
         53,100
  Automatic Data Processing Inc.
$
 2,258,343  
         11,000
  Cintas Corp.   519,970  
         74,242
   Paychex Inc.   2,139,654  
 
  4,917,967  
 
Conglomerates — 7.8%      
         16,600
  3M Co.   2,107,204  
         13,300
  General Dynamics Corp.   1,052,429  
       495,102
  General Electric Co.   12,501,326  
 
  15,660,959  
 
Consumer Non-Durables — 12.7%      
          6,820
  Alberto-Culver Co., Class B shares   352,048  
        39,500
  Anheuser-Busch Cos., Inc.   2,084,020  
      144,631
   The Coca Cola Co.   6,722,449  
      111,914
  PepsiCo Inc.   4,935,407  
      101,850
  Philip Morris Cos., Inc.   4,150,388  
        59,000
  The Procter & Gamble Co.   5,218,550  
        63,700
  SYSCO Corp.   2,018,016  
 
  25,480,878  
 
Consumer Services — 0.5%      
         17,000   McGraw-Hill Cos., Inc   1,096,500  
 
Finance — 10.1%      
         69,150
  American Express Co.   2,514,986  
         89,280
  Concord EFS Inc.*   1,274,918  
         73,524
  Fannie Mae   4,915,815  
         49,493
  Freddie Mac   3,047,779  
         28,000
  Fifth Third Bancorp   1,778,000  
          93,621
  MBNA Corp.   1,901,443  
         37,000
  Northern Trust Corp.   1,288,340  
         66,300
  State Street Corp.   2,742,831  
         38,600
  The BISYS Group, Inc.*   690,940  
 
  20,155,052  
 
Healthcare — 6.6%      
         65,805
  Amgen Inc.*   3,063,881  
         28,400
  Biomet, Inc.   836,664  
         48,107
  Eli Lilly & Co.   2,669,939  
         42,240
      Health Management Associates, Class A shares*   807,629  
       107,633
  Medtronic Inc.   4,821,958  
         12,000
  Techne Corp.*   396,000  
           7,300
  Wellpoint Health Networks Inc.*   549,033  
 
  13,145,104  
 
Pharmaceuticals — 19.5%      
         91,381
  Abbott Laboratories   3,826,122  
         11,100
  Amerisourcebergen Corp.   789,765  
         38,854
  Bristol Myers Squibb Co.   956,197  
         39,150
  Cardinal Health Inc.   2,709,572  
       155,074
  Johnson & Johnson   9,110,597  
See Notes to Financial Statements.

4    Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders
Portfolio of Investments (continued) October 31, 2002  
   SHARES SECURITY
VALUE
  
Pharmaceuticals — (continued)      
         92,727
     Merck & Co Inc.
$
 5,029,512  
       326,447
  Pfizer Inc.   10,371,221  
         58,000
  Pharmacia Corp.   2,494,000  
       111,000
   Wyeth   3,718,500  
  39,005,486  
Retail — 13.1%      
         22,500
  Abercrombie and Fitch Co.*   400,950  
         26,000
  American Eagle Outfitters Inc.*   376,740  
         28,011
  Bed Bath & Beyond Inc.*   993,270  
         28,340
  CDW Computer Centers, Inc.*   1,502,587  
      167,287
  Home Depot   4,831,249  
         20,200
  Kohl's Corp.*   1,180,690  
            8,500
  Ross Stores Inc.   355,725  
         75,200
  TJX Companies Inc.   1,543,104  
         96,328
  Walgreen Co.   3,251,070  
      221,119
   Wal-Mart Stores Inc.   11,840,922  
  26,276,307  
Semi-Conductors — 5.3%      
      335,768
   Intel Corp.   5,808,786  
      105,100
   Linear Technologies Corp.   2,904,964  
        57,000
   Maxim Integrated Products, Inc.*   1,814,880  
  10,528,630  
Technology — 17.8%      
        81,300
  Adobe Systems Inc.   1,921,932  
      394,969
  Cisco Systems Inc.*   4,415,753  
      132,956
  Dell Computer Corp.*   3,803,871  
         74,123
  International Business Machines Corp.   5,851,270  
      285,707
  Microsoft Corp.*   15,276,753  
      159,910
  Network Appliance Inc.*   1,434,553  
      286,596
  Oracle Corp.*   2,920,413  
  35,624,545  
Transportation — 0.4%      
         22,800
  Expeditors International Inc.   718,428  
        TOTAL COMMON STOCKS      
           (Identified Cost — $237,248,253) 192,609,856  
FACE
          
AMOUNT
  
SECURITY
 VALUE  
REPURCHASE AGREEMENT — 3.7%      
$ 7,313,000      UBS Warburg Repurchase Agreement,      
      1.91% due 11/1/02 proceeds at maturity $7,313,388      
      (Fully Collateralized by Fannie Mae, 0% due 11/27/02      
      Valued at $7,480,000); (Identified Cost — $7,313,000)   7,313,000  
     
TOTAL INVESTMENTS — 100%
      
     
(Identified Cost — $244,561,253)
$
 199,922,856  

* Non-income producing security

See Notes to Financial Statements.


5   Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

   Statement of Assets and Liabilities
October 31, 2002
  
     
ASSETS:    
      Investment at value (Note 1A) (Identified Cost, $237,248,253)
$
 192,609,856  
      Short-term holdings at amortized cost (Note1A) (Identified Cost, $7,313,000) 7,313,000  
      Cash
353
  
      Dividend and interest receivable 112,582  
      Receivable for shares of beneficial interest sold 43,261  
      Total Assets 200,079,052  
     
LIABILITIES:    
      Payable for shares of beneficial interest repurchased 377,110  
      Distribution/Service fees payable (Note 3) 47,605  
      Management fees payable (Note 2) 14,663  
      Accrued expenses and other liabilities 197,820  
      Total Liabilities 637,198  
Net Assets
$
 199,441,854  
       
NET ASSETS CONSIST OF:      
      Paid-in capital
$
 281,658,750  
      Accumulated net realized loss (37,631,472 )
      Unrealized depreciation (44,638,397 )
      Undistributed net investment income 52,973  
      Total
$
 199,441,854  
       
Computation of      
Class A Shares:      
      Net Asset Value and redemption price per share ($188,538,810/16,001,893 shares outstanding)
$11.78  
      Offering Price per share ($11.78 ÷ 0.95)
$12.40 *
 
   
Class B Shares:
   
      Net Asset Value per share and offering price ($10,366,430/907,115 shares outstanding)
$ 11.43 **
 
   
Class L Shares:
   
      Net Asset Value per share ($536,614/44,860 shares outstanding)
$11.96 **
      Offering Price per share ($11.96 ÷ 0.99)
$12.08  

 *   Based upon single purchases of less than $25,000.
** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See Notes to Financial Statements.

6    Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

   Statement of Operations
 
 
 
For the Year Ended October 31, 2002
 
INVESTMENT INCOME (Note 1B):
 
      Dividend income
$
2,665,402
  
      Interest income
112,955
  
      Total Investment Income
2,778,357
  
 
 
EXPENSES:
 
      Management fees (Note 2)
2,248,343
  
      Distribution/Service fees Class A (Note 3)
590,552
  
      Distribution/Service fees Class B (Note 3)
131,992
  
      Distribution/Service fees Class L (Note 3)
3,960
  
      Custody and fund accounting fees
148,495
  
      Transfer agent fees
81,867
  
      Shareholder reports
79,273
  
      Audit fees
61,110
  
      Legal fees
52,120
  
      Blue Sky fees
45,835
  
      Trustees fees
2,434
  
      Other
24,667
  
      Total Expenses
3,470,648
  
      Less: Aggregate amount waived by the Manager (Note 2)
(745,264
 )
      Net Expenses
2,725,384
  
Net Investment Income
52,973
  
 
 
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
 
      Net realized loss from investment transactions
(30,376,137
 )
      Net decrease in unrealized depreciation on investments
(13,941,775
 )
       
Net Realized and Unrealized Loss From Investments
(44,317,912
 )
Net Decrease in Net Assets Resulting From Operations
$
(44,264,939
 )

See Notes to Financial Statements.

7    Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

   Statements of Changes in Net Assets
   
   
 
   
   
For the Year Ended October 31,
2002
2001
  
Increase (Decrease) in Net Assets From:
 
 
OPERATIONS:
   
   
         Net investment Income (loss)
$
 52,973  
$
 (548,593 )
         Net realized loss
(30,376,137 )
(16,489,957 )
         Unrealized depreciation
(13,941,775 )
(101,857,377 )
         Net Decrease in Net Assets Resulting From Operations
(44,264,939 )
(118,895,927 )
 
   
   
DISTRIBUTIONS TO SHAREHOLDERS FROM:
   
   
         Net realized gain Class A
—  
(33,473,456 )
         Net realized gain Class B
—  
(1,926,859 )
         Net realized gain Class L
—  
(3,916 )
         Decrease in Net Assets From Distributions to Shareholders
—  
(35,404,231 )
 
   
   
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST (NOTE 7):
   
   
Class A
   
   
         Net proceeds from sale of shares
2,818,237  
7,484,061  
         Net asset value of shares issued to shareholders from reinvestment of distributions
—  
33,423,247  
         Cost of shares repurchased
(34,441,458 )
(54,475,485 )
         Total Class A
(31,623,221 )
(13,568,177 )
Class B
   
   
         Net proceeds from sale of shares
924,709  
754,192  
         Net asset value of shares issued to shareholders from reinvestment of distributions
—  
1,816,021  
         Cost of shares repurchased
(2,576,833 )
(3,885,398 )
         Total Class B
(1,652,124 )
(1,315,185 )
Class L
   
   
         Net proceeds from sale of shares
531,533  
274,115  
         Net asset value of shares issued to shareholders from reinvestment of distributions
—  
3,916  
         Cost of shares repurchased
(102,172 )
(81,913 )
         Total Class L
429,361  
196,118  
         Net Decrease in Net Assets From
   
   
            Transactions in Shares of Beneficial Interest
(32,845,984 )
(14,687,244 )
Net Decrease in Net Assets
(77,110,923 )
(168,987,402 )
 
   
   
NET ASSETS:
   
   
         Beginning of period
276,552,777  
445,540,179  
         End of period†
$
 199,441,854  
$
 276,552,777  
 
   
   
† Includes undistributed net investment income of:
$
 52,973  
—  

See Notes to Financial Statements.
8    Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

   Financial Highlights
 
Year Ended October 31,
 
Class A Shares
2002
2001
2000
1999
1998
Net Asset Value, Beginning of Year
$
14.26
  
$
21.91
$
24.42
$
21.47
$
21.14
Income From Operations:
 
      Net investment income (loss)
0.009
  
(0.021
)
(0.084
)
(0.079
)†
(0.022
)†
      Net realized and unrealized gain (loss)
(2.489
 )
(5.851
)
1.021
4.944
4.735
Total From Operations
(2.480
 )
(5.872
)
0.937
4.865
4.713
Less Distributions From:
 
      Net investment income
—
  
—
—
—
(0.012
)
      Net realized gain
—
  
(1.778
)
(3.447
)
(1.915
)
(4.371
)
Total Distributions
—
  
(1.778
)
(3.447
)
(1.915
)
(4.383
)
Net Asset Value, End of Year
$
11.78
  
$
14.26
$
21.91
$
24.42
$
21.47
Ratios/Supplemental Data:
 
      Net assets, end of year (000’s omitted)
$
188,539
  
$
261,864
$
421,307
$
513,883
$
378,380
      Ratio of expenses to average net assets
1.05
 %
1.05
%(A)
1.05
%(A)
1.05
%(A)
1.05
%(A)
      Ratio of net investment income (loss)
 
            to average net assets
0.06
 %
(0.12
)%
(0.33
)%
(0.34
)%
(0.11
)%
Total Return
(17.39
 )%
(28.00
)%
3.20
%
23.60
%
26.90
%
Portfolio Turnover Rate
29
 %
29
%
80
%
108
%
53
%
Note: If Agents of the Fund for the periods indicated had not voluntarily waived a portion of their fees, the net investment income (loss) per share and the ratios would have been as follows:
      Net investment income (loss) per share
$
(0.035
 )
$
(0.062
)
$
(0.143
)
$
(0.131
)†
$
(0.078
)†
      Ratios:
 
      Expenses to average net assets
1.35
 %
1.29
%(A)
1.29
%(A)
1.27
%(A)
1.32
%(A)
      Net investment loss to average net assets
(0.24
 )%
(0.36
)%
(0.57
)%
(0.56
)%
(0.38
)%
 
†
The per share amounts were computed using a monthly average number of shares outstanding during the year.
(A)
Includes the Fund’s share of Large Cap Growth Portfolio allocated expenses for the periods indicated.

9 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

   Financial Highlights (continued)
   
   
               
   
 
   
   
     
   
 
   
   
   
January 4, 1999
 
Year Ended October 31,
 
(Commencement
 
of Operations) to
Class B Shares
2002
2001
2000
  
October 31, 1999
Net Asset Value, Beginning of Year
$
 13.93  
$
 21.61  
$
 24.28    
$		 22.73  
Income From Operations:
   
   
     
   
      Net investment loss
(0.100 )
(0.150 )
(0.248 )  
(0.206 )†
      Net realized and unrealized gain (loss)
(2.400 )
(5.752 )
1.025    
1.756  
Total From Operations
(2.500 )
(5.902 )
0.777    
1.550  
Less Distributions From:
   
   
     
   
      Net investment income
—  
—  
—    
—  
      Net realized gain
—  
(1.778 )
(3.447 )  
—  
Total Distributions
—  
(1.778 )
(3.447 )  
—  
Net Asset Value, End of Year
$
 11.43  
$
 13.93  
$
 21.61    
$
 24.28  
Ratios/Supplemental Data:
   
   
     
   
      Net assets, end of year (000’s omitted)
$
 10,366  
$
 14,485  
$
 24,194    
$
 28,275  
      Ratio of expenses to average net assets
1.80 %
1.80 %(A)
1.80 %(A)  
1.80 %(A)*
      Ratio of net investment loss to average net assets
(0.69 )%
(0.87 )%
(1.08 )%  
(1.13 )%*
Total Return
(17.95 )%
(28.58 )%
2.47 %  
6.82 %**
Portfolio Turnover Rate
29 %
29 %
80 %  
108 %
Note: If Agents of the Fund for the periods indicated had not voluntarily waived a portion of their fees, the net investment loss per shareand the ratios would have been as follows:
      Net investment loss per share
$
 (0.143 )
$
 (0.191 )
$
 (0.307 )  
$
 (0.258 )†
      Ratios:
   
   
     
   
      Expenses to average net assets
2.10 %
2.04 %(A)
2.04 %(A)  
2.02 %(A)*
      Net investment loss to average net assets
(0.99 )%
(1.11 )%
(1.32 )%  
(1.35 )%*
* Annualized
** Not Annualized
† The per share amounts were computed using a monthly average number of shares outstanding during the year.
(A) Includes the Fund’s share of Large Cap Growth Portfolio allocated expenses for the periods indicated.

10 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

   Financial Highlights (continued)                                    
                   
               
September 22, 2000
  Year Ended October 31,  
(Commencement
 
 
of Operations) to
Class L Shares
2002
2001
  
October 31, 2000
Net Asset Value, Beginning of Year
$
 14.58     $ 22.51    
$
 23.16  
Income From Operations:                      
      Net investment loss (0.058 ) (0.093 )   (0.022 )†
      Net realized and unrealized loss (2.562 ) (6.059 )   (0.628 )
Total From Operations (2.620 ) (6.152 )   (0.650 )
Less Distributions From:                      
      Net investment income   —       —       —  
      Net realized gain   —   (1.778 )     —  
Total Distributions   —   (1.778 )     —  
Net Asset Value, End of Year
$
 11.96     $ 14.58     $ 22.51  
Ratios/Supplemental Data:
                   
      Net assets, end of year (000’s omitted)
$
 537     $ 204     $ 39  
      Ratio of expenses to average net assets 1.80 %   1.80 %(A)   1.80 %(A)*
      Ratio of net investment loss to average net assets (0.66 )%   (0.88 )%   (1.08 )%*
Total Return (17.97 )% (28.54 )%   (2.81) %**
Portfolio Turnover Rate   29 %     29 %     80 %
Note: If Agents of the Fund for the periods indicated had not voluntarily waived a portion of their fees, the net investment loss per share and the ratios would have been as follows:
      Net investment loss per share
$
 (0.084 )   $ (0.118 ) $(0.027 )†
      Ratios:                      
      Expenses to average net assets 2.10 %   2.04 %(A)   2.04 %(A)*
      Net investment loss to average net assets (0.96 )%   (1.12 )%   (1.32 )%*
* Annualized
** Not Annualized
† The per share amounts were computed using a monthly average number of shares outstanding during the year.
(A) Includes the Fund’s share of Large Cap Growth Portfolio allocated expenses for the periods indicated.

11 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements

1. Significant Accounting Policies

Smith Barney Diversified Large Cap Growth Fund (the “Fund”) is a separate diversified series of Smith Barney Trust II (the “Trust”), a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Prior to November 1, 2001, the Fund sought to achieve its investment objectives by investing substantially all of its assets in Large Cap Growth Portfolio (the “Portfolio”). On October 29, 2001, the Board of Trustees approved a change in the investment structure of the Fund. Effective November 1, 2001, the Fund withdrew its investment in the Portfolio through an in kind redemption equal to the Fund’s proportionate share of the Portfolio’s net assets. Subsequent to the redemption in kind from the Portfolio, the Fund ceased utilizing a hub and spoke investment structure and began investing directly in investment securities. Prior to May 13, 2002, the investment manager of the Fund was Citi Fund Management Inc. Effective May 13, 2002 the investment manager became Smith Barney Fund Management LLC (the “Manager”). Salomon Smith Barney Inc. (“SSB”), serves as the Fund’s distributor (the “Distributor”), and continues to sell Fund shares to the public as a member of the selling group. Citi Fund Management Inc., Smith Barney Fund Management LLC and Salomon Smith Barney Inc. are subsidiaries of Citigroup.

Citicorp Trust Bank, fsb. (“CTB”), a subsidiary of Citigroup, acts as the Fund’s transfer agent and PFPC Global Fund Services (“PFPC”) acts as the Fund’s sub-transfer agent. CTB receives fees and asset-based fees that vary according to the account size and type of account. PFPC is responsible for shareholder recordkeeping and financial processing for all shareholder accounts and is paid by CTB. For the year ended October 31, 2002, the Fund paid transfer agent fees of $74,450 to CTB.

The Fund offers Class A, Class B and Class L shares. Class A shares have a front-end, or initial, sales charge. This sales charge may be reduced or eliminated in certain circumstances. Class B shares have no front-end sales charge, pay a higher ongoing distribution fee than Class A shares, and are subject to a deferred sales charge if sold within five years of purchase. Class B shares automatically convert into Class A shares after eight years. Class L shares have a front-end, or initial, sales charge that is lower than Class A shares, pay a higher ongoing distribution fee than Class A shares, and are subject to a deferred sales charge if sold within one year of purchase. Expenses of the Fund are borne pro-rata by the holders of each class of shares, based on the proportionate interest in the Fund represented by the daily net assets of such class, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro-rata share of the net assets of the Fund, if the Fund were liquidated. Class A shares have lower expenses than Class B and Class L shares. For the year ended October 31, 2002, the Fund has been informed that the distributor retained front-end net commissions paid by investors of $33,000 and $4,000 from sales of Class A and Class L shares, respectively and $28,000 and $0 in deferred sales charges from redemptions of Class B and Class L shares, respectively.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements.Actual results could differ from those estimates.

The significant accounting policies consistently followed by the Fund are as follows:

A.  Investment Security Valuations Equity securities listed on securities exchanges or reported through the NASDAQ system are valued at last sale prices. Unlisted securities or listed securities for which last sale prices are not available are valued at last quoted bid prices.Debt securities (other than short-term obligations maturing in sixty days or less) are valued on the basis of valuations furnished by pricing services approved by the Board of Trustees which take into account appropriate factors such as institutional-size trading in similar groups of

12 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

securities, yield, quality, coupon rate, maturity, type of issue,and other market data, without exclusive reliance on quoted prices or exchange or over-the-counter prices. Short-term obligations, maturing in 60 days or less, are valued at amortized cost, which constitutes fair value as determined by the Trustees. Securities, if any, for which there are no such valuations or quotations are valued at fair value as determined in good faith by or under guidelines established by the Trustees.

B.  Income Interest income consists of interest accrued and discount earned, adjusted for amortization of premium or accretion of discount on long-term debt securities. Dividend income is recorded on the ex-dividend date.

C.  Federal Taxes The Fund’s policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute to shareholders all of its taxable income, including any net realized gain on investment transactions. Accordingly, no provision for federal income or excise tax is necessary. At October 31, 2002 the Fund for federal income tax purposes had a loss carryover of $42,053,000 of which $15,234,000 will expire in October 2009 and $26,819,000 will expire in October 2010.

D.  Expenses The Fund bears all costs of its operations other than expenses specifically assumed by the Manager. Expenses incurred by the Trust with respect to any two or more funds or series are allocated in proportion to the average net assets of each fund, except when allocations of direct expenses to each fund can otherwise be made fairly. Expenses directly attributable to a fund were charged to that fund.

E.  Distributions Distributions to shareholders are recorded on the ex-dividend date. The amount and character of income and net realized gains to be distributed are determined in accordance with income tax rules and regulations, which may differ from generally accepted accounting principles. These differences are attributable to permanent book and tax accounting differences. Reclassifications are made to the Fund’s capital accounts to reflect income and net realized gains available for distribution (or available capital loss carryovers) under income tax rules and regulations. For the year ended October 31, 2002, the Fund reclassified $10,480,977 from paid in capital to accumulated realized loss.

F.  Repurchase Agreements It is the policy of the Fund to require the custodian bank to take possession, to have legally segregated in the Federal Reserve Book Entry System or to have segregated within the custodian bank’s vault, all securities held as collateral in support of repurchase agreements. The Fund requires continued maintenance of the market value (plus accrued interest) of the collateral in amounts at least equal to the repurchase price.

G.  Other Investment transactions are accounted for on the date the investments are purchased or sold. Realized gains and losses are determined on the identified cost basis.

2. Management Fees

The Manager is responsible for overall management of the Fund’s business affairs, and has a Management Agreement with the Fund. The Manager or an affiliate also provides certain administrative services to the Fund. These administrative services include providing general office facilities and supervising the overall administration of the Fund.

The management fees paid to the Manager are accrued daily and payable monthly. The management fee is computed at the annual rate of 0.90% of the Funds’ average daily net assets. The management fee amounted to $2,248,343, of which $745,264 was voluntarily waived for the year ended October 31, 2002.

The Trust pays no compensation directly to any Trustee or any other officer who is affiliated with the Manager, all of whom receive remuneration for their services to the Trust from the Manager or its affiliates.

3. Distribution/Service Fees

The Fund maintains separate Service Plans for Class A, Class B and Class L shares, which have been adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended. Under the Class A Service Plan, the Fund may pay monthly fees at an annual rate not to exceed

13 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

0.25% of the average daily net assets represented by Class A shares of the Fund. The Service fees for Class A shares amounted to $590,552 for the year ended October 31, 2002. Under the Class B and Class L Service Plans, the Fund may pay a combined monthly distribution and service fee at an annual rate not to exceed 1.00% of the average daily net assets represented by Class B and Class L shares of the Fund, respectively.The Service fees for Class B and Class L shares amounted to $131,992 and $3,960, respectively, for the year ended October 31, 2002. These fees may be used to make payments to the distributor for distribution services and to others as compensation for the sale of shares of the applicable class of the Fund, for advertising, marketing, or other promotional activity, and for preparation, printing and distribution of prospectuses, statements of additional information and reports for recipients other than regulators and existing shareholders.The Fund also may make payments to the distributor and others for providing personal service or the maintenance of shareholder accounts.

4. Purchases and Sales of Investments

Purchases and sales of investments, other than short-term obligations, aggregated $69,978,188 and $98,632,489, respectively, for the year ended October 31, 2002. Brokerage commissions paid to SSB amounted to $2,885.

5. Federal Income Tax Basis of Investments

The cost and unrealized appreciation (depreciation) in value of the investment securities owned at October 31, 2002, as computed on a federal income tax basis, are as follows:

Aggregate cost
$
 240,139,812  
 
   
Gross unrealized appreciation
$
 10,546,652  
Gross unrealized depreciation
(50,763,610 )
Net unrealized depreciation
$
 (40,216,958 )


6. Income Tax Information and Distributions to Shareholders
At October 31, 2002 the tax basis components of distributable earnings were:

Undistributed ordinary income $52,973  
Accumulated capital (losses) ($42,052,912 )
Unrealized depreciation ($40,216,958 )

The difference between book basis and tax basis unrealized depreciation is attributable primarily to the Fund’s in-kind redemption received in exchange for the Fund’s investment in the Portfolio.

14 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

7. Shares of Beneficial Interest

The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in shares of beneficial interest were as follows:

  Year Ended October 31,  
 
 
  2002   2001  
Class A        
Shares sold 207,980   484,351  
Shares issued to shareholders from reinvestment of distributions —   1,996,610  
Shares repurchased (2,575,287 ) (3,338,225 )
Class A net decrease (2,367,307 ) (857,264 )
         
Class B        
Shares sold 69,838   46,396  
Shares issued to shareholders from reinvestment of distributions —   110,329  
Shares repurchased (202,523 ) (236,451 )
Class B net decrease (132,685 ) (79,726 )
         
Class L        
Shares sold 38,576   17,071  
Shares issued to shareholders from reinvestment of distributions —   228  
Shares repurchased (7,680 ) (5,077 )
Class L net increase 30,896   12,222  

8. Trustee Retirement Plan

The Trustees of the Fund have adopted a Retirement Plan for all Trustees who are not “interested persons” of the Fund, within the meaning of the 1940 Act. Under the Plan, all Trustees are required to retire from the Board as of the last day of the calendar year in which the applicable Trustee attains age 75 (certain Trustees who had already attained age 75 when the Plan was adopted are required to retire effective December 31, 2003). Trustees may retire under the Plan before attaining the mandatory retirement age. Trustees who have served as Trustee of the Trust or any of the investment companies associated with Citigroup for at least ten years when they retire are eligible to receive the maximum retirement benefit under the Plan. The maximum retirement benefit is an amount equal to five times the amount of retainer and regular meeting fees payable to a Trustee during the calendar year ending on or immediately prior to the applicable Trustee’s retirement.Amounts under the Plan may be paid in installments or in a lump sum (discounted to present value). Benefits under the Plan are unfunded. The Fund’s allocable share of the expense of the Plan for the year ended October 31, 2002 and the related liability at October 31, 2002 were not material.

15 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

Report of Independent Accountants

To the Trustees and the Shareholders of Smith Barney Trust II:
Smith Barney Diversified Large Cap Growth Fund:

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Smith Barney Diversified Large Cap Growth Fund (the “Fund”), a series of Smith Barney Trust II, at October 31, 2002, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These finanacial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2002 by correspondence with the custodian, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, New York
December 13, 2002

16 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited)

Information about Trustees and Officers The business and affairs of the Smith Barney Diversified Large Cap Growth Fund (the “Fund”) are managed under the direction of the Fund’s Board of Trustees. Information pertaining to the Trustees and officers of the Fund is set forth below. Each Trustee and officer holds office for his or her lifetime, unless that individual resigns, retires or is otherwise removed. The Statement of Additional Information includes additional information about Fund Trustees and is available, without charge, upon request by calling Citicorp Trust Bank, fsb at 1-800-451-2010.

        Number of Other
      Principal Portfolios In Board Memberships
  Position(s) Length Occupation(s) Fund Complex Held by
  Held with of Time During Past Overseen by Trustee During
Name, Address and Age Fund Served Five Years Trustee Past Five Years
NON-INTERESTED          
TRUSTEES:          
           
Elliott J. Berv Trustee Since 2001 President and Chief Operations Officer, Landmark City (Real Estate Development) (since 2002); Executive Vice President and Chief Operations Officer, DigiGym Systems (On-line Personal Training Systems) (since 2001); Chief Executive Officer, Rocket City Enterprises (Internet Service Company) (since 2000); President, Catalyst (Consulting) (since 1984). 35 Board Member, American Identity Corp. (doing business as Morpheus Technologies) (biometric information management) (since 2001; consultant since 1999); Director, Lapoint Industries (Industrial Filter Company) (since 2002); Director, Alzheimer’s Association (New England Chapter) (since 1998).
125 Broad Street      
New York, NY 10004      
Age 59      
       
       
       
       
           
Donald M. Carlton Trustee Since 2001 Consultant, URS Corporation (Engineering) (since 1999); former Chief Executive Officer, Radian International L.L.C. (Engineering) (from 1996 to 1998), Member of Management Committee, Signature Science (Research and Development) (since 2000). 30 Director, American Electric Power (Electric Utility) (since 1999); Director, Valero Energy (Petroleum Refining) (since 1999); Director, National Instruments Corp. (Technology) (since 1994).
125 Broad Street      
New York, NY 10004      
Age 65      
       
           
A. Benton Cocanougher Trustee Since 2001 Dean Emeritus and Wiley Professor, Texas A&M University (since 2001); former Dean and Professor of Marketing, College and Graduate School of Business of Texas A & M University (from 1987 to 2001). 30 Former Director, Randall’s Food Markets, Inc. (from 1990 to 1999); former Director, First American Bank and First American Savings Bank (from 1994 to 1999).
125 Broad Street      
New York, NY 10004      
Age 64      
           
Mark T. Finn Trustee Since 2001 Chairman and Owner,Vantage Consulting Group, Inc. (Investment Advisory and Consulting Firm) (since 1988); former Vice Chairman and Chief Operating Officer, Lindner Asset Management Company (Mutual Fund Company) (from March 1999 to 2001); former General Partner and Shareholder, Greenwich Ventures, LLC (Investment Partnership) (from 1996 to 2001); former President, Secretary, and Owner, Phoenix Trading Co. (Commodity Trading Advisory Firm) (from 1997 to 2000). 35 Former President and Director, Delta Financial, Inc. (Investment Advisory Firm) (from 1983 to 1999).
125 Broad Street      
New York, NY 10004      
Age 59      
       
       
         
         
         
           

17 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

        Number of Other
      Principal Portfolios In Board Memberships
  Position(s) Length Occupation(s) Fund Complex Held by
  Held with of Time During Past Overseen by Trustee During
Name, Address and Age Fund Served Five Years Trustee Past Five Years
Stephen Randolph Gross Trustee Since 2001 Partner, Capital Investment Advisory Partners (Consulting) (since January 2000); Managing Director, Fountainhead Ventures, LLC (Consulting) (from 1998 to 2002); Secretary, Carint N.A. (Manufacturing) (since 1988); former Treasurer, Hank Aaron Enterprises (Fast Food Franchise) (from 1985 to 2001); Chairman, Gross, Collins & Cress, P.C. (Accounting Firm) (since 1980); Treasurer, Coventry Limited, Inc. (since 1985). 30
Director, United Telesis, Inc. (Telecommunications) (since 1997); Director, eBank.com, Inc. (since 1997); Director, Andersen Calhoun, Inc. (Assisted Living) (since 1987); former Director, Charter Bank, Inc. (from 1987 to 1997); former Director, Yu Save, Inc. (Internet Company) (from 1998 to 2000); former Director, Hotpalm, Inc. (Wireless Applications) (from 1998 to 2000); former Director, Ikon Ventures, Inc. (from 1997 to 1998).
125 Broad Street      
New York, NY 10004      
Age 54      
       
       
       
       
       
       
       
         
Diana R. Harrington Trustee Since 1992 Professor, Babson College (since 1992). 35
Former Trustee, The Highland Family of Funds (Investment Company) (from March 1997 to March 1998).
125 Broad Street      
New York, NY 10004        
Age 62        
         
Susan B. Kerley Trustee Since 1992 Consultant, Strategic Management Advisors, LLC Global Research Associates, Inc. (Investment Consulting) (since 1990). 35
Director, Eclipse Funds (currently supervises 17 investment companies in fund complex) (since 1980).
125 Broad Street      
New York, NY 10004      
Age 51      
         
Alan G. Merten Trustee Since 2001 President, George Mason University (since 1996). 30
Director, Comshare, Inc. (Information Technology) (since 1985); former Director, Indus (Information Technology) (from 1995 to 1999).
125 Broad Street      
New York, NY 10004        
Age 61        
         
C. Oscar Morong, Jr. Trustee Since 1991 Managing Director, Morong Capital Management (since 1993). 35
Former Director, Indonesia Fund (Closed-End Fund) (from 1990 to 1999); Trustee, Morgan Stanley Institutional Fund (currently supervises 75 investment companies) (since 1993).
125 Broad Street      
New York, NY 10004      
Age 67        
         
           

18 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

       
Number of
 Other
      Principal
Portfolios In
 Board Memberships
  Position(s) Length Occupation(s)
Fund Complex
 Held by
  Held with of Time During Past
Overseen by
 Trustee During
Name, Address and Age Fund Served Five Years
Trustee
 Past Five Years
R. Richardson Pettit Trustee Since 2001 Professor of Finance, University of Houston (since 1977); Independent Consultant (since 1984).
30
 None
125 Broad Street    
 
New York, NY 10004    
 
Age 60    
 
       
 
Walter E. Robb, III Trustee Since 2001 President, Benchmark Consulting Group, Inc. (Service Company) (since 1991); Sole Proprietor, Robb Associates (Consulting) (since 1978); Co-owner, Kedron Design (Gifts) (since 1978); former President and Treasurer, Benchmark Advisors, Inc. (Financial Consulting) (from 1989 to 2000).
35
 Director, John Boyle & Co., Inc. (Textiles) (since 1999); Director, Harbor Sweets, Inc. (Candy) (since 1990); Director,W.A.Wilde Co. (Direct Media) (since 1982); Director, Alpha Grainger Manufacturing, Inc. (Electronics) (since 1983); former Trustee, MFS Family of Funds (Investment Company) (from 1985 to 2001); Harvard Club of Boston (Audit Committee) (since 2001).
125 Broad Street    
New York, NY 10004    
Age 76    
     
     
     
     
     
     
       
 
INTERESTED      
 
TRUSTEE:      
 
       
 
R. Jay Gerken* President Since 2002 President since 2002; Managing Director, Salomon Smith Barney (since 1996).
Chairman
 N/A
125 Broad Street and  
of the
  
New York, NY 10004 Trustee  
Board,
  
Age 51      
Trustee or
  
       
Director
  
       
of 226
  
OFFICERS:      
 
       
 
Lewis E. Daidone Senior Vice Since 2000 Managing Director, Salomon Smith Barney (since 1990); Chief Financial Officer, Smith Barney Mutual Funds; Director and Senior Vice President, Smith Barney Fund Management LLC and Travelers Investment Adviser.
N/A
 N/A
125 Broad Street President  
 
New York, NY 10004 and  
 
Age 45 Chief  
 
  Adminis-  
 
  trative  
 
  Officer  
 
       
 
Irving P. David Treasurer Since 2002 Director, Salomon Smith Barney (since 1997); former Assistant Treasurer, First Investment Management Company (from 1988 to 1994).
N/A
 N/A
125 Broad Street    
 
New York, NY 10004    
 
Age 42    
 
       
 
Frances M. Guggino Controller Since 2002 Vice President, CitigroupAsset Management(since 1991).
N/A
 N/A
125 Broad Street    
 
New York, NY 10004    
 
Age 45      
 

19 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

        Number of Other
      Principal Portfolios In Board Memberships
  Position(s) Length Occupation(s) Fund Complex Held by
  Held with of Time During Past Overseen by Trustee During
Name, Address and Age Fund Served Five Years Trustee Past Five Years
Robert I. Frenkel Secretary Since 2000 Managing Director and General Counsel, Global Mutual Funds for Citigroup Asset Management (since 1994) N/A N/A
SSB        
300 First Stamford Place        
Stamford, CT 06902        
Age 48          

* Mr. Gerken is an “interested person” of the fund as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of Smith Barney Fund Management LLC and certain of its affiliates.

20 Smith Barney Diversified Large Cap Growth Fund | 2002 Annual Report to Shareholders

SMITH BARNEY
DIVERSIFIED LARGE CAP GROWTH FUND

TRUSTEES & OFFICERS
INVESTMENT MANAGER
Elliott J. Berv
Smith Barney Fund Management LLC
Donald M. Carlton
A. Benton Cocanougher
  
Mark T. Finn
DISTRIBUTOR
R. Jay Gerken, Chairman*
Salomon Smith Barney Inc.
Stephen Randolph Gross
Diana R. Harrington
  
Susan B. Kerley
CUSTODIAN
Alan G. Merten
State Street Bank
C. Oscar Morong, Jr.
    & Trust Company
R. Richardson Pettit
Walter E. Robb, III
 
TRANSFER AGENT
 
Citicorp Trust Bank, fsb.
PRESIDENT
125 Broad Street, 11th Floor
R. Jay Gerken*
New York, NY 10004
 
 
SECRETARY
SUB-TRANSFER AGENT
Robert I. Frenkel*
PFPC Global Fund Services
 
P.O. Box 9699
Providence, RI 02940-9699
SENIOR VICE PRESIDENT
AND CHIEF ADMINISTRATIVE
OFFICER
INDEPENDENT
Lewis E. Daidone*
ACCOUNTANTS
 
PricewaterhouseCoopers LLP
 
1177 Avenue of the Americas
TREASURER
New York, NY 10036
Irving P. David*
  
CONTROLLER
Frances M. Guggino*
   * Affiliated Person of
     Investment Manager
 
 

Smith Barney Diversified Large Cap Growth Fund

This report is submitted for general information of the shareholders of Smith Barney Diversified Large Cap Growth Fund, but it may also be used as sales literature when preceded or accompanied by the current Prospectus, which gives details about charges, expenses, investment objectives and operating policies of the Fund. If used as sales material after January 31, 2003, this report must be accompanied by performance information for the most recently completed calendar quarter.

SMITH BARNEY DIVERSIFIED LARGE CAP GROWTH FUND
Smith Barney Mutual Funds
125 Broad Street, MF-2
New York, New York 10004

For complete information on any Smith Barney Mutual Funds, including management fees and expenses, call or write your financial professional for a free prospectus. Read it carefully before you invest or send money.

www.smithbarney.com/mutualfunds

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

FD02662 12/02
02-4139

The manager uses a growth-oriented investment style that emphasizes small U.S. companies believed to have superior management teams and good prospects for growth.

Annual Report • October 31, 2002
SMITH BARNEY SMALL CAP
GROWTH OPPORTUNITIES FUND

The Fund seeks to achieve its investment objective by normally investing at least 80% of its net assets in equity securities of U.S. small cap companies with small market capitalizations and related investments.(1) In selecting investments, the manager looks for issuers that have a predictable, growing demand for their products or services, and issuers with a dominant position in a niche market or whose customers are very large companies.

FUND OBJECTIVE
The Fund seeks long-term capital growth. Dividend income, if any, is incidental to this goal.

FUND FACTS

FUND INCEPTION
June 21, 1995
 
CLASS A
CLASS B
CLASS L
  
 
NASDAQ
CFSGX
SMOBX
SGOLX
  
 
Inception
6/21/95
1/4/99
9/22/00
  
  		  

(1) Investments in small-capitalization companies may involve a higher degree of risk and volatility than investments in larger, more established companies.


Average Annual Total Returns as of October 31, 2002 (unaudited)

 
Without Sales Charges(1)
  
                 
 
Class A
Class B
Class L
  
 
 
 
One Year
(18.35)%
(18.97)%
(18.94)%
  
 
 
 
Five Years
(2.09)%
—
—
  
 
 
 
Since Inception†
10.61%
(1.66)%
(24.55)%
  
 
 
 
 
 
 
With Sales Charges(2)
  
 
 
 
Class A
Class B
Class L
  
 
 
 
One Year
(22.43)%
(23.02)%
(20.55)%
  
 
 
 
Five Years
(3.09)%
—
—
  
 
 
 
Since Inception†
9.84%
(2.03)%
(24.91)%
  
(1) Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect deduction of all applicable sales charges with respect to Class A and L shares or the applicable contingent deferred sales charges (“CDSC”) with respect to Class B and L shares
(2) Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value. In addition, Class A and L shares reflect the deduction of the maximum sales charge of 5.00% and 1.00%, respectively, and Class B shares reflect the deduction of a 5.00% CDSC, which applies if shares are redeemed within one year from initial purchase. Thereafter, this CDSC declines by 1.00% per year until no CDSC is incurred. Class L shares reflect the deduction of 1.00% CDSC, which applies if shares are redeemed within first year of purchase
  All figures represent past performance and are not a guarantee of future results. Investment returns and principal value will fluctuate, and redemption value may be more or less than the original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on a fund distribution or the redemption of fund shares.
† Inception dates for Class A, B and L shares are June 21, 1995, January 4, 1999 and September 22, 2000, respectively.
     
What’s Inside    
Letter to Our Shareholders
1
  
Fund at a Glance
4
  
Portfolio of Investments
5
  
Statement of Assets and Liabilities
9
  
Statement of Operations
10
  
Statement of Changes in Net Assets
11
  
Financial Highlights
12
  
Notes to Financial Statements
15
  
Report of Independent Accountants
19
  
Additional Information
20
  

Investment Products: Not FDIC Insured • Not Bank Guaranteed • May Lose Value

Dear Shareholder:

We are pleased to provide the annual report for the Smith Barney Small Cap Growth Opportunities Fund (“Fund”) for the fiscal year ended October 31, 2002. In this report, we have summarized what we believe to be the period’s prevailing economic conditions and outlined our investment strategy. A detailed summary of the Fund’s performance can be found in the appropriate sections that follow.We hope that you will find this report to be useful and informative.

Special Notice to Shareholders:
Effective October 4, 2002,Victor Dosti became responsible for the day-to-day management of the Fund. From October 1999 to October 4, 2002, Mr. Dosti served as a member of the Fund’s management team. Mr. Dosti is a senior portfolio manager and investment officer of the Fund’s manager and a director of Citibank, N.A., a Citigroup affiliate. Mr. Dosti joined Citigroup in October 1999 and has been a member of the small cap equity team since that time. From November 1996 to October 1999, he served as a senior analyst for Northern Trust Company, focusing on the technology sector. Mr. Dosti has more than seven years of investment management experience.

Additionally, we are pleased to report that during the past year R. Jay Gerken, a managing director of Salomon Smith Barney Inc., has been elected Chairman of the Board, President and Chief Executive Officer of the Fund replacing Heath B. McLendon, who has been appointed Chairman of Salomon Smith Barney’s new Equity Research Policy Committee. Previously, Jay managed the Smith Barney Growth and Income Fund for six years; developed and managed the Smith Barney Allocation Series Inc. from inception in 1996 through the end of 2001; and was responsible for the investment design and implementation of Citigroup Asset Management’s college savings programs with the States of Illinois and Colorado.

On May 13, 2002, Smith Barney Fund Management LLC became the Fund’s investment manager, replacing its affiliate, Citi Fund Management Inc.

Performance Review
For the year ended October 31, 2002, the Fund’s Class A shares, without sales charges, returned negative 18.35%. In comparison, the Russell 2000 Growth Index (“Russell 2000 Growth”)(1) returned negative 21.57% for the same period.

Portfolio Manager Market Overview

The reporting period has been an extremely difficult one for the equity markets. The S&P 500 Index,(2) the Dow Jones Industrial Average (“DJIA”)(3) and The NASDAQ Composite Index(4) returned negative 15.10%, negative 5.62% and negative 21.33%, respectively, during the period.The small-cap equity market suffered similar declines: The Russell 2000 Index(5) and the Russell 2000 Growth Index returned negative 11.57% and negative 21.57%, respectively, for the same period.This was the second consecutive year of declines for many of the major stock market indices. Although the small-cap growth equity market, based upon the performance of the Russell 2000 Growth, displayed a more resilient performance during the Fund’s first fiscal quarter, subsequent quarters were weaker.

The third fiscal quarter of 2002 was one of the weakest for the Fund. A combination of factors led to the third quarter declines, including: investors’ fears of a double-dip recession; concerns over corporate governance; and worries regarding

(1) The Russell 2000 Growth measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. (Price-to-book ratio is the price of a stock divided by its net asset value.) Please note that an investor cannot invest directly in an index.
(2) The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks Please note that an investor cannot invest in an index.
(3) The DJIA is a widely followed measurement of the stock market.The average is comprised of 30 stocks that represent leading companies in major industries.These stocks, widely held by both individual and institutional investors, are considered to be all blue-chip companies. Please note that an investor cannot directly invest in an index.
(4) The NASDAQ Composite Index is a market-value weighted index, which measures all securities listed on The NASDAQ Stock Market. Please note that an investor cannot invest directly in an index
(5) The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russell 3000 Index.The Russell 2000 Index represents approximately 8% of the total market capitalization of the Russell 3000 Index. Please note that an investor cannot invest directly in an index.

1    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

companies’ future revenue and earnings growth.The potential conflict with Iraq and worries over terrorism also contributed to investors’ concerns during this period.

Portfolio Manager Fund Overview
While the market has been very difficult this year, we believe our prudent approach to selecting stocks by using extensive quantitative and fundamental research, as well as our adherence to diversification, contributed to the Fund’s more favorable performance relative to its benchmark index during the reporting period.

Although the performance of some equities in the Fund proved resilient during the period, many of the Fund’s holdings were negatively impacted by the severe market-price corrections in the technology and telecommunications sectors. Certain segments of the healthcare sector, such as biotechnology, suffered declines as well during the Fund’s fiscal year.We believe, however, that our disciplined investment approach helped to mitigate some of the negative impact from these sectors.We feel investing across many different sectors, industries and companies within the small-cap equity universe is crucial during times immediately following economic slowdowns.

Portfolio Manager Market Outlook
This has been a very challenging time for the equity markets, as virtually all major equity market indices have recently hovered at or near their lowest levels in several years. Just as investor psychology drove the stock markets to excessive highs in several sectors during the year 2000, investor fears can drive the markets to excessive lows. Historically, we believe stock markets have been inherently cyclical. We think the more recent U.S. equity market declines have been similar in many respects to the market declines during 1962, 1974 and 1987, and that this bear market environment will eventually turn bullish.

We believe that investor expectations may have overlooked certain prospects for future growth. In our opinion, current equity marketplace valuations, therefore, may have created opportunities for investment. Many companies have significantly reduced their costs over the past two years, which we feel may afford these companies significant operating leverage when revenues increase.We anticipate that many corporations will have easier year-over-year earning comparisons in 2003 over 2002 (and expected earnings improvements).

We believe that the U.S. economy has stabilized and is moving forward. According to the recent estimate (released from the U.S. Department of Commerce Bureau of Economic Analysis after the close of the reporting period), U.S. Gross Domestic Product (“GDP”)(6) growth for the calendar quarter ending September 30, 2002 was 4.0%. GDP growth for the second calendar quarter ending June 30, 2002 was 1.3%. The economy is growing, albeit, at a slower rate than in recent years. However, monetary policy remains stimulative. The Federal Open Market Committee (“FOMC”)(7) has effectively lowered short-term interest rates to the lowest levels in decades. (After the reporting period in early November, the fed funds rate was further reduced from 1.75% to 1.25%.)

Mortgage refinancing, housing and consumer demand has remained at strong levels. Fiscal policy is also stimulative given the income tax cuts enacted in 2001.There have been reports of recent discussions in Washington D.C. about further potential fiscal stimulus measures (e.g., tax credits and tax cuts) to spur business and corporate investments (although there are no assurances that such measures will be enacted).

Going forward, we believe that small-capitalization growth stocks may continue to be highly volatile, but may provide investors with exposure to companies in some of the most dynamic areas of the U.S. economy. We believe this sector will

(6) Gross Domestic Product (“GDP”) is the market value of the goods and services produced by labor and property in the U.S. GDP comprises consumer and government purchases, private domestic investments and net exports of goods and services.
(7) The FOMC is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

2    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

post relatively competitive results in the U.S. equity marketplace over time and offers significant growth potential. Historically, the small-cap growth sector has performed particularly well when economic growth reemerges.

Thank you for your investment in the Smith Barney Small Cap Growth Opportunities Fund.We look forward to continuing to help you meet your investment objectives.

Sincerely,

R. Jay Gerken Victor Dosti
Chairman Portfolio Manager

November 27, 2002

The information provided in this letter by the portfolio manager represents the opinion of the portfolio manager and is not intended to be a forecast of future events, a guarantee of future results or investment advice.Views expressed are those of the portfolio manager and may differ from those of other portfolio managers or of the firm as a whole. Furthermore, there is no assurance that certain securities will remain in or out of the Fund or that the percentage of the Fund’s assets in various sectors will remain the same. Please refer to pages 5 through 8 for a list and percentage breakdown of the Fund’s holdings.Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio manager’s views are as of October 31, 2002 and are subject to change.

3    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Smith Barney Small Cap Growth Opportunities Fund at a Glance

Growth of $10,000 Invested in Shares of the
Smith Barney Small Cap Growth Opportunities Fund Class A vs. Benchmarks

Growth of
a $10,000
Investment
A $10,000 invest-
ment in the Fund’s
Class A Shares
made on their incep-
tion date would
have grown to
$19,960 with sales
charge as of
10/31/02.The
graph shows the
performance of the
Fund’s Class A
Shares compares to
its benchmarks
over the same
period.
 

The graph includes the initial sales charge on the Fund (no comparable charge exists for the index) and assumes all dividends and distributions from the Fund are reinvested at net asset value.

Notes: All Fund performance numbers represent past performance and are no guarantee of future results. The Fund’s share price and investment return will fluctuate so that the value of an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Total returns include change in share price and reinvestment of dividends and distributions, if any. Total return figures “with sales charge” are provided in accordance with SEC guidelines for comparative purposes for prospective investors and reflect certain voluntary fee waivers which may be terminated at any time. If the waivers were not in place, the Fund’s returns would have been lower. The returns shown do not reflect the deductions of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The maximum sales charge of 5.00% went into effect on January 4, 1999. Investors may not invest directly in an index. The performance of the Fund’s other classes may be greater or less than the performance of Class A shares performance indicated on this chart, depending on whether greater or lesser sales charges and fees were incurred by shareholders investing in other classes.

 

Top Ten Equity Holdings*
 
Portfolio Breakdown*
       
   1. Cullen Frost Bankers, Inc
2.87
 %
 
 
   2. Precision Drilling Corp
2.86
  
 
 
   3. P F Chang’s China Bistro, Inc
2.61
  
 
 
   4. West America Bancorporation
2.38
  
 
 
   5. Affiliated Managers Group Inc
2.17
  
 
 
   6. Alliant Techsystems, Inc
2.06
  
 
 
   7. Aptargroup, Inc
2.03
  
 
 
   8. Cost Plus, Inc
1.89
  
 
 
   9. Varian Inc
1.85
  
 
 
10. Lifepoint Hospitals, Inc
1.72
  

* As a percentage of total investments. All figures are as of 10/31/02 and subject to change at any time.

4    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

 

Portfolio of Investments
October 31, 2002


SHARES SECURITY
VALUE
  
COMMON STOCKS — 94.3%      
Capital Goods/Producer Manufacturing/Industrial Services — 12.6%      
6,639
    Alliant Techsystems, Inc.*
$
399,336
  
   14,081
     Aptargroup, Inc.
393,282
  
10,472
   Brooks-PRI Automation, Inc.*
160,117
  
8,936
   Carlisle Inc.
333,045
  
7,494
   Gentex Corp.*
220,923
  
8,049
   Idex Corp.
241,792
  
9,636
  Mettler Toledo International, Inc.*
288,598
  
3,000
   Mueller Industries, Inc.*
80,250
  
 12,800
   Phillips-Van Heusen Corp.
173,056
  
10,874
   Shaw Group Inc.*
162,675
  
 
 
2,453,074
  
 
Commercial Services — 1.1%      
 42,100
   I-many, Inc.*  
62,729
  
 6,900
   National Processing, Inc.*  
90,873
  
 4,600
   Plexus Corp.*  
49,358
  
5,000
   Retek Inc.*  
16,350
  
 
 
219,310
  
 
Consumer Durables — 0.7%      
6,403
   Callaway Golf Co.  
78,373
  
3,700
   Jakks Pacific Inc.*  
48,988
  
 
 
127,361
  
 
Consumer Non-Durables — 0.8%      
7,600
   International Multifoods Corp.*  
147,820
  
 
Consumer Services — 6.8%      
4,263
   Emmis Communications Corp.*  
93,019
  
8,600
   GTECH Holdings Corp.*  
223,600
  
10,232
   Isle of Capri Casinos, Inc.*  
131,481
  
14,700
   P F Chang’s China Bistro, Inc.*  
507,150
  
2,400
   Scholastic Corp.*  
105,960
  
 5,850
   Tetra Tech, Inc.  
51,948
  
6,400
   Watson Wyatt & Company Holdings*  
126,400
  
2,475
   Westwood One, Inc.*  
89,842
  
 
1,329,400
  
 
Electronic Technology/Technology Services — 13.2%      
12,706
   Aeroflex, Inc.*  
73,568
  
8,679
   Anaren Microwave, Inc.*  
78,988
  
11,308
   Bisys Group, Inc.*  
202,413
  
 2,600
   Black Hills Corp.  
68,510
  
8,000
   CACI International Inc.*  
327,280
  
 9,500
   Computer Network Technology Corp.*  
57,950
  
 13,433
   Concurrent Computer Corp.*  
24,985
  
4,100
   DRS Technologies, Inc.*  
135,874
  
6,73 8
   Emulex Corp.*  
120,947
  
 4,800
   Mercury Computer Systems, Inc.*  
144,725
  
 4,756
   National Instruments Corp.*  
136,450
  
 6,050
   Newport Corp.  
66,314
  

See Notes to Financial Statements.

5    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Portfolio of Investments (continued)
October 31, 2002

 

SHARES SECURITY
VALUE
  
Electronic Technology/Technology Services — (continued)      
10,287
   Powerwave Technologies, Inc.*
$
47,423
  
11,800
   Precise Software Solutions Ltd.*  
136,880
  
28,019
   REMEC, Inc.*  
90,221
  
 6,201
   Spectralink Corp.*  
50,228
  
 12,000
   Technitrol, Inc.  
175,560
  
 40,200
   TIBCO Software Inc.*  
200,598
  
12,244
   Varian Inc.*  
360,096
  
8,700
   WebMethods, Inc.  
62,901
  
 
 
2,561,911
  
 
Energy/Minerals — 6.1%      
2,902
   Atwood Oceanics Inc.*  
86,480
  
23,420
   Hanover Compressor Co.*  
245,676
  
2,900
   Penn Virginia Corp.  
93,090
  
16,286
   Precision Drilling Corp.*  
556,167
  
12,495
   Varco International Inc.*  
205,418
  
 
 
1,186,831
  
 
Finance — 13.5%      
8,099
   Affiliated Managers Group Inc.*  
420,500
  
3,624
   Andrx Corp.*  
55,991
  
 11,125
   Banknorth Group Inc.  
257,766
  
12,007
   Chittenden Corp.  
328,512
  
16,117
   Cullen Frost Bankers, Inc.  
558,132
  
  6,100
   Philadelphia Consolidated Holding Corp.*  
204,472
  
 9,530
   SEI Investments Co.  
254,356
  
  2,900
   Trustco Bank Corp.  
30,946
  
1,600
   United Bankshares Inc.  
48,352
  
10,862
   West America Bancorporation  
461,418
  
 
 
2,620,445
  
 
Health Services/Technology — 17.7%      
 7,500
   Abgenix Inc.*  
51,000
  
7,900
   Alkermes, Inc.  
72,838
  
9,673
   CIMA Labs Inc.*  
225,961
  
     3,800
   Cooper Companies, Inc.  
201,400
  
10,703
   Corixa Corp.*  
91,511
  
10,048
   Curagen Corp.  
38,082
  
   7,600
   DIANON Systems, Inc.*  
304,000
  
 4,947
   Enzon, Inc.*  
95,972
  
 4,100
   Exact Sciences Corp.*  
60,065
  
2,550
   Integra Lifesciences Holdings*  
35,241
  
  7,623
   K V Pharmaceuticals Co.*  
129,591
  
10,636
   Lifepoint Hospitals, Inc.*  
333,439
  
11,200
   Ligand Pharmaceuticals Inc.*  
73,696
  
4,639
   Medicis Pharmaceutical Corp.*  
212,930
  
3,900
   Neurocrine Biosciences, Inc.*  
175,110
  
4,446
   NPS Pharmaceuticals Inc.*  
115,507
  
11,750
   Province Healthcare Co.  
153,338
  
4,000
   Resmed Inc.*  
135,080
  
4,900
   Respironics, Inc.*  
156,506
  

See Notes to Financial Statements.

6    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Portfolio of Investments (continued)
October 31, 2002

 

SHARES SECURITY
VALUE
Health Services/Technology — (continued)      
 6,100
      Scios Inc.*
 $
176,046
 4,800
   Taro Pharma Industries Ltd.*  
166,800
  
3,900
   Techne Corp.*  
128,700
  
 652
   Trimeris, Inc.*  
34,380
  
 5,100
   Varian Medical Systems, Inc.*  
245,922
  
 1,640
   Vertex Pharmaceuticals Inc.*  
32,160
  
 
 
3,445,275
  
 
Retail — 7 .7%      
3,863
   Abercrombie & Fitch Co.*  
68,839
  
3,400
   American Eagle Outfitters Inc.*  
49,266
  
11,300
   Chico’s FAS, Inc.*  
218,090
  
8,200
   Claire's Stores, Inc.  
211,232
  
12,679
   Cost Plus, Inc.*  
366,436
  
2,300
   Duane Reade Inc.  
44,252
  
  4,950
   Fred’s, Inc.  
135,090
  
7,391
   Linens‘n Things, Inc.  
173,762
  
1,900
   Too Inc.*  
48,070
  
7,090
   Ultimate Electronics Inc.*  
93,446
  
7,200
   Wild Oats Market, Inc.*  
81,223
  
 
 
1,489,706
  
 
Semi-Conductor — 3.6%      
8,400
   Advanced Power Technology, Inc.*  
19,908
  
11,300
  Amkor Technology Inc.*  
39,776
  
 9,800
   Asyst Technologies Inc.*  
58,800
  
 4,762
  ATMI Inc.*  
87,573
  
 6,672
   Exar Corp.*  
84,067
  
 6,282
   IXYS Corp.*  
35,682
  
 10,100
   Microtune, Inc.  
17,069
  
 27,467
   Oak Technology*  
45,595
  
15,015
   Semtech Corp.*  
212,162
  
    3,900 
   Varian Semiconductor Equipment*  
92,898
  
 
 
693,530
  
 
Software — 5.6%      
 8,969
   Activision, Inc.*  
183,864
  
2,100
   Advent Software, Inc.*  
29,631
  
7,100
   Agile Software Corp.*  
48,351
  
4,950
   Fair Issac & Co. Inc.  
190,426
  
4,600
   JDA Software Group Inc.*  
40,250
  
3,836
   Macrovision Corp.*  
49,484
  
17,000
   Manugistics Group, Inc.*  
49,300
  
5,700
   MCSi, Inc.*  
28,215
  
10,847
   Mercury Interactive Corp.*  
286,035
  
13,536
   NetIQ*  
190,993
  
 
 
1,096,549
  
 
Telecommunications — 0.9%      
4,500
         Commonwealth Telephone Enterprises, Inc.  
166,140
  
 

See Notes to Financial Statements.

7   Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Portfolio of Investments (continued)
October 31, 2002

 

SHARES SECURITY
VALUE
  
Transportation — 2.5%      
  9,830
    
CH Robinson Worldwide
$
290,673
  
10,000
  
Knight Transportation, Inc.
  
197,073
  
 
 
488,073
  
 
Utilities — 1.5%      
20,220
  
Cleo Corp.
 
282,069
  
 
   
TOTAL COMMON STOCKS
    
    (Identified Cost — $22,982,093)  
18,307,494
  
 
CORPORATE BONDS— 0.1%      
  88,900
        Microstrategy Inc. 7.50% due 6/24/07 (Identified Cost — $9,335)
22,003
  
 
FACE
          
AMOUNT
   SECURITY  
VALUE
  
 
REPURCHASE AGREEMENT — 5.6%      
$1,086,000
   UBS Warburg Repurchase Agreement, 1.91% due 11/1/02,      
        proceeds at maturity $1,086,058  
 
        (Fully collateralized by Freddie Mac, 0% due 11/19/02    
          valued at $1,118,600)      
          (Identified Cost — $1,086,000)  
1,086,000
  
 
    TOTAL INVESTMENTS — 100%      
         (Identified Cost — $24,077,428)
$
19,415,497
  
 

*Non-income producing security

See Notes to Financial Statements.

8    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

 

Statement of Assets and Liabilities
October 31, 2002


ASSETS:
        
   Investments at value (Note 1A) (Identified Cost, $22,991,428)
    
$18,329,497
  
   Short-term holdings at amortized cost (Note1A) (Identified Cost, $1,086,000)
1,086,000
  
   Cash
    
684
  
   Receivable for shares of beneficial interest sold
    
22,980
  
   Dividends and interest receivable
    
14,481
  
   Receivable for investments sold
    
3,636
  
   Receivable from the Manager (Note 8)
    
128,070
  
 
   Total Assets    
$19,585,348
  
 
     
 
LIABILITIES:    
 
   Distribution/Service fees payable (Note 3)    
5,564
  
   Payable for shares of beneficial interest repurchased  
1,063
  
   Accrued expenses and other liabilities    
96,902
  
 
   Total Liabilities    
103,529
  
 
Net Assets    
$
 19,481,819  
 
NET ASSETS CONSIST OF:    
 
   Paid-in capital    
$23,148,655
  
   Unrealized depreciation    
(4,661,931
 )
   Accumulated net realized gain      
995,095
  
 
   Total    
$19,481,819
  
 
Computation of        
 
Class A Shares:        
 
   Net Asset Value and redemption price per share ($16,608,186/1,260,622 shares outstanding)  
$13.17
  
   Offering Price per share ($13.17 ÷ 0.95)        
13.86
 *
 
Class B Shares:        
 
    Net Asset Value per share and offering price ($1,562,104/122,680 shares outstanding)  
$12.73
 **
 
Class L Shares:        
 
   Net Asset Value per share ($1,311,529/101,106 shares outstanding)  
$12.97
 **
   Offering Price per share ($12.97 ÷ 0.99)        
$13.10
  
 
* Based upon single purchases of less than $25,000.
** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

See Notes to Financial Statements.

9    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Statement of Operations

For the Year Ended October 31, 2002      
INVESTMENT INCOME (NOTE 1B):      
   Dividend income
$      93,934
  
   Interest income
96,280
  
 
   Total Investment Income  
190,214
  
 
   
 
EXPENSES:  
 
   Management fees (Note 2)  
263,071
  
   Distribution/service fees Class A (Note 3)  
52,584
  
   Distribution/service fees Class B (Note 3)  
18,716
  
   Distribution/service fees Class L (Note 3)  
10,102
  
   Shareholder reports  
107,367
  
   Legal fees  
67,979
  
   Custody and fund accounting fees  
51,410
  
   Transfer agent fees  
43,183
  
   Blue Sky fees  
41,503
  
   Audit fees  
41,330
  
   Trustees fees  
320
  
   Other  
24,815
  
 
   Total Expenses  
722,380
  
   Less: Aggregate amount waived by the Manager (Note 2)  
(263,071
 )
   Less: Expenses assumed by the Manager (Note 8)  
(114,786
 )
 
   Net Expenses  
344,523
  
 
Net Investment Loss  
(154,309
 )
 
   
 
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS:  
 
   Net realized loss from investment transactions  
(1,198,814
 )
   Net decrease in unrealized depreciation on investments  
(3,188,844
 )
 
Net Realized and Unrealized Loss From Investments  
(4,387,658
 )
 
Net Decrease in Net Assets Resulting From Operations
$      (4,541,967
 )
 

See Notes to Financial Statements.

10    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Statement of Changes in Net Assets

For the Year Ended October 31, 2002   2001  
         
Increase (Decrease) in Net Assets From:            
OPERATIONS:            
   Net investment loss
$(154,309
)
$(176,514
 )
   Net realized loss
(1,198,814
)
(1,589,586
 )
   Unrealized depreciation
(3,188,844
)
(7,353,457
 )
 
   Net Decrease in Net Assets Resulting From Operations
(4,541,967
)
(9,119,557)
  
 
 
 
DISTRIBUTIONS TO SHAREHOLDERS FROM:
 
   Net realized gain Class A
     —
(7,163,770
 )
   Net realized gain Class B
     —
(448,402
)  
   Net realized gain Class L
     —
(38,490
 )
 
   Decrease in Net Assets From Distributions to Shareholders
—
(7,650,662
 )
 
 
 
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST (NOTE 7):
 
Class A
 
   Net proceeds from sale of shares
4,859,940
6,975,703
  
   Net asset value of shares issued to shareholders from reinvestment of distributions
—
6,883,130
  
   Cost of shares repurchased
(5,949,444
)
(7,485,548
 )
 
   Total Class A
(1,089,504
)
6,373,285
  
 
Class B
 
   Net proceeds from sale of shares
593,483
957,749
  
   Net asset value of shares issued to shareholders from reinvestment of distributions
—
400,644
  
   Cost of shares repurchased
(356,130
)
(326,863
 )
 
   Total Class B
237,353
1,031,530
  
 
Class L
 
   Net proceeds from sale of shares
1,287,160
726,288
  
   Net asset value of shares issued to shareholders from reinvestment of distributions
—
38,490
  
   Cost of shares repurchased
(193,761)
(96,434)
  
 
   Total Class L
1,093,399
668,344
  
 
   Net Increase in Net Assets From
 
      Transactions in Shares of Beneficial Interest
241,248
8,073,159
  
 
   Net Decrease in Net Assets
(4,300,719
)
(8,697,060
 )
 
 
 
NET ASSETS:
 
   Beginning of period
23,782,538
32,479,598
  
 
   End of period
$19,481,819
$23,782,538
  
 

See Notes to Financial Statements.

11    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Financial Highlights

  Year Ended October 31,  
 
Class A Shares
2002
2001
2000
1999
1998
  
Net Asset Value, Beginning of Year
$16.13
$31.06
21.44
$16.96
$21.24
Income From Operations:
Net investment loss
(0.093
 )
(0.111
 )
(0.525
 )
(0.196
 )†
(0.193
)†
Net realized and unrealized gain (loss)
(2.867
)
(7.432
)
10.145
4.676
(3.224
)
Total From Operations
(2.960)
(7.543
)
9.620
4.480
(3.417)
Less Distributions From:
   Net investment income
—
—
—
—
—
   Net realized gain
—
(7.387
)
—
—
(0.863)
Total Distributions
—
(7.387
)
—
—
(0.863)
Net Asset Value, End of Year
$13.17
$16.13
$31.06
$21.44
$16.96
Ratios/Supplemental Data:
   Net assets, end of year (000’s omitted)
$16,608
$21,529
$30,717
$23,794
$27,802
                           
   Ratio of net investment
  loss to average net assets
1.35
%
1.35
%(A)
1.35
%(A)
1.35
%(A)
1.35
%(A)
      loss to average net assets
(0.56
)%
(0.60
 )%  
(0.82
)%
(1.03
)%
(0.98
)%
Total Return
(18.35
 )%
(27.89
 )%  
44.87
%
26.42
%
(16.56
)%
Portfolio Turnover Rate
21
%
57
 %  
81
%
104
%
51
%
                               
Note: If Agents of the Fund had not voluntarily waived a portion of their fees and assumed Fund expenses for the periods indicated, the net investment loss per share and the ratios would have been as follows:  
Net investment loss per share
$(0.357
)
$(0.345
)
$(0.435
)
$(0.351
)†
$(0.319
 )†
   Ratios:
   Expenses to average net assets
2.93
%
2.61
 %(A)  
2.18
%(A)
2.16
%(A)
1.99
%(A)
   Net investment loss to average net assets
(2.14
)%
(1.86
)%
  
(1.65
)%
(1.84
)%
(1.62
 )%
 

 

†
  		 The per share amounts were computed using a monthly average number of shares outstanding during the period.
(A) Includes the Fund’s share of Small Cap Growth Portfolio allocated expenses for the periods indicated.

12    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Financial Highlights (continued)

               
              January 4, 1999  
  Year Ended October 31,   (Commencement  
 
 
of Operations) to
  
Class B Shares   2002     2001       
2000
   October 31, 1999  
 
Net Asset Value, Beginning of Year   $15.71     $30.65     $21.31   $18.95  
 
Income From Operations:                      
   Net investment loss   (0.198 )   (0.214 ) (0.481 ) (0.265 )†
   Net realized and unrealized gain (loss)   (2.782 )   (7.339 )   9.821   2.625  
 
Total From Operations   (2.980 )   (7.553 )   9.340   2.360  
 
Less Distributions From:                      
   Net investment income   —     —     —   —  
   Net realized gain   —     (7.387 )   —   —  
 
Total Distributions   —     (7.387 )   —   —  
 
Net Asset Value, End of Year   $12.73     $15.71     $30.65   $21.31  
 
Ratios/Supplemental Data:                      
   Net assets, end of year (000’s omitted)   $1,562     $1,730     $1,743   $737  
   Ratio of expenses to average net assets   2.10 %   2.10 %(A)   2.10 %(A) 2.10 %(A)*
   Ratio of net investment                      
      loss to average net assets   (1.30 )%   (1.36 )%   (1.55 )% (1.77 )%*
 
Total Return   (18.97 )%   (28.42 )%   43.78 % 12.45 %**
 
Portfolio Turnover Rate   21 %   57 %   81 % 104 %
 
                       
Note: If Agents of the Fund had not voluntarily waived a portion of their fees and assumed Fund expenses for the periods indicated, the net investment loss per share and the ratios would have been as follows:  
   Net investment loss per share   $(0.439 )   $(0.453 )   $(0.621 ) $(0.420 )†
   Ratios:                      
   Expenses to average net assets   3.68 %   3.61 %(A)   2.93 %(A) 2.91 %(A)*
   Net investment loss to average net assets   (2.88 )%   (2.87 )%   (2.40 )% (2.58 )%*
 
* Annualized
** Not Annualized
† The per share amounts were computed using a monthly average number of shares outstanding during the period.
(A)
 Includes the Fund’s share of Small Cap Growth Portfolio allocated expenses for the periods indicated.

13    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Financial Highlights (continued)

           
          September 22,  
  2000  
  Year Ended October 31, (Commencement  
 
of Operations) to
  
Class L Shares  
2002
    
2001
October 31, 2000
  
Net Asset Value, Beginning of Year     
$16.00
$31.06
  
    $32.62
    
Income From Operations:  
 
 
   Net investment loss  
(0.122
)
(0.153
 )
(0.065
)
  
   Net realized and unrealized loss  
(2.908
)
(7.520
 )
(1.495
)
  
Total From Operations  
(3.030
)
(7.673
 )
(1.560
)
  
Less Distributions From:  
 
 
   Net investment income  
—
—
  
—
 
   Net realized gain  
—
(7.387
 )
—
 
Total Distributions  
—
(7.387
 )
—
 
Net Asset Value, End of Year  
$12.97
$16.00
  
$31.06
 
Ratios/Supplemental Data:  
 
 
   Net assets, end of year (000’s omitted)  
$1,312
$523
  
$19
 
   Ratio of expenses to average net assets  
2.10
%
2.10
 %(A)
2.10
%(A)*
  
   Ratio of net investment loss to average net assets  
(1.22
)%
(1.37
 )%
(1.91
)%*
  
Total Return  
(18.94
)%
(28.39
 )%
(4.78
)%**
  
Portfolio Turnover Rate  
21
%
57
 %
81
%
  
                     
Note: If Agents of the Fund had not voluntarily waived a portion of their fees and assumed Fund expenses for the periods indicated, the net investment loss per share and the ratios would have been as follows:  
   Net investment loss per share  
$(0.280
)
$(0.383
 )
$(0.140
)
  
   Ratios:  
 
 
   Expenses to average net assets  
3.68
%
4.16
 %(A)
2.93
%(A)*
  
   Net investment loss to average net assets  
(2.80)
%
(3.43
 )%
(2.74)
%*
  
* Annualized
**  Not Annualized
(A) Includes the Fund’s share of Small Cap Growth Portfolio allocated expenses for the periods indicated.

14    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements

1. Significant Accounting Policies

Smith Barney Small Cap Growth Opportunities Fund (the “Fund”) is a separate diversified series of Smith Barney Trust II (the “Trust”), a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Prior to November 1, 2001, the Fund sought to achieve its investment objectives by investing substantially all of its assets in Small Cap Growth Portfolio (the “Portfolio”). On October 29, 2001, the Board of Trustees approved a change in the investment structure of the Fund. Effective November 1, 2001, the Fund withdrew its investment in the Portfolio through an in kind redemption equal to the Fund’s proportionate share of the Portfolio’s net assets. Subsequent to the redemption in kind from the Portfolio, the Fund ceased utilizing a hub and spoke investment structure and began investing directly in investment securities. Prior to May 13, 2002, the investment manager of the Fund was Citi Fund Management Inc. Effective May 13, 2002, the investment manager became Smith Barney Fund Management LLC (the “Manager”). Salomon Smith Barney Inc. (“SSB”), serves as the Fund’s distributor, (the “Distributor”) and continues to sell Fund shares to the public as a member of the selling group. Citi Fund Management Inc., Smith Barney Fund Management LLC and Salomon Smith Barney Inc. are subsidiaries of Citigroup.

Citicorp Trust Bank, fsb. (“CTB”), a subsidiary of Citigroup, acts as the Fund’s transfer agent and PFPC Global Fund Services (“PFPC”) acts as the Fund’s sub-transfer agent. CTB receives fees and asset-based fees that vary according to the account size and type of account. PFPC is responsible for shareholder recordkeeping and financial processing for all shareholder accounts and is paid by CTB. For the year ended October 31, 2002, the Fund paid transfer agent fees of $24,810 to CTB.

The Fund offers Class A, Class B and Class L shares. Class A shares have a front-end, or initial, sales charge. This sales charge may be reduced or eliminated in certain circumstances. Class B shares have no front-end sales charge, pay a higher ongoing distribution fee than Class A shares, and are subject to a deferred sales charge if sold within five years of purchase. Class B shares automatically convert into Class A shares after eight years. Class L shares have a front-end, or initial, sales charge that is lower than Class A shares, pay a higher ongoing distribution fee than Class A shares, and are subject to a deferred sales charge if sold within one year of purchase. Expenses of the Fund are borne pro-rata by the holders of each class of shares, based on the proportionate interest in the Fund represented by the daily net assets of such class, except that each class bears expenses unique to that class (including the Rule 12b-1 service and distribution fees applicable to such class), and votes as a class only with respect to its own Rule 12b-1 plan. Shares of each class would receive their pro-rata share of the net assets of the Fund, if the Fund were liquidated. Class A shares have lower expenses than Class B and Class L shares. For the year ended October 31, 2002, the Fund has been informed that the distributor retained front-end net commissions paid by investors of $15,000 and $7,000 from sales of Class A and Class L shares, respectively and $4,000 and $1,000 in deferred sales charges from redemptions of Class B and Class L shares, respectively.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements.Actual results could differ from those estimates.

The significant accounting policies consistently followed by the Fund are as follows:

A. Investment Security Valuations Equity securities listed on securities exchanges or reported through the NASDAQ system are valued at last sale prices. Unlisted securities or listed securities for which last sale prices are not available are valued at last quoted bid prices. Debt securities (other than short-term obligations maturing in sixty days or less) are valued on the basis of valuations furnished by pricing services approved by the Board of Trustees which take into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, and other market data, without exclusive reliance on quoted prices or exchange or over-the-counter prices. Short-term obligations, maturing in 60 days or less, are value at amortized cost, which constitutes fair value as determined by the Trustees. Securities, if any, for which there are no such valuations or quotations are valued at fair value as determined in good faith by or under guidelines established by the Trustees.

15    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

B. Income Interest income consists of interest accrued and discount earned, adjusted for amortization of premium or accretion of discount on long-term debt securities. Dividend income is recorded on the ex-dividend date.

C. Federal Taxes The Fund’s policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute to shareholders all of its taxable income, including any net realized gain on investment transactions. Accordingly, no provision for federal income or excise tax is necessary.At October 31, 2002, the Fund for federal income tax purposes had a loss carryover of $804,000, of which $308,000 will expire in October 2009 and $496,000 which will expire in October 2010.

D. Expenses The Fund bears all costs of its operations other than expenses specifically assumed by the Manager. Expenses incurred by the Trust with respect to any two or more funds or series are allocated in proportion to the average net assets of each fund, except when allocations of direct expenses to each fund can otherwise be made fairly. Expenses directly attributable to a fund were charged to that fund.

E. Distributions Distributions to shareholders are recorded on the ex-dividend date.The amount and character of income and net realized gains to be distributed are determined in accordance with income tax rules and regulations, which may differ from generally accepted accounting principles. These differences are attributable to permanent book and tax accounting differences. Reclassifications are made to the Fund’s capital accounts to reflect income and net realized gains available for distribution (or available capital loss carryovers) under income tax rules and regulations. For the year ended October 31, 2002, the Fund reclassified $3,986,512 from paid in capital, $154,309 to accumulated investment loss and $3,832,203 to accumulated realized gain.

F. Repurchase Agreements It is the policy of the Fund to require the custodian bank to take possession, to have legally segregated in the Federal Reserve Book Entry System or to have segregated within the custodian bank’s vault, all securities held as collateral in support of repurchase agreements. The Fund requires continued maintenance of the market value (plus accrued interest) of the collateral in amounts at least equal to the repurchase price.

G. Other Investment transactions are accounted for on the date the investments are purchased or sold. Realized gains and losses are determined on the identified cost basis.

2. Management Fees

The Manager is responsible for overall management of the Fund’s business affairs, and has a Management Agreement with the Fund.The Manager or an affiliate also provides certain administrative services to the Fund.These administrative services include providing general office facilities and supervising the overall administration of the Fund.

The management fees paid to the Manager are accrued daily and payable monthly. The management fee is computed at the annual rate of 1.10% of the Funds’ average daily net assets. The management fee amounted to $263,071, all of which was voluntarily waived for the year ended October 31, 2002.

The Trust pays no compensation directly to any Trustee or any other officer who is affiliated with the Manager, all of whom receive remuneration for their services to the Trust from the Manager or its affiliates.

3. Distribution/Service Fees

The Fund maintains separate Service Plans for Class A, Class B and Class L shares, which have been adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended. Under the Class A Service Plan, the Fund may pay monthly fees at an annual rate not to exceed 0.25% of the average daily net assets represented by Class A shares of the Fund. The Service fees for Class A shares amounted to $52,584 for the year ended October 31, 2002. Under the Class B and Class L Service Plans, the Fund may pay a combined monthly distribution and service fee at an annual rate not to exceed 1.00% of the average daily net assets represented by Class B and Class L shares of the Fund, respectively.The Service fees for Class B and Class L shares amounted to $18,716 and $10,102 respectively, for the year ended October 31, 2002. These fees may be used to make payments to the distributor for distribution services and to others as compensation for the sale of shares of the applicable class of the Fund, for advertising, marketing, or other promotional activity, and for preparation, printing and distri-

16    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

bution of prospectuses, statements of additional information and reports for recipients other than regulators and existing shareholders.The Fund also may make payments to the distributor and others for providing personal service or the maintenance of shareholder accounts.

4. Purchases and Sales of Investments

Purchases and sales of investments, other than short-term obligations, aggregated $5,291,670 and $4,660,563, respectively, for the year ended October 31, 2002.

5. Federal Income Tax Basis of Investments

Then cost and unrealized appreciation (depreciation) in value of the investment securities owned at October 31, 2002, as computed on a federal income tax basis, are as follows:

Aggregate cost $ 22,278,211  
 
       
Gross unrealized appreciation $  2,181,560  
Gross unrealized depreciation   (5,044,274)  
 
Net unrealized depreciation $ (2,862,714)  
 

6. Income Tax Information and Distributions to Shareholders

At October 31, 2002 the tax basis components of distributable earnings were:

Undistributed ordinary income
$0
  
Accumulated capital gains (losses)
($804,122
 )
Unrealized depreciation
($2,862,714
 )

The difference between book basis and tax basis unrealized depreciation is attributable primarily to the Fund’s in-kind redemption received in exchange for the Fund’s investment in the Portfolio.

7. Shares of Beneficial Interest

The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value).Transactions in shares of beneficial interest were as follows:

  Year Ended October 31,  
 
 
  2002   2001  
 
 
         
Class A        
Shares sold
311,000
376,540
  
Shares issued to shareholders from reinvestment of distributions
        —
362,079
  
Shares repurchased
(384,834)
(392,995)
  
 
Class A net increase (decrease)
(73,834)
345,624
  
 
 
 
Class B
 
Shares sold
36,421
50,390
  
Shares issued to shareholders from reinvestment of distributions
      —
21,505
  
Shares repurchased
(23,841)
(18,682)
  
 
Class B net increase
12,580
53,213
  
 
 
 
Class L
 
Shares sold
82,234
35,831
  
Shares issued to shareholders from reinvestment of distributions
       —
2,028
  
Shares repurchased
(13,830)
(5,763)
  
 
Class L net increase
68,404
32,096
  
 

17    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

8. Assumption of Expenses

The Manager has voluntarily agreed to pay a portion of the unwaived expenses of the Fund for the year ended October 31, 2002, which amounted to $114,786, to maintain a voluntary expense limitation of average daily net assets of 1.35%, 2.10% and 2.10% for Class A, Class B and Class L shares, respectively. These voluntary expense limitations may be discontinued at any time.

9. Trustee Retirement Plan

The Trustees of the Fund have adopted a Retirement Plan for all Trustees who are not “interested persons” of the Fund, within the meaning of the 1940 Act. Under the Plan, all Trustees are required to retire from the Board as of the last day of the calendar year in which the applicable Trustee attains age 75 (certain Trustees who had already attained age 75 when the Plan was adopted are required to retire effective December 31, 2003).Trustees may retire under the Plan before attaining the mandatory retirement age.Trustees who have served as Trustee of the Trust or any of the investment companies associated with Citigroup for at least ten years when they retire are eligible to receive the maximum retirement benefit under the Plan. The maximum retirement benefit is an amount equal to five times the amount of retainer and regular meeting fees payable to a Trustee during the calendar year ending on or immediately prior to the applicable Trustee’s retirement. Amounts under the Plan may be paid in installments or in a lump sum (discounted to present value). Benefits under the Plan are unfunded. The Fund’s allocable share of the expense of the Plan for the year ended October 31, 2002 and the related liability at October 31, 2002 were not material.

18    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Report of Independent Accountants

To the Trustees and the Shareholders of Smith Barney Trust II:
Smith Barney Small Cap Growth Opportunities Fund:

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Smith Barney Small Cap Growth Opportunities Fund (the “Fund”), a series of Smith Barney Trust II, at October 31, 2002, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.We believe that our audits, which included confirmation of securities at October 31, 2002 by correspondence with the custodian, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, New York
December 13, 2002

19    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited)

Information about Trustees and Officers The business and affairs of the Smith Barney Small Cap Growth Opportunities Fund (the “Fund”) are managed under the direction of the Fund’s Board of Trustees. Information pertaining to the Trustees and officers of the Fund is set forth below. Each Trustee and officer holds office for his or her lifetime, unless that individual resigns, retires or is otherwise removed. The Statement of Additional Information includes additional information about Fund Trustees and is available, without charge, upon request by calling Citicorp Trust Bank, fsb at 1-800-451-2010.

                       Number of     Other
            Principal   Portfolios In   Board Memberships
      Position(s)   Length   Occupation(s)   Fund Complex   Held by
    Held with   of Time   During Past   Overseen by   Trustee During
Name, Address and Age   Fund   Served   Five Years   Trustee   Past Five Years
NON-INTERESTED                    
TRUSTEES:                    
                     
Elliott J. Berv   Trustee   Since 2001   President and Chief Operations   35   Board Member,
125 Broad Street           Officer, Landmark City (Real       American Identity Corp.
New York, NY 10004           Estate Development) (since       (doing business as
Age 59           2002); Executive Vice President       Morpheus Technologies)
            and Chief Operations Officer,       (biometric information
            DigiGym Systems (On-line       management) (since
            Personal Training Systems)       2001; consultant since
            (since 2001); Chief Executive       1999); Director, Lapoint
            Officer, Rocket City Enterprises       Industries (Industrial
            (Internet Service Company)       Filter Company) (since
            (since 2000); President, Catalyst       2002); Director,
            (Consulting) (since 1984).       Alzheimer’s Association
                    (New England Chapter)
                    (since 1998).
                     
Donald M. Carlton   Trustee   Since 2001   Consultant, URS Corporation   30   Director, American
125 Broad Street           (Engineering) (since 1999);       Electric Power (Electric
New York, NY 10004           former Chief Executive Officer,       Utility) (since 1999);
Age 65           Radian International L.L.C.       Director,Valero Energy
            (Engineering) (from 1996 to       (Petroleum Refining)
            1998), Member of Management       (since 1999); Director,
            Committee, Signature Science       National Instruments
            (Research and Development)       Corp. (Technology)
            (since 2000).       (since 1994).
                     
A. Benton Cocanougher   Trustee   Since 2001   Dean Emeritus and Wiley   30   Former Director,
125 Broad Street           Professor,Texas A&M University       Randall’s Food Markets,
New York, NY 10004           (since 2001); former Dean and       Inc. (from 1990 to
Age 64           Professor of Marketing, College       1999); former Director,
            and Graduate School of Business       First American Bank
            of Texas A & M University (from       and First American
            1987 to 2001).       Savings Bank (from
                    1994 to 1999).

20    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

                         Number of     Other
            Principal   Portfolios In   Board Memberships
    Position(s)   Length   Occupation(s)   Fund Complex   Held by
    Held with   of Time   During Past   Overseen by   Trustee During
Name, Address and Age   Fund   Served   Five Years   Trustee   Past Five Years
Mark T. Finn   Trustee   Since 2001   Chairman and Owner,Vantage   35   Former President and
125 Broad Street           Consulting Group, Inc.       Director, Delta
New York, NY 10004           (Investment Advisory and       Financial, Inc.
Age 59           Consulting Firm) (since 1988);       (Investment Advisory
            former Vice Chairman and       Firm) (from 1983 to
            Chief Operating Officer,       1999).
            Lindner Asset Management        
            Company (Mutual Fund        
            Company) (from March 1999        
            to 2001); former General        
            Partner and Shareholder,        
            Greenwich Ventures, LLC        
            (Investment Partnership)        
            (from 1996 to 2001); former        
            President, Secretary, and        
            Owner, Phoenix Trading Co.        
            (Commodity Trading Advisory        
            Firm) (from 1997 to 2000).        
                     
Stephen Randolph Gross   Trustee   Since 2001   Partner, Capital Investment   30   Director, United Telesis,
125 Broad Street           Advisory Partners (Consulting)       Inc. (Telecommuni-
New York, NY 10004           (since January 2000); Managing       cations) (since 1997);
Age 54           Director, Fountainhead Ventures,       Director, eBank.com,
            LLC (Consulting) (from 1998 to       Inc. (since 1997);
            2002); Secretary, Carint N.A.       Director, Andersen
            (Manufacturing) (since 1988);       Calhoun, Inc. (Assisted
            former Treasurer, Hank Aaron       Living) (since 1987);
            Enterprises (Fast Food Franchise)       former Director,
            (from 1985 to 2001); Chairman,       Charter Bank, Inc.
            Gross, Collins & Cress, P.C.       (from 1987 to 1997);
            (Accounting Firm) (since 1980);       former Director,
            Treasurer, Coventry Limited, Inc.       Yu Save, Inc. (Internet
            (since 1985).       Company) (from 1998
                    to 2000); former
                    Director, Hotpalm, Inc.
                    (Wireless Applications)
                    (from 1998 to 2000);
                    former Director, Ikon
                    Ventures, Inc. (from
                    1997 to 1998).
                     
Diana R. Harrington   Trustee   Since 1992   Professor, Babson College   35   Former Trustee,The
125 Broad Street           (since 1992).       Highland Family of
New York, NY 10004                   Funds (Investment
Age 62                   Company) (from March
                    1997 to March 1998).
                     
Susan B. Kerley   Trustee   Since 1992   Consultant, Strategic   35   Director, Eclipse Funds
125 Broad Street           Management Advisors, LLC       (currently supervises 17
New York, NY 10004           Global Research Associates, Inc.       investment companies
Age 51           (Investment Consulting)       in fund complex) (since 1990)
            (since 1990).   .

21    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

                       Number of     Other
            Principal   Portfolios In   Board Memberships
      Position(s)   Length   Occupation(s)   Fund Complex   Held by
    Held with   of Time   During Past   Overseen by   Trustee During
Name, Address and Age   Fund   Served   Five Years   Trustee   Past Five Years
Alan G. Merten   Trustee   Since 2001   President, George Mason   30   Director, Comshare,
125 Broad Street           University (since 1996).       Inc. (Information
New York, NY 10004                   Technology)
Age 61                   (since 1985); former
                    Director, Indus
                    (Information
                    Technology) (from
                    1995 to 1999).
                     
C. Oscar Morong, Jr.   Trustee   Since 1991   Managing Director, Morong   35   Former Director,
125 Broad Street           Capital Management       Indonesia Fund
New York, NY 10004           (since 1993).       (Closed-End Fund)
Age 67                   (from 1990 to 1999);
                    Trustee, Morgan
                    Stanley Institutional
                    Fund (currently
                    supervises 75 invest-
                    ment companies) (since
                    1993).
                     
R. Richardson Pettit   Trustee   Since 2001   Professor of Finance,   30   None
Age 60           University of Houston        
            (since 1977);        
            Independent Consultant        
            (since 1984).        
                     
Walter E. Robb, III   Trustee   Since 2001   President, Benchmark   35   Director, John Boyle &
Age 76           Consulting Group, Inc. (Service       Co., Inc. (Textiles)
            Company) (since 1991); Sole       (since 1999); Director,
            Proprietor, Robb Associates       Harbor Sweets, Inc.
            (Consulting) (since 1978);       (Candy) (since 1990);
            Co-owner, Kedron design       Director,W.A.Wilde
            (Gifts) (since 1978); former       Co. (Direct Media)
            President and Treasurer,       (since 1982); Director,
            Benchmark Advisors, Inc.       Alpha Grainger
            (Financial Consulting) (from       Manufacturing, Inc.
            1989 to 2000).       (Electronics) (since
                    1983); former Trustee,
                    MFS Family of Funds
                    (Investment Company)
                    (from 1985 to 2001);
                    Harvard Club of Boston
                    (Audit Committee)
                    (since 2001).

22    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

                       Number of     Other
            Principal   Portfolios In   Board Memberships
    Position(s)   Length   Occupation(s)   Fund Complex   Held by
      Held with   of Time   During Past   Overseen by   Trustee During
Name, Address and Age   Fund   Served   Five Years   Trustee   Past Five Years
INTERESTED                    
TRUSTEE:                    
                     
R. Jay Gerken*   Chairman,   Since 2002   President since 2002; Managing   Chairman   N/A
125 Broad Street   President       Director, Salomon Smith   of the    
New York, NY 10004   and       Barney (since 1996).   Board,    
Age 51   Chief           Trustee or    
    Executive           Director    
    Officer           of 226    
OFFICERS:                    
                     
Lewis E. Daidone   Senior Vice   Since 2000   Managing Director, Salomon   N/A   N/A
125 Broad Street   President       Smith Barney (since 1990);        
New York, NY 10004   and       Chief Financial Officer,        
Age 45   Chief       Smith Barney Mutual Funds;        
    Adminis-       Director and Senior Vice        
    trative       President, Smith Barney Fund        
    Officer       Management LLC and        
            Travelers Investment Adviser.        
                     
Irving P. David   Treasurer   Since 2002   Director, Salomon Smith   N/A   N/A
125 Broad Street           Barney (since 1997);        
New York, NY 10004           former Assistant        
Age 42           Treasurer, First Investment        
            Management Company (from        
            1988 to 1994).        
                     
Frances M. Guggino   Controller   Since 2002   Vice President, Citigroup   N/A   N/A
125 Broad Street           Asset Management        
New York, NY 10004           (since 1991).        
Age 45                    
                     
Robert I. Frenkel   Secretary   Since 2000   Managing Director and   N/A   N/A
SSB           General Counsel, Global        
300 First Stamford Place           Mutual Funds for Citigroup        
Stamford, CT 06902           Asset Management (since 1994)        
Age 48                    

* Mr. Gerken is an “interested person” of the fund as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of Smith Barney Fund Management LLC and certain of its affiliates.

23    Smith Barney Small Cap Growth Opportunities Fund | 2002 Annual Report to Shareholders

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SMITH BARNEY
SMALL CAP GROWTH OPPORTUNITIES FUND

TRUSTEES & OFFICERS INVESTMENT MANAGER
Elliott J. Berv Smith Barney Fund Management LLC
Donald M. Carlton  
A. Benton Cocanougher DISTRIBUTOR
Mark T. Finn Salomon Smith Barney Inc.
R. Jay Gerken, Chairman*  
Stephen Randolph Gross  
Diana R. Harrington CUSTODIAN
Susan B. Kerley State Street Bank
Alan G. Merten & Trust Company
C. Oscar Morong, Jr.  
R. Richardson Pettit TRANSFER AGENT
Walter E. Robb, III Citicorp Trust Bank, fsb.
  125 Broad Street, 11th Floor
  New York, NY 10004
PRESIDENT  
R. Jay Gerken*  
  SUB-TRANSFER AGENT
  PFPC Global Fund Services
SECRETARY P.O. Box 9699
Robert I. Frenkel* Providence, RI 02940-9699
   
   
SENIOR VICE PRESIDENT INDEPENDENT
AND CHIEF ADMINISTRATIVE ACCOUNTANTS
OFFICER PricewaterhouseCoopers LLP
Lewis E. Daidone* 1177 Avenue of the Americas
  New York, NY 10036
   
TREASURER  
Irving P. David*  
   
   
CONTROLLER  
Frances M. Guggino*  
   
   
   * Affiliated Person of  
      Investment Manager  

Smith Barney Small Cap Growth Opportunities Fund

This report is submitted for general information of the shareholders of Smith Barney Small Cap Growth Opportunities Fund, but it may also be used as sales literature when preceded or accompanied by the current Prospectus, which gives details about charges, expenses, investment objectives and operating policies of the Fund. If used as sales material after January 31, 2003, this report must be accompanied by performance information for the most recently completed calendar quarter.

SMITH BARNEY SMALL CAP
     GROWTH OPPORTUNITIES FUND
Smith Barney Mutual Funds
125 Broad Street, MF-2
New York, New York 10004

For complete information on any Smith Barney Mutual Funds, including management fees and expenses, call or write your financial professional for a free prospectus. Read it carefully before you invest or send money.

www.smithbarney.com/mutualfunds

 

 

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

 

FD02663 12/02  02-4144

Annual Report • October 31, 2002
SMITH BARNEY CAPITAL
PRESERVATION FUND

FUND OBJECTIVE
The objective of the Fund during the Guarantee Period is to seek some capital growth while preserving principal. During the Post Guarantee Period, the Fund expects to seek long-term growth of capital.

FUND FACTS

FUND INCEPTION      
April 3, 2002      
       
  CLASS A CLASS B CLASS L
NASDAQ
SPNAX
SPRBX
SPRLX

Average Annual Total Returns as of October 31, 2002 (unaudited)

 
Without Sales Charges(1)
  
                 
 
Class A
Class B
Class L
  
 
Since Inception*
(0.09)%
(0.48)%
(0.48)%
  
 
             
             
 
With Sales Charges(2)
  
             
 
Class A
  
Class B
  
Class L
  
 
Since Inception*
(5.08)%
  
(5.45)%
  
(2.50)%
  
 
             
(1) Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value and does not reflect deduction of all applicable sales charges with respect to Class A and L shares or the applicable contingent deferred sales charges (“CDSC”) with respect to Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if any, at net asset value. In addition, Class A and L shares reflect the deduction of the maximum sales charge of 5.00% and 1.00%, respectively, and Class B shares reflect the deduction of a 5.00% CDSC, which applies if shares are redeemed within one year from initial purchase. Thereafter, this CDSC declines by 1.00% per year until no CDSC is incurred. Class L shares reflect the deduction of 1.00% CDSC, which applies if shares are redeemed within first year of purchase.
  All figures represent past performance and are not a guarantee of future results. Investment returns and principal value will fluctuate, and redemption value may be more or less than the original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on a fund distribution or the redemption of fund shares.

* Not Annualized 
 
What’s Inside    
Letter to Our Shareholders
1
  
Fund at a Glance
4
  
Portfolio of Investments
5
  
Statement of Assets and Liabilities
8
  
Statement of Operations
9
  
Statement of Changes in Net Assets
10
  
Notes to Financial Statements
11
  
Financial Highlights
16
  
Independent Auditors’ Report
19
  
Additional Information
20
  

Investment Products: Not FDIC Insured • Not Bank Guaranteed • May Lose Value

Dear Shareholder:

Enclosed herein is the first annual report for the Smith Barney Capital Preservation Fund (“Fund”) for the period ended October 31, 2002. In this report, we summarize what we believe to be the period’s prevailing economic and market conditions and outline our investment strategy. A detailed summary of the Fund’s performance can be found in the appropriate sections that follow.We hope you find this report to be useful and informative.

Performance Review
For the period ended October 31, 2002, the Fund’s Class A shares, without sales charges, returned negative 0.09%.(1) In comparison, the S&P 500 Index (“S&P 500”)(2) returned negative 15.10% and the Lehman Brothers Aggregate Bond Index (“Lehman Index”)(3) returned 5.89% for the same period.

Investment Strategy
During the Guarantee Period the Fund seeks some capital growth, while preserving principal. Under normal market conditions during the Guarantee Period the Fund’s assets are allocated between:

•   An equity component, consisting primarily of common stocks, with an emphasis on stocks of large capitalization companies, and
•   A fixed income component, consisting primarily of high quality debt instruments.
The manager uses a proprietary model to determine, on an ongoing basis, the percentage of assets allocated to the equity component and to the fixed income component.The model evaluates a number of factors, including, but not limited to:
•   the market value of the Fund’s assets as compared to the aggregate guaranteed amount;
•   the prevailing level of interest rates;
•   equity market volatility; and
•   the length of time remaining until the Guarantee Maturity Date.

The terms of a Financial Guarantee Agreement executed in connection with the Guarantee impose certain limitations on the manner in which the Fund may be managed during the Guarantee Period.The Financial Guarantee Agreement could limit the manager’s ability to alter the management of the Fund during the Guarantee Period in response to changing market conditions.

Portfolio Manager Market Overview
In our experience, there have been three periods in post-WorldWar stock market history that have evoked the same kinds of anxieties and the sense of foreboding that were present during the last few weeks of the reporting period.Those periods were October of 1962, December of 1974 and December of 1987. Similar to the present, each of those times was characterized by huge declines in the market and highly unusual circumstances that led investors to abandon all hope and to exit the stock market.

In 1962, the market had a full-scale washout in May and June and then it had a good rally. It started dropping in October and then people got really scared because of the Cuban Missile Crisis, as nuclear warheads were in the silos ready to be launched.
(1)   The performance number provided reflects the Fund’s performance since the inception date of 4/03/2002.
(2)   The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Please note that an investor cannot invest directly in an index.
(3)   The Lehman Brothers Aggregate Bond Index is a broad-based bond index comprised of government, corporate, mortgage and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. Please note that an investor cannot invest directly in an index.

 

1    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

People often ask us now,“What if there is a war with Iraq?” To this we reply,“In our view, whatever we have now does not compare to the intense despair and sense of fear that existed in October 1962 when Kennedy and Khrushchev faced off over nuclear missiles in Cuba.”

In December 1974, we had an oil embargo, which caused oil prices to go up eight or nine fold.We had long lines for gasoline. We had a country that was deeply torn apart by Vietnam. We had a disgraced presidency. New York City almost went bankrupt. Inflation was increasing. It was a situation that had not existed in prior memory. It seemed to us that the only worse time for the stock market was during the depression of the 1930s.

We had a record-breaking crash in October of 1987. The market went down approximately 22% in one day. There were insider trading scandals and a real estate bust. The market rallied after that crash. In December, people felt a tremendous sense of despair and it wasn’t until people started shopping in the malls again for Christmas that they realized that the economy wasn’t just going to fall off a cliff.

Over the last two years, many young people in the securities business have asked whether this bear market was similar to that of 1974, which had been the worst decline since the Great Depression. Each time our answer was “No way, no way.” 1974 was just something totally different. It was just day after day of feeling helpless. Work was not just tedious, it was oppressive. Business was dreadful, and the daily declines in the market just led to physical exhaustion. Those of us who had survived the bear market of 1974 wore it like a badge of honor.We thought there would never be another 1974. At the end of September of 2002, we said, “Yes, this was like 1974.” Not only had the market taken on the attributes mentioned above, but also the declines in the stock market averages and the decimation of groups of stocks were very similar in magnitude to what we saw in 1974. Many excellent values were created in 1974. That is the background that we wanted to share as we look ahead. Even though the reasons behind the declines of 1962, 1974 and 1987 were different, we feel that the emotions during each of those periods were virtually identical.

The fixed income market has been largely supported by equity market volatility as investors sought safer havens, particularly in U.S.Treasury securities. In our view, the fixed income market was also supported by solid fundamentals such as low inflation and an extremely accommodative Federal Open Market Committee (“FOMC”)(4). The FOMC lowered short-term interest rates eleven times in 2001 in an effort to boost an ailing economy. Seeing little improvement, the Committee decided to leave the federal funds rate(5) unchanged at its historically low level of 1.75% during each of the six meetings it held throughout the first ten months of 2002 (since the end of this reporting period,the FOMC lowered the fed funds target rate an additional 50 basis points(6) on November 6, 2002 to 1.25%, the lowest level since April of 1958 when the target rate was 1.00%).

Portfolio Manager Market and Fund Outlook
The stock market declined substantially during the early months of the Guarantee Period, while bond rates dropped to over 40-year lows (and bond prices rose).The combination of a falling stock market and a rising bond market caused the Fund to allocate some of its assets out of stocks and into bonds(7). As a result of these market conditions, the Fund’s equity allocation was reduced from a high of 43.1% on May 27, 2002 to a low of 10% on November 20, 2002. Given this low equity allocation, it may be difficult for the Fund to build back to its previous level of equity investment.

 

(4)   The FOMC is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
(5)   The fed funds rate is the interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans.
(6)   A basis point is one one-hundredth (1/100 or 0.01) of one percent.
(7)   Generally, as the market value of the equity component rises, more assets are allocated to the equity component, and as the market value of the equity component declines, more assets are allocated to the fixed income component. Use of the fixed income component during the Guarantee period will reduce the Fund’s ability to participate as fully in upward equity market movements, and therefore represents some loss of opportunity cost, compared to a portfolio that is more heavily invested in equities. For example, if interest rates decline significantly or if the value of the equity component declines precipitously, all or a substantial portion of the Fund’s assets may be reallocated to the fixed income portion. If all of the Fund’s assets are reallocated to the fixed income portion, the reallocation may be irreversible. Please see the Fund’s prospectus for more information.

 

2    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

While the Fund’s future allocation to equities is dependent on market conditions, shareholders who remain in the Fund and reinvest all dividends and distributions will continue to be guaranteed their original investment (net of sales charges and redemptions) at the end of the Guarantee Period(8). Shareholders also have the ability — at any time during the Guarantee Period — to assess their market outlook and risk tolerance in order to determine if another investment option may be more suitable.

Thank you for your investment in the Smith Barney Capital Preservation Fund.We look forward to continuing to help you meet your investment objectives.

Sincerely,

R. Jay Gerken Alan Blake Hersh Cohen Sandip Bhagat
Chairman Portfolio Manager Portfolio Manager Portfolio Manager

November 18, 2002

The information provided in this letter by the portfolio managers represents the opinion of the portfolio managers and is not intended to be a forecast of future events, a guarantee of future results or investment advice.Views expressed are those of the portfolio managers and may differ from those of other portfolio managers or of the firm as a whole. Furthermore, there is no assurance that certain securities will remain in or out of the Fund or that the percentage of the Fund’s assets in various sectors will remain the same. Please refer to pages 5 through 7 for a list and percentage breakdown of the Fund’s holdings.Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio managers’ views are as of October 31, 2002 and are subject to change.

 

(8)   When you hold your investment until the end of the five-year Guarantee Period, on the Guarantee Maturity Date your account will be worth no less than your initial investment (less sales charges) at the end of the Offering Period, reduced to reflect any redemptions, dividends and distributions received in cash and certain Fund expenses, such as taxes and extraordinary expenses. If you choose to redeem your investment on any day other than the Guarantee Maturity Date, your shares will be redeemed at the current net asset value (“NAV”) and the amount returned could be less than that invested.The Guarantee is based on the amount invested as of the first day of the Guarantee Period and does not apply to any earnings realized during the Guarantee Period.As with the sale of any securities, a taxable event may occur if the Fund liquidates securities for asset allocation purposes or at the end of the Guarantee Period. Please keep in mind that the Fund’s NAV will fluctuate.After the Guarantee Period ends, your investment will no longer be protected by the guarantee and will be subject to possible loss of principal.Any exchange into another fund will constitute a taxable event. Fund allocations may change at any time.

 

3    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Smith Barney Capital Preservation Fund at a Glance

Growth of $10,000 Invested in Class A Shares of the
Smith Barney Capital Preservation Fund vs. Benchmarks

Growth of
a $10,000
Investment
A $10,000 invest-
ment in the Fund’s
made on its incep-
tion date would
have decreased to
$9,492 with sales
charge as of
10/31/02.The
graph shows how
performance of the
Fund’s Class A
Shares compares to
its benchmarks
over the same
period.
 

The graph includes the initial sales charge on the Fund (no comparable charge exists for the index) and assumes all dividends and distributions from the Fund are reinvested at net asset value.

Notes: All Fund performance numbers represent past performance, and are no guarantee of future results. The Fund’s share price and investment return will fluctuate so that the value of an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Total returns include change in share price and reinvestment of dividends and distributions, if any. Total return figures “with sales charge” are provided in accordance with SEC guidelines for comparative purposes for prospective investors and reflect certain voluntary fee waivers which may be terminated at any time. If the waivers were not in place, the Fund’s returns would have been lower. Investors may not invest directly in an index.

 

Top Ten Equity Holdings*
 
Portfolio Breakdown*
       
1. Berkshire Hathaway, Inc
0.2%
  
 
 
2. Pfizer, Inc
0.2%
  
 
 
3. Microsoft Corp
0.1%
  
 
 
4. Merck & Co., Inc
0.1%
  
 
 
5. Wells Fargo & Co
0.1%
  
 
 
6. Dell Computer Corp
0.1%
  
 
 
7. AOL Time Warner, Inc
0.1%
  
 
 
8. Gillette Co
0.1%
  
 
 
9. The Walt Disney Co
0.1%
  
 
 
10. Merrill Lynch & Co., Inc
0.1%
  

* As a percentage of total investments. Information as of 10/31/02, subject to change.

 

 

4    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders


Portfolio of Investments
October 31, 2002
  
           
SHARES   SECURITY   VALUE  
 
COMMON STOCK — 4.5%  
Consumer Discretionary — 0.6%    
        33,526
      Amazon Com, Inc. (a)
$
649,063
  
 64,915
   AOL Time Warner, Inc. (a)  
957,496
  
16,442
  Comcast Corp. (a)  
378,330
  
11,196
   Costco Wholesale Corp. (a)  
379,880
  
  21,376
   Delphi Corp.  
148,777
  
  6,701
   Dow Jones & Co., Inc.  
235,339
  
10,375
   Fairmont Hotels Resorts, Inc.  
254,810
  
6,427
   Gannett Inc.  
488,002
  
13,473
   Home Depot, Inc.  
389,100
  
 22,356
   Liberty Media Corp. (a)  
184,884
  
 14,771
   McDonald’s Corp.  
267,503
  
  8,305
   USA Interactive (a)  
210,449
  
  51,134
   The Walt Disney Co.  
853,938
  
 
 
5,397,571
  
 
Consumer Staples — 0.5% 		 
 
 17,408
   The Coca-Cola Co.  
809,124
  
7,499
   General Mills, Inc.  
309,859
  
30,009
   Gillette Co.  
896,669
  
  4,869
   Hershey Foods Corp.  
316,826
  
140
  The J.M. Smucker Co.  
5,125
  
 8,590
   Kimberly-Clark Corp.  
442,385
  
10,845
   Kraft Foods, Inc.  
428,378
  
 5,376
   Procter & Gamble Co.  
475,507
  
 8,755
   Walgreen Co.  
295,481
  
13,582
   Wm. Wrigley Jr. Co.  
716,722
  
 
 
4,696,076
  
 
Energy — 0.3%
     
7,489
   BP Amoco PLC  
287,952
  
7,054
   ChevronTexaco Corp.  
477,062
  
6,315
   ConocoPhillips  
306,278
  
 22,382
   Encana Corp.  
651,316
  
 9,589
   Exxon Mobil Corp.  
322,766
  
4,785
   Schlumberger Ltd.  
191,926
  
 
 
2,237,300
  
 
Financial Services — 0.8%      
8,437
   American International Group, Inc.  
527,734
  
13,669
   Bank One Corp.  
527,213
  
 24
   Berkshire Hathaway, Inc. (a)  
1,780,560
  
3,751
   Chubb Corp.  
211,594
  
13,613
   Forest City Enterprises, Inc.  
423,364
  
14,273
  Household International, Inc.  
339,126
  
 22,264
   Merrill Lynch & Co., Inc.  
844,919
  
14,351
   Morgan Stanley  
558,542
  
 8,997
  Old Republic International Corp.  
268,201
  
14,721
   The St. Joe Co.  
429,559
  
  14,815
   St Paul Cos., Inc.  
485,932
  
20,754
   Wells Fargo & Co.  
1,047,454
  
 
 
7,444,198
  
 

See Notes to Financial Statements.

5    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders


Portfolio of Investments (continued)
October 31, 2002
  
           
SHARES   SECURITY  
VALUE
  
 
Health Care — 0.7%      
  15,515 
     Amgen Inc., (a)
$
722,378
  
13,989
   Eli Lilly & Co.  
776,390
  
16,869
   Genentech, Inc. (a)  
575,064
  
11,418
  Johnson & Johnson  
670,808
  
19,482
  Merck & Co., Inc.  
1,056,704
  
52,565
  Pfizer, Inc.  
1,669,990
  
8,374
   Wyeth  
280,529
  
 
 
5,751,863
  
 
Industrials — 0.5%      
   5,570
   3M Co.  
707,056
  
 12,463
   Burlington Northern Santa Fe Corp.  
320,673
  
16,297
   Canadian Pacific Railway, Ltd., Class 1  
322,844
  
3,314
   Dover Corp.  
83,115
  
6,300
   First Data Corp.  
220,122
  
14,197
  Florida East Coast Industry, Inc.  
339,308
  
  27,511
   General Electric Co.  
694,653
  
 7,847
   H & R Block, Inc.  
348,250
  
17,536
   Molex Inc.  
407,361
  
11,530
  Tyco International Ltd.  
166,724
  
 7,910
   United Parcel Services, Inc.  
474,679
  
 8,762
   Waste Management, Inc.  
201,701
  
 
 
4,286,486
  
 
Information Technology — 0.7%      
46,489
   CIENA Corp.  
171,080
  
31,433
   Cisco Systems, Inc. (a)  
351,421
  
32,521
   Corning Inc., (a)  
60,814
  
34,052
  Dell Computer Corp. (a)  
974,228
  
 47,863
   Intel Corp.  
828,030
  
  25,723
   Juniper Networks, Inc. (a)  
149,836
  
5,623
   Mettler-Toledo International, Inc. (a)  
168,409
  
 20,649
   Microsoft Corp. (a)  
1,104,102
  
44,937
   Motorola, Inc.  
412,072
  
2,840
   Palm, Inc. (a)  
33,938
  
8,610
   Sybase, Inc. (a)  
110,294
  
46,999
   Texas Instruments Inc.  
745,404
  
15,803
  VERITAS Software Corp. (a)  
240,996
  
14,912
   Vishay Intertechnology, Inc. (a)  
153,594
  
22,228
   Western Digital Corp. (a)  
137,591
  
  23,369
   Xilinx, Inc. (a)  
443,777
  
 
 
6,085,586
  
 
Materials — 0.2%      
12,887
   Alcoa, Inc.  
284,287
  
 9,583
   E. I. Du Pont de Nemour & Co.  
395,299
  
  6,907
   Nucor Corp.  
291,061
  
7,242
   PPG Industries, Inc.  
340,591
  
 6,288
   Weyerhaeuser Co.  
284,847
  
 
 
1,596,085
  
 

See Notes to Financial Statements.

6   Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders



Portfolio of Investments (continued)
October 31, 2002
  
           
SHARES   SECURITY  
VALUE
  
 
Telecommunication Services — 0.1%      
  24,248
    
SBC Communications, Inc.
$
622,203
  
15,176
  
Verizon Communications, Inc.
  
573,046
  
 
 
1,195,249
  
 
Utilities — 0.1%      
6,665
  
Allegheny Energy, Inc.
  
37,991
  
   10,903
  
Ameren Corp.
  
440,481
  
  5,824
  
American Electric Power, Inc.
  
149,327
  
 6,490
 
PPL Corp.
  
224,619
  
 
 
852,418
  
 
   
TOTAL COMMON STOCK
    
         (Cost — $49,650,742)  
39,542,832
  
 
U.S. TREASURY OBLIGATIONS — 88.3%      
    United States Treasury Strip Notes      
  663,199,000
        due 5/15/07  
585,612,675
  
225,000,000
       due 8/15/07  
196,391,025
  
 
   
TOTAL U.S. TREASURY OBLIGATIONS
      
         (Cost — $722,193,185)  
782,003,700
  
 
SHORT-TERM OBLIGATION — 7.2%      
47,025,000
  United States Treasury Bills (b)      
        due 12/19/02 (Cost — $46,924,042)  
46,937,863
  
17,058,000
   State Street Repurchase Agreement 1.80% due 11/1/02      
          Proceeds at maturity — $17,058,853;      
          (Fully collateralized by US Treasury Notes, 0.00% due 1/30/03;      
          Market Value — $17,400,120) (Cost — $17,058,000)  
17,058,000
  
 
    TOTAL SHORT-TERM OBLIGATIONS      
         (Cost — $63,982,042)  
63,995,863
  
 
    TOTAL INVESTMENTS — 100%      
         (Cost — $835,825,969*)
$
885,542,395
  
 
(a)
 Non-income producing security
(b) Security is segregated as collateral for open futures contracts
*   Aggregate cost for Federal income tax purposes is substantially the same.

See Notes to Financial Statements.

7   Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Statement of Assets and Liabilities
October 31, 2002
  
         
ASSETS:        
   Investments, at value (Cost — $835,825,969)
  
885,542,395
  
   Cash
  
1,480
  
   Dividend receivable
  
37,745
  
   Interest receivable
  
853
  
 
   Total Assets  
885,582,473
  
 
         
LIABILITIES:        
   Payable for shares of beneficial interest repurchased  
11,223,592
  
   Distribution fees payable (Note 2)  
672,412
  
   Management fee payable (Note 2)  
560,247
  
   Payable to broker — variation margin  
70,558
  
   Accrued expenses and other Liabilities  
942,080
  
 
   Total Liabilities  
13,468,889
  
 
Total Net Assets
$
872,113,584
  
 
       
NET ASSETS:      
   Par value of shares of beneficial interest
$
769
  
   Capital paid in excess of par value
875,316,608
  
   Undistributed net investment income
5,603,696
  
   Accumulated net realized loss from security transactions,      
      foreign currency transactions and futures contracts  
(58,446,605)
  
   Net unrealized appreciation on investments and futures contracts  
49,639,116
  
 
Total Net Assets
$
872,113,584
  
 
         
Computation of        
Class A Shares:        
   Net Asset Value and redemption price per share ($116,466,140/10,232,576 shares outstanding)  
$11.38
  
   Offering Price per share ($11.38 ÷ 0.95)  
$11.98
 *
 
         
Class B Shares:        
   Net Asset Value per share and offering price ($605,061,076/53,347,268 shares outstanding)  
$11.34
 **
 
         
Class L Shares:        
   Net Asset Value per share ($150,586,368/13,276,954 shares outstanding)  
$11.34
 **
   Offering Price per share ($11.34 ÷ 0.99)  
$11.45
 
 
*
 Based upon single purchases of less than $25,000
** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges.

See Notes to Financial Statements.

8    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Statement of Operations

For the Period April 3, 2002 (Commencement of Operations) to October 31, 2002

INVESTMENT INCOME:      
   Interest
$
14,945,205
  
   Dividends
  
807,428
  
   Less: Foreign withholding tax
  
(5,267
 )
 
   Total investment income  
15,747,366
  
 
       
EXPENSES:      
   Management fees (Note 2)  
3,263,660
  
   Guarantee fees (Note 8)  
3,084,890
  
   Distribution fees Class A (Note 2)  
158,375
  
   Distribution fees Class B (Note 2)  
3,196,269
  
   Distribution fees Class L (Note 2)  
819,669
  
   Legal fees  
373,111
  
   Blue sky fees  
353,675
  
   Transfer agent fees  
324,694
  
   Shareholder reports  
145,573
  
   Custody and fund accounting fees  
63,596
  
   Audit fees  
50,343
  
   Trustees fees  
22,717
  
   Registration fees  
7,163
  
   Other  
69,044
  
 
   Total Expenses  
11,932,779
  
   Less: Aggregate amount waived by the Manager and Distributor (Note 2)  
(678,021
 )
 
   Net Expenses  
11,254,758
  
 
Net Investment Income  
4,492,608
  
 
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND      
FOREIGN CURRENCY TRANSACTIONS (NOTE 3):      
   Realized loss from investments (excluding short-term securities), foreign      
      currency transactions and futures contracts  
(58,446,822
 )
 
   Increase in Net Unrealized Appreciation on Investments and Futures Contracts  
49,639,116
  
 
Net Loss on Investments, Foreign Currency Transactions and Futures Contracts  
(8,807,706
 )
 
Decrease in Net Assets From Operations
$
(4,315,098
 )
 

See Notes to Financial Statements.

9    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Statement of Changes in Net Assets

  For the Period April 3, 2002  
  (Commencement of Operations)  
  to October 31, 2002  
 
OPERATIONS:      
   Net investment income
$
4,492,608
    
   Realized loss from investments (excluding short-term securities), foreign      
      currency transactions and futures contracts  
(58,446,822
 )  
   Increase in Net Unrealized Appreciation on Investments and Futures Contracts  
49,639,116
    
 
   Decrease in Net Assets From Operations  
(4,315,098
 )  
 
         
DISTRIBUTIONS TO SHAREHOLDERS FROM:        
   Net investment income  
(237,556
 )  
 
   Decrease in Net Assets From Distributions to Shareholders  
(237,556
 )  
 
         
FUND SHARE TRANSACTIONS (NOTE 10):        
   Net proceeds from sales of shares  
912,838,310
    
   Net asset value of shares issued for reinvestment of dividends  
225,337
    
   Cost of shares reacquired  
(36,397,409
 )  
 
Increase in Net Assets From Fund Share Transactions  
876,666,238
    
 
Increase in Net Assets  
872,113,584
    
NET ASSETS:      
   Beginning of period  
—
    
 
   End of period*
$
872,113,584
    
 
* Includes undistributed net investment income of:
$
5,603,696
    
 

See Notes to Financial Statements.

10    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements

1. Significant Accounting Policies
The Smith Barney Capital Preservation Fund (the “Fund”), a separate series of Smith Barney Trust II (the “Trust”), a Massachusetts business trust, is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The Fund commenced operations on April 3, 2002.

The significant accounting policies consistently followed by the Fund are: (a) security transactions are accounted for on trade date; (b) investments are valued at market value or, in the absence of market value with respect to any portfolio securities, at fair value as determined by or under the direction of the Board of Trustees.Equity securities that are traded primarily on a domestic, foreign exchange, or the Nasdaq Stock Market are valued at the last sale price on that exchange or, if there were no sales during the day, at the current quoted bid price. Options are generally valued at the mean of the quoted bid and asked prices. Bonds and other fixed income securities (other than short-term obligations) are valued on the basis of valuations furnished by a pricing service,use of which has been approved by the board of trustees. In making such valuations, the pricing service utilizes both dealer-supplied valuations and electronic data processing techniques that take into account appropriate factors such as institutional-size trading in similar groups of securities,yield,quality,coupon rate,maturity,type of issue, trading characteristics and other market data, without exclusive reliance upon quoted prices or exchange or over-the-counter prices, since such valuations are believed to reflect more accurately the fair value of such securities. Short-term obligations (maturing in 60 days or less) are valued at amortized cost, which constitutes fair value as determined by the board of trustees. Futures contracts are normally valued at the settlement price on the exchange on which they are traded. Securities for which there are no such valuations are valued using fair value procedures established by and under the general supervision of the Board of Trustees; (c) interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis; (d) dividend income is recorded on the ex-dividend date; foreign dividend income is recorded on the ex-dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence; (e) dividends and distributions to shareholders are recorded on the ex-dividend date; (f ) gains or losses on the sale of securities are calculated by using the specific identification method; (g) the accounting records are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S.dollars on the date of valuation (although the Fund generally does not expect to hold investments denominated in foreign currencies). Purchases and sales of securities, and income and expenses are translated at the rate of exchange quoted on the respective date that such transactions are recorded;(h) direct expenses are charged to each class;manage-ment fees and general fund expenses are allocated on the basis of relative net assets of each class; (i) the character of income and gains distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Reclassifications were made to the Fund’s capital accounts to reflect permanent book/tax differences and income and gains available for distributions under income tax regulations. For the year ended October 31, 2002, the Fund reclassified $1,348,861 from paid in capital to undistributed net investment income; (j) the Fund intends to comply with the applicable provisions of the Internal Revenue Code of 1986, as amended, pertaining to regulated investment companies and to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes; and (k) estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.

2. Management Agreement, Distribution Agreement and Other Transactions
Smith Barney Fund Management LLC (“SBFM”), a subsidiary of Salomon Smith Barney Holdings Inc. (“SSBH”),

11    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

which, in turn, is a subsidiary of Citigroup Inc. (“Citigroup”), acts as investment manager to the Fund. The Fund paid SBFM a management fee calculated at an annual rate of 0.35% of the average daily net assets during the Offering Period. The management fees amounted to $178,770 of which $115,048 was voluntarily waived for the period from April 3, 2002 through May 13, 2002. On May 14, 2002, the Fund terminated its Offering Period and implemented the Guarantee Period. The management fee is calculated daily and paid monthly. The management fees amounted to $3,084,890 of which $408,989 was voluntarily waived for the period May 14, 2002 to October 31, 2002.The management fees during the Guarantee Period are computed at annual rate of 0.75% of the Fund’s average daily net assets.

Citicorp Trust Bank, fsb. (“CTB”), formerly known as Citi Fiduciary Trust Company, another subsidiary of Citigroup, acts as the Fund’s transfer agent and PFPC Global Fund Services (“PFPC”) acts as the Fund’s sub-transfer agent. CTB receives account fees and asset-based fees that vary according to the size and type of account. PFPC is responsible for shareholder recordkeeping and financial processing for all shareholder accounts and is paid by CTB. For the period April 3, 2002 to October 31, 2002, the Fund paid transfer agent fees of $220,209 to CTB.

Salomon Smith Barney Inc. (“SSB”), another subsidiary of SSBH, acts as the Fund’s distributor. Certain other broker-dealers continue to sell Fund shares to the public as members of the selling group. For the period April 3, 2002 to October 31, 2002, SSB and its affiliates received brokerage commissions of $206,661 for the Fund’s portfolio agency transactions.

There are maximum initial sales charges of 5.00% and 1.00% for Class A and L shares, respectively. There is a contingent deferred sales charge (“CDSC”) of 5.00% on Class B shares, which applies if redemption occurs within one year from purchase and declines thereafter by 1.00% per year until no CDSC is incurred. Class L shares also have a 1.00% CDSC, which applies if redemption occurs within the first year of purchase. In addition, Class A shares have a 1.00% CDSC, which applies if redemption occurs within the first year of purchase.This CDSC only applies to those purchases of Class A shares which, when combined with current holdings of Class A shares, equal or exceed $1,000,000 in the aggregate.

For the period April 3, 2002 to October 31, 2002, SSB received sales charges of approximately $1,650,000 and $1,577,000 on sales of the Fund’s Class A and L shares, respectively. In addition, for the period April 3, 2002 to October 31, 2002, CDSCs paid to SSB were approximately:

  Class A   Class B   Class L
CDSCs
$2,000
  
$423,000
  
$46,000

Pursuant to a Distribution Plan, the Fund pays a distribution fee with respect to Class A, B and L shares calculated at the annual rate of .25%, 1.00% and 1.00% of the average daily net assets of each class, respectively. Classes B and L waived 0.75% of this distribution fee during the offering period. For the period April 3, 2002 to October 31, 2002, total Distribution Plan fees were:

      Distribution   Distribution  
    Plan Fees   Plan Fees Waived  
 
           
Class A  
$   158,375
  
$        —
  
 
Class B  
$3,196,269
  
$119,483
  
 
Class L  
$  819,669
  
$  34,501
  
 

All officers and one Trustee of the Trust are employees of Citigroup or its affiliates.

3. Investments
During the period April 3, 2002 to October 31, 2002, the aggregate cost of purchases and proceeds from sales of investments (including maturities, but excluding short-term securities) were as follows:

 
Purchases
$1,241,593,022
  
 
Sales
$   385,958,119
  
 

At October 31, 2002, the aggregate gross unrealized appreciation and depreciation of investments for Federal income tax purposes were substantially as follows:

 
Gross unrealized appreciation
  $   59,901,227
  
Gross unrealized depreciation
(11,545,426)
  
 
Net unrealized appreciation
$   48,355,801
  
 

12    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

4. Income Tax Information and Distributionsto Shareholders

At October 31, 2002 the tax basis components of distributable earnings were:

  
Undistributed ordinary income  
$    6,069,298
  
 
Accumulated capital gains (losses)  
$(57,163,290)
  
 
Unrealized appreciation/depreciation  
$  48,355,801
  
 

The difference between book basis and tax basis unrealized appreciation is attributable primarily to wash sale loss deferrals

The tax character of distributions paid during the year was:

 
Ordinary income  
$      237,556
  
 

5. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized as assets. Securities equal to the initial margin amount are segregated by the custodian in the name of the broker. Additional securities are also segregated up to the current market value of the futures contracts. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by “marking-to-market” on a daily basis to reflect the market value of the contract at the end of the each day’s trading.Variation margin payments are received or made and recognized as assets due from or liabilities due to broker, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of ) the closing transactions and the Fund’s basis in the contract.

The Fund enters into such contracts to hedge a portion of its portfolio. The Fund bears the market risk that arises from changes in the value of the financial instruments and securities indices (futures contracts) and the credit risk should a counterparty fail to perform under such contracts.

Futures contracts which were open at October 31, 2002 are as follows:

        Aggregate        
    Number of   Face Value   Expiration   Unrealized
Contracts
   Contracts   of Contracts   Date   Gain/(Loss)
 
 
 
 
S & P Index Futures (Buy)
  
45
  
11,250
  
December 2002
  
($77,310)

6. Option Contracts
Premiums paid when put or call options are purchased by the Fund, represent investments, which are marked-to-market daily. When a purchased option expires, the Fund will realize a loss in the amount of the premium paid.When the Fund enters into a closing sales transaction, the Fund will realize a gain or loss depending on whether the proceeds from the closing sales transaction are greater or less than the premium paid for the option.When the Fund exercises a put option, it will realize a gain or loss from the sale of the underlying security and the proceeds from such sale will be decreased by the premium originally paid. When the Fund exercises a call option, the cost of the security which the Fund purchases upon exercise will be increased by the premium originally paid.

At October 31, 2002, the Fund held no purchased call options or purchased put options.

When a Fund writes a call or put option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily. When a written option expires, the Fund realizes a gain equal to the amount of the premium received.When the Fund enters into a closing purchase transaction, the Fund realizes a gain or loss depending upon whether the cost of the closing transaction is greater or less than the premium originally received, without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is eliminated.When a written call option is exercised, the proceeds of the security sold will be increased by the premium originally received.When a written put option is exercised, the amount of the premium originally received will reduce the cost of the security which the Fund purchases upon exercise. When written index options are exercised, settlement is made in cash.

The risk associated with purchasing options is limited to the premium originally paid. The Fund enters into options for hedging purposes.The risk in writing a covered call option is that the Fund gives up the opportunity to participate in any increase in the price of the underlying security beyond

 

13    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

the exercise price.The risk in writing a put option is that the Fund is exposed to the risk of loss if the market price of the underlying security declines.

No written covered call/put option transactions occurred during the period April 3, 2002 to October 31, 2002.

7. Repurchase Agreements
The Fund purchases (and its custodian takes possession of ) U.S. government securities from banks and securities dealers subject to agreements to resell the securities to the sellers at a future date (generally, the next business day) at an agreed-upon higher repurchase price. The Fund requires continual maintenance of the market value (plus accrued interest) of the collateral in amounts at least equal to the repurchase price.

8.The Guarantee
Provided that all dividends and distributions received from the Fund have been reinvested and no shares have been redeemed by a shareholder, the Fund guarantees that on the Guarantee Maturity Date, as described in the prospectus, each shareholder will be entitled to redeem his or her shares for an amount no less than the value of that shareholder’s account as of the close of business on May 13, 2002, less certain expenses. The Fund’s guarantee is backed by an unconditional and irrevocable financial guarantee from Ambac Assurance Corporation (the “Guarantor”) pursuant to a financial guarantee insurance policy issued by the Guarantor for the benefit of the shareholders of the Fund. The Fund pays to the Guarantor a fee equal to 0.75% of the average daily net assets of the Fund during the Guarantee Period for providing the financial guarantee insurance policy. The guarantee fees amounted to $3,084,890 for the period from May 14, 2002 through October 31, 2002. Please see the prospectus for more information relating to the guarantee arrangement.

9. Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from invest-ments.Translation of foreign currency includes net exchange gains and losses resulting from the disposition of foreign currency and the difference between the amount of investment income, expenses and foreign withholding taxes recorded and the actual amount received or paid.

10. Shares of Beneficial Interest
At October 31, 2002, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share.The Fund has the ability to issue multiple classes of shares. Each share of a class represents an identical interest and has the same rights, except that each class bears certain direct expenses specifically related to the distribution of its shares.

At October 31, 2002, total paid-in capital amounted to the following for each class:

  Class A   Class B   Class L  
 
Total paid-in Capital
$116,688,557
  
$608,477,939
$151,499,742
  
 

 

14     Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

Transactions in shares of each class were as follows:

  For the Period April 3, 2002  
  (Commencement of Operations) to  
 
 
  Shares   Amount  
 
Class A        
Shares sold
10,613,282
    
$
120,976,230
    
Shares issued on reinvestment
4,281
      
48,804
    
Shares reacquired
(384,987
 )    
(4,336,477
 )  
 
Net Increase
10,232,576
    
$
116,688,557
    
 
           
Class B          
Shares sold
55,334,410
    
$
630,840,688
    
Shares issued on reinvestment
12,142
      
138,420
    
Shares reacquired
(1,999,284)
      
(22,501,169
 )  
 
Net Increase
53,347,268
    
$
608,477,939
    
 
           
Class L          
Shares sold
14,124,886
    
$
161,021,392
    
Shares issued on reinvestment
3,343
      
38,113
    
Shares reacquired
(851,275)
      
(9,559,763
 )  
 
Net Increase
13,276,954
    
$
151,499,742
    
 

11. Trustee Retirement Plan
The Trustees of the Fund have adopted a Retirement Plan for all Trustees who are not “interested persons” of the Fund, within the meaning of the 1940 Act. Under the Plan, all Trustees are required to retire from the Board as of the last day of the calendar year in which the applicable Trustee attains age 75 (certain Trustees who had already attained age 75 when the Plan was adopted are required to retire effective December 31, 2003).Trustees may retire under the Plan before attaining the mandatory retirement age.Trustees who have served as Trustee of the Trust or any of the investment companies associated with Citigroup for at least ten years when they retire are eligible to receive the maximum retirement benefit under the Plan. The maximum retirement benefit is an amount equal to five times the amount of retainer and regular meeting fees payable to a Trustee during the calendar year ending on or immediately prior to the applicable Trustee’s retirement.Amounts under the Plan may be paid in installments or in a lump sum (discounted to present value). Benefits under the Plan are unfunded. The Fund’s allocable share of the expenses of the Plan for the period ended October 31, 2002 and the related liability at October 31, 2002 was not material.

12. Capital Loss Carryforward
At October 31, 2002, the Fund had, for Federal income tax purposes, a capital loss carryforward of approximately $57,163,000 available to offset future capital gains expiring October 31, 2010.To the extent that these carryforward losses are used to offset capital gains, it is probable that any gains so offset will not be distributed.

13. Tax Information (unaudited)
For Federal tax purposes the Fund hereby designates for the fiscal year ended October 31, 2002

• A corporate dividends received deduction of 10.17%.

A total of 88.66% of the ordinary dividends paid by the Fund from net investment income are derived from Federal obligations and may be exempt from taxation at the state level.

15    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Financial Highlights

For a share of each class of Capital Stock:

  For the Period April 3, 2002  
  (Commencement of Operations) to  
Class A Shares October 31, 2002(1)  
 
Net Asset Value, Beginning of Period
$
11.40
    
 
Income (Loss) From Operations:      
   Net investment income  
0.099
    
   Net realized and unrealized loss  
(0.109)
    
 
Total Loss From Operations  
(0.010)
    
 
Less Distributions From:        
   Net investment income  
(0.010)
    
   Net realized gains  
—
    
 
Total Distributions  
(0.010)
    
 
Net Asset Value, End of Period
$
11.38
    
 
Total Return  
(0.09
 )%**  
 
Net Assets, End of Period (000s)
$
116,466
    
 
Ratios to Average Net Assets:        
   Expenses  
1.82
 %*  
   Net investment income  
1.59
 %*  
 
Portfolio Turnover Rate  
47
 %  
 

Note: If Agents of the Fund had not voluntarily waived a portion of their fees the net investment income per share and the ratios would have been as follows:

   Net investment income per share  
0.090
    
   Ratios:        
   Expenses to average net assets  
1.97
 %*  
   Net investment income to average net assets  
1.44
 %*  
 
*
 Annualized
** Not Annualized
(1)
 The per share amounts were computed using a monthly average number of shares outstanding during the period.

See Notes to Financial Statements.

 

16    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Financial Highlights (continued)

For a share of each class of Capital Stock:

  For the Period April 3, 2002  
  (Commencement of Operations) to  
Class B Shares October 31, 2002(1)  
 
Net Asset Value, Beginning of Period
$
11.40
      
 
Income (Loss) From Operations:      
   Net investment income  
0.055
      
   Net realized and unrealized loss  
(0.109)
      
 
Total Loss From Operations  
(0.054
 )    
 
Less Distributions From:          
   Net investment income  
(0.006
 )    
   Net realized gains  
—
      
 
Total Distributions  
(0.006
 )    
 
Net Asset Value, End of Period  
$11.34
      
 
Total Return  
(0.48
 )%**    
 
Net Assets, End of Period (000s)
$605,061
      
 
Ratios to Average Net Assets:          
   Expenses  
2.52
 %*    
   Net investment income  
0.87
 %*    
 
Portfolio Turnover Rate  
47
 %    
 
           
Note: If Agents of the Fund had not voluntarily waived a portion of their fees the net investment income per share and the ratios would have been as follows:  
 
   Net investment income per share  
$0.046
      
   Ratios:          
   Expenses to average net assets  
2.66
 %*    
   Net investment income to average net assets  
0.73
 %*    
 
* Annualized
** Not Annualized
(1) The per share amounts were computed using a monthly average number of shares outstanding during the period.

See Notes to Financial Statements.

 

17    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Financial Highlights (continued)

For a share of each class of Capital Stock:

  For the Period April 3, 2002  
  (Commencement of Operations) to  
Class L Shares October 31, 2002(1)  
 
Net Asset Value, Beginning of Period
$
11.40
      
 
Income (Loss) From Operations:      
   Net investment income  
0.055
      
   Net realized and unrealized loss  
(0.109)
      
 
Total Loss From Operations  
(0.054
 )    
 
Less Distributions From:          
   Net investment income  
(0.006
 )    
   Net realized gains  
—
      
 
Total Distributions  
(0.006
 )    
 
Net Asset Value, End of Period  
$11.34
      
 
Total Return  
(0.48
 )%**    
 
Net Assets, End of Period (000s)
$150,586
      
 
Ratios to Average Net Assets:          
   Expenses  
2.52
 %*    
   Net investment income  
0.87
 %*    
 
Portfolio Turnover Rate  
47
 %    
 
           
Note: If Agents of the Fund had not voluntarily waived a portion of their fees the net investment income per share and the ratios would have been as follows:  
   Net investment income per share  
$0.046
      
   Ratios:          
   Expenses to average net assets  
2.66
 %*    
   Net investment income to average net assets  
0.73
 %*    
 
* Annualized
** Not Annualized
(1) The per share amounts were computed using a monthly average number of shares outstanding during the period.

See Notes to Financial Statements.

18    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Independent Auditors' Report

To the Shareholders and Board of Trustees
of the Smith Barney Trust II:

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Smith Barney Capital Preservation Fund of Smith Barney Trust II (the “Trust”) as of October 31, 2002, and the related statements of operations, changes in net assets, and financial highlights for the period April 3, 2002 (Commencement of Operations) through October 31, 2002.These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2002, by correspondence with the custodian.An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material aspects, the financial position of Smith Barney Capital Preservation Fund of Smith Barney Trust II as of October 31, 2002, and the results of its operations, the changes in its net assets and financial highlights for the period April 3, 2002 through October 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

New York, New York
December 11, 2002

19    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited)

Information about Trustees and Officers The business and affairs of the Smith Barney Capital Preservation Fund (the “Fund”) are managed under the direction of the Fund’s Board of Trustees. Information pertaining to the Trustees and officers of the Fund is set forth below. Each Trustee and officer holds office for his or her lifetime, unless that individual resigns, retires or is otherwise removed. The Statement of Additional Information includes additional information about Fund Trustees and is available, without charge, upon request by calling Citicorp Trust Bank, fsb. at 1-800-451-2010 or Primerica Shareholder Services at 1-800-544-5445.

                          Number of     Other
               Principal   Portfolios In   Board Memberships
    Position(s)   Length   Occupation(s)   Fund Complex   Held by
    Held with   of Time   During Past   Overseen by   Trustee During
Name, Address and Age   Fund   Served   Five Years   Trustee   Past Five Years
 
 
 
 
 
NON-INTERESTED                    
TRUSTEES:                    
                     
Elliott J. Berv   Trustee   Since 2001   President and Chief Operations  
35
   Board Member,
125 Broad Street           Officer, Landmark City (Real       American Identity Corp.
New York, NY 10004           Estate Development) (since       (doing business as
Age 59           2002); Executive Vice President       Morpheus Technologies)
            and Chief Operations Officer,       (biometric information
            DigiGym Systems (On-line       management) (since
            Personal Training Systems)       2001; consultant since
            (since 2001); Chief Executive       1999); Director, Lapoint
            Officer, Rocket City Enterprises       Industries (Industrial
            (Internet Service Company)       Filter Company) (since
            (since 2000); President, Catalyst       2002); Director,
            (Consulting) (since 1984).       Alzheimer’s Association
                    (New England Chapter)
                    (since 1998).
                     
Donald M. Carlton   Trustee   Since 2001   Consultant, URS Corporation  
30
   Director, American
125 Broad Street           (Engineering) (since 1999);       Electric Power (Electric
New York, NY 10004           former Chief Executive Officer,       Utility) (since 1999);
Age 65           Radian International L.L.C.       Director,Valero Energy
            (Engineering) (from 1996 to       (Petroleum Refining)
            1998), Member of Management       (since 1999); Director,
            Committee, Signature Science       National Instruments
            (Research and Development)       Corp. (Technology)
            (since 2000).       (since 1994).
                     
A. Benton Cocanougher   Trustee   Since 2001   Dean Emeritus and Wiley  
30
   Former Director,
125 Broad Street           Professor,Texas A&M University       Randall’s Food Markets,
New York, NY 10004           (since 2001); former Dean and       Inc. (from 1990 to
Age 64           Professor of Marketing, College       1999); former Director,
            and Graduate School of Business       First American Bank
            of Texas A & M University (from       and First American
            1987 to 2001).       Savings Bank (from
                    1994 to 1999).
                     
Mark T. Finn   Trustee   Since 2001   Chairman and Owner,Vantage  
35
   Former President and
125 Broad Street           Consulting Group, Inc.       Director, Delta
New York, NY 10004           (Investment Advisory and       Financial, Inc.
Age 59           Consulting Firm) (since 1988);       (Investment Advisory
            former Vice Chairman and       Firm) (from 1983 to
            Chief Operating Officer,       1999).
            Lindner Asset Management        
            Company (Mutual Fund        
            Company) (from March 1999        
            to 2001); former General        
            Partner and Shareholder,        
            Greenwich Ventures, LLC        
            (Investment Partnership)        
            (from 1996 to 2001); former        
            President, Secretary, and        
            Owner, Phoenix Trading Co.        
            (Commodity Trading Advisory        
            Firm) (from 1997 to 2000).        

20    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

                        Number of     Other
            Principal   Portfolios In   Board Memberships
    Position(s)   Length   Occupation(s)   Fund Complex   Held by
    Held with   of Time   During Past   Overseen by   Trustee During
Name, Address and Age   Fund   Served   Five Years   Trustee   Past Five Years
 
 
 
 
 
Stephen Randolph Gross   Trustee   Since 2001   Partner, Capital Investment  
30
   Director, United Telesis,
125 Broad Street           Advisory Partners (Consulting)       Inc. (Telecommuni-
New York, NY 10004           (since January 2000); Managing       cations) (since 1997);
Age 54           Director, Fountainhead Ventures,       Director, eBank.com,
            LLC. (Consulting) (from 1998 to       Inc. (since 1997);
            2002); Secretary, Carint N.A.       Director, Andersen
            (Manufacturing) (since 1988);       Calhoun, Inc. (Assisted
            former Treasurer, Hank Aaron       Living) (since 1987);
            Enterprises (Fast Food Franchise)       former Director,
            (from 1985 to 2001); Chairman,       Charter Bank, Inc.
            Gross, Collins & Cress, P.C.       (from 1987 to 1997);
            (Accounting Firm) (since 1980);       former Director,
            Treasurer, Coventry Limited, Inc.       Yu Save, Inc. (Internet
            (since 1985).       Company) (from 1998
                    to 2000); former
                    Director, Hotpalm, Inc.
                    (Wireless Applications)
                    (from 1998 to 2000);
                    former Director, Ikon
                    Ventures, Inc. (from
                    1997 to 1998).
                     
Diana R. Harrington   Trustee   Since 1992   Professor, Babson College  
35
   Former Trustee,The
125 Broad Street           (since 1992).       Highland Family of
New York, NY 10004                   Funds (Investment
Age 62                   Company) (from March
                    1997 to March 1998).
                     
                     
Susan B. Kerley   Trustee   Since 1992   Consultant, Strategic  
35
   Director, Eclipse Funds
125 Broad Street           Management Advisors, LLC       (currently supervises 17
New York, NY 10004           Global Research Associates, Inc.       investment companies
Age 51           (Investment Consulting)       in fund complex)
            (since 1990).       (since 1990).
                     
Alan G. Merten   Trustee   Since 2001   President, George Mason  
30
   Director, Comshare,
125 Broad Street           University (since 1996).       Inc. (Information
New York, NY 10004                   Technology)
Age 61                   (since 1985); former
                    Director, Indus
                    (Information
                    Technology) (from
                    1995 to 1999).
                     
C. Oscar Morong, Jr.   Trustee   Since 1991   Managing Director, Morong  
35
   Former Director,
125 Broad Street           Capital Management       Indonesia Fund
New York, NY 10004           (since 1993).       (Closed-End Fund)
Age 67                   (from 1990 to 1999);
                    Trustee, Morgan
                    Stanley Institutional
                    Fund (currently
                    supervises 75 invest-
                    ment companies) (since
                    1993).

21    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

                        Number of     Other
            Principal   Portfolios In   Board Memberships
    Position(s)   Length   Occupation(s)   Fund Complex   Held by
    Held with   of Time   During Past   Overseen by   Trustee During
Name, Address and Age   Fund   Served   Five Years   Trustee   Past Five Years
 
 
 
 
 
R. Richardson Pettit   Trustee   Since 2001   Professor of Finance,  
30
   None
125 Broad Street           University of Houston        
New York, NY 10004           (since 1977);        
Age 60           Independent Consultant        
            (since 1984).        
                     
                     
Walter E. Robb, III   Trustee   Since 2001   President, Benchmark  
35
   Director, John Boyle &
125 Broad Street           Consulting Group, Inc. (Service       Co., Inc. (Textiles)
New York, NY 10004           Company) (since 1991); Sole       (since 1999); Director,
Age 76           Proprietor, Robb Associates       Harbor Sweets, Inc.
            (Consulting) (since 1978);       (Candy) (since 1990);
            Co-owner, Kedron Design       Director,W.A.Wilde
            (Gifts) (since 1978); former       Co. (Direct Media)
            President and Treasurer,       (since 1982); Director,
            Benchmark Advisors, Inc.       Alpha Grainger
            (Financial) (from 1989 to 2000).       Manufacturing, Inc.
                    (Electronics) (since
                    1983); former Trustee,
                    MFS Family of Funds
                    (Investment Company)
                    (from 1985 to 2001);
                    Harvard Club of Boston
                    (Audit Committee)
                    (since 2001).
                     
INTERESTED                    
TRUSTEE:                    
                     
R. Jay Gerken*   Chairman,   Since 2002   President since 2002; Managing   Chairman   N/A
125 Broad Street   President       Director, Salomon Smith   of the    
New York, NY 10004   and       Barney (since 1996).   Board,    
Age 51   Chief           Trustee or    
    Executive           Director    
    Officer           of 226    
OFFICERS:                    
                     
Lewis E. Daidone   Senior Vice   Since 2000   Managing Director, Salomon   N/A   N/A
125 Broad Street   President       Smith Barney (since 1990);        
New York, NY 10004   and       Chief Financial Officer,        
Age 45   Chief       Smith Barney Mutual Funds;        
    Adminis-       Director and Senior Vice        
    trative       President, Smith Barney Fund        
    Officer       Management LLC and        
            Travelers Investment Adviser.        
                     
Irving P. David   Treasurer   Since 2002   Director, Salomon Smith   N/A   N/A
125 Broad Street           Barney (since 1997);        
New York, NY 10004           former Assistant        
Age 42           Treasurer, First Investment        
            Management Company (from        
            1988 to 1994).        
                     
Frances M. Guggino   Controller   Since 2002   Vice President, Citigroup   N/A   N/A
125 Broad Street           Asset Management        
New York, NY 10004           (since 1991).        
Age 45                    

22    Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

                        Number of   Other
            Principal   Portfolios In     Board Memberships
    Position(s)   Length   Occupation(s)   Fund Complex   Held by
    Held with   of Time   During Past   Overseen by   Trustee During
Name, Address and Age   Fund   Served   Five Years   Trustee   Past Five Years
 
 
 
 
 
Robert I. Frenkel   Secretary   Since 2000   Managing Director and   N/A   N/A
SSB           General Counsel, Global        
300 First Stamford Place           Mutual Funds for Citigroup        
Stamford, CT 06902           Asset Management (since 1994)        
Age 48                    

*Mr. Gerken is an “interested person” of the fund as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of Smith Barney Fund Management LLC and certain of or its affiliates.

23   Smith Barney Capital Preservation Fund | 2002 Annual Report to Shareholders

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SMITH BARNEY
CAPITAL PRESERVATION FUND

TRUSTEES & OFFICERS
Elliott J. Berv
Donald M. Carlton
A. Benton Cocanougher
Mark T. Finn
R. Jay Gerken*
Stephen Randolph Gross
Diana R. Harrington
Susan B. Kerley
Alan G. Merten
C. Oscar Morong, Jr.
R. Richardson Pettit
Walter E. Robb, III

PRESIDENT
R. Jay Gerken*

SECRETARY
Robert I. Frenkel*

SENIOR VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER
Lewis E. Daidone*

TREASURER
Irving P. David*

CONTROLLER
Frances M. Guggino*

*  Affiliated Person of Investment Manager
      

INVESTMENT MANAGER
Smith Barney Fund Management

DISTRIBUTOR
Salomon Smith Barney Inc. PFS Distributors, Inc.

CUSTODIAN
State Street Bank &Trust Company

TRANSFER AGENT
Citicorp Trust Bank, fsb.
125 Broad Street, 11th Floor
New York, New York 10004

SUB-TRANSFER AGENT
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island
02940-9699

AUDITORS
KPMG, LLP
757 Third Avenue
New York, New York 10017

 

Smith Barney Capital Preservation Fund

This report is submitted for the general information of shareholders of Smith Barney Capital Preservation Fund. It is not for distribution to prospective investors unless accompanied by a current Prospectus for the Fund, which contains information concerning the Fund’s investment policies and expenses as well as other pertinent information. If used as sales material after January 31, 2003, this report must be accompanied by performance information for the most recently completed calendar quarter.

SMITH BARNEY CAPITAL PRESERVATION FUND
Smith Barney Mutual Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004

For complete information on any Smith Barney Mutual Funds, including management fees and expenses, call or write your financial professional for a free prospectus. Read it carefully before you invest or send money.

www.smithbarney.com/mutualfunds


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


FD02664 12/02

02-4157

Annual Report • October 31, 2002

SMITH BARNEY CAPITAL PRESERVATION FUND II

What’s Inside    
     
Letter to Our Shareholders 1  
     
     
Schedule of Investments 3  
     
     
Statement of Assets and Liabilities 4  
     
     
Statement of Operations 5  
     
     
Statement of Changes in Net Assets 6  
     
     
Notes to Financial Statements 7  
     
     
Financial Highlights 12  
     
     
Independent Auditors’ Report 15  
     
     
Additional Information 16  

Investment Products: Not FDIC Insured • Not Bank Guaranteed • May Lose Value

Dear Shareholder:

Enclosed herein is the first annual report for the Smith Barney Capital Preservation Fund II for the period ended October 31, 2002. As a shareholder you can expect to receive a shareholder report, like this one, every six months. We encourage you to read it to stay informed of the progress of your investment. In this report, we summarize what we believe to be the period’s prevailing economic and market conditions and outline our investment strategy. A detailed summary of the Fund’s performance can be found in the appropriate sections that follow. We hope you find this report to be useful and informative.

Investment Strategy

During the Guarantee Period1, the Fund seeks some capital growth, while preserving principal. Under normal market conditions, during the Guarantee Period the Fund’s assets are allocated between:

An equity component, consisting primarily of common stocks and common stock equivalents, such as preferred stocks and securities convertible into common stocks, and
A fixed income component, consisting primarily of high quality debt instruments.

The Manager uses a proprietary model to determine, on an ongoing basis, the percentage of assets allocated to the equity component and to the fixed income component. The model evaluates a number of factors, including, but not limited to:

the market value of the Fund’s assets as compared to the aggregate guaranteed amount;
the prevailing level of interest rates;
equity market volatility; and
the length of time remaining until the Guarantee Maturity Date.

Generally as the market value of the equity component rises, more assets are allocated to the equity component, and as the market value of the equity component declines, more assets are allocated to the fixed income component. There may be times during the Guarantee Period when the Fund’s allocation of assets to equities may be substantially limited or entirely precluded.2 In addition, the terms of a Financial Guarantee Agreement executed in connection with the Guarantee impose certain limitations on the manner in which the Fund may be managed during the Guarantee Period. The Financial Guarantee Agreement could limit the Managers’ ability to alter the management of the Fund during the Guarantee Period in response to changing market conditions.

Portfolio Manager Market Overview

This has been a very difficult year for the equity markets as the strength of the U.S. economy was brought into question while virtually all major equity indices dropped to their lowest levels in several years. Unless the stock market dramatically rallies by year-end, we believe it is possible that many major equity indices may finish the calendar year down for the third year in a row. Such an occurrence of consecutive retreats has not happened in over 60 years. Until recently, many thought the benchmark for bear markets was that of 1973-1974, but now it appears the current period has eclipsed this earlier one in terms of length and severity.

1 When you hold your investment until the end of the five-year Guarantee Maturity Date, your account will be worth no less than your initial investment (less sales charges) at the end of the Offering Phase, minus any redemptions, dividends and distributions you have received in cash and certain Fund expenses, such as interest, taxes and extraordinary expenses. If you choose to redeem your investment on any other day than the Guarantee Maturity Date, the amount returned could be less than that invested. If you sell your shares during the Guarantee Period, shares are redeemed at the current net asset value (“NAV”), which may be more or less than your original investment.The Guarantee is based on the amount invested as of the first day of the Guarantee Period and does not apply to any earnings realized during the Guarantee Period.As with the sale of any securities, a taxable event may occur if the Fund liquidates securities for asset allocation purposes or at the end of the Guarantee Period. Please keep in mind that the Fund’s NAV will fluctuate.After the Guarantee Period ends, your investment will no longer be protected by the guarantee and will be subject to possible loss of principal.
2 Use of the fixed income component during the Guarantee Period will reduce the Fund’s ability to participate as fully in upward equity market movements, and therefore represents some loss of opportunity, or opportunity cost, compared to a portfolio that is more heavily invested in equities. If the value of the stock component were to decline substantially during the Guarantee Period or upon the occurrence of certain non-market-related events, the Fund may be completed and irreversibly 100% reallocated to fixed income. Please see the Fund’s prospectus for more information.

1 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

The fixed income market has been largely supported by equity market volatility as investors sought safer havens, particularly in U.S.Treasury securities. In our view, the fixed income market was also supported by solid fundamentals such as low inflation and an extremely accommodative Federal Open Market Committee (“FOMC”).3 The FOMC lowered short-term interest rates eleven times in 2001 in an effort to boost an ailing economy. Seeing little improvement, the Committee decided to leave the federal funds rate4 unchanged at its historically low level of 1.75% during each of the six meetings it held throughout the first ten months of 2002 (since the end of this reporting period, the FOMC lowered the fed funds rate target an additional 50 basis points5 on November 6, 2002 to 1.25%, the lowest level since April of 1958 when the target was 1.00%).

Portfolio Manager Market Outlook

We are often asked about the catalyst that would generate a better market environment. If one looks at the periods after major market lows in the last few decades, it is often difficult to pick out a catalyst early on. Having said this, clearing up uncertainty with regard to Iraq probably heads every one’s most likely “catalyst”. Our candidate for “catalyst” is the price of oil falling to the $18-$22 per barrel level regardless of whether we go to war with Iraq.A decline from the current $26-$28 per barrel range would represent, in effect, a major tax cut for the world economy, especially the emerging market economies most dependent on oil.

We also would like to meet head on concerns that interest rates might rise next year, compromising the ability of stocks to move higher. We believe the 2003 market may resemble events that followed the stock market bottom of December 1974. The stock market rallied substantially between then and June 30, 1975, while yields on U.S.Treasuries surged into double-digits. Thus, a major bear market for bonds coexisted with double-digit gains for stocks in the same period. We suspect things may play out along similar lines beginning in 2003.

Thank you for your investment in the Smith Barney Capital Preservation Fund II. We look forward to continuing to help you meet your investment objectives.

Sincerely,  
   
   
R. Jay Gerken John Goode
Chairman Portfolio Manager
   
   
Peter Hable Sandip Bhagat
Portfolio Manager Portfolio Manager
   
November 18, 2002  

The information provided in this letter by the portfolio managers represents the opinion of the portfolio managers and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed are those of the portfolio managers and may differ from those of other portfolio managers or of the firm as a whole. Furthermore, there is no assurance that certain securities will remain in or out of the Fund or that the percentage of the Fund’s assets in various sectors will remain the same. Please refer to page 3 for a list and percentage breakdown of the Fund’s holdings. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio managers’ views are as of October 31, 2002 and are subject to change.

3 The FOMC is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
4 The fed funds rate is the interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans.
5 A basis point is one one-hundredth (1/100 or 0.01) of one percent.

2 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Schedule of Investments   October 31, 2002  
         
FACE          
AMOUNT SECURITY VALUE  
 
U.S.TREASURY OBLIGATIONS — 90.9%        
$ 600,178,000 U.S. Treasury Bills 1.65% due 11/7/02        
      (Cost — $600,025,955)     $600,025,955  
 
REPURCHASE AGREEMENT — 9.1%        
  60,067,000 State Street Repurchase Agreement 1.80% due 11/1/02      
      Proceeds at maturity — $60,070,003;      
      (Fully collateralized by US Treasury Notes, 2.875% due 6/30/04;      
      Market Value — $61,269,888) (Cost — $60,067,000)      60,067,000  
 
    TOTAL INVESTMENTS — 100%        
      (Identified Cost — $660,092,955*)   $660,092,955  
 

* Aggregate cost for Federal income tax purposes is substantially the same.

 

See Notes to Financial Statements.

3 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Statement of Assets and Liabilities October 31, 2002    
         
ASSETS:            
      Investments, at value (Cost — $660,092,955)   $ 660,092,955    
      Cash       1,000    
      Receivable for shares of beneficial interest sold     213,218,411    
      Interest receivable       3,003    
   
      Total Assets     873,315,369    
   
LIABILITIES:            
      Payable for shares of beneficial interest repurchased     2,654,542    
      Distribution fees payable (Note 2)     252,216    
      Dividends payable     170,349    
      Accrued expenses     106,772    
   
      Total Liabilities     3,183,879    
   
Total Net Assets $ 870,131,490    
   
NET ASSETS:            
      Par value of shares of beneficial interest   $   763    
      Capital paid in excess of par value     869,867,772    
      Undistributed net investment income     262,955    
   
Total Net Assets $ 870,131,490    
   
Computation of            
Class A Shares:            
      Net Asset Value and redemption price per share ($74,551,634/6,539,617 shares outstanding)       $11.40    
      Offering Price per share ($11.40 ÷ 0.95)     $12.00 *  
   
Class B Shares:            
      Net Asset Value per share ($673,366,952/59,067,276 shares outstanding)     $11.40 **  
   
Class L Shares:            
      Net Asset Value per share ($122,212,904/10,720,430 shares outstanding)     $11.40 **  
      Offering Price per share ($11.40 ÷ 0.99)       $11.52    
   
   
* Based upon single purchases of less than $25,000.
** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charges.

See Notes to Financial Statements.

4 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Statement of Operations      
For the Period September 24, 2002 (Commencement of Operations) to October 31, 2002      
INVESTMENT INCOME (NOTE 1):      
      Interest Income $543,815  
 
EXPENSES:      
      Management fees (Note 2)   130,691  
      Distribution fees Class A (Note 2)   6,818  
      Distribution fees Class B (Note 2)   293,181  
      Distribution fees Class L (Note 2)   52,950  
      Audit fees   30,000  
      Blue sky fees   28,348  
      Shareholder communications   16,667  
      Custody fees   15,000  
      Legal fees   10,000  
      Registration fees   5,915  
      Transfer agent fees   2,000  
      Trustee fees   1,500  
      Other   1,000  
 
      Total Expenses 594,070  
      Less: Aggregate amounts waived by the Manager and Distributor (Note 2) (220,685 )
 
      Net Expenses 373,385  
 
Net Investment Income and Increase in Net Assets From Operations $170,430  
 

See Notes to Financial Statements.

5 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Statement of Changes in Net Assets      
       
  For the Period September 24, 2002  
  (Commencement of Operations)  
  to October 31, 2002  
 
     
OPERATIONS:      
      Net investment income $       170,430    
 
      Increase in Net Assets From Operations 170,430  
 
DISTRIBUTION TO SHAREHOLDERS FROM:      
      Net investment income (170,430 )  
 
      Decrease in Net Assets From Distributions to Shareholders (170,430 )
 
FUND SHARE TRANSACTIONS (NOTE 9):      
      Net proceeds from sale of shares 875,240,576    
      Cost of shares reacquired (5,109,086 )  
 
      Increase in Net Assets From Fund Share Transactions 870,131,490  
 
Increase in Net Assets 870,131,490    
NET ASSETS:      
      Beginning of period —    
 
      End of period* $870,131,490  
 
      *Includes undistributed net investment income of: $       262,955    
 

 

See Notes to Financial Statements.

6 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Notes to Financial Statements

1. Significant Accounting Policies

The Smith Barney Capital Preservation Fund II (the “Fund”), a separate series of Smith Barney Trust II (the “Trust”), a Massachusetts business trust, is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company.The Fund commenced operations on September 24, 2002. The significant accounting policies consistently followed by the Fund are: (a) security transactions are accounted for on trade date; (b) investments are valued at market value or, in the absence of market value with respect to any portfolio securities, at fair value as determined by or under the direction of the Board of Trustees. Equity securities that are traded primarily on a domestic, foreign exchange, or the Nasdaq Stock Market are valued at the last sale price on that exchange or, if there were no sales during the day, at the current quoted bid price. Options are generally valued at the mean of the quoted bid and asked prices. Bonds and other fixed income securities (other than short-term obligations) are valued on the basis of valuations furnished by a pricing service, use of which has been approved by the board of trustees. In making such valuations, the pricing service utilizes both dealer-supplied valuations and electronic data processing techniques that take into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data, without exclusive reliance upon quoted prices or exchange or over-the-counter prices, since such valuations are believed to reflect more accurately the fair value of such securities. Short-term obligations (maturing in 60 days or less) are valued at amortized cost, which constitutes fair value as determined by the Board of Trustees. Futures contracts are normally valued at the settlement price on the exchange on which they are traded. Securities for which there are no such valuations are valued using fair value procedures established by and under the general supervision of the board of trustees; (c) interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis; (d) dividend income is recorded on the ex-dividend date; foreign dividend income is recorded on the ex-dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence; (e) dividends and distributions to shareholders are recorded on the ex-dividend date; (f) gains or losses on the sale of securities are calculated by using the specific identification method; (g) the accounting records are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation (although the Fund generally does not expect to hold investments denominated in foreign currencies). Purchases and sales of securities, and income and expenses are translated at the rate of exchange quoted on the respective date that such transactions are recorded; (h) direct expenses are charged to each class; management fees and general fund expenses are allocated on the basis of relative net assets of each class; (i) the character of income and gains distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Reclassifications were made to the Fund’s capital accounts to reflect permanent book/tax differences and income and gains available for distributions under income tax regulations. For the year ended October 31, 2002, the Fund reclassified $262,955 from paid in capital to undistributed net investment income; (j) the Fund intends to comply with the applicable provisions of the Internal Revenue Code of 1986, as amended, pertaining to regulated investment companies and to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes; and (k) estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.

2.  Management Agreement, Distribution Agreement and Other Transactions

Smith Barney Fund Management LLC (“SBFM”), a subsidiary of Salomon Smith Barney Holdings Inc., which, in turn, is a subsidiary of Citigroup Inc. (“Citigroup”), acts as investment manager to the Fund. The Fund pays SBFM a management fee calculated at an annual rate of 0.35% of the average daily net assets during the Offering Period and 0.75% of the average daily net assets during the Guarantee Period. The Guarantee Period will commence on November 4, 2002. The management fee is calculated daily and paid monthly.The management fee amounted to $130,691, all of which was voluntarily waived for the period ended October 31, 2002.

7 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

Citicorp Trust Bank, fsb. (“CTB”), a subsidiary of Citigroup, acts as the Fund’s transfer agent and PFPC Global Fund Services (“PFPC”) acts as the Fund’s sub-transfer agent. CTB receives account fees and asset-based fees that vary according to the size and type of account. PFPC is responsible for shareholder recordkeeping and financial processing for all shareholder accounts and is paid by CTB. For the period ended October 31, 2002, the Fund paid no transfer agent fees to CTB.

Salomon Smith Barney Inc. (“SSB”), another subsidiary of SSBH, acts as the Fund’s distributor. In addition, SSB acts as the primary broker for the Fund’s portfolio agency transactions. Certain other broker-dealers continue to sell Fund shares to the public as members of the selling group. For the period ended October 31, 2002, SSB and its affiliates received no brokerage commissions for the Fund’s portfolio agency transactions.

There are maximum initial sales charges of 5.00% and 1.00% for Class A and L shares, respectively. There is a contingent deferred sales charge (“CDSC”) of 5.00% on Class B shares, which applies if redemption occurs within one year from purchase and declines thereafter by 1.00% per year until no CDSC is incurred. Class L shares also have a 1.00% CDSC, which applies if redemption occurs within the first year of purchase. In addition, Class A shares have a 1.00% CDSC, which applies if redemption occurs within the first year of purchase.This CDSC only applies to those purchases of Class A shares which, when combined with current holdings of Class A shares, equal or exceed $1,000,000 in the aggregate.

For the period ended October 31, 2002, SSB received sales charges of approximately $886,000 and $955,000 on sales of the Fund’s Class A and L shares, respectively. In addition, for the period ended October 31, 2002, CDSCs paid to SSB were approximately:

  Class A   Class B   Class L  
 
CDSCs $—   $15,000   $—  
 

Pursuant to a Distribution Plan, the Fund pays a distribution fee with respect to Class A, B and L shares calculated at the annual rate of .25%, 1.00% and 1.00% of the average daily net assets of each class, respectively. Classes B and L waived 0.75% of this distribution fee during the offering period. For the period ended October 31, 2002, total Distribution Plan fees were:

  Distribution   Distribution  
  Plan Fees   Plan Fees Waived  
 
Class A $ 6,818   $ —  
 
 
Class B $ 293,181   $ 76,227  
 
 
Class L $ 52,950   $ 13,767  
 

All officers and one Trustee of the Trust are employees of Citigroup or its affiliates.

3. Investments

During the period ended October 31, 2002, the aggregate cost of purchases and proceeds from sales of investments (including maturities, but excluding short-term securities) were as follows:

 
Purchases   $ —  
 
Sales   —  
 

At October 31, 2002, the aggregate gross unrealized appreciation and depreciation of investments for Federal income tax purposes were substantially as follows:

 
Gross unrealized appreciation $ —  
Gross unrealized depreciation   —  
 
Net unrealized appreciation (depreciation)   —  
 

4. Futures Contracts

Initial margin deposits made upon entering into futures contracts are recognized as assets. Securities equal to the initial margin amount are segregated by the custodian in the name of the broker. Additional securities are also segregated up to the current market value of the futures contracts. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by “marking-to-market” on a daily basis to reflect the market value of the contract at the end of the each day’s trading. Variation margin payments are received or made and recognized as assets due from or liabilities due to broker, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transactions and the Fund’s basis in the contract.

8 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

The Fund enters into such contracts to hedge a portion of its portfolio.The Fund bears the market risk that arises from changes in the value of the financial instruments and securities indices (futures contracts) and the credit risk should a counterparty fail to perform under such contracts.

At October 31, 2002, the Fund had no open futures contracts.

5. Option Contracts

Premiums paid when put or call options are purchased by the Fund, represent investments, which are marked-to-market daily. When a purchased option expires, the Fund will realize a loss in the amount of the premium paid.When the Fund enters into a closing sales transaction, the Fund will realize a gain or loss depending on whether the proceeds from the closing sales transaction are greater or less than the premium paid for the option.When the Fund exercises a put option, it will realize a gain or loss from the sale of the underlying security and the proceeds from such sale will be decreased by the premium originally paid. When the Fund exercises a call option, the cost of the security which the Fund purchases upon exercise will be increased by the premium originally paid.

At October 31, 2002, the Fund held no purchased call options or purchased put options.

When a Fund writes a call or put option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily. When a written option expires, the Fund realizes a gain equal to the amount of the premium received. When the Fund enters into a closing purchase transaction, the Fund realizes a gain or loss depending upon whether the cost of the closing transaction is greater or less than the premium originally received, without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is eliminated.When a written call option is exercised, the proceeds of the security sold will be increased by the premium originally received.When a written put option is exercised, the amount of the premium originally received will reduce the cost of the security which the Fund purchases upon exercise. When written index options are exercised, settlement is made in cash.

The risk associated with purchasing options is limited to the premium originally paid. The Fund enters into options for hedging purposes.The risk in writing a covered call option is that the Fund gives up the opportunity to participate in any increase in the price of the underlying security beyond the exercise price.The risk in writing a put option is that the Fund is exposed to the risk of loss if the market price of the underlying security declines.

No written covered call/put option transactions occurred during the period ended October 31, 2002.

6. Repurchase Agreements

The Fund purchases (and its custodian takes possession of) U.S. government securities from banks and securities dealers subject to agreements to resell the securities to the sellers at a future date (generally, the next business day) at an agreed-upon higher repurchase price. The Fund requires continual maintenance of the market value (plus accrued interest) of the collateral in amounts at least equal to the repurchase price.

7. The Guarantee

Provided that all dividends and distributions received from the Fund have been reinvested and no shares have been redeemed by a shareholder, the Fund guarantees that on the Guarantee Maturity Date, as described in the prospectus, each shareholder will be entitled to redeem his or her shares for an amount no less than the value of that shareholder’s account as of the close of business on October 31, 2002, less certain expenses. The Fund’s guarantee is backed by an unconditional and irrevocable financial guarantee from Ambac Assurance Corporation (the “Guarantor”) pursuant to a financial guarantee insurance policy issued by the Guarantor for the benefit of the shareholders of the Fund. The Fund will pay to the Guarantor a fee equal to 0.75% of the average daily net assets of the Fund during the Guarantee Period for providing the financial guarantee insurance policy. Please see the prospectus for more information relating to the guarantee arrangement.

9 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)      
       
8. Income Tax Information and Distributions to Shareholders      
       
At October 31, 2002 the tax basis components of distributable earnings were:      
       
Undistributed ordinary income $316,136  
     
The tax character of distributions paid during the year was:      
       
Ordinary income   $170,430  

9. Shares of Beneficial Interest

At October 31, 2002, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share.The Fund has the ability to issue multiple classes of shares. Each share of a class represents an identical interest and has the same rights, except that each class bears certain direct expenses specifically related to the distribution of its shares.

At October 31, 2002, total paid-in capital amounted to the following for each class:

  Class A   Class B   Class L    
   
Total paid-in Capital $74,551,634   $673,366,952   $122,212,904    
   

Transactions in shares of each class were as follows:

                 
      For the Period September 24, 2002    
      (Commencement of Operations)    
      to October 31, 2002    
     
   
      Shares   Amount    
 
Class A                
Shares sold     6,886,963   $ 78,511,378    
Shares issued on reinvestment     —     —    
Shares reacquired     (347,346 )   (3,959,744 )  
 
Net Increase     6,539,617   $ 74,551,634    
 
Class B                
Shares sold     59,164,503   $ 674,475,339    
Shares issued on reinvestment     —     —    
Shares reacquired     (97,227 )   (1,108,387 )  
 
Net Increase     59,067,276   $ 673,366,952    
 
Class L                
Shares sold     10,724,023   $ 122,253,859    
Shares issued on reinvestment     —     —    
Shares reacquired     (3,593 )   (40,955 )  
 
Net Increase     10,720,430   $ 122,212,904    
 

10 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Notes to Financial Statements (continued)

10.Trustee Retirement Plan

The Trustees of the Fund have adopted a Retirement Plan for all Trustees who are not “interested persons” of the Fund, within the meaning of the 1940 Act. Under the Plan, all Trustees are required to retire from the Board as of the last day of the calendar year in which the applicable Trustee attains age 75 (certain Trustees who had already attained age 75 when the Plan was adopted are required to retire effective December 31, 2003).Trustees may retire under the Plan before attaining the mandatory retirement age. Trustees who have served as Trustee of the Trust or any of the investment companies associated with Citigroup for at least ten years when they retire are eligible to receive the maximum retirement benefit under the Plan. The maximum retirement benefit is an amount equal to five times the amount of retainer and regular meeting fees payable to a Trustee during the calendar year ending on or immediately prior to the applicable Trustee’s retirement.Amounts under the Plan may be paid in installments or in a lump sum (discounted to present value). Benefits under the Plan are unfunded.The Fund’s allocable share of the expenses of the Plan for the period ended October 31, 2002 and the related liability at October 31, 2002 was not material.

11.Tax Information (unaudited)

For Federal tax purposes the Fund hereby designates for the fiscal year ended October 31, 2002, a total of 4.66% of the ordinary dividends paid by the Fund from net investment income are derived from Federal obligations and may be exempt from taxation at the state level.

11 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Financial Highlights        
         
For a share of each class of Capital Stock:        
         
  For the Period September 24, 2002  
  (Commencement of Operations) to  
Class A Shares October 31, 2002(1)  
 
Net Asset Value, Beginning of Period   $11.40  
 
Income From Operations:      
      Net investment income     0.006  
      Net realized and unrealized gain     0.004  
 
Total Income From Operations     0.010  
 
Less Distributions From:        
      Net investment income   (0.010 )
 
Total Distributions   (0.010 )
 
Net Asset Value, End of Period     $11.40  
 
Total Return     0.09 %**
 
Net Assets, End of Period (000s)   $74,552  
 
Ratios to Average Net Assets:        
      Expenses     0.68 %*
      Net investment income     0.76 %*
 
Portfolio Turnover Rate     —  
 
Note: If Agents of the Fund had not voluntarily waived a portion of their fees and assumed expenses the net investment income per  
share and the ratios would have been as follows:        
      Net investment income per share     $0.002  
      Ratios:        
      Expenses to average net assets     1.24 %*
      Net investment income to average net assets     0.20 %*
 
* Annualized
** Not Annualized
(1) The per share amounts were computed using a monthly average number of shares outstanding during the period.

12 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Financial Highlights (continued)        
         
For a share of each class of Capital Stock:        
         
  For the Period September 24, 2002  
  (Commencement of Operations) to  
Class B Shares October 31, 2002(1)  
 
Net Asset Value, Beginning of Period $11.40    
 
Income From Operations:      
      Net investment income   0.004    
      Net realized and unrealized gain   0.002    
 
Total Income From Operations   0.006    
 
Less Distributions From:        
      Net investment income   (0.006 )  
 
Total Distributions   (0.006 )  
 
Net Asset Value, End of Period   $11.40    
 
Total Return   0.05 %**  
 
Net Assets, End of Period (000s)   $673,367    
 
Ratios to Average Net Assets:        
      Expenses   0.97 %*  
      Net investment income   0.41 %*  
 
Portfolio Turnover Rate   —    
 
Note: If Agents of the Fund had not voluntarily waived a portion of their fees and assumed expenses the net investment loss per share and  
the ratios would have been as follows:        
      Net investment loss per share   $(0.001 )  
      Ratios:        
      Expenses to average net assets   1.53 %*  
      Net investment loss to average net assets   (0.15 )%*  
 
* Annualized
** Not Annualized
(1) The per share amounts were computed using a monthly average number of shares outstanding during the period.

13 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Financial Highlights (continued)        
         
For a share of each class of Capital Stock:        
         
  For the Period September 24, 2002  
  (Commencement of Operations) to  
Class L Shares October 31, 2002(1)  
 
Net Asset Value, Beginning of Period $11.40    
 
Income From Operations:      
      Net investment income   0.004    
      Net realized and unrealized gain   0.002    
 
Total Income From Operations   0.006    
 
Less Distributions From:        
      Net investment income   (0.006 )  
 
Total Distributions   (0.006 )  
 
Net Asset Value, End of Period   $11.40    
 
Total Return   0.05 %**  
 
Net Assets, End of Period (000s)   $122,213    
 
Ratios to Average Net Assets:        
      Expenses   0.97 %*  
      Net investment income   0.41 %*  
 
Portfolio Turnover Rate   —    
 
Note: If Agents of the Fund had not voluntarily waived a portion of their fees and assumed expenses the net investment loss per share and  
the ratios would have been as follows:        
      Net investment loss per share   $(0.001 )  
      Ratios:        
      Expenses to average net assets   1.53 %*  
      Net investment loss to average net assets   (0.15 )%*  
 
* Annualized
** Not Annualized
(1) The per share amounts were computed using a monthly average number of shares outstanding during the period.

14 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Independent Auditors’ Report

To the Shareholders and Board of Trustees
of the Smith Barney Trust II:

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Smith Barney Capital Preservation Fund II of Smith Barney Trust II (the “Trust”) as of October 31, 2002, and the related statements of operations, changes in net assets, and financial highlights for the period September 24, 2002 (Commencement of Operations) through October 31, 2002. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2002, by correspondence with the custodian.An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material aspects, the financial position of Smith Barney Capital Preservation Fund II of Smith Barney Trust II as of October 31, 2002, and the results of its operations, changes in its net assets and financial highlights for the period September 24, 2002 through October 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

New York, New York
December 11, 2002

15 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Additional Information (unaudited)

Information about Trustees and Officers The business and affairs of the Smith Barney Capital Presentation Fund II (the “Fund”) are managed under the direction of the Fund Board of Trustees. Information pertaining to the Trustees and officers of the Fund is set forth below. Each Trustee and officer holds office for his or her lifetime, unless that individual resigns, retires or is otherwise removed.The Statement of Additional Information includes additional information about Fund Trustees and is available, without charge, upon request by calling Citicorp Trust Bank, fsb. at 1-800-451-2010 or Primerica Shareholder Services at 1-800-544-5445.

        Number of Other  
      Principal Portfolios In Board Memberships  
  Position(s) Length Occupation(s) Fund Complex Held by  
  Held with of Time During Past Overseen by Trustee During  
Name, Address and Age Fund Served Five Years Trustee Past Five Years  
 
NON-INTERESTED            
TRUSTEES:            
             
Elliott J. Berv Trustee Since 2001 President and Chief Operations 35 Board Member,  
125 Broad Street     Officer, Landmark City (Real   American Identity Corp.  
New York, NY     Estate Development) (since   (doing business as  
Age 59     2002); Executive Vice President   Morpheus Technologies)  
      and Chief Operations Officer,   (biometric information  
      DigiGym Systems (On-line   management) (since  
      Personal Training Systems)   2001; consultant since  
      (since 2001); Chief Executive   1999); Director, Lapoint  
      Officer, Rocket City Enterprises   Industries (Industrial  
      (Internet Service Company)   Filter Company) (since  
      (since 2000); President, Catalyst   2002); Director,  
      (Consulting) (since 1984).   Alzheimer’s Association  
          (New England Chapter)  
          (since 1998).  
             
Donald M. Carlton Trustee Since 2001 Consultant, URS Corporation 30 Director, American  
125 Broad Street     (Engineering) (since 1999);   Electric Power (Electric  
New York, NY 10004     former Chief Executive Officer,   Utility) (since 1999);  
Age 65     Radian International L.L.C.   Director,Valero Energy  
      (Engineering) (from 1996 to   (Petroleum Refining)  
      1998), Member of Management   (since 1999); Director,  
      Committee, Signature Science   National Instruments  
      (Research and Development)   Corp. (Technology)  
      (since 2000).   (since 1994).  
             
A. Benton Cocanougher Trustee Since 2001 Dean Emeritus and Wiley 30 Former Director,  
125 Broad Street     Professor,Texas A&M University   Randall’s Food Markets,  
New York, NY 10004     (since 2001); former Dean and   Inc. (from 1990 to  
Age 64     Professor of Marketing, College   1999); former Director,  
      and Graduate School of Business   First American Bank  
      of Texas A & M University (from   and First American  
      1987 to 2001).   Savings Bank (from  
          1994 to 1999).  
             
Mark T. Finn Trustee Since 2001 Chairman and Owner,Vantage 35 Former President and  
125 Broad Street     Consulting Group, Inc.   Director, Delta  
New York, NY 10004     (Investment Advisory and   Financial, Inc.  
Age 59     Consulting Firm) (since 1988);   (Investment Advisory  
      former Vice Chairman and   Firm) (from 1983 to  
      Chief Operating Officer,   1999).  
      Lindner Asset Management      
      Company (Mutual Fund      
      Company) (from March 1999      
      to 2001); former General      
      Partner and Shareholder,      
      Greenwich Ventures, LLC      
      (Investment Partnership)      
      (from 1996 to 2001); former      
      President, Secretary, and      
      Owner, Phoenix Trading Co.      
      (Commodity Trading Advisory      
      Firm) (from 1997 to 2000).      

16 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

        Number of Other  
      Principal Portfolios In Board Memberships  
  Position(s) Length Occupation(s) Fund Complex Held by  
  Held with of Time During Past Overseen by Trustee During  
Name, Address and Age Fund Served Five Years Trustee Past Five Years  
 
Stephen Randolph Gross Trustee Since 2001 Partner, Capital Investment 30 Director, United Telesis,  
125 Broad Street     Advisory Partners (Consulting)   Inc. (Telecommuni-  
New York, NY 10004     (since January 2000); Managing   cations) (since 1997);  
Age 54     Director, Fountainhead Ventures,   Director, eBank.com,  
      LLC. (Consulting) (from 1998 to   Inc. (since 1997);  
      2002); Secretary, Carint N.A.   Director, Andersen  
      (Manufacturing) (since 1988);   Calhoun, Inc. (Assisted  
      former Treasurer, Hank Aaron   Living) (since 1987);  
      Enterprises (Fast Food Franchise)   former Director,  
      (from 1985 to 2001); Chairman,   Charter Bank, Inc.  
      Gross, Collins & Cress, P.C.   (from 1987 to 1997);  
      (Accounting Firm) (since 1980);   former Director,  
      Treasurer, Coventry Limited, Inc.   Yu Save, Inc. (Internet  
      (since 1985).   Company) (from 1998  
          to 2000); former  
          Director, Hotpalm, Inc.  
          (Wireless Applications)  
          (from 1998 to 2000);  
          former Director, Ikon  
          Ventures, Inc. (from  
          1997 to 1998).  
             
Diana R. Harrington Trustee Since 1992 Professor, Babson College 35 Former Trustee,The  
125 Broad Street     (since 1992).   Highland Family of  
New York, NY 10004         Funds (Investment  
          Company) (from March  
          1997 to March 1998).  
             
             
Susan B. Kerley Trustee Since 1992 Consultant, Strategic 35 Director, Eclipse Funds  
125 Broad Street     Management Advisors, LLC   (currently supervises 17  
New York, NY 10004     Global Research Associates, Inc.   investment companies  
Age 51     (Investment Consulting)   in fund complex)  
      (since 1990).   (since 1990).  
             
Alan G. Merten Trustee Since 2001 President, George Mason 30 Director, Comshare,  
125 Broad Street     University (since 1996).   Inc. (Information  
New York, NY 10004         Technology)  
Age 61         (since 1985); former  
          Director, Indus  
          (Information  
          Technology) (from  
          1995 to 1999).  
             
C. Oscar Morong, Jr. Trustee Since 1991 Managing Director, Morong 35 Former Director,  
125 Broad Street     Capital Management   Indonesia Fund  
New York, NY 10004     (since 1993).   (Closed-End Fund)  
Age 67         (from 1990 to 1999);  
          Trustee, Morgan  
          Stanley Institutional  
          Fund (currently  
          supervises 75 invest-  
          ment companies) (since  
          1993).  

17 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

        Number of Other
      Principal Portfolios In Board Memberships
  Position(s) Length Occupation(s) Fund Complex Held by
  Held with of Time During Past Overseen by Trustee During
Name, Address and Age Fund Served Five Years Trustee Past Five Years
R. Richardson Pettit Trustee Since 2001 Professor of Finance, 30 None
125 Broad Street     University of Houston    
New York, NY 10004     (since 1977);    
Age 60     Independent Consultant    
      (since 1984).    
           
           
Walter E. Robb, III Trustee Since 2001 President, Benchmark 35 Director, John Boyle &
125 Broad Street     Consulting Group, Inc. (Service   Co., Inc. (Textiles)
New York, NY 10004     Company) (since 1991); Sole   (since 1999); Director,
Age 75     Proprietor, Robb Associates   Harbor Sweets, Inc.
      (Consulting) (since 1978);   (Candy) (since 1990);
      Co-owner, Kedron Design   Director,W.A.Wilde
      (Gifts) (since 1978); former   Co. (Direct Media)
      President and Treasurer,   (since 1982); Director,
      Benchmark Advisors, Inc.   Alpha Grainger
      (Financial Consulting)   Manufacturing, Inc.
      (from 1989 to 2000).   (Electronics) (since
          1983); former Trustee,
          MFS Family of Funds
          (Investment Company)
          (from 1985 to 2001);
          Harvard Club of Boston
          (Audit Committee)
          (since 2001).
           
INTERESTED          
TRUSTEE:          
           
R. Jay Gerken* Chairman, Since 2002 President since 2002; Managing Chairman N/A
125 Broad Street President   Director, Salomon Smith of the  
New York, NY 10004 and   Barney (since 1996). Board,  
Age 51 Chief     Trustee or  
  Executive     Director  
  Officer     of 226  
OFFICERS:          
           
Lewis E. Daidone Senior Vice Since 2000 Managing Director, Salomon N/A N/A
125 Broad Street President   Smith Barney (since 1990);    
New York, NY 10004 and   Chief Financial Officer,    
Age 45 Chief   Smith Barney Mutual Funds;    
  Adminis-   Director and Senior Vice    
  trative   President, Smith Barney Fund    
  Officer   Management LLC and    
      Travelers Investment Adviser.    
           
Irving P. David Treasurer Since 2002 Director, Salomon Smith N/A N/A
125 Broad Street     Barney (since 1997);    
New York, NY 10004     former Assistant    
Age 42     Treasurer, First Investment    
      Management Company (from    
      1988 to 1994).    
           
Frances M. Guggino Controller Since 2002 Vice President, Citigroup N/A N/A
125 Broad Street     Asset Management    
New York, NY 10004     (since 1991).    
Age 45          

18 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

Additional Information (unaudited) (continued)

        Number of Other
      Principal Portfolios In Board Memberships
  Position(s) Length Occupation(s) Fund Complex Held by
  Held with of Time During Past Overseen by Trustee During
Name, Address and Age Fund Served Five Years Trustee Past Five Years
Robert I. Frenkel Secretary Since 2000 Managing Director and N/A N/A
SSB     General Counsel, Global    
300 First Stamford Place     Mutual Funds for Citigroup    
Stamford, CT 06902     Asset Management (since 1994)    
Age 48          

* Mr. Gerken is an “interested person” of the fund as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of Smith Barney Fund Management LLC and certain of its affiliates.

19 Smith Barney Capital Preservation Fund II | 2002 Annual Report to Shareholders

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SMITH BARNEY
CAPITAL PRESERVATION FUND II

TRUSTEES & OFFICERS INVESTMENT MANAGER
Elliott J. Berv Smith Barney Fund Management LLC
Donald M. Carlton  
A. Benton Cocanougher DISTRIBUTOR
Mark T. Finn Salomon Smith Barney Inc.
R. Jay Gerken, Chairman* PFS Distributors, Inc.
Stephen Randolph Gross  
Diana R. Harrington CUSTODIAN
Susan B. Kerley State Street Bank
Alan G. Merten &Trust Company
C. Oscar Morong, Jr.  
R. Richardson Pettit
Walter E. Robb, III TRANSFER AGENT
  Citicorp Trust Bank, fsb.
PRESIDENT 125 Broad Street, 11th Floor
R. Jay Gerken* New York, New York 10004
   
SECRETARY SUB-TRANSFER AGENT
Robert I. Frenkel* PFPC Global Fund Services
  P.O. Box 9699
SENIOR VICE PRESIDENT Providence, Rhode Island
AND CHIEF 02940-9699
ADMINISTRATIVE OFFICER  
Lewis E. Daidone* AUDITORS
  KPMG, LLP
TREASURER 757 Third Avenue
Irving P. David* New York, N.Y. 10017
   
CONTROLLER  
Frances M. Guggino*  
   
   * Affiliated Person of  
      Investment Manager  

Smith Barney Capital Preservation Fund II

This report is submitted for the general information of shareholders of Smith Barney Capital Preservation Fund. It is not for distribution to prospective investors unless accompanied by a current Prospectus for the Fund, which contains information concerning the Fund’s investment policies and expenses as well as other pertinent information. If used as sales material after January 31, 2003, this report must be accompanied by performance information for the most recently completed calendar quarter.

SMITH BARNEY CAPITAL PRESERVATION FUND II
Smith Barney Mutual Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004

For complete information on any Smith Barney Mutual Funds, including management fees and expenses, call or write your financial professional for a free prospectus. Read it carefully before you invest or send money.

www.smithbarney.com/mutualfunds

 

 

 

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

FD02665 12/02 02-4156